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Audit programs can be developed only after the auditor has completed the audit _______________ process. ANSWER: PLANNING


An auditor who gathers increased quantities of evidence for larger account balances is observing the standard relating to of audit evidence. ANSWER: SUFFICIENCY


An auditor who gathers increased amounts of external evidence under conditions of weak internal control is observing the standard of of audit evidence. ANSWER: COMPETENCE (VALIDITY)


In performing substantive audit tests, focusing on the existence or occurrence objective helps locate misstatements due to while the completeness objective directs audit attention to misstatements due to . ANSWER: COMMISSION, OMISSION


Evidence consisting of everything that can be counted, examined, observed, or inspected is referred to as _____________ evidence. ANSWER: PHYSICAL


The audit trail consists of that stream of evidence that enables the auditor to trace a transaction or event forward from its inception to the appropriate ledger account, or conversely, vouch a transaction backward from the ledger account to the inception of the transaction or event. For the audit trail to exist, transactions must be . ANSWER: DOCUMENTED evidence may be the best form the objective, in concerning errors of omission the application of analytical of evidence that auditors' are often first procedures.


Analytical supporting suspicions aroused by ANSWER:



An auditor-prepared bank reconciliation is an example of _______________ evidence.



A group of related transactions affecting essentially the same set of general ledger accounts is referred to as a _________________ . ANSWER: TRANSACTION CYCLE


The focal point of the current file is the ____________ _______________ ______________ often referred to as a table of contents. ANSWER: WORKING TRIAL BALANCE


In satisfying the requirements of SAS 82, the auditor must assess the risk of material misstatement due to fraud, develop an appropriate audit response, and ___________ the response. ANSWER: DOCUMENT


A preliminary expectation of few errors, followed by subsequent discovery of numerous errors should lead to a in the aggregate materiality threshold. ANSWER: DECREASE (LOWERING, REDUCTION)


High inherent risk, combined with high control risk, should lead the auditor to the aggregate materiality threshold. ANSWER: LOWER (DECREASE, REDUCE)

44. A scheme perpetrated by top management to inflate reported earnings and net assets for the purpose of maximizing the value of stock options and/or bonuses is an example of _____________. ANSWER: FRAUDULENT FINANCIAL REPORTING

45. The main factor that distinguishes errors from fraud is . ANSWER: INTENT


The two factors that contribute to the probability that unaudited financial statements contain material errors or fraud are and . ANSWER: INHERENT RISK, CONTROL RISK


Inasmuch as its complement forms the basis for the audit opinion, overall audit risk should be set . ANSWER: LOW risk is the


In the audit risk equation, controllable variable. ANSWER: DETECTION


The auditors primary goal in considering the client acceptance decision is to avoid associating with clients whose managements lack . ANSWER: INTEGRITY


In a recurring audit, the best source of business and industry information may be found in the . ANSWER: PERMANENT FILE


The financial statement impact of a single error is referred to as materiality, whereas the total effect of a series of errors is termed materiality. ANSWER: INDIVIDUAL ITEM, AGGREGATE


An audit approach that allocates proportionately more audit resources to areas of high audit risk is referred to as a audit. ANSWER: RISK-DRIVEN


The , in addition to the permanent file, is an effective means for familiarizing members of the audit team with the nature of the client's business and for highlighting those areas presenting the highest audit risk. ANSWER: PRE-AUDIT CONFERENCE


The is an effective device for planning and controlling audit field work.



Illegal payments, fraud detected during the audit, and contingencies are examples of _____________ aspects of materiality. QUALITATIVE


An overriding factor contributing to internal control effectiveness is toward internal control. ANSWER: MANAGEMENT ATTITUDE


A chart of accounts, accounting manuals, and standard journal entries promote proper of transactions. ANSWER: RECORDING .


Evidence of proper approval, review, and recording of transactions is provided by a well-documented ANSWER: AUDIT TRAIL


Limited access controls and accountability controls are subsets of . ANSWER: SAFEGUARD CONTROLS


The independent auditor is interested only in those aspects of control that affect the . ANSWER: FINANCIAL STATEMENTS


An effective system of budgeting, standard costs, and performance reporting should highlight significant variances caused by failure to record transactions. This set of controls, therefore, assists in detecting material errors of . ANSWER: OMISSION is met, errors


To the extent the assertion of of omission are minimized. ANSWER: COMPLETENESS


To assure proper control in a small business, the necessary approval and review procedures should be performed by the . OWNER/MANAGER


