Ch.

6
...

The appropriateness of audit evidence refers to its relevance

and reliability.
True

*The sufficiency of evidence is a measure of evidence quality.

False

*When testing for existence, the auditor will vouch recorded

transactions.
True

Evidence that is obtained directly from the client is usually

considered more reliable than evidence obtained from a source
independent of the client.
False

A procedure that involves only inspection of documentation is

usually considered to be of lower quality than a procedure
involving reperformance.
True

All audit procedures need to be performed at or after the

client's balance sheet date.
False

Substantive analytical procedures are required on every audit.

False

One of the most rigorous approaches to substantive analytical

procedures is regression analysis.
True

The quantity of audit evidence needed when testing an

account will be influenced by the risk of material misstatement
in that account.
True

When testing the operating effectiveness of a control, the

frequency with which the control is performed will influence
the sample size to be used by the auditor.

True

Because management estimates are often subjective, the

auditor does not need to test these estimates, but can rely
solely on management's work.
False

When testing management estimates, the auditor should

understand the process that management uses to develop its
estimates.
True

When relying on the work of a specialist, the auditor should

evaluate the professional qualifications of the specialist.
True

When the auditor uses the work of a specialist, the auditor's

responsibility for the audit opinion is reduced.
False

The auditor may be able to use generalized audit software to

identify transactions that have been entered into with related
parties.
True

A primary concern for the auditor for related-party

transactions is whether undisclosed related-party relationships
and transactions exist.
True

The auditor should document significant issues that were

identified and how they were resolved.
True

*As part of the audit documentation, auditors should maintain

copies of all client documents reviewed during the audit.
False

A standardized audit program, without any modifications,

should be used for each client.
False

An audit program can be used to record the audit work

performed and identify those responsible for performing the
work.
True

Which of the following statements best describes what is

meant by the term appropriateness of audit evidence?
a. Appropriateness is a measure of the quality of audit
evidence.
b. Appropriateness refers to the relevance and reliability of
audit evidence.
c. Appropriateness is a measure of the quantity of audit
evidence.
d. Both a. and b.
D

Which of the following statements is true regarding the

relationship
between risk and evidence sufficiency for substantive tests?
a. Evidence sufficiency will be affected by inherent risk, but not
control risk.
b. Evidence sufficiency will be affected by control risk, but not
inherent risk.
c. Evidence sufficiency will be affected by both inherent and
control risks.
d. None of the above statements are true.
C

*An auditor determines that management integrity is high, the

risk of material misstatement is low, and the client's internal
controls are effective. Which of the following conclusions can
be reached regarding the need to obtain direct evidence
regarding the
account balances?
a. Direct evidence can be limited to material account balances,
and the extent of testing should be sufficient to corroborate the
auditor's assessment of low risk.
b. Direct evidence of account balances is not needed.
c. Direct evidence can be obtained through analytical
procedures.
d. Direct evidence should be obtained for all accounts,
regardless of the auditor's assessment of control risk.
A

Which of the following factors affects the relevance of audit

evidence?
a. The purpose of the audit procedure.
b. The direction of testing.
c. The type of procedure.
d. All of the above factors affect the relevance of audit evidence.
D

*The auditor wishes to test the completeness assertion. Which

of the following statements is true regarding the auditor's work
flow?
a. The auditor would take a sample of recorded transactions
and obtain supporting documentation for those transactions.
b. The auditor would perform a process referred to as tracing.
c. The auditor would take a sample of source documents and
obtain additional supporting documents for those transactions.
d. For a sample of items recorded in the sales journal, the
auditor would obtain the related shipping documents and
customer orders.
B

The auditor wishes to gather evidence to test the assertion that

the client's capitalization of leased equipment assets is properly
valued. Which of the following sources of evidence will the
auditor generally find to be of the highest quality (most reliable
and relevant)?
a. Inspection of the leased equipment.
b. Inspection of documents, including the lease contract and
recalculation of capitalized amount and current amortization.
c. Confirmation of the current purchase price for similar
equipment with vendors.
d. Confirmation of the original cost of the equipment with the
lessor.
B

