Which of the Following Would Be Considered an Assurance Engagement

1. Which of the following would be considered an assurance engagement? a.) Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past. b.) giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. c.) giving an opinion on the fair presentation of a newspaper's circulation data. d.) giving assurance about the average drive length achieved by golfers with a client's gold balls. e.) all of the above. Explanation: Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements. 2. It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that.... a.) A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. b.) In audits of financial statements, the auditor acts exclusively in the capacity of an auditor. c.) The professional status of the independent auditor imposes commensurate professional obligations. d.) Financial statements and financial data are verifiable. Explanation: The management team is generally trying to put its "best foot forward" when reporting their financial statement information. the auditor must make sure that the management team does not violate the accounting rules when doing so 3. In an attestation engagement, a CPA practitioner is engaged to... a.) Compile a company's financial forecast based on management's assumptions without expressing any form of assurance. b.) Prepare a written report containing a conclusion about the reliability of a management assertion. c.) Prepare a tax return using information the CPA has not audited or reviewed. d.) Give expert testimony in court on particular facts in a corporate income tax controversy. Explanation: This is the basic definition of an attestation service, as articulated in the book and the professional standards. 4. A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of... a.) Environmental auditing b.) Financial auditing c.) Compliance auditing d.) Operational auditing Explanation: Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efÏcient use of resources, effective achievement of business objectives, and compliance with a company policies. 5. The primary difference between operation auditing and financial auditing is that in operational auditing.... a.) The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards b.) The operational auditor is seeking to help management use resources in the most effective manner possible. c.) The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them. d.) The operation auditor can use analytical skills and tools that are not necessary in financial auditing. Explanation: This statement exactly characterizes the goal and is the basic definition of operational auditing. 6. According to the AICPA, the purpose of an audit of financial statements is to... a.) Enhance the degree of confidence that intended users can place in the financial statements. b.) Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board. c.) Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. SEC d.) Obtain systematic and objective evidence about financial assertions and report the results to interested users. 7. The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about... a.) Completeness b.) Existence c.) Valuation and allocation d.) Rights and obligations e.) Occurrence Explanation: A review of credit ratings of customers' gives indirect evidence of the collectability of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation. 8. Jones, CPA is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard... a.) Is sufÏcient evidence for Jones to conclude that the completeness assertion is supported for expenses. b.) Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion. c.) Should be disregarded because it is not in writing. d.) Is not considered a sufÏcient basis for Jones to conclude that all expenses have been recorded. Explanation: Rhonda's assertions are nice. However, to be considered as sufÏcient to conclude that all expenses have been recorded, they will need corroboration with documentary evidence. 9. When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end re received before the physical inventory count. This audit procedure provides assurance about which management assertion? a.) Cutoff b.) Existence c.) Valuation and allocation d.) Occurrence Explanation: This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP. 10.When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion? a.) Completeness b.) Existence c.) Valuation and allocation d.) Rights and obligations e.) Occurrence Explanation: This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that amounts reported as assets of the company represent true assets that it really does own and that the amounts reported as liabilities truly represent its obligations. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet 11.When an auditor reviews additions to the equipment (fixed asset) account to make sure that repair and maintenance expenses are not understated, she wants to obtain evidence as to management's assertion regarding... a.) Completeness b.) Existence c) Valuation d.) Rights and obligations e.) Occurrence Explanation: This is a test of existence. This test is completed by auditors to answer the question as to whether the transactions recorded as an asset really represent assets that exist and did add value to the company's equipment as compared to routine repair and maintenance expenses under GAAP. Management's existence assertion states that the reported assets actually exist. If an addition to the equipment account cannot be located or identified as adding value to the equipment balance, it is possible that the amount should have been classified as repair and maintenance expenses under GAAP. 12.The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from... a.) Acting in a managerial decision-making role for an audit client. b.) Auditing the firm's own work on an audit client. c.) Providing tax consulting to an audit client without audit committee approval. d.) All of the above. Explanation: Sarbanes-Oxley prevents public accounting firms from serving an audit client in any of the preceding listed roles. 13.Which of the following best describes the relationship between auditing and attestation engagements? a.) Auditing is a subset of attestation engagements that focuses on the certification of financial statements. b.) Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement c.) Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support. d.) Attestation is a subset of auditing that improves the quality of information or its context for decision makers. Explanation: Auditing is a subset of attestation engagements that focuses on the certification of financial statements. The subject matter is the set of financial statements from management and the criteria is GAAP in the United States. 14.During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion? a.) Existence b.) Rights and obligations c.) Valuation or Allocation d.) Occurrence Explanation: Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion. 15.When auditing an investment in another company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion? a.) Inspect the stock certificates evidencing the investment. b.) Examine the audited financial statements of the invested company. c.) Review the broker's advice or canceled check for the investment's acquisition. d.) Obtain market quotations from The Wall Street Journal or another independent source Explanation: Always remember that management is more likely to overstate assets. As a result, when auditing an asset balance like investments, a relevant assertion is likely to be valuation. In this situation, to answer the question of what the investment should be valued at in the balance sheet, an auditor would first seek to obtain a market quotation from an independent source like the Wall Street Journal. 16.Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of... a.) Presentation and disclosure b.) Completeness c.) Rights and obligations d.) Existence Explanation: A cutoff test is clearly a test of the completeness assertion as the test is designed to insure that all transactions that should have been included in accordance with GAAP have been recorded. 17.Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account? a.) Trace test counts noted during physical count to the summarization of quantities. b.) Inspect agreements for evidence of inventory held on consignment. c.) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. d.) Inspect the open PO file for significant commitments to consider for disclosure. Explanation: This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that the inventory reported as assets really is owned by the company. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet. 18.In auditing the accrued liabilities account on the balance sheet, an auditor's procedures most likely would focus primarily on management's assertion of... a.) Existence or occurrence b.) Completeness c.) Presentation and disclosure d.) Valuation or allocation Explanation: Management is more likely to understate liabilities. As a result, when auditing the accrued liabilities account, the most relevant assertion is likely to be completeness. 19.One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following... a.) Generally Accepted Auditing Standards b.) Standards within a system of quality control c.) Generally accepted accounting principles d.) International auditing standards Explanation: Standards within a system of quality control are firm- (rather than auditor-) related. 20.Which of the following best demonstrates the concept of professional skepticism? a.) Relying more extensively on external evidence rather than internal evidence. b.) Focusing on items that have a more significant quantitative effect on the entity's financial statements. c.) Critically assessing verbal evidence received from the entity's management. d.) Evaluating potential financial interests held by auditors in the client. Explanation: Professional skepticism is characterized by appropriate questioning and a critical assessment of audit evidence. 21.The primary purpose for obtaining n understanding of the entity's environment (including its internal control) in a financial statement audit is... a.) To determine the nature, timing, and extent of substantive procedures to be performed. b.) To make consulting suggestions to the entity's management. c.) To obtain direct sufÏcient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. d.) To determine whether the entity has changed any accounting principles. Explanation: Auditors study internal control to determine the nature, timing, and extent of further audit procedures. 22.Ordinarily, what source of evidence should least affect audit conclusions? a.) External documentary evidence. b.) Inquiry of management. c.) Documentation prepared by the audit team. d.) Inquiry of entity legal counsel. Explanation: Inquiry of management is a form of internal evidence, which is the least reliable form of evidence. 23.The most reliable evidence regarding the existence of newly-acquired computer equipment is... a.) Inquiry of management. b.) Documentation prepared externally. c.) Evaluation of the client's procedures. d.) Physical observation Explanation: Auditors' personal knowledge through physical observation provides the most reliable form of evidence; in addition, unlike evaluation of client procedures (choice c), this relates directly to verifying the existence of newly-acquired equipment. 24.Which of the following procedures would provide the most reliable audit evidence? a.) Inquiries of the client's internal audit staff. b.) Inspection of renumbered client purchase orders filed in the vouchers payable department. c.) Inspection of vendor sales invoices received from client personnel. d.) Inspection of bank statements obtained directly from the client's financial institution. Explanation: Because the statements were received directly from outside parties, this is a more reliable form of evidence than internal forms of evidence (choices a and b) or external evidence received indirectly by the auditor (choice c). 25.The evidence considered most appropriate by auditors is best described as... a.) Internal documents such as sales invoice copies produced under conditions of strong internal control. b.) Written representations made by the president of the entity. c.) Documentary evidence obtained directly from independent external sources. d.) Direct personal knowledge obtained through physical observation and mathematical recalculations. Explanation: Direct, personal knowledge of auditors is the most appropriate form of evidence. 