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Homework answers / question archive / Manila Doctors College CAM bsa AUDIT EVIDENCE-MULTIPLE CHOICE PART II 1)Which of the following statements concerning audit evidence is correct? A
Manila Doctors College
CAM bsa
AUDIT EVIDENCE-MULTIPLE CHOICE PART II
1)Which of the following statements concerning audit evidence is correct?
A. To be appropriate, audit evidence should be either reliable or relevant, but it need not be both.
B. The measure of validity of audit evidence lies in the auditor's judgment.
C. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
D. A client's accounting records can be sufficient audit evidence to support the financial statements.
2. Which of the following statements concerning audit evidence is correct?
Statement 1: The quantity of audit evidence is affected by the risk of misstatement and also by the quality of such audit evidence.
Statement 2: The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained.
A. Both statements are true C. True; False
B. Both statements are false D. False; True
3. Management makes certain assertions that are embodied in financial statement components; for example, two such categories of assertions are completeness and valuation and allocation. Which of the following is not a broad category of management assertions?
A. Rights and obligations C. Existence
B. Completeness D. Error or fraud
4. The objective of tests of details of transactions performed as substantive tests is to
A. Comply with generally accepted auditing standards
B. Attain assurance about the reliability of the accounting s system C. Detect material misstatements in the financial statements
D. Evaluate whether management's policies and procedures operated effectively
5. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records
6. In determining whether transactions have been recorded, the direction of the audit testing should be from the
A. General ledger balance C. Original source documents
B. Adjusted trial balance D. General journal entries
7. Which of the following statements concerning evidential matter is true?
A. Appropriate evidence supporting management's assertions should be convincing rather than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created within the entity
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained
D. A client's accounting records cannot be considered sufficient evidence to support the financial statements
8. Which of the following is an example of "other information” that could be used by an auditor as evidential matter supporting financial statements
A. Worksheet supporting cost allocations C. Special journals
B. Confirmation of accounts receivable D. Accounting manuals
9. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
A. Bank statement obtained from the client
B. Test counts of inventory made by the auditor C. Prenumbered purchase order forms
D. Correspondence from the client's attorney about litigation
10. Which of the following statements concerning audit evidence is correct?
A. An audit usually involves the authentication of documentation
B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not others
C. Audit evidence obtained from an independent external source is always reliable
D. An entity's accounting records can be sufficient audit evidence to support the financial statements
11. In which of the following circumstances would be the use of the negative form of accounts receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances
C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers
D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances
12. Which of the following might be detected by an auditor's review of the client's sale cut-off?
A. Excessive goods returned for credit
B. Unrecorded sales discounts
C. Lapping of year-end accounts receivable D. Inflated sales for the year
13. Which of the following most likely would give the most assurance concerning the valuation and allocation assertion of accounts receivable?
A. Vouching amounts of accounts subsidiary ledger to details on shipping documents
B. Comparing receivable turnover ratios with industry statistics for reasonableness
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for uncollectible accounts for reasonableness
14. Confirmation is "the process of obtaining and evaluating a direct communication from a third party in response to a request about a particular item affecting financial statement assertions." Two assertions for which confirmation of accounts receivable balances provides primary evidence are
A. Completeness and valuation C. Rights and obligations and existence
B. Valuation and rights and obligations D. Existence and completeness
15. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests
A. Review the cash receipts journal for the month prior to year-end
B. Intensity the study of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping records documenting the merchandise sold to the debtors
16. Which of the following is an essential control procedure to ensure the accuracy of the recorded inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test
D. Established a cutoff for goods received and shipped.
17. Effective internal controls over inventories are designed and implemented for the following reasons, except
A. Inventories typically represent a large component of an entity's current tasks. B. Inventories are the most liquid asset.
C. Inventories directly affect the financial directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity's total assets.
18. Your client, a merchandise concern, has annual sales of P30,000,000 and a 40% gross profit rate. Test reveals that 2% of the peso amount of purchases does not get into inventory because of breakage and inventory pilferage by employees. The company estimates that these losses could be reduced to 0.5% of purchases by designing and implementing certain controls costing approximately P350,000. Should the controls be designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls exceeds the projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.
19. The primary source of information to be reported about litigation, claims, and assessments is the
A. Client's lawyer C. Client's management
B. Courts records D. Independent auditor
20. Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims and assessments?