After assessing inherent risk, the auditor needs to assess control risk in order to complete the phase of the audit. ANSWER: PLANNING


Based on the initial understanding of internal control, the auditor may decide to assess control risk at the maximum level for some assertions and below maximum for others. To justify reducing the assessed level of control risk below maximum, the auditor must obtain an understanding of the of the controls relating to those assertions. ANSWER: OPERATING EFFECTIVENESS


As an internal control documentation device, the internal control , by presenting a pictorial overview of the processing steps, has the advantage of providing a clear and easy review of existing internal control policies and procedures. ANSWER: FLOWCHART


is an effective means for further testing of selected internal control policies and procedures where an audit trail in the form of documentation exists. ANSWER: DOCUMENT EXAMINATION AND TESTING


Whenever control risk is assessed below maximum, the auditor must document the for such reduction. ANSWER: BASIS


If, based on the study of the business and application of analytical procedures, the auditor suspects earnings inflation, individual item materiality thresholds should be .



For transaction cycle subsets where internal control is weak and numerous errors are expected, aggregate materiality thresholds should be set ____ relative to those applicable to strong internal control subsets. ANSWER: LOW


The nature and timing of substantive audit procedures requires a approach to designing audit programs, whereas determining the extent of testing suggests a approach. ANSWER: QUALITATIVE, QUANTITATIVE


Although computerized data processing does not affect audit objectives, the auditor may need to modify the audit , given complex CBIS applications. ANSWER: APPROACH


In a batch processing system transactions are processed in groups, whereas in a real-time system transactions are entered as they and are processed as they are . ANSWER: OCCUR, ENTERED , than batch


Although powerful in terms of real- time systems are more processing systems. ANSWER:



A distinguishing feature of integrated data base systems is that many files are updated as transactions are processed. ANSWER: SIMULTANEOUSLY


systems, by eliminating the need to reenter data into the accounting system, reduce the incidence of processing errors; but, by reducing transaction documentation, these systems also require greater attention to proper controls over the of transactions. ANSWER: ELECTRONIC DATA INTERCHANGE, INPUT


Input controls, processing controls, and output controls are categories of controls. ANSWER: APPLICATION


Some entities require completing a prior to transaction input, in order to ensure consistency and completeness of recurring inputs. ANSWER: TRANSACTION LOG


are manual control procedures applied by organizational units whose data are processed by data processing. ANSWER: USER CONTROLS


In on-line real-time systems the most effective means for assuring limited access to data bases is by the use of properly controlled . ANSWER: PASSWORDS


Programmed controls for testing the validity of customer numbers, product numbers, employee numbers, and vendor numbers, as well as tests for reasonableness, are collectively referred to as controls. ANSWER: INPUT EDITING


In a ____________ __________ system, users own their own data, whereas in _________ ______ systems, users share a single operating system housed in a central location. FLAT FILE, MULTI-USER


Statistical sampling for attributes is most applicable in situations where a visible in the form of exists. ANSWER: AUDIT TRAIL, DOCUMENTATION


As contrasted with statistical sampling, nonstatistical sampling is a more approach to inference. ANSWER: SUBJECTIVE

49. whereas amount. ANSWER: 50.

estimates the frequency of events, is an estimate of ATTRIBUTE SAMPLING, VARIABLES SAMPLING

The is the anticipated error rate, whereas the is the maximum rate of error acceptable to the auditor, while still warranting a lowering of assessed control risk below the maximum level. ANSWER: EXPECTED OCCURRENCE RATE, TOLERABLE OCCURRENCE the precision range, the larger the

RATE 51. The sample size. ANSWER: 52. NARROWER

The more critical an attribute to those control policies and procedures relevant to an audit, the the tolerable occurrence rate. ANSWER: LOWER

53. `

Another term for "risk of underassessment" is ____________ risk. ANSWER: BETA


Random selection requires that items to be included in the sample must be drawn on a basis. ANSWER: PROBABILITY


When documents are not prenumbered, an acceptable alternative to the use of random number tables or computer-generated numbers is ANSWER: SYSTEMATIC SAMPLING


Under conditions of detection risk, a minimal quantity of audit evidence is needed.