26.Auditors' understanding of the internal control in an entity provides information for.... a.) Determining whether members of the audit team have the required competence and capabilities to perform the audit. b.) Ascertaining the independence in mental attitude of members of the audit team. c.) Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. d.) Planning the nature, timing, and extent of substantive procedures on an audit. Explanation: The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement. 27.Which of the following topics is not addressed in the auditors' report for a public entity? a.) Responsibilities of the auditor and management in the financial reporting process. b.) Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP. c.) A description of an audit engagement. d.) A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting Explanation: Auditors provide reasonable (but not absolute) assurance in an audit engagement (this is noted in the scope paragraph of the auditors' report). 28.Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? a.) Absolute assurance. b.) Professional judgment c.) Reliability of audit evidence d.) Reasonable assurance Explanation: Reasonable assurance recognizes that an audit conducted under GAAS may fail to detect all material misstatements. 29.Which of the following combinations would provide the auditor the most reliable evidence? Source of evidence; Effectiveness of Internal control a.) Internal; More effective b.) Internal; Less effective c.) External; More effective d.) External; Less effective Explanation: Evidence is most reliable when the source of the evidence is external and when the evidence is developed under more effective internal control. 30.Which of the following is true with respect to PCAOB inspections of accounting firms? a.) All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. b.) PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. c.) All results of PCAOB inspections are made available to the public following the inspection. d.) Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection. Explanation: In a PCAOB inspection, a sample of audits as well as the firm's system of quality control are reviewed by the inspection team. 31.The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as... a.) Audit procedures. b.) Audit standards. c.) Interpretive publications. d.) Statements on Auditing Standards Explanation: Audit procedures are particular and specialized actions that auditors take to obtain evidence during a specific engagement. 32.Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Oversight Board? a.) Develop Auditing Standards for the audit of nonpublic entities. b.) Develop Auditing Standards for the audit of public entities. c.) Develop Statements on Auditing Standards for the audit of nonpublic entities. d.) Develop Statements on Auditing Standards for the audit of public entities. Explanation: The PCAOB develops Auditing Standards for the audit of public entities. 33.Which of the following best describes the general contents of the introductory paragraph of the auditors' report? a.) A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. b.) The auditors' conclusion with respect to the fairness of the entity's financial statements. c.) Statements identifying the responsibility of auditors and management in the financial reporting process. d.) The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting. Explanation: The responsibility of auditors and management in the financial reporting process is described in the introductory paragraph. 34.Which of the following opinions would be issued if auditors believe that the entity's financial statements were not presented in conformity with GAAP? a.) Adverse opinon. b.) Disclaimer of opinion c.) Qualified opinion. d.) Unmodified opinion. Explanation: An adverse opinion is issued for material and pervasive departures from GAAP. 35.When initiating communication with predecessor auditors, prospective auditors should expect.. a.) To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. b.) To conduct interviews with the partner and manage in charge of the predecessor public accounting firm's engagement. c.) To obtain copies of some or all of the predecessor auditors' audit documentation. d.) All of the above. 36.Generally accepted auditing standards require that auditors always prepare and use... a.) A written planning memorandum explaining the auditors' understanding of the client's business. b.) A written client consent to discuss audit matters with prospective auditors. c.) A written audit plan. d.) The written time budgets and schedules for performing each audit. Explanation: A written audit plan is required to be documented by U.S. GAAS (Clarified Standards Section 300.14). 37.Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in.... a.) Current file audit documentation. b.) Permanent file audit documentation. c.) Administrative audit documentation in the current file. d.) Planning memorandum in the current file. Explanation: Since this is evidence that relates directly on the year under audit, the current file is appropriate. 38.An auditor's permanent file audit documentation most likely will contain... a.) Internal control analysis for the current year. b.) The most recent engagement letter. c.) Memoranda of conference with management. d.) Excerpts of the corporate charter and bylaws. Explanation: Excerpts of the corporate charter and bylaws would not change often and would therefore likely be found in the permanent file. 39.An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a.) Schedules and analyses to be prepared by the client's employees. b.) Methods of statistical sampling the auditor will use. c.) Specification of litigation in progress against the client. d.) Client representations about availability of all minutes of meetings of the board of directors. Explanation: Client cooperation should be specified in the engagement letter. This is a key purpose of the letter. 