San Jose State University

ACCOUNTING 129A

Chapter 6

1)The auditors best defense when material misstatements are not uncovered is to have conducted the audit:

1. 1. in accordance with generally accepted auditing standards.
   2. as effectively as reasonably possible.
   3. in a timely manner.
   4. only after an adequate investigation of the management team.

2. An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and:
   1. the assumption that upper-level management is dishonest.
   2. a critical assessment of the audit evidence.
   3. the assumption that all employees are motivated by greed.
   4. verification of all critical information by independent third parties.

3. Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?
   1. The auditor commonly examines a sample, rather than the entire population of transactions.
   2. Accounting presentations contain complex estimates which involve uncertainty.
   3. Fraudulently prepared financial statements are often difficult to detect.
   4. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

4. Which of the following statements is the most correct regarding errors and fraud?
   1. An error is unintentional, whereas fraud is intentional.
   2. Frauds occur more often than errors in financial statements.
   3. Errors are always fraud and frauds are always errors.
   4. Auditors have more responsibility for finding fraud than errors.

5. When an auditor believes that an illegal act may have occurred, the auditor should first:
   1. obtain an understanding of the nature and circumstances of the act.
   2. consult with legal counsel or others knowledgeable about the illegal act.
   3. discuss the matter with the audit committee.
   4. withdraw from the engagement.

6. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not                                    are detected.
   1. important to the financial statements
   2. statistically significant to the financial statements
   3. material to the financial statements
   4. identified by the client

7. Fraudulent financial reporting is most likely to be committed by whom?
   1. Line employees of the company
   2. Outside members of the company's board of directors
   3. Company management
   4. The company's auditors

8. Which of the following would most likely be deemed a direct-effect illegal act?
   1. Violation of federal employment laws
   2. Violation of federal environmental regulations
   3. Violation of federal income tax laws
   4. Violation of civil rights laws

9. The concept of reasonable assurance indicates that the auditor is:
   1. not a guarantor of the correctness of the financial statements.
   2. not responsible for the fairness of the financial statements.
   3. responsible only for issuing an opinion on the financial statements.
   4. responsible for finding all misstatements.

10. Which of the following is the auditor least likely to do when aware of an illegal act?
    1. Discuss the matter with the client's legal counsel.
    2. Obtain evidence about the potential effect of the illegal act on the financial statements.
    3. Contact the local law enforcement officials regarding potential criminal wrongdoing.
    4. Consider the impact of the illegal act on the relationship with the company's management.

11. An auditor discovers that the company's bookkeeper unintentionally made a mistake in calculating the amount of the quarterly sales. This is an example of:
    1. employee fraud.
    2. an error.
    3. misappropriation of assets.
    4. a defalcation.

12. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to:
    1. provide reasonable assurance that material misstatements will be detected.
    2. be a guarantor of the fairness in the statements.
    3. be equally responsible with management for the preparation of the financial statements.
    4. be an insurer of the fairness in the statements.

13. "The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered." This is an example of:
    1. unprofessional behavior.
    2. an attitude of professional skepticism.
    3. due diligence.
    4. a rule in the AICPA's Code of Professional Conduct.

14. If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct:
    1. bankruptcies could no longer occur.
    2. bankruptcies would be reduced to a very small number.
    3. audits would be much easier to complete.
    4. audits would not be economically practical.

15. One of the characteristics of professional skepticism is                              , which is the conviction to decide for oneself, rather than accepting the claims of others.
    1. interpersonal understanding
    2. autonomy
    3. suspension of judgment
    4. self-esteem

16. When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor:
    1. should inquire of management about whether the entity is in compliance with such laws and regulations.
    2. has no responsibility to determine if any violations of these laws has occurred.
    3. must report all violations, including inconsequential violations, to the audit committee.
    4. should perform the same procedures as for violations having a direct effect on the financial statements.

17. Which of the following statements is usually true?
    1. Materiality is easy to quantify.
    2. Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management.
    3. Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement.
    4. An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

18. Auditing standards make                           distinction(s) between the auditor's responsibilities for searching for errors and fraud.
    1. little
    2. a significant
    3. no
    4. various

19. In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:
    1. greater for management fraud because managers are inherently more deceptive than employees.
    2. greater for management fraud because of management's ability to override existing internal controls.
    3. greater for employee fraud because of the higher crime rate among blue collar workers.
    4. greater for employee fraud because of the larger number of employees in the organization.