ANSWER: HIGH 44. Of the two variations of classical variables sampling, often results in smaller sample sizes and is therefore more cost-effective under those


Detection risk, defined as the risk that material errors or fraud that are not prevented or detected by the client's system of internal control, will not be discovered by the auditor, is referred to as by statisticians. ANSWER: BETA RISK


Rejecting a book value that is stated fairly is referred to as risk. ANSWER: ALPHA


Standard deviation is defined as the degree of variation of individual values about the population mean. The more narrowly dispersed the values in the population, the (larger or smaller) the standard deviation. ANSWER: SMALLER


In applying probability proportional to size sampling, the auditor rejects a book value as being materially overstated when upper error limit is (greater or less) than the tolerable error. ANSWER: GREATER


For PPS sampling purposes, the allowance for sampling risk is the sum of basic precision plus the . ANSWER: INCREMENTAL ALLOWANCE


The incremental allowance for precision need be calculated only when errors are found in logical units that are (larger or smaller) than the _______________ . ANSWER: SMALLER, SAMPLING INTERVAL


As contrasted with classical variables sampling, probability proportional to size sampling has the advantage of automatically the population such that logical units equal to or greater than the _____________

_________ have a 100% chance of being included in the sample. ANSWER: 52. STRATIFYING, SAMPLING INTERVAL

Probability proportional to size sampling has its greatest applicability to situations in which the auditor suspects a few material errors of . ANSWER: OVERSTATEMENT


In evaluating sampling results for mean per unit sampling purposes, achieved precision (A') must be equal to or ______ (greater or less) than desired precision (A). Otherwise, the actual beta risk is higher than specified in the sampling plan, and further sampling would be necessary to reduce the risk to an acceptable level. ANSWER: LESS

COMPLETION: 49. In applying the concept of in auditing, given that two or more alternate methods for obtaining evidence are equally effective in meeting the stated audit objective, the auditor should choose the least costly from among the alternatives. ANSWER: 50. COST/BENEFIT

An audit approach that is designed to avoid overemphasizing either income overstatement or income understatement is said to be . ANSWER: BALANCED


Audit procedures that examine documentary evidence supporting sales transactions for a few days before and after year end are referred to as tests. ANSWER: SALES CUTOFF


Many accounts receivable confirmation exceptions involve goods or remittances in transit and usually (do or do not) require adjustment. ANSWER: DO NOT


A schedule that categorizes accounts receivable balances by period of time outstanding is referred to as a(n)


A bank overdraft that is material in amount should be reported on the balance sheet as a ANSWER: CURRENT LIABILITY


Kiting, a type of fraudulent financial reporting used to conceal bank overdrafts or cash misappropriations, may be detected by an analysis of . ANSWER: INTERBANK TRANSFERS


The time lag between the disbursing and payee banks for cash transfers is referred to as . ANSWER: FLOAT


A performs the same function as the bank reconciliation and, in addition, reconciles the client's recorded receipts and disbursements with bank statement credits and debits. PROOF OF CASH


Two alternative means for determining that recorded securities exist are and . ANSWER: INSPECTION (EXAMINATION), CONFIRMATION


When examining securities, the auditor should prepare a workpaper (count sheet) that lists such data as serial number of the securities certificate, registered owner, and number of shares or par value. This workpaper should then be compared with the client's investment record for agreement. In this regard, the auditor tests for existence of securities by tracing from (investment record or count sheet) to the (investment record or count sheet); and the auditor tests for completeness by tracing from the to the . ANSWER: INVESTMENT RECORD, COUNT SHEET, COUNT SHEET, INVESTMENT RECORD


Auditing intracompany transactions for consistency and completeness is known as a test for .



If investments in unconsolidated subsidiaries are accounted for under the equity method, the auditor may need to insist that the financial statements of these subsidiaries be . ANSWER: AUDITED


Examining long-term debt agreements helps the auditor identify necessary and . ANSWER: ACCRUALS, DISCLOSURES


Although a Type II subsequent event does not require adjustment, it may require . ANSWER: DISCLOSURE


An audit workpaper listing unresolved matters and the ultimate disposition of these matters is commonly referred to as a(n) workpaper. ANSWER: OPEN ITEMS


The vehicle that is designed to make management more aware of their primary responsibility for fairness of financial presentation is known as the . ANSWER: CLIENT REPRESENTATION LETTER

COMPLETION: 56. The nature of the examination is described in the ____________ paragraph of the audit report. ANSWER: 57. SCOPE

Generally accepted auditing standards are addressed in the paragraph of the audit report, whereas generally accepted accounting principles are the evaluation standard used in the paragraph. ANSWER: SCOPE, OPINION


The two relevant dates in a dual-dated audit report are the date of completion of audit field work and the date of the . ANSWER: SUBSEQUENT EVENT


An unqualified audit opinion may be rendered only when the financial statements contain no material departures from GAAP, and when no material have prevented the auditor from collecting sufficient, competent evidence. ANSWER: SCOPE LIMITATIONS (RESTRICTIONS)