40.When auditing Vandalay Jewelry, Constanza, CPA was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Constanza hired Benes, an expert in jewel valuation to assist as an audit specialist for the inventory valuation. Should Constanza refer to Bene's work in the audit report? a.) Yea, the auditor' report should mention the fact that an audit specialist was used. b.) The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusion. c.) The use of an audit specialist need not be mentioned if the auditor decide not to take responsibility for the audit specialist's findings. d.) The auditors' report should mention the audit specialist only if Vandalay agrees with the audit speciality's findings. Explanation: he auditors' report should only mention the use of the specialist when the specialist's findings affect the auditors' conclusions. 41.Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balancesheet date? a.) Interviewing internal auditors about their reporting responsibilities. b.) Reviewing accounting records for recurring transactions occurring near year-end. c.) Inspecting communications with the client's legal counsel regarding recorded contingent liabilities. d.) Scanning the minutes for significant transactions with members of the board of directors. Explanation: Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties. 42.Which of the following communications is most likely to be written before the balance sheet date? a.) A report to the audit committee on the results of testing internal control over cash receipts. b.) Confirmation letters to vendors confirming the amounts they owe to the client. c.) An attorney's letter regarding contingent liabilities. d.) An engagement letter. Explanation: An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date. 43.Which of the following procedures would most likely be performed during planning? a.) Surprise counts of the client's petty cash fun. b.) Reporting internal control deficiencies to the audit committee. c.) Performing a search for unrecorded liabilities. d.) Identifying related parties. Explanation: Identifying related parties is an important part of the audit planning process. 44.Prior to accepting a new audit engagement, a public accounting firm should... a.) Attempt to contact the predecessor auditors. b.) Evaluate the integrity of management. c.) Assess the firm's resources to endure that they are sufÏcient to permit the firm to accept the engagement. d.) All of the above. Explanation: Prior to accepting a new audit engagement, an audit firm should (a) attempt to contact the predecessor auditor, (b) evaluate the integrity of management, and (c) assess the firm's resources. 45.An audit plan contains... a.) Specifications of audit standards relevant to the financial statements being audited. b.) Specifications of procedures the auditors believe appropriate for the financial statements under audit. c.) Documentation of the assertions under audit, the evidence obtained , and the conclusions reached. d.) Reconciliation of the account balances in the financial statements with the account balances in the client's garner ledger. Explanation: This is exactly what an audit plan consists of - that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit. 46.When auditing the existence assertion for an asset, auditors proceed from the... a.) Financial statement amounts back to the potentially unrecorded items. b.) Potentially unrecorded items forward to the financial statement amounts. c.) General ledger back to the supporting original transaction documents. d.) Supporting original transaction documents to the general ledger. Explanation: By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded. 47.Confirmation of accounts receivable provide evidence primarily about which two assertions? a.) Completeness and valuation b.) Valuation and rights and obligations c.) Existence and rights and obligations d.) Existence and completeness Explanation: Confirmation of accounts receivable does produce evidence of existence because the customer is admitting that it owes the client money and some evidence of rights to the accounts receivable amount is also supported because the customer is admitting that it owes the client the money (thus, they own the receivable). 48.With respect to the concept of materiality, which of the following statements is correct? a.) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. b.) Materiality depends on the nature of a transaction rather than the dollar amount of the transactions. c.) Materiality is determined by reference to AICPA guidelines. d.) Materiality is a matter of professional judgement. Explanation: Most definitely, materiality is always a matter of professional judgment. 49.When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a.) Key factors that are consistent with prior periods. b.) Assumptions that are similar to industry guidelines. c.) Measurements that are objective and not susceptible to bias. d.) Evidence of a conservative systematic bias. Explanation: Evidence of a systematic bias, whether aggressive or conservative, would be of most concern to the audit team. 50.Which of the following would be considered an analytical procedure? a.) Testing purchasing, shipping, and receiving cutoff activities. b.) Comparing inventory balances to recent sales activities. c.) Projecting the deviation rate of a statistical sample to the population. d.) reconciling physical counts to perpetual records and general ledger balances. Explanation: One example of an analytical procedure is when auditors evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant financial and nonfinancial data. When examining the inventory balance, the auditor would expect a lower balance if there was significant sales activity 51.Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a.) Make inquiries of the client's lawyer concerning pending litigation. b.) Perform cutoff tests of cash receipts and disbursements. c.) Compare financial information with non financial operating data. d.) Recalculate the prior-years' accruals and deferrals. Explanation: Comparing the financial information with nonfinancial operating data is a step that may be completed during preliminary analytical procedures. This is done during the planning phase of the audit. 