University of Maryland, University College

ACCT 612

1)Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

1. The audit plan.

2. The auditor's judgment.

3. Auditing standards.

4. The audit documentation.

2. An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

1. To enable the auditor to accurately identify significant deficiencies and material weaknesses.

2. To assist the auditor to accurately interpret information obtained during an audit.

3. To allow the auditor to more accurately perform tests of controls.

4. To decide whether it will be necessary to perform analytical procedures.

3. Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement?

1. Prepare a rough draft of the financial statement and of the auditor's report.

2. Assess control risk for the assertions embodied in the financial statements.

3. Tour the client's facilities.

4. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

4. A CPA wishes to determine how various issuers have complied with the disclosure requirements in a new Accounting Standards Update. Which of the following information sources would the CPA most likely consult for this information?

1. AICPA Accounting Trends & Techniques.

2. FASB Technical Bulletins.

3. AICPA Audit and Accounting Manual.

4. FASB Statements of Financial Accounting Concepts.

5. Practical guidance for conducting accounting and audit engagements can be found in various nonauthoritative publications, such as Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.

A basic premise underlying analytical procedures is that

1. These procedures cannot replace tests of balances and transactions.

2. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements.

3. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.

4. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known

conditions to the contrary.

6. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Variability in these relationships can be explained by, for example, unusual events or transactions, business or accounting changes, misstatements, or random fluctuations.

The objective of performing analytical procedures in planning an audit is to identify the existence of

1. Unusual transactions and events.

2. Noncompliance with laws and regulations that went undetected because of internal control deficiency.

3. Related party transactions.

4. Recorded transactions that were not properly authorized.

7. An auditor's analytical procedures used to form an overall conclusion indicated that the client's accounts receivable had doubled since the end of the prior year. However, the

allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

1. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.

2. Twice as many accounts receivable were written off in the prior year as in the current year.

3. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.

4. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

8. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

1. Accounts receivable.

2. Interest expense.

3. Accounts payable.

4. Travel and entertainment expense.

9. Analytical procedures reveal significant unexpected differences between recorded amounts and the expectations developed by the auditor. If management is unable to

provide an acceptable explanation, the auditor should

1. Consider the matter a scope limitation.

2. Perform additional audit procedures to investigate the matter further.

3. Intensify the audit with the expectation of detecting management fraud.

4. Withdraw from the engagement.

10. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except

1. Tracing transactions through the system to determine whether procedures are being applied as prescribed.

2. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts), and similar data for the industry in which the entity operates.

3. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience.

4. Study of the relationships of financial data with relevant nonfinancial data.

11. Tracing transactions through the system is a test of controls directed toward the operating effectiveness of internal control, not an analytical procedure.

Analytical procedures can best be categorized as

1. Substantive procedures.

2. Tests of controls.

3. Qualitative tests.

4. Budget comparisons.

12. Which of the following statements about audit evidence is true?

1. To be appropriate, audit evidence should be either persuasive or relevant but need not be both.

2. The sufficiency and appropriateness of audit evidence is a matter of professional judgment.

3. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test.

4. A client's accounting records can be sufficient audit evidence to support the financial statements.

13. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.

Which of the following statements about evidence is true?

1. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive.

2. Effective internal control contributes little to the reliability of the evidence created within the entity.

3. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

4. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

14. Which of the following presumptions is least likely to relate to the reliability of audit evidence?

1. The more effective internal control is, the more assurance it provides about the accounting data and financial statements.

2. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

3. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.

4. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

15. Which of the following procedures would provide the most reliable audit evidence?

1. Inquiries of the client's internal audit staff held in private.

2. Inspection of prenumbered client purchase orders filed in the vouchers payable department.

3. Analytical procedures performed by the auditor on the entity's trial balance.

4. Inspection of bank statements obtained directly from the client's financial institution.

16. When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.

Most of the auditor's work in forming an opinion on financial statements consists of

1. Understanding internal control.

2. Obtaining and evaluating audit evidence.

3. Examining cash transactions.

4. Comparing recorded accountability with assets.

17. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of

1. Transactions.

2. Authorizations.

3. Costs.

4. Cutoffs.

18. In gathering evidence in the performance of substantive procedures, the auditor most likely

1. Uses the test month approach.

2. Relies on persuasive rather than conclusive evidence in the majority of cases.

3. Considers the client's documentary evidence less reliable than evidence gathered orally by inquiry of management.

4. Expresses an adverse opinion if (s)he has substantial doubt as to any assertion of material significance.

19. The appropriateness of evidence available to an auditor is least likely to be affected by the

1. Relevance of such evidence to the financial statement assertion being investigated.

2. Relationship of the preparer of such evidence to the entity being audited.

3. Timeliness of such audit evidence.

4. Sampling method employed by the auditor to obtain a sample of such evidence.

20. The most reliable forms of documentary evidence are those documents that are

1. Prenumbered.

2. Internally generated.

3. Easily duplicated.

4. Authorized by a responsible official.

21. Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?

1. It is the most effective audit methodology to use in filling out internal control questionnaires.

2. It is the most persuasive methodology to learn how transactions are really processed during the period under audit.

3. It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.

4. It is the most persuasive audit technique for determining if fraud has occurred.

22. If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

1. Cash receipts journal with the sales journal.

2. Sales journal with the cash receipts journal.

3. Source documents with the accounting records.

4. Accounting records with the source documents.

23. An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

1. Occurrence.

2. Rights and obligations.

3. Valuation and allocation.

4. Completeness.

24. A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

1. Meter department records to the billing (sales) register.

2. Billing (sales) register to the meter department records.