The statement "in our opinion the financial statements do not present fairly" is included in a(n) ____________ opinion. ANSWER: ADVERSE


The responsibilities of management and the auditors with respect to the financial statements are described in the paragraph of the audit report. ANSWER: INTRODUCTORY


An audit report, in a separate paragraph following the opinion paragraph, describes the impact of related party transactions that have been properly reflected and disclosed in the financial statements. This form of report illustrates __ . ANSWER: EMPHASIS OF A MATTER


A CPA who audited the financial statements for the preceding year, and will also be auditing the current year, is said to be a auditor. ANSWER: CONTINUING


If a scope restriction is material and client-imposed, the auditor should render a(an) (qualified, adverse, disclaimer of) opinion. ANSWER: DISCLAIMER OF


A fourth paragraph making reference to omission of supplemental data required by FASB is categorized as .

ANSWER: 66. the


If financial statements have been prepared utilizing a comprehensive basis of accounting other than GAAP, auditor will evaluate fairness within the framework of ____ __________ ________.


ANSWER: THE OTHER BASIS The two levels of attestation are and assurance. ANSWER: POSITIVE, NEGATIVE



Unlike a compilation, a review report includes, after the disclaimer, a paragraph expressing on the financial statements. ANSWER: LIMITED (NEGATIVE) ASSURANCE


Another term for limited assurance is assurance. ANSWER: NEGATIVE


A CPAs expression of an opinion on the effectiveness of a clients internal control system is known as __________ attestation. ANSWER: DIRECT


A CPAs expression of an opinion on managements assertions as to the effectiveness of a clients internal control system is known as ______________ attestation. ANSWER: INDIRECT


A report covering the application of agreed-upon procedures an on the financial statements because the procedures are less extensive than those applied in an audit. ANSWER: 41. DISCLAIMS, OPINION

If procedures have been applied to unaudited data, the CPA may give in the

comfort letter to underwriters of proposed securities issues. ANSWER: 42. LIMITED, NEGATIVE ASSURANCE

The requires that public companies establish and maintain adequate systems of internal control. ANSWER: FOREIGN CORRUPT PRACTICES ACT OF 1977


If interim financial information which has been reviewed is presented alone, rather than in an unaudited footnote to the annual financial statements, a report must accompany the statements. ANSWER: REVIEW


An examination of prospective financial statements, like an audit, requires a form of .

ANSWER: ATTESTATION (OPINION) Select the term that best fits the listed definition. A. Review B. Assertion C. Forecast D. Compilation E. Prospective financial statements F. Projection G. Agreed-upon procedures engagement H. Assurance services I. Compliance attestation J. Negative assurance K. Attestation ____1. The CPA presents information that is the representation of management without undertaking to express any assurance on the statements. ____2. Independent professional services that improve the quality of information, or its context, for decision makers. ____3. A disclaimer of opinion followed by a statement that nothing came to the CPAs attention indicating that the financial statements were not in conformity with GAAP. ____4. audit. More extensive than a compilation but less so than an

____5. The resulting report is in the form of procedures applied and findings. ____6. Results in a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. ____7. Any declaration, or set of related declarations taken as a whole, by a party responsible for it. ____8. Assurance regarding an entitys conformity with specified laws, regulations, rules, contracts, or grants. ____9. Future-oriented financial statements.

____10. Presents the entitys expected financial position, results of operations, and cash flows reflecting conditions expected to exist. SOLUTION: 1. D 2. H 3. J 4. A 5. G 6. K 7. B 8. I 9. E 10. C 23. Management auditing concentrates more on ____________ than efficiency.



24. Efficiency is __________ oriented, whereas effectiveness is __________ oriented.




Until recently, operational auditing performed recurring

efficiency and effectiveness audits on different functions or units in a company. The emphasis has now begun to shift away from recurring audits to focus more on managements special problems. This latter approach is referred to as ________- __________ operational auditing.




In conducting an operational audit, identification of ___________ __________ is necessary if the auditor is to ultimately determine the cause of discovered inefficiencies.




The __________ __________ consists of those procedures necessary to satisfy the audit objectives and produce sufficient and competent evidence to corroborate or refute the auditors preliminary findings.




In drafting an operational audit report, the difference between actual and expected conditions should be presented as to _______ and _______.



24. Whenever footing ad comparisons are restricted to journals, master file records, and ledgers, the process is a. Valuation c. Cutoff b. Summarization d. Completeness