Midterm test 1 (90 m)

No 1. Multiple choices
1. The CPA firm will lose its independence if
A) a staff auditor providing audit services to the client acquires stock in that
client.
B) a staff tax preparer who provides 15 hours of non-audit services to the
client acquires stock in that client.
C) an audit manager in an office different than the office providing audit
services has a direct, immaterial financial interest in the audit client.
D) a covered member has an indirect, immaterial financial interest in an audit
client.
2. When the auditor uses tracing as an audit procedure for tests of transactions, she
is primarily concerned with which audit objective?
A) occurrence
B) completeness
C) cutoff
D) classification
3. The evaluations of financial information through analysis of plausible
relationships among financial and nonfinancial data is the definition of
A) analytical procedures.
B) tests of transactions.
C) tests of balances.
D) auditing.
4. Evidence is generally considered appropriate when
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an
opinion on financial statements.
C) it is relevant to the audit objective being tested.
D) it consists of written statements made by managers of the
company under audit.

5. Appropriateness of evidence is a measure of the

A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence.

6. The two characteristics of the appropriateness of evidence are

A) relevance and timeliness.

B) relevance and accuracy.
C) relevance and reliability.
 D) reliability and accuracy
7. Auditors compare client data with
A) industry data.
B) client-determined expected results.
C) similar prior-period data.
D) all of the above.
8. Another term for misappropriation of assets is
A) management fraud.
B) collusion.
C) employee fraud.
D) illegal acts.
9. Audit evidence has two primary qualities for the auditor; relevance and reliability.
Given the choices below, which provides the auditor with the most reliable audit
evidence?
A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries
10. Appropriateness of evidence is a measure of the
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence.
11. A measure of how willing the auditor is to accept that the financial statements
may be materially misstated after the audit is completed and an unqualified opinion
has been issued is the
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
12. The auditor uses knowledge gained from the understanding of the client's
business and industry to assess
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
13. Most auditors assess the risk of material misstatement as high for related parties
and related-party transactions because
A) of the unique classification of related-party transactions required on the balance
sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income
statement.
D) it is required by generally accepted accounting principles.
14. A tour of the client's facilities provides the auditor an opportunity to
A) meet key personnel.
B) observe operations.
C) assess physical safeguards over assets.
D) all of the above
15. The measurement of the auditor's assessment of the susceptibility of an assertion
to material misstatement, before considering the effectiveness of related internal
controls is defined as
A) audit risk.
B) inherent risk.
C) sampling risk.
D) detection risk.

No2. Determine whether each of the following statements is true or false and
provide a brief explanation?
1. Assessing acceptable audit risk, client business risk, and risk of material
misstatement helps determine the audit procedures that will be needed.
2. As acceptable audit risk is decreased, the likely cost of conducting an audit
increases.
3. When a successor auditor contacts a company's previous auditor, the predecessor
auditor is required to respond fully and without limit to the request for information.
4. Many risks are common to all clients in certain industries.
5. Transactions with related parties must be disclosed in the financial statements if
they are deemed to be material.
6. Management's philosophy and operating style influence the risk of material
misstatements in the financial statements.
7. In order to be meaningful, a company's ratios should be compared to their prior
year's ratios, not industry benchmarks.
8. A high detection risk equates to a low amount of audit evidence needed.

No 3. Tracy Keulen, the sole owner of a small bakery, has been told that the business
should have financial statements reported on by an independent Registeraccountant
(RA). Keulen, having some bookkeeping experience, has personally prepared the
company’s financial statements and does not understand why such state- ments
should be examined by an RA. Keulen discussed the matter with petra Dassen, an
RA, and asked Dassen to explain why an audit is considered important.

Required:

1. Describe the objectives of the independent audit.

2. Identify five ways in which an independent audit may be beneficial to
Keulen.
No 4.
Dracule Industries is a privately owned business that sells medical product and
devices to hospitals, clinics and the public. Certain changes have occurred in
Dracule Industries during the year undergoing the audit. Harker needs to evaluate
the effect these changes have on audit risk. Audit risk at the financial statement level
is influenced by the risk of material misstatement; which include factors related to
management, the industry and the entity or a combination thereof. For each of the
following changes that have occurred during the year under audit identify the
appropriate audit response for the list of responses. Each response can be used once,
more than once or not at all.

Client changes: Possible effect on the audit:

1. An internal audit department has been a. increase the acceptable level of
established. detection risk.
2. A new inventory control system has b. decrease the acceptable level of
been installed that reduces the access of detection risk.
unauthorized parties. c. change has no effect on the acceptable
3. Inexperienced accounting personnel level of detection risk.
were hired in the accounting department.
4. Excess cash was used to purchase
complex derivatives.
5. Controls over the sales credit approval
process have laxed.
6. New government regulations now
apply to Dracule Industries.
7. Management has become overly
aggressive in reaching target goals.
8. An expert was hired to help determine
the value of the ore content in ending
materials inventory.