Long Quiz 003

The two characteristics of the appropriateness of evidence are relevance and reliability.

Analytical procedures are required at the planning stage of all audits and as a part of the final overall review.

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

In determining whether transactions have been recorded, the direction of the audit testing should start from
the general ledger entries.

To be relevant, evidence must be derived from a system including effective internal controls.

During financial statement audits, auditors seek to restrict inherent risk.

Lead schedules show the detailed general ledger accounts that make up a financial statement line item on the
auditor's working trial balance.

The decision of how many items to test should not be influenced by the increased costs of performing the
additional tests.

Analytical procedures are used for planning, but they should not be used to obtain evidence as to the
reasonableness of specific account balances.

To test for unsupported entries in the ledger, the direction of audit testing should start from the ledger entries.

A potential business risk created by industry developments may most likely include
a. The entity does not have the personnel or expertise to deal with the changes in the industry.
b. Increased legal exposure
c. Loss of financing due to the entity's inability to meet financing requirements.
d. Increased product liability.

When litigation or claims have been identified or when the auditor believes they may exist, the auditor should
a. Issue unqualified opinion with explanatory paragraph.
b. Seek direct communication with the entity's lawyers.
c. Disclose the litigation and claims in the auditor's report.
d. Issue qualified or adverse opinion.

The refusal of a client's lawyer to provide a representation on the legality of a particular act committed by the
client is ordinarily
a. Considered to be a scope limitation.
b. Insufficient reason to modify the auditor's report because of the lawyer's obligation of confidentiality.
c. Sufficient reason to issue a "subject to" opinion.
d. Proper grounds to withdraw from the management

Analytical procedures used as a substantive procedure focus on

a. Understanding the business and in identifying areas of potential risk.
b. Detecting material misstatements in the financial statements.
c. Obtaining audit evidence about the suitability of design and effective operation of the accounting and internal
control systems
d. Whether the financial statements as a whole are consistent with the auditor's knowledge of the business.

Which of the following statements can be found on the scope paragraph of the standard audit report? We
believe that our audit provides a reasonable basis for our opinion
a. The financial statements are the responsibility of the Company's management.
b. Our responsibility is to express an opinion on these financial statements based on our audit.
c. None of the choices
d. The financial statements 'present fairly, in all material respects'.
It means the analysis of significant ratios and trends including the resulting investigation of fluctuations and
relationships that are inconsistent with other relevant information or which deviate from predicted amounts.
a. Substantive procedures
b. Tests of controls
c. Audit sampling
d. Analytical procedures

Which statement is incorrect regarding analytical procedures?

a. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts,
ratios, and trends that might indicate matters that have financial statement and audit implications.
b. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts
yields unusual or unexpected relationships, the auditor considers those results in identifying risks of material
misstatement.
c. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about
plausible relationships that are reasonably expected to exist.
d. When such analytical procedures use data aggregated at a high level (which is often the situation), the results of
those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.

Which statement is correct regarding business risks?

a. The auditor should identify or assess all business risks.
b. The risk of material misstatement of the financial statements is broader than business risk, though it includes the
latter.
c. A business risk may have an immediate consequence for the risk of misstatement for classes of transactions,
account balances, and disclosures at the assertion level or the financial statements as a whole.
d. All business risks give rise to risks of material misstatement.

The following will usually result in a modified report but will not affect the auditor's opinion, except
a. There is a disagreement with management regarding the acceptability of the accounting policies selected.
b. There is a significant uncertainty (other than a going concern problem), the resolution of which is dependent
upon future events and which may affect the financial statements.
c. Emphasis of a matter.
d. Existence of going concern problem. b. c.

The element of the auditor's report that distinguishes it from reports that might be issued by others is
a. Opinion paragraph
b. Auditor's signature
c. Addressee
d. Title

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have
unexpected relationships. The results of these procedures most likely indicate that
a. The communication with the audit committee should be revised.
b. Irregularities exist among the relevant account balances.
c. Internal control activities are not operating effectively.
d. Additional tests of details are required.

In extreme cases, such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor may consider it appropriate to express a
a. Qualified opinion.
b. Unqualified opinion with explanatory paragraph.
c. Disclaimer of opinion
d. Disclaimer of opinion.

Which statement is incorrect regarding the date of the auditor's report?

a. The auditor should not date the report earlier than the date on which the financial statements are signed or
approved by management.
b. The auditor should date the report as of the completion date of the audit.
c. The auditor should date the report as of date the report is delivered to the entity audited.
d. The date of the report informs the reader that the auditor has considered the effect on the financial statements
and on the report of events and transactions of which the auditor became aware and that occurred up to that
date.

Which of the following statements concerning analytical procedures is true?

a. Analytical procedures usually are effective and efficient for tests of controls.
b. Analytical procedures used in planning the audit should not use nonfinancial information.
c. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
d. Analytical procedures may be omitted entirely for some financial statement audits.

When the financial statements of the prior period were not audited, the incoming auditor should:
a. Not allow the inclusion of the corresponding figures in the financial statements of the current period.
b. Insist that an audit of prior year's financial statements must be made.
c. Obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the
relevant financial reporting framework.
d. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope limitation.
Examples of situations where the auditor may find it impossible to design effective substantive procedures that
by themselves provide sufficient appropriate audit evidence that certain assertions are not materially misstated
include the following:
I. An entity that conducts its business using IT to initiate orders for the purchase and delivery of goods based on
predetermined rules of what to order and in what quantities and to pay the related accounts payable based on
system-generated decisions initiated upon the confirmed receipt of goods and terms of payment. No other
documentation of orders placed or goods received is produced or maintained, other than through the IT
system.
II. An entity that provides services to customers via electronic media (for example, an Internet service provider
or a telecommunications company) and uses IT to create a log of the services provided to its customers, initiate
and process its billings for the services and automatically record such amounts in electronic accounting records
that are part of the system used to produce the entity's financial statements.
a. II only
b. I and II
c. Neither I nor II
d. I only

Which statement is incorrect regarding significant risks that require special audit consideration?
a. The auditor should determine which of the risks identified are, in the auditor's judgment, risks that require special
audit consideration.
b. Significant risks are often derived from business risks that may result in a material misstatement.
c. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to
significant risks because they have higher inherent risks.
d. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the
risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to
multiple misstatements, and the likelihood of the risk occurring are such that they require special audit
consideration.

The primary reason an auditor requests that letters of inquiry be sent to a client's attorneys is to provide the
auditor with
a. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.
b. The probable outcome of asserted claims and pending or threatened litigation.
c. Corroboration of the information furnished by management about litigation, claims, and assessments.
d. The attorneys' opinions of the client's historical experiences in recent similar litigation.

The auditor should determine overall responses to address the risks of material misstatement at the financial
statement level. Such responses least likely include
a. Assigning more experienced staff or those with special skills or using experts. are such that they require special
audit consideration.
b. Performing substantive procedures at an interim date instead of at period end.
c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
d. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit
evidence.

The auditor should design and perform further audit procedures whose nature, timing, and extent are
responsive to the assessed risks of material misstatement at the assertion level. Which of the following is the
most important consideration in responding to the assessed risks?
a. The nature of the audit procedures.
b. The timing of the audit procedures.
c. The extent of the audit procedures.
d. All of these are equally important.