*Analytical procedures are best used as a substantive audit

procedure in which of the following scenarios?
a. The auditor's primary objective is to reduce audit costs to a
minimum.
b. Internal control risk is high, and therefore it is not efficient
to test controls.

c. Preliminary analytical procedures indicate that

misstatements are likely to occur in significant account
balances.
d. Substantive analytical procedures would not be appropriate
in any of the above scenarios.
D

*Which of the following statements is false regarding

substantive analytical procedures?
a. Substantive analytical procedures are not required to be
performed on all audit engagements.
b. If the results of substantive analytical procedures suggest
that an account balance is materially correct, the evidence
needed from tests of details can likely be reduced.
c. Substantive analytical procedures would be performed after
tests of details.
d. All of the above statements are true.
C

The sufficiency of audit evidence is affected by which of the

following factors?
a. The reliability of the audit evidence.
b. The relevance of the audit evidence gathered.
c. The risk of material misstatement of the assertion being
examined.
d. All of the above.
D

Which of the following statements is true regarding the

sufficiency of evidence needed to test an account?
a. Evidence sufficiency is a measure of evidence quality.
b. Evidence sufficiency is affected by the quality of evidence.
c. A relationship does not exist between evidence sufficiency
and evidence quality.
d. For a specific client, evidence sufficiency will be the same
across all accounts.
B

Which of the following procedures would an auditor typically

perform first when assessing the reasonableness of
management's estimate of its pension liability?
a. Inspect documentation related to the pension transactions

that the client has recorded.

b. Develop an understanding of management's process for
developing the estimate.
c. Identify sensitive management assumptions.
d. Review transactions occurring prior to the report release
date to assess the reasonableness of management estimates.
B

Which of the following is a reason that accounts containing

management estimates pose a high level of risk of material
misstatement for auditors?
a. Accounting estimates are especially susceptible to
management bias.
b. Accounting estimates are a means for management to
manage or misstate the financial statements.
c. Accounting estimates are sensitive to variations in
management assumptions.
d. All of the above are reasons that accounts containing
management estimates pose a high level of risk of material
misstatement for auditors.
D

For which of the following audit judgments would an auditor

be least likely to use an audit specialist?
a. Existence of cash.
b. Valuation of works of art.
c. Valuation of oil and gas reserves.
d. Interpretation of laws and regulations.
A

Which of the following statements is true regarding the

auditor's use of the work of a specialist?
a. The specialist, not the auditor, is responsible for evaluating
whether the specialist's findings support the assertions in the
financial statements.
b. Because the individual is considered a specialist, the auditor
does not need to evaluate the professional qualifications of the
specialist.
c. The auditor should obtain an understanding of the methods
and assumptions used by the specialist.
d. All of the above statements are true.
C

Which of the following statements is most accurate regarding

the auditor's primary focus on a client's related-party
transactions?
a. The auditor wants reasonable assurance that all relatedparty transactions are accounted for differently than
transactions with unrelated parties.
b. The auditor will want to confirm the existence of the related
parties.
c. The auditor wants reasonable assurance that all relatedparty transactions have been appropriately disclosed.
d. The auditor will focus on verifying the valuation of the
related-party transactions.
C

Which of the following transactions would be least likely to be a

related-party transaction?
a. A purchase transaction between an entity and its owners.
b. A debt-related transaction between an entity and one of its
SPEs.
c. An exchange of property between an entity and a joint
venture in which the entity has part ownership.
d. Writing-off obsolete inventory prior to year end.
D

Which of the following statements is true regarding audit

documentation?
a. Auditors document only those significant issues that have
not been resolved by the audit report date.
b. Audit documentation provides the principal support for the
audit opinion expressed by the auditor.
c. Audit documentation would identify who reviewed the audit
work, but not who performed the audit work.
d. Documentation must be in paper format.
B

Which of the following items would typically not be included in

the heading of a workpaper?
a. Client name.
b. Client balance sheet date.
c. Audit firm name.
d. A descriptive explanatory title.
C