A. Request the clients lawyer to evaluate whether the client's pending litigations, claims and assessment indicate a going concern problem
B. Examine the legal documents in the client's lawyer's possession concerning litigations, claims and assessment to which the lawyer has devoted substantive attention
C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigations, claims and assessments
D. Confirm directly with the client's lawyer that all litigations, claims and assessment have been recorded or disclosed in the financial statements
21. Which of the following statements is generally correct about the competence of evidential matter?
A. Competence of evidential matter refers to the amount corroborative evidence obtained. B. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
C. Information obtained indirectly from independent sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection.
D. Competence of evidential matter refers to the audit evidence obtained from outside the entity.
22. Although the validity of evidential matter is dependent on the circumstances under which it is obtained, there are three general presumptions that have some usefulness. The situations given below indicate the relative reliability a CPA has placed on two types of evidence obtained in different situations. Which of these is an exception to one of the general presumptions?
A. The CPA places more reliance on the balance in the scrap sales account at Plant A, where the CPA has made limited tests of transactions because of effective controls, than at Plant B, where the CPA has made extensive tests of transactions because of ineffective controls.
B. The CPA places more reliance on the CPAs computation of interest payable on outstanding bonds than on the amount confirmed by the trustee.
C. The CPA places more reliance on the report of an expert on an inventory of precious gems than on the CPA's physical observation of the gems.
D. The CPA places more reliance on a schedule of insurance coverage obtained from the company's insurance agent than on one prepared by the internal audit staff.
23. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records
24. An auditor audits an accounting estimate by any of the following means except
A. Testing the process used by management to develop the estimate. B. Obtaining a confirmation from an independent source.
C. Developing an independent expectation.
D. Reviewing subsequent events or transactions.
25. When analytical procedures are used as substantive tests, some account relationships are more predictable than others. For which of the following accounts is the prior-year balance likely to be the best predictor of the current year-end balance?
A. Accounts payable C. Revenues
B. Cash D. Inventory
26. Which of the following best describes the most important stage of an auditor's statistical analysis of significant ratios and trends?
A. Computation of significant ratios and trends.
B. Reconciliation of statistical data to the client's accounting ratios. C. Interpretation of significant variations and unusual relationships.
D. Comparison of statistical data to prior-year statistics and to similar data published by government and private sources.
27. In the audit of accounts receivable an auditor sends confirmations to all customers with balances of P50,000 or more and to a sample of 25% of the customers with balances of less than P50,000. Overstatement errors of P12,000 were found in the accounts of P50,000 or more, and understatement errors of P3,000 were found in the sample. Likely misstatements for accounts receivable is
A. P0 B. P15,000 C. P9,000 D. P24,000
28. An auditor would least likely initiate a discussion with a client's audit committee concerning
A. The methods used to account for significant unusual transactions.
B. The maximum peso amount of misstatements that could exist without causing the financial statements to be materially misstated.
C. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.
D. Disagreements with management as to accounting principles that were resolved during the current year's audit.
ACCOUNTING ESTIMATES
1. Which of the following statements is incorrect about accounting estimates?
A. Management is responsible for making accounting estimates included in the financial statements.
B. When evaluating accounting estimates, the auditor should pay particular attention to assumptions that are objective and are consistent with industry patterns.
C. The risk of material misstatement is greater when accounting estimates are involved.
D. The evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence available to support other items in the financial statements.
2. In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are
A. Susceptible to bias
B. Consistent with prior periods
C. Insensitive to variations
D. Similar to industry guidelines
3. Which of the following would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?
A. Develop independent expectations of management's estimates.
B. Consider the appropriateness of the key factors or assumptions used in preparing the estimates.
C. Test the calculations used by management in developing the estimates. D. Obtain an understanding of how management developed its estimates
4. Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly accounted for and disclosed?
A. Inquiry of management
B. Make an independent estimate for comparison with client's estimate
C. Review subsequent events
D. Obtain knowledge about the applicable financial reporting standards related to the accounting estimate
5. Which of the following procedures would an auditor least likely perform when evaluating the reasonableness of management's estimates?
A. Make independent estimates for comparison with management estimates B. Read minutes of board of director’s meetings
C. Review and test the process used by management
D. Review subsequent events and confirm the estimate made
6. In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are
A. Not subject to bias
B. Consistent with industry guidelines
C. Based on objective assumptions D. Reasonable in the circumstances
7. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumption that are
A. Consistent with prior periods
B. Similar to industry guidelines
C. Objective and not susceptible to bias D. Deviations from historical patterns
8. When auditing the fair value of an asset or liability, valuation issues ordinarily arise at the point of
Initial recording Subsequent to initial recording
A. Yes Yes
B. Yes
C. No No
Yes
D. No No
9. Which of the following is least likely to be an approach followed when auditing the fair values of assets and liabilities?
A. Review and test management's process of valuation. B. Confirm valuation with audit committee members.
C. Independently develop an estimate of the value of the account.
D. Review subsequent events relating to the account.
10. Which of the following is not a specialist upon whose an auditor may rely?
A. Actuary C. Appraiser
B. Internal auditor D. Engineer