52.Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a.) They often replace the tests of controls that are performed to assess control risk. b.) They typically use financial and non financial data aggregated at a high level. c.) They usually involve the comparison of assertions developed by management to ratios calculated by an auditor. d.) they are often used to develop an auditor's preliminary judgment about materiality. Explanation: The use of financial and nonfinancial data aggregated at a high level is commonly used during preliminary analytical procedures. 53.The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may... a.) Allow the internal auditor to perform tests of internal control. b.) Allow the internal auditor to audit a major subsidiary of the company. c.) Not assign any task to the internal auditor because of the internal auditor's lack of independence. d.) Allow the internal auditor to perform analytical procedures but not be involved with any tests of detail. Explanation: If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests, like certain tests of internal control. 54.Failure to meet company objectives is a result of... a.) Information risk b.) Audit risk c.) Business risk d.) Inherent risk Explanation: This is the definition of business risk. 55.Auditing standards do not require auditors of financial statements to... a.) Understand the nature of errors and fraud. b.) Assess the risk of occurrence of errors and frauds. c.) Design audits to provide reasonable assurance of detecting errors and frauds. d.) Report all errors and frauds found to police authorities. Explanation: Auditors are not required to report all finding of errors and frauds to police authorities. 56.Id sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? a.) Inventory b.) Cost of goods sold c.) Bad debt expense. d.) Accounts receivable Explanation: In (fictitious) credit sales and (fictitious) receivables. 57.The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as... a.) Inherent Risk b.) Control Risk c.) Detection Risk d.) Risk of Material Misstatement 58.The risk of material misstatement is composed of which audit risk components? a.) Inherent risk and control risk b.) Control risk and detection risk c.) Inherent risk and detection risk d.) Inherent risk, control risk, and detection risk 59.The risks that the auditors' own testing procedures will lead to the decision that material misstatements of no exist in the financial statements when in fact such misstatement do exist is... a.) Audit risk b.) Inherent risk c.) Control risk d.) Detection risk 60.Analytical procedures are generally used to produce evidence from.... a.) Confirmations mailed directly to the auditors by client customers. b.) Physical observation of inventories. c.) relationships among current financial balances and prior balances, forecasts, and non-financial data. d.) Detailed examination of external, external-internal, and internal documents. 61.Analytical procedures can be used in which of the following ways? a.) As a means of overall review near the end of the audit. b.) As "attention-directing" methods when planning an audit at the beginning. c.) As substantive audit procedures to obtain evidence during an audit. d.) All of the above Explanation: Analytical procedures can be used when planning the audit, when performing substantive procedures during an audit, and as a method of overall review at the end of an audit. 62.Analytical procedures used when planning an audit should concentrate on... a.) Weaknesses in the company's internal control activities. b.) Predictability of account balances based on individual significant transactions. c.) Management assertions in financial statements. d.) Accounts and relationships that can represent specific potential problems and risks in the financial statements. Explanation: With preliminary analytical procedures, the auditors are looking for signs of accounts and relationships that may represent specific potential problems and risks in the financial statements. 63.When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will... a.) Increase b.) Decrease c.) Remain unchanged d.) Not be able to be determined with the information provided. Explanation: The numerator (cost of goods sold) increases relatively less than the denominator (sales) increases. 64.Auditors are not responsible for accounting estimates with respect to… a.) Making the estimates. b.) Determining the reasonableness of estimates. c.) Determining that estimates are presented in conformity with GAAP. d.) Determining that estimates are adequately disclosed in the financial statements. Explanation: Management is responsible for making the estimates in the first place, just as management is primarily responsible for all the financial statement elements. 65.An audit strategy memorandum contains... a.) Specifications of auditing standards relevant to the financial statements being audited. b.) Specifications of procedures the auditors believe appropriate for the financial statements under audit. c.) Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. d.) Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. Explanation: An audit strategy contains specifications of procedures the auditors believe appropriate for the financial statements under audit. 66.It is acceptable under generally accepted auditing standards for an audit team to... a.) Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive test. b) Assess control risk at zero and perform a minimum of detection work. c.) Assess inherent risk at zero and perform a minimum of detection work. d.) Decide that audit risk can be 40 percent. Explanation: The objective is to perform a quality audit and keep audit risk low. 67.Under the Private Securities Litigation Reform Act, independent auditors are required to first... a.) Report in writing all instances of noncompliance with the Act to the client's board of directors. b.) Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC. c.) Report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors. d.) Resign from the audit engagement and report the instances of noncompliance with the Act to the SEC. Explanation: Once informed, the board of directors has the first responsibility to report to the SEC. If the board does not report these items to the SEC, the law then requires the auditors to do so. 68.When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a.) Key factors that are consistent with prior periods. b.) Assumptions that are similar to industry guidelines. c.) Measurements that are objective and not susceptible to bias. d.) Evidence of a conservative systematic bias. Explanation: Evidence of a systematic bias, whether aggressive or conservative, would be of most concern to the audit team. 69.An audit committee is... a.) Composed of internal auditors. b.) Composed of members of the audit team. c.) Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. d.) A committee composed of persons not associating in any way with the client or the board of directors. Explanation: An audit committee is composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. 70.Which of the following is not one of the major categories of auditors’ services? a. Related service framework b. Assurance engagements on subject matters other than historical financial information. c. Audit and reviews of historical financial information. d. Compilation engagement. 71.Which of the following isNnotNone of five elements exhibited by all assurance engagements? a. The subject matter. b. A multi-party relationship involving a practitioner, a responsible party, those in charge of governance, and the intended users. c. Evidence. d. Suitable criteria. 72. Which of the following is one of the basic elements required to be included in the assurance report according to International Standards on Assurance Engagements 3000? a. The results of the internal control tests. b. Identification of the criteria. c. Identification of the subject matter information. d. Summarisation of work performed. 73. Subject matter and subject matter information of an assurance engagement can take all the following forms EXCEPT: a. Physical characteristics. b. Financial performance or conditions. c. Non-financial performance or conditions. d. Litigation planning. 74. What is the type of assurance engagement that has as its subject matter non-historical financial information? a. Prospective financial information. b. Agreed-upon procedures. c. Review of financial statements d. Special purpose engagement. 75. The report on a review of financial statements should contain all of the following basic elementsNexcept: a. b. c. d. Scope paragraph, describing the nature of a review. Title Statement of positive assurance. Addressee. 76. How does the related services framework differ from the assurance framework? a. Related services enhance the degree of confidence intended users can have. b. Related services claim compliance with ISAs. c. Related services engagements do not result in an opinion. d. Related services claim compliance with ISAEs. 77. Which of the following isNnotNtrue about the subject matter of an assurance engagement? a. It could be information such as financial statements, statistical information and non-financial performance indicators. b. It could be International Financial Reporting Standards. c. It is the topic about which the assurance is conducted. d. It could be systems and processes or behaviour. 78. A responsible party does each of the followingNexcept: a. Engages the practitioner. b. Determines the subject matter. c. Selects criteria. d. Selects the audit procedures. 79. The characteristics for assessing whether criteria are suitable are all the followingNexcept: a. Understandability. b. Reliability. c. International acceptance. d. Neutrality. 80. SufÏciency of evidence is: a. The measure of the quality of evidence. b. Evidence which is adequate. c. Evidence which is material. d. The measure of the quantity of evidence. 81.In a limited assurance engagement, the practitioner: a. Expresses the conclusion in a positive form b. Conveys reasonable assurance. c. Expresses the conclusion in the negative form. d. Has obtained sufÏcient appropriate evidence to reduce assurance engagement risk to an acceptably low level. 82.Professional judgement is the application of relevant training, knowledge and experience, within the context provided by __________________, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. a. b. c. d. Auditing, accounting and ethical standards. International Standards on Auditing. The Code of Professional Ethics. International Financial Reporting Standards. 83. The auditor is required to prepare audit documentation sufÏcient to enable an experienced auditor, having no previous connection with the audit, to understand the _______________ in reaching conclusions on significant matters arising during the audit. a. The interviews conducted with employees and management b. The total evidence gathered. c. Significant professional judgements made. d. Comformation letters. 84. The subject matter, and subject matter information, of an assurance engagement can take many forms, such as: a. Non-financial performance or conditions. b. Behaviour. c. Financial performance or conditions. d. All of the above. 85. What standards are practitioners who perform assurance engagements governed by no matter what type of assurance audit they are performing? a. International Standards for Related Services and IESBA Code of Ethics for Professional Accountants. b. International Standards for Review Engagements and IESBA Code of Ethics for Professional Accountants c. The IESBA Code of Ethics for Professional Accountants and International Standards on Quality Control (ISQCs). d. The IESBA Code of Ethics for Professional Accountants and International Standards on Auditing (ISAs) 86. An assurance report: a. Provides reasonable assurance to the responsible party. b. Has a format that is uniquely different from ISA audit opinions. c. Provides a written report containing a conclusion that conveys the assurance obtained about the subject matter information. d. Is prepared by the responsible party. 87. The audit firm must establish, maintain, document and communicate to their personnel a system of quality control that includes policies and procedures that address each of the following elementsNexcept: a. Engagement performance b. Monitoring. c. Human resources. d. Public relations.