Which of the following statements describes a purpose of an

audit program?
a. An audit program is used to specify the procedures to be
performed in obtaining audit evidence.
b. An audit program is used to record the completion of each
audit step.
c. An audit program is useful for monitoring the progress of the
audit.
d. All of the above statements describe the purpose of an audit
program.
D

Which of the following items would typically not be included in

an audit program?
a. A list of audit procedures to be performed.
b. An indication of who performed the procedure.
c. A workpaper heading.
d. All of the above would typically be included in an audit
program.
D

Ch. 7
...

Material misstatements refer only to intentional misstatements

that exist in a transaction or financial statement account
balance.
False

*Performance materiality is set less than overall materiality

and helps the auditor determine the extent of audit evidence
needed.
True

Detection risk is the susceptibility of an assertion about a class

of transaction, account balance, or disclosure to a
misstatement that could be material before consideration of
related controls.
False

Audit risk is the risk that the auditor expresses an

inappropriate audit opinion when the financial statements are
materially misstated.
True

Inherent risks at the financial statement level include factors

that could threaten the fundamental financial viability of the
organization.
True

Inherent risk at the financial statement level is not affected by

the competence and integrity of management or their potential
incentives to misstate the financial statements.
False

Some level of control risk is always present in an organization

because of the inherent limitations of internal control.
True

*Each of the following factors would lead the auditor to assess

control risk at a higher level: the company lacks personnel or
expertise to deal with changes in the industry, there exist
significant supply chain risks, the industry is mature and
declining, and there exist regulatory requirements that
increase legal exposure.
False

When conducting trend analysis, it is important that the

auditor not develop expectations and establish decision rules in
advance; doing so would make it more difficult for the auditor
to identify unexpected results for additional investigation
False

*When performing preliminary analytical procedures and

evaluating the results of those procedures, it is important that
the auditor discusses the results with management before
identifying hypotheses to explain the results; by discussing
with management the auditor will be better able to identify
alternative explanations.
False

A high level of detection risk means that the audit firm is

willing to take accept a low risk of not detecting a material
misstatement.

False

The interpretation of audit risk set at a low level (1%) is that the
auditor is willing to take only a 1% chance of expressing an
audit opinion that the financial statement are fairly presented
when they are materially misstated.
True

*The nature of risk response refers to the sufficiency and

appropriateness of evidence that is necessary given the client's
assessed risks, materiality, and the level of audit risk that is
deemed acceptable.
False

In terms of the timing of the risk response, the following

procedures can be completed only at or after period end:
comparing the financial statements to the accounting records,
evaluating adjusting journal entries made by management in
preparing the financial statements, and conducting procedures
to response to risks that management may have engaged in
improper transactions at period end.
True

Which of the following statements is true regarding the concept

of materiality?
a. Materiality is the magnitude of an omission or misstatement
of accounting information that, in light of surrounding
circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have been
changed or influenced by the omission or misstatement.
b. Materiality is the magnitude of an omission or misstatement
of accounting information that, in light of surrounding
circumstances, makes it possible that the judgment of a
reasonable person relying on the information would have been
changed or influenced by the omission or misstatement.
c. A fact is material if there is a substantial likelihood that the
fact would have been viewed by the reasonable investor as
having significantly altered the total mix of information made
available.
d. Both (a) and (c) are correct.
e. Both (b) and (c) are correct.
D

*Which of the following statements is true concerning the

concept of performance materiality?
a. Performance materiality is set less than overall materiality
and helps the auditor determine the extent of audit evidence.
b. If performance materiality is set too low, the auditor might
not perform sufficient procedures to detect material
misstatements in the financial statements.
c. If performance materiality is set too high, the auditor might
perform more substantive procedures than necessary.
d. Performance materiality is essentially the same posting
materiality.
e. All of the above are true.
A

