31) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence?
A) general ledger account balances B) internal memo explaining the issuance of a credit memo C) copy of month-end adjusting entries D) confirmation of accounts receivable balance received from a customer 32) Appropriateness of evidence is a measure of the
32) A) quality of evidence. B) quantity of evidence. C) sufficiency of evidence. D) meaning of evidence.
33) Calculating the gross margin for the current audit year as a percent of sales and comparing it with previous years is what type of evidence? A) analytical procedures B) observation C) inquiry D) physical examination
34) An example of an external document that provides reliable information for the auditor is: a(n) 34) A) bank statement. B) carbon copies of a check. C) purchase order for company purchases. D) employees' time report.
35) A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the 35) A) inherent risk. B) statistical risk. C) financial risk. D) acceptable audit risk.
36) Auditing standards define ________ as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements. 36) A) significant B) fraud C) materiality D) inherent risk
37) Why do auditors establish a preliminary judgment about materiality? 37) A) to help plan the appropriate evidence to accumulate B) to finalize the control risk assessment C) so the client can know what records to make available to the auditor D) to determine the appropriate level of staff to assign to the audit 38) Auditors generally allocate the preliminary judgment about materiality to the:
38) A) income statement only. B) balance sheet only. C) income statement and balance sheet. D) statement of cash flows.
39) A ________ risk represents an identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. 39) A) substantial B) financial statement C) significant D) material 5 40) Which of the following risks are used in the audit risk model?
40) A) Control Risk Inherent Risk Planned Detection Risk No No No B) Control Risk Inherent Risk Planned Detection Risk Yes Yes No C) Control Risk Inherent Risk Planned Detection Risk No No Yes D) Control Risk Inherent Risk Planned Detection Risk Yes Yes Yes
41) The measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as A) detection risk. B) inherent risk. C) sampling risk. D) audit risk.
42) Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? A) touring the client's plant and offices B) identifying related parties C) obtaining client's agreement on the engagement letter D) obtaining knowledge about the client's business and industry
43 ________ is fraud that involves theft of an entity's assets. A) Income smoothing B) A “cookie jar” reserve C) Misappropriation of assets D) Fraudulent financial reporting
44) Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings? A) income smoothing B) expense smoothing C) fraudulent financial reporting D) Each of the above is correct.
45) Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that A) have low amounts of debt. B) have to make significant judgments for accounting estimates. C) are heavily regulated. D) operate in stable economic environments.
46) Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement? A) Senior management emphasizes that job evaluations are based on performance. B) Senior management emphasizes that job rotation is a worthwhile corporate objective. C) Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report. D) Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period. 6
47) Which of the following is not one of the three primary objectives of effective internal control? ) A) efficiency and effectiveness of operations B) compliance with laws and regulations C) assurance of elimination of business risk D) reliability of financial reporting
48) Two key concepts that underlie management's design and implementation of internal control are A) collusion and materiality. B) absolute assurance and costs. C) costs and materiality. D) inherent limitations and reasonable assurance.
49) Which of the following activities would be least likely to strengthen a company's internal control? A) separating accounting from other financial operations B) carefully selecting and training employees C) maintaining insurance for fire and theft D) fixing responsibility for the performance of employee duties
50) Which of the following is a component of general controls? A) processing controls B) output controls C) input controls D) back-up and contingency planning