20. Misappropriation of assets:
    1. is generally committed by company management.
    2. harms the users of the financial statements by providing them incorrect financial data for their decision making.

1. 3. causes harm to stockholders because the assets are no longer available to their rightful owners.
   4. causes the financial statements to be misstated since the misappropriation usually involves material amounts.

21. When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:
    1. more on discovering errors than employee fraud.
    2. more on discovering employee fraud than errors.
    3. equally on discovering errors and employee fraud.
    4. on the senior auditor for detecting errors and on the manager for detecting employee fraud.

22. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is:
    1. very low.
    2. very high.
    3. zero.
    4. none of the above.

23. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should:
    1. include audit procedures which have a strong probability of detecting illegal acts.
    2. still include some audit procedures designed specifically to uncover illegalities.
    3. ignore the issue.
    4. make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.

24. When the auditor identifies or suspects noncompliance with laws and regulations, the auditor:
    1. should discuss the matter with those whom they believe committed the illegal act.
    2. begin communication with the FASB in accordance with PCAOB regulations.
    3. may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.
    4. should withdraw from the engagement.

25. When an auditor knows that an illegal act has occurred, she must:
    1. report it to the proper governmental authorities.
    2. consider the effects on the financial statements, including the adequacy of disclosure.
    3. withdraw from the engagement.
    4. issue an adverse opinion.

26. A questioning mindset:
    1. means the auditor must prove every statement that management makes to them.
    2. means the auditor should approach the audit with a "do not trust anyone" mental outlook.

1. 3. assures that the auditor will only accept honest clients.
   4. means the auditor should approach the audit with a "trust but verify" mental outlook.

27. Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?
    1. Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements.
    2. The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
    3. It is the responsibility of the auditor to determine if an act constitutes noncompliance.
    4. The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

28. Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?
    1. Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.
    2. Generally, the auditor is under an obligation to inform the PCAOB.
    3. Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
    4. Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

29. Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
    1. The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
    2. The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
    3. The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets.
    4. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

30. The essence of the attest function is to:
    1. assure the consistent application of correct accounting procedures.
    2. determine whether the client's financial statements are fairly stated in accordance with an applicable financial reporting framework.
    3. examine individual transactions so that the auditor may certify as to their validity.
    4. detect collusion and fraud.

31. The auditor's evaluation of the likelihood of material employee fraud is normally done initially as a part of:
    1. tests of controls.
    2. tests of transactions.
    3. understanding the entity's internal control.
    4. the assessment of whether to accept the audit engagement.

32. One of the characteristics of professional skepticism is                          , which is a desire to investigate beyond the obvious.
    1. self-esteem
    2. an interpersonal understanding
    3. a search for knowledge
    4. a questioning mindset

33. Most illegal acts affect the financial statements:
    1. directly.
    2. only indirectly.
    3. both directly and indirectly.
    4. materially if direct; immaterially if indirect.

34. If a client has violated federal tax laws:
    1. the auditor must notify the IRS.
    2. and the amount is significant, the auditor should communicate with those charged with governance.
    3. the noncompliance generally will not impact the financial statements.
    4. the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

35. An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should:
    1. plan and perform the engagement with an attitude of professional skepticism.
    2. not rely on internal controls that are designed to prevent or detect errors or fraud.
    3. design audit tests to detect unrecorded transactions.
    4. extend the work to audit the majority of the recorded transactions and records of an entity.

36. Which of the following is not one of the three categories of assertions?
    1. 1. 1. Assertions about classes of transactions and events for the period under audit
          2. Assertions about financial statements and correspondence to GAAP
          3. Assertions about account balances at period end
          4. Assertions about presentation and disclosure

37. If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the:
    1. 1. 1. completeness assertion.
          2. existence assertion.
          3. cutoff assertion.
          4. classification assertion.