Which of the following statements represent the appropriate

directional relationships between the concepts of inherent risk,
control risk, audit risk, and detection risk?
a. As inherent risk goes up, audit risk goes up.
b. As inherent risk goes up, audit risk goes down.
c. As control risk goes up, detection risk goes up.
d. As control risk goes up, inherent risk goes down.
B

Which of the following statements is true regarding the concept

of detection risk?
a. After assessing inherent and control risk and determining
the level of acceptable audit risk, the auditor determines
detection risk.
b. Detection risk is under the control of the auditor, and the
level of audit effort that the auditor expends on the
engagement depends on the level of detection risk.
c. When the risk of material misstatement is higher, detection
risk is lower in order to reduce audit risk to an acceptable level.
d. The auditor controls detection risk through the nature,
timing, and extent of substantive audit procedures.
e. All of the above are true.
E

Inherent risk is present in organizations at which of the

following levels?
a. At the assertion level.
b. At the financial statement level in terms of business risk

relating to operations.
c. At the financial statement level in terms of financial
reporting.
d. All of the above.
D

*Which of the following characteristics would lead the

auditor to assess inherent risk relating to financial reporting at
a higher level?
a. The account balance represents an asset that is relatively
easily stolen.
b. The controls over the account balance are weak.
c. The company has a history of exactly meeting analyst
estimates.
d. The company is in an industry that is mature and declining.
C

Which of the following statements is true regarding the concept

of control risk?
a. When control risk is high, the auditor is concerned that a
misstatement may not be prevented, or that if a misstatement
exists in the organization's financial statements that it will not
be detected, and therefore corrected by management.
b. Some organizations have zero control risk because they have
made a significant commitment to the effective design and
operation of controls.
c. Control risk relates to the susceptibility of an assertion to a
misstatement, due to either error or fraud, before
consideration of any related controls.
d. All of the above are true.
A

*Which of the following characteristics would lead the auditor

to assess control risk at a higher level?
a. It is difficult for the auditor to determine or gain access to
the organization or individuals who own and/or control the
entity.
b. The organization has inadequate accounting staff, or the
staff lacks requisite expertise.
c. There exists a lack of supervision of accounting personnel.
d. The organization has inadequate information and
communication systems.
e. All of the above.

Which of the following statements is true regarding analytical

techniques?
a. Ratio analysis takes advantage of economic relationships
between two or more accounts.
b. Ratio and trend analysis are generally carried out through a
comparison of client data with expectations based on industry
data, prior-period data, and expectations developed from
industry trends, client budgets, and so on.
c. Developing expectations is the first step in performing
analytical procedures.
d. All of the above are true.
D

*Which of the following statements is false regarding

brainstorming?
a. Brainstorming is a group discussion designed to encourage
auditors to creatively assess client risks, particularly those
relevant to the possible existence of fraud in an organization.
b. Brainstorming predominantly occurs during the early
planning phases of the audit.
c. To facilitate the generation and evaluation of quality ideas
during the brainstorming session, a typical practice during
brainstorming is to invite criticism and value judgments about
ideas generated.
d. Participants are encouraged to provide more ideas rather
than fewer, with the intent to generate a variety of possible risk
assessment scenarios that can be explored during the conduct
of the audit.
e. All of the above are true.
C

*Assume that the auditor sets audit risk at a low level, equal to
1%. What is the appropriate interpretation of this level of audit
risk?
a. The auditor is willing to take only a 1% chance that audit
procedures will not detect a material misstatement.
b. The auditor is 99% confident that the audit procedures will
detect a material misstatement.
c. The auditor is willing to take only a 1% chance of expressing
an audit opinion that the financial statements are fairly
presented when they are materially misstated.

d. The auditor is 99% confident that the audit opinion is

correct.
C

*Assume for Client X that inherent risk is assessed at 30%,

control risk is assessed at 100%, audit risk is 5%, and detection
risk is therefore determined to be 17%. Assume for Client Z that
inherent risk is assessed at 100%, control risk is assessed at
100%, audit risk is 1%, and detection risk is therefore
determined to be 1%. What is true about the amount of audit
work that will need to be conducted?
a. Client X will require more audit work than Client Z.
b. Client Z will require more audit work than Client X.
c. Both clients will require a similar amount of audit work.
d. The auditor will most likely resign from the Client Z audit
because the inherent risk and control risk are so high.
B

When considering responses to risk at the individual assertion

level, the auditor should do which of the following?
a. Evaluate the reasons for the assessed risk of material
misstatement.
b. Estimate the likelihood of material misstatement due to the
inherent risks of the client.
c. Consider the role of internal controls, and determine
whether control risk is relatively high or low, thereby
determining whether the auditor should rely on controls or
whether the auditor needs to conduct a more substantive audit.
d. Obtain more relevant and reliable audit evidence as the
auditor's assessment of the risk of material misstatement
increases.
e. All of the above.
E

Which of the following statements is false regarding the nature,

timing, and extent of risk responses?
a. The nature of risk response refers to the types of audit
procedures applied given the nature of the account balance and
the most relevant assertions regarding that account balance.
b. The timing of risk response refers to when audit procedures
are conducted and whether those procedures are conducted at
announced or predictable times.
c. When the risk of material misstatement is low, the auditor

conducts the audit procedures closer to year end, on an

unannounced basis, and includes some element of
unpredictability in the timing of procedures.
d. The extent of risk response refers to the sufficiency of
evidence that is necessary given the client's assessed risks,
materiality, and the acceptable level of audit risk.
C

Ch. 8
...

Sampling can be used for both tests of controls and direct tests
of account balances and assertions.
True

*Audit procedures such as inquiry, observation, and analytical

procedures are the primary audit procedures involving audit
sampling.
False

Sampling risk is the risk that the auditor's conclusion based on

a sample might be different from the conclusion that would be
reached if the audit procedure were applied in the same way to
the
entire population.
True

The risk of incorrect acceptance of internal control reliability is

the risk that the auditor will conclude that the state of internal
controls is not effective when internal controls are actually
effective.
False

A benefit of nonstatistical sampling as compared to statistical

sampling is that the sample size can be significantly smaller,
thereby making the audit more efficient.
False

*A benefit of statistical sampling as compared to nonstatistical

sampling is that less auditor judgment is required because the
auditor can leverage the power of probability theory.
False

Attributes sampling is a statistical sampling method used to

estimate the rate of control procedure failures based on
selecting one sample and performing the appropriate audit
procedure.
True

In attributes sampling, the attribute of interest is an individual

dollar amount in the population.
False

Factual misstatements are those that are the auditor's best

estimate of misstatements in a given population based on
sample results.
False

The division of a population into two or more subgroups is

referred to as stratification.
True

One strength of MUS is that it automatically selects a sample in

proportion to an item's dollar amount, thus providing
automatic stratification of the sample.
True

*MUS is most often used in situations in which the auditor

expects a significant number of large understatements in
recorded balances.
False

GAS would be useful for completing the following tasks:

footing a file, doing arithmetic calculations, checking for gaps
in processing sequences, and printing confirmations.
True

GAS would be useful in testing the completeness assertion by

helping the auditor select data to perform sales cutoff tests
around year end.
True

*For which of the following auditing procedures would

sampling be most appropriate?
a. Examining documents.
b. Inquiring of management.

c. Observing controls being completed.

d. Conducting analytical procedures.
A

Which of the following activities would be most likely to be

accomplished using sampling?
a. Sorting a file to identify the largest items.
b. Scanning for unusual transactions.
c. Selecting items and tracing back to source documents.
d. Footing the file.
C

Which of the following is a question that the auditor will

answer when sampling?
a. Which population and sampling unit should be tested, and
what characteristics should be examined?
b. How many items should be selected for audit testing?
c. Which items should be included in the sample?
d. What inferences can be made about the overall population
from the sample?
e. All of the above.
E