38. International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements?
    1. 1. 1. Assertions about classes of transactions for the period under audit

1. 1. 1. 2. Assertions about account balances at period end
         3. Assertions about the quality of source documents used to prepare the financial statements
         4. Assertions about presentation and disclosure

39. Management assertions are:
    1. 1. 1. directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.
          2. stated in the footnotes to the financial statements.
          3. explicitly expressed representations about the financial statements.
          4. provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

40. Management makes the following assertions about account balances:
    1. 1. 1. existence, completeness, classification and cutoff.
          2. existence, accuracy, classification and rights and obligations.
          3. existence, completeness, valuation and allocation, and rights and obligations.
          4. existence, completeness, rights and obligations, and cutoff.

41. Which of the following statements is true about the completeness and occurrence assertions?
    1. 1. 1. Both assertions are relevant to classes of transactions and events and account balances.
          2. If management asserts that recorded sales transactions represent exchanges of goods or services that actually took place, they are asserting to completeness.
          3. Violations of the occurrence assertion relate to account overstatements.
          4. The failure to record a sale that did occur is a violation of the occurrence assertion.

42. Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"?
    1. 1. 1. Occurrence
          2. Completeness
          3. Rights and obligations
          4. Existence

43. Which of the following management assertions is not associated with classes of transactions and events?
    1. 1. 1. Occurrence
          2. Classification
          3. Accuracy
          4. Rights and obligations

44. Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?
    1. 1. 1. 1. 1. The specific audit objectives are applicable to every class of transactions.
                2. The general audit objectives are applicable to every class of transactions.
                3. Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives.

1. 1. 1. 1. 1. 4. For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

45. The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction related audit objective?
    1. 1. 1. 1. 1. Existence
                2. Completeness
                3. Accuracy
                4. Cut-off

46. The posting and summarization audit objective is the auditor's counterpart to management's assertion of:
    1. 1. 1. 1. 1. occurrence.
                2. completeness.
                3. accuracy.
                4. classification.

47. After the general transaction related-audit objectives are understood, specific transaction- related audit objectives for each material class of transactions can be developed. Which of the following statements is true?
    1. 1. 1. 1. 1. There should be at least one specific objective for each relevant general objective.
                2. There will be only one specific objective for each relevant general objective.
                3. There will be many specific objectives developed for each relevant general objective.
                4. There must be one specific objective for each general objective.

48. In testing for cutoff, the objective is to determine:
    1. 1. 1. 1. 1. 1. 1. whether all of the current period's transactions are recorded.
                      2. whether transactions are recorded in the correct accounting period.
                      3. the proper cutoff between capitalizing and expensing expenditures.
                      4. the proper cutoff between disclosing items in footnotes or in account balances.

49. The detail tie-in objective is not concerned that the details in the account balance:
    1. 1. 1. 1. 1. 1. 1. agree with related subsidiary ledger amounts.
                      2. are properly disclosed in accordance with GAAP.
                      3. foot to the total in the account balance.
                      4. agree with the total in the general ledger.

50. The detail tie-in is part of the                            assertion for account balances.
    1. 1. 1. 1. 1. 1. 1. classification
                      2. valuation and allocation
                      3. rights and obligations
                      4. completeness

51. The classification balance-related audit objective:

1. 1. 1. 1. 1. 1. 1. 1. involves determining if items included on a client's listing are included in the correct general leger accounts.
                     2. is the counterpart to the management assertion of completeness.
                     3. involves determining if items included on a client's listing are disclosed properly in the financial statements.
                     4. involves tying in the account balances to the general ledger.

52. Which of the following best describes tests of details of balances?
    1. 1. 1. 1. 1. 1. 1. Audit procedures designed to test for monetary misstatements in the accounts summarized in the financial statements
                      2. Audit procedures designed to test for the monetary amounts of transactions
                      3. Audit procedures designed to test for reasonableness of account balances
                      4. Audit procedures designed to test for effectiveness in recording accounting information

53. Which of the following statements is not true?
    1. 1. 1. 1. 1. 1. 1. Balance-related audit objectives are applied to ending account balances.
                      2. Transaction-related audit objectives are applied to classes of transactions.
                      3. Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
                      4. Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

54. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the:

1. board of directors.
2. company management.
3. financial statement auditor.
4. company's internal audit department

55. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or:

A)

B)

C)

D)

56. The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:
    1. the auditor.