Refer to Exhibit 8.3 and determine which of the following

terms matches this definition: the risk that the auditor will
conclude that the state of internal controls is effective when
internal controls are actually not effective.
a. The risk of incorrect acceptance of internal control
reliability.
b. The risk of incorrect acceptance of book value.
c. The risk of incorrect rejection of internal control reliability.
d. The risk of incorrect rejection of book value.
A

Refer to Exhibit 8.4 and determine which of the following

statements is true.
a. In nonstatistical sampling, sample size is determined by
auditor judgment.
b. In statistical sampling, the sample must be randomly
selected to give each unit in the population an equal chance to
be included in the sample.
c. In nonstatistical sampling, evaluation is based on auditor

judgment and projections are based on sample results.

d. In statistical sampling, the auditor is required to define
acceptable risk in advance.
e. All of the above.
E

Which of the following statements is false?

a. When properly used, either nonstatistical or statistical
sampling can be effective in providing sufficient appropriate
audit evidence.
b. Statistical sampling allows the auditor to precisely control
the risk of making an incorrect inference about the population
from which the sample is taken, whereas nonstatistical
sampling does not allow such control.
c. Nonstatistical sampling may help avoid second guessing by
regulators or jurors should those parties question the quality of
the sampling method used.
d. Combining statistical sampling with audit judgment
generally produces a higher quality audit conclusion than using
audit judgment alone.
C

*In attributes sampling, which of the following will not affect

the determination of sample size?
a. Sampling risk.
b. The tolerable rate of deviation.
c. The expected population deviation rate.
d. The risk of incorrect rejection of book value.
D

*Refer to Exhibit 8.6. Assume a 5% risk of overreliance, a

tolerable deviation rate of 8%, a sample size of 100, and that
the number of deviations is 5. What is the upper limit of the
possible deviation rate, and what does it mean?
a. 10.3%. The auditor is 95% confident that the real error rate
in the population is no greater than 10.3%.
b. 10.3%. The auditor is 95% confident that the real error rate
in the population is no greater than 5%.
c. 5%. The auditor is 92% confident that the real error rate in
the population is no greater than 10.3%.
d. 5%. The auditor is 92% confident that the real error rate in
the population is no greater than 5%.
A

Which of the following definitions is correct?

a. Factual misstatementA misstatement that has been
specifically identified and about which there is no doubt.
b. Projected misstatementThe auditor's best estimate of the
misstatement in a given population based on the sample
results.
c. Tolerable misstatementA monetary amount set by the
auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the
population.
d. Expected misstatementThe level of misstatement that the
auditor expects to detect.
e. All of the above are correct.
E

Which of the following statements is false?

a. Top-stratum items are population items whose book values
exceed the sampling interval and are therefore all included in
the sample.
b. Because the auditor knows the amount of errors in the topstratum (all items were evaluated), no estimate of errors is
required.
c. Stratification of the population into several homogeneous
sub-populations generally reduces audit efficiency.
d. The audit sampling evaluation reflects the sum of topstratum items and the projected misstatement derived from
lower-stratum items.
e. None of the above.
C

Refer to Exhibit 8.7. Assume that the risk of incorrect

acceptance is 10%, tolerable misstatement is 5% of population
dollars, and expected misstatement is 30% of tolerable
misstatement (in other words, 1.5% of the population dollars).
What is the minimum sample size that the auditor should use?
a. 28
b. 87
c. 120
d. 162
B

Which of the following represents the correct calculation of the

sampling interval?
a. Tolerable error Risk of incorrect acceptance.
b. Sample size Population size.
c. Tolerable error Risk of incorrect acceptance.
d. Population size Sample size.
D

Which of the following is a task commonly performed using

GAS?
a. Selecting transactions based on logical identifiers.
b. Selecting samples.
c. Evaluating samples.
d. Printing confirmations.
e. All of the above.
E

*Which of the following auditing procedures would be

conducted using GAS to assess the validity of the valuation
assertion?
a. Foot a file.
b. Compare sales invoices with shipping documents and/or
sales contracts.
c. Select a sample of shipping documents and electronically
compare them with invoices to determine if billed in the proper
period.
d. Select contracts for audit review.
A