TEST BANK for Auditing A Risk Based Approach 11th Edition Johnstone, Gramling, Rittenberg. by welldoneassistant

Chapter 01 1. The need for independent assurance arises because the interests of the users of information may be different from the interests of those responsible for providing information. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 2:50 AM DATE MODIFIED: 1/17/2018 7:42 AM 2. A financial statement audit is a systematic process of objectively obtaining and evaluating evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 2:58 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 3. A bank using Milton Company's financial statements to evaluate Milton’s loan application is an example of a user’s need for unbiased reporting. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: User’s Need for Reliable Financial Reporting DATE CREATED: 1/17/2018 3:00 AM DATE MODIFIED: 1/17/2018 7:42 AM 4. An integrated audit requires the auditor to assess the effectiveness of internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Integrated Audit DATE CREATED: 1/17/2018 3:02 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 5. Auditors obtain and evaluate evidence regarding assertions about economic actions and events to verify the accuracy of those assertions. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 3:03 AM DATE MODIFIED: 1/17/2018 7:42 AM 6. Auditing is the process of verifying the accuracy of the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 3:04 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 7. Management may have incentives to present biased financial information, but the various users of the statements are not likely to have conflicting interests in the financial information. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Users’ Needs for Reliable Financial Information DATE CREATED: 1/17/2018 3:06 AM DATE MODIFIED: 1/17/2018 7:42 AM 8. Auditing exists because users need unbiased information on which to assess management performance and make economic decisions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 3:07 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 9. Users rely on the auditors' independent assessment of financial statement presentation because few users have direct knowledge of the company's operations. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 3:08 AM DATE MODIFIED: 1/17/2018 7:42 AM 10. If the auditor has no reservations about management’s financial statements, then the auditor will issue a qualified opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Opinion DATE CREATED: 1/17/2018 3:09 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 11. Independence is often referred to as the cornerstone of the auditing profession. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Auditor Independence DATE CREATED: 1/17/2018 3:09 AM DATE MODIFIED: 1/17/2018 7:42 AM 12. Auditors generally need quantitative and mathematical skills more than they need communication and leadership skills. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Skills and Knowledge Needed by Professionals DATE CREATED: 1/17/2018 3:10 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 13. The overall objective of an audit is to obtain assurance whether the financial statements are free of misstatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Overview of the External Auditing Profession DATE CREATED: 1/17/2018 3:12 AM DATE MODIFIED: 1/17/2018 7:42 AM 14. The foundation for the audit opinion formulation process relies on obtaining evidence to support the auditor’s opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Opinion Formulation Process DATE CREATED: 1/17/2018 3:12 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 15. Complex transactions, information, and processing systems provide an opportunity for management to mislead users of financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 3:13 AM DATE MODIFIED: 1/17/2018 7:42 AM 16. Users of audited financial statements include a company’s bondholders but not its stockholders, who are the owners of the company. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Users of Audited Financial Statements DATE CREATED: 1/17/2018 3:14 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 17. A key responsibility of the internal audit function is to provide assurance on the reliability of financial information reported to external users of audited financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Parties Involved in Preparing and Auditing Financial Statements DATE CREATED: 1/17/2018 3:16 AM DATE MODIFIED: 1/17/2018 7:42 AM 18. The audit committee oversees both the internal and external auditors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Role of the Audit Committee DATE CREATED: 1/17/2018 3:17 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 19. A CPA is a certified public accountant who is licensed by a state board of accountancy. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:18 AM DATE MODIFIED: 1/17/2018 7:42 AM 20. Internal controls are the responsibility of management. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Parties Involved in Financial Reporting DATE CREATED: 1/17/2018 3:19 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 21. Audit staff performing audit work must be appropriately supervised by partners and managers. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Engagement Team DATE CREATED: 1/17/2018 3:21 AM DATE MODIFIED: 1/17/2018 7:42 AM 22. An auditor who has reservations about the effectiveness of a client company’s internal controls would issue an adverse opinion on internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Report on Internal Controls DATE CREATED: 1/17/2018 3:22 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 23. Audit firm culture is one of the primary drivers of audit quality. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Drivers of Audit Quality DATE CREATED: 1/17/2018 3:23 AM DATE MODIFIED: 1/17/2018 7:42 AM 24. Effective audit processes, by themselves, are sufficient to achieve audit quality. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Achieving Audit Quality DATE CREATED: 1/17/2018 3:23 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 25. A quality audit is one performed “in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether due to errors or fraud.” a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Quality Audit Defined DATE CREATED: 1/17/2018 3:25 AM DATE MODIFIED: 1/17/2018 7:42 AM 26. Audit quality is driven, in part, by the skills and personal qualities of audit partners and staff. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Drivers of Audit Quality DATE CREATED: 1/17/2018 3:26 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 27. The Financial Reporting Council’s Audit Quality Framework is the only framework for audit quality recognized by audit professionals worldwide. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Frameworks of Audit Quality DATE CREATED: 1/17/2018 3:27 AM DATE MODIFIED: 1/17/2018 7:42 AM 28. Some factors affecting audit quality are outside the direct control of the auditor, such as the amount of time allotted for completion of the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Frameworks of Audit Quality DATE CREATED: 1/17/2018 3:28 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 29. Auditors should conduct their work with an attitude of professional skepticism. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Frameworks of Audit Quality DATE CREATED: 1/17/2018 3:29 AM DATE MODIFIED: 1/17/2018 7:42 AM 30. In the United States, auditors form conclusions about whether the financial statements are presented fairly in accordance with generally accepted auditing standards (GAAS). a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Frameworks of Audit Quality DATE CREATED: 1/17/2018 3:30 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 31. The International Auditing and Assurance Standards Board sets international standards on auditing and has developed a framework for audit quality. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:31 AM DATE MODIFIED: 1/17/2018 7:42 AM 32. To ensure audit quality, audits of public companies must be performed by multinational accounting firms. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Quality DATE CREATED: 1/17/2018 3:32 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 33. The PCAOB requires disclosure of the names of engagement partners for all public company audits. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:33 AM DATE MODIFIED: 1/17/2018 7:42 AM 34. The PCAOB is a public board, appointed by Congress, to provide oversight of the firms that audit public companies registered with the SEC. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:34 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 35. The SEC is the governmental body with oversight responsibility for the efficient operation of capital markets in the United States. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:35 AM DATE MODIFIED: 1/17/2018 7:42 AM 36. The PCAOB provides the criteria against which the auditor measures the fairness of financial statement presentation. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:36 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 37. The AICPA sets auditing standards for nonpublic companies. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:37 AM DATE MODIFIED: 1/17/2018 7:42 AM 38. Though often relying on the FASB, the SEC has authority to establish GAAP for public companies. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:38 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 39. The SEC has authority to establish GAAP for all business enterprises. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:39 AM DATE MODIFIED: 1/17/2018 7:42 AM 40. The Center for Audit Quality is responsible for the oversight of the peer review process for registered audit firms. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:40 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 41. The SEC and PCAOB independence rules for auditors are identical to those of the AICPA. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 3:41 AM DATE MODIFIED: 1/17/2018 7:42 AM 42. Compliance with the AICPA Code of Professional Conduct depends primarily on the threat of disciplinary actions for violating the Code. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:42 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 43. The AICPA’s conceptual framework of “threats and safeguards” included in the Code of Professional Conduct applies only to AICPA members in public practice. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:45 AM DATE MODIFIED: 1/17/2018 7:42 AM 44. Threats to an auditor’s independence may occur when the auditor has a long-standing relationship with an important person associated with the client. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:46 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 45. A safeguard is an action or other measure that may eliminate a threat or reduce the threat to an acceptable level. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:47 AM DATE MODIFIED: 1/17/2018 7:42 AM 46. Safeguards implemented by the audit client include mandatory audit partner rotation requirements for public companies. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:48 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 47. An AICPA member who is not in public practice is not subject to any of the Principles of Professional Conduct. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:50 AM DATE MODIFIED: 1/17/2018 7:42 AM 48. Specific rules of conduct contained in the AICPA Code of Professional Conduct and related interpretations of those rules cover many, but not all, relationships and circumstances that an auditor may encounter. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:51 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 49. An individual does not need to agree to uphold the AICPA’s Code of Professional Conduct in order to become licensed as a CPA. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:52 AM DATE MODIFIED: 1/17/2018 7:42 AM 50. A covered member’s investment in a mutual fund that owns stock in a firm being audited by the covered member is a direct financial interest resulting in the impairment of independence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:53 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 51. When an auditor identifies threats to compliance with the rules of conduct, the auditor must demonstrate that safeguards were applied that totally eliminated the threat. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:54 AM DATE MODIFIED: 1/17/2018 7:42 AM 52. A covered member may not have a direct financial interest in an audit client if the interest is material. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:56 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 53. The AICPA's Code of Professional Conduct defines an indirect financial interest as an investment of one percent or less of a client's organization, and because the amount is so small it is considered immaterial. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:56 AM DATE MODIFIED: 1/17/2018 7:42 AM 54. Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:58 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 55. An auditor may not disclose any confidential client information unless the auditor determines that disclosure is in the public interest. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 3:59 AM DATE MODIFIED: 1/17/2018 7:42 AM 56. Contingent fees are prohibited for tax professionals when preparing tax returns for clients. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:00 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 57. Contingent fees are prohibited for any client for which the auditor performs audit services, but are otherwise permitted. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:01 AM DATE MODIFIED: 1/17/2018 7:42 AM 58. Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:02 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 59. A CPA firm may include the name of only one past owner in the firm name. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:03 AM DATE MODIFIED: 1/17/2018 7:42 AM 60. A covered member under the AICPA’s rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and a partner or manager who provides more than 10 hours of nonattest services to the audit client within a fiscal year. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:04 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 61. Rule 102 on integrity and objectivity applies only to covered members as defined by the AICPA. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:05 AM DATE MODIFIED: 1/17/2018 7:42 AM 62. The AICPA may revoke a member’s CPA license for violating its Code of Professional Conduct. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:06 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 63. A new staff member on an audit engagement may own stock in that client until the audit report is issued. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:07 AM DATE MODIFIED: 1/17/2018 7:42 AM 64. A contingency fee is a situation in which no fee will be charged unless a specified finding or result is attained. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:08 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 65. Rule 102, Integrity and Objectivity, of the AICPA Professional Code of Conduct, does not apply to a CPA who is a corporate CFO. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Professional Code of Conduct DATE CREATED: 1/17/2018 4:09 AM DATE MODIFIED: 1/17/2018 7:42 AM 66. Loans between the auditor and the client are permitted in some circumstances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:11 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 67. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:12 AM DATE MODIFIED: 1/17/2018 7:42 AM 68. A covered member’s independence would be impaired if an immediate family member was employed by the client company in any position. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:13 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 69. The AICPA Code of Professional Conduct prohibits an auditor from providing any non-audit services to audit clients because of the threat posed to the auditor’s independence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 4:14 AM DATE MODIFIED: 1/17/2018 7:42 AM 70. The SEC and PCOAB have independence requirements that apply only to auditors of public companies. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: SEC and PCOAB Independence Requirements DATE CREATED: 1/17/2018 4:15 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 71. According to the framework for professional decision making, the first step in decision-making is to structure the audit problem. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: General Decision-Making Framework DATE CREATED: 1/17/2018 4:16 AM DATE MODIFIED: 1/17/2018 7:42 AM 72. According to Rights Theory, the highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Ethical Decision Making DATE CREATED: 1/17/2018 4:17 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 73. An ethical dilemma occurs in a situation in which moral duties or obligations conflict. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Ethical Decision Making DATE CREATED: 1/17/2018 4:18 AM DATE MODIFIED: 1/17/2018 7:42 AM 74. An ethical dilemma occurs when an ethically correct action may conflict with an individual’s immediate self-interest. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Ethical Decision Making DATE CREATED: 1/17/2018 4:19 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 75. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Ethical Decision Making DATE CREATED: 1/17/2018 4:21 AM DATE MODIFIED: 1/17/2018 7:42 AM 76. There is a hierarchy of rights to consider when applying rights theory. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: An Ethical Decision-Making Framework DATE CREATED: 1/17/2018 4:22 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 77. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical dilemmas. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Ethical Theories DATE CREATED: 1/17/2018 5:35 AM DATE MODIFIED: 1/17/2018 7:42 AM 78. Professional judgment is an attitude that includes a questioning mind and a critical evaluation of audit evidence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Professional Decision Making DATE CREATED: 1/17/2018 5:36 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 79. Without professional skepticism, auditors are susceptible to accepting weak or inaccurate audit evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Framework for Professional Decision Making DATE CREATED: 1/17/2018 5:37 AM DATE MODIFIED: 1/17/2018 7:42 AM 80. Both client acceptance decisions and client continuance decisions are based on an evaluation of relative risk and audit fees. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance DATE CREATED: 1/17/2018 5:37 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 81. Auditors consider both quantitative and qualitative risk factors when making client acceptance or continuance decisions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance DATE CREATED: 1/17/2018 5:38 AM DATE MODIFIED: 1/17/2018 7:42 AM 82. An auditor is not permitted to contact the predecessor auditor when considering a prospective new client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance DATE CREATED: 1/17/2018 5:39 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 83. Engagement letters issued to new clients do not specify the amount of audit fees to be charged because fees cannot be determined until the audit has been completed. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance DATE CREATED: 1/17/2018 5:40 AM DATE MODIFIED: 1/17/2018 7:42 AM 84. Which of the following is not a reason for audits of financial statements of public companies? a. Potential bias in providing information. b. Greater likelihood of fraud in large public companies. c. Complexity of the processing systems. d. Remoteness between a user and the organization. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 5:41 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 85. What is the term used to describe a systematic process of objectively obtaining evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users? a. Internal audit. b. Financial statement audit. c. External audit. d. Program audit ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 5:42 AM DATE MODIFIED: 1/17/2018 7:42 AM 86. An Integrated Audit Report provides opinion(s) on which of the following? a. The financial statements. b. Internal controls. c. Both financial statements and internal controls. d. Neither financial statements nor internal controls. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Integrated Audit Defined DATE CREATED: 1/17/2018 5:43 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 87. Who are the users of the financial statements? a. Management. b. Auditors. c. Taxing Authorities. d. Both A and C. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 5:45 AM DATE MODIFIED: 1/17/2018 7:42 AM 88. Which of the following is a factor that creates a need for an independent auditor's assessment of the financial statement presentation? a. Complexity of transactions affecting the financial statements. b. Lack of criteria on which to base information. c. Remoteness of the user from the organization. d. Both A and C. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Need for Independent Assurance DATE CREATED: 1/17/2018 5:46 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 89. What can users of the audit report reasonably expect from the audited financial statements? a. The financial statements are complete and contain many of the important financial disclosures. b. The financial statements are presented fairly according to the substance of GAAP. c. The financial statements are free from all errors. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 5:47 AM DATE MODIFIED: 1/17/2018 7:42 AM 90. To conduct an audit, what must an auditor do? a. Comply with relevant ethical standards. b. Exercise perfect judgment. c. Obtain sufficient appropriate evidence to provide absolute assurance. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:00 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 91. What is the first phase in an audit? a. Client acceptance or client continuance. b. Understanding the client. c. Understanding internal controls. d. Testing of account balances. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:02 AM DATE MODIFIED: 1/17/2018 7:42 AM 92. How is the audit report referred to when the auditor has no reservations about management’s financial statements? a. An unqualified report. b. A qualified report. c. An adverse report. d. An integrated report. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Overview of the External Auditing Profession DATE CREATED: 1/17/2018 6:03 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 93. Why is auditing important in a free market society? a. The public requires auditors to function as divisions of regulatory bodies. b. Auditors detect all errors and fraud perpetrated by company employees. c. Audits provide reliable information upon which to judge economic performance. d. The auditor is a form of insurance policy for investors. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:05 AM DATE MODIFIED: 1/17/2018 7:42 AM 94. What must an auditor do in an audit? a. Consider how the economic activity is portrayed in the financial statements. b. Force management to make operational decisions that will improve the company’s financial performance. c. Disregard independence in order to find the underlying truth of the evidence. d. Establish new criteria by which financial statements may be compared. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:08 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 95. What document communicates the conclusions of the financial statement audit? a. The financial statements. b. Written management assertions. c. The audit report. d. None of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:09 AM DATE MODIFIED: 1/17/2018 7:42 AM 96. Who is responsible for internal controls within an organization? a. The internal auditor. b. The external auditor. c. Management. d. The PCAOB. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:12 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 97. What is the primary objective of the independent auditor’s report on financial statements? a. To report on all instances of fraud. b. To assist the board in evaluating management’s effectiveness. c. To attest to the credit-worthiness of the client. d. To give credibility to management’s prepared financial statements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:16 AM DATE MODIFIED: 1/17/2018 7:42 AM 98. Which of the following is not part of the systematic process called auditing? a. Communicating results of the audit to users. b. Procuring and evaluating evidence. c. Assisting management in designing internal controls. d. Comparing evidence regarding assertions to certain established criteria. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 6:18 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 99. Which of the following is not a primary driver of audit quality? a. Skills and personal qualities of audit staff. b. Size of the audit firm. c. Effective audit processes. d. Audit firm culture. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Quality DATE CREATED: 1/17/2018 6:19 AM DATE MODIFIED: 1/17/2018 7:42 AM 100. According to the Financial Reporting Council (FRC), which of the following attributes contributes to the reliability and usefulness of audit reporting? a. The audit methodology is well structured. b. Quality technical support is available when auditors require guidance. c. Auditors appropriately conclude as to the truth and fairness of the financial statements. d. The audit work is effectively reviewed. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Quality DATE CREATED: 1/17/2018 6:20 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 101. According to the Financial Reporting Council (FRC), when is the culture of an audit firm likely to provide a positive contribution to audit quality? a. When the leadership of the audit firm ensures partners and other staff have sufficient time and resources to deal with difficult issues as they arise. b. When the leadership of the audit firm ensures robust systems for client acceptance and continuation based on the likelihood of increased audit fees. c. When the leadership of the audit firm creates an environment where achieving efficiency is valued, invested in and rewarded. d. When the leadership of the audit firm ensures financial considerations drive actions. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Quality DATE CREATED: 1/17/2018 6:21 AM DATE MODIFIED: 1/17/2018 7:42 AM 102. Which of the following is a driver of audit quality? a. Audit firm culture. b. Engagement team skills and attributes. c. Factors outside control of auditors. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Drivers of Audit Quality DATE CREATED: 1/17/2018 6:22 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 103. Which of the following items should an auditor communicate to an audit committee? a. Any meaningful threats to auditor objectivity. b. The scope of the audit. c. The qualitative aspects of the entity’s accounting and reporting and potential ways of improving financial reporting. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Quality DATE CREATED: 1/17/2018 6:24 AM DATE MODIFIED: 1/17/2018 7:42 AM 104. The Center for Audit Quality is dedicated to enhancing investor confidence in what? a. The global capital markets. b. Management. c. Auditors. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 6:25 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 105. International Standards on Auditing (ISAs) are set by which of the following organizations? a. International Center for Audit Quality. b. International Auditing and Assurance Standards Board. c. American Institute of Certified Public Accountants d. All of the above organizations participate in setting ISAs. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 6:26 AM DATE MODIFIED: 1/17/2018 7:42 AM 106. What must audit firms do to perform financial statement audits for public companies? a. Register with the American Institute of Certified Public Accountants. b. Register with the Institute of Internal Auditors. c. Register with the U.S. General Accounting Office. d. Register with the Public Company Accounting Oversight Board. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 6:27 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 107. Which term describes the type of threat that occurs when top management threatens to replace the audit firm because of a disagreement over an accounting issue? a. Management participation threat. b. Undue influence threat. c. Adverse interest threat. d. Financial self-interest threat. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA’s Conceptual Framework DATE CREATED: 1/17/2018 6:28 AM DATE MODIFIED: 1/17/2018 7:42 AM 108. According to the AICPA, which of the following is not a safeguard to the auditing profession? a. Education. b. Professional standards. c. External reviews. d. Legislation concerning competency requirements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA’s Conceptual Framework DATE CREATED: 1/17/2018 6:29 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 109. Which of the following is a correct statement regarding the Code of Ethics of the International Ethics Standards Board for Accountants (IESBA)? a. The IESBA Code applies only to members in public practice. b. The five fundamental principles of the IESBA Code are identical to the AICPA’s principles of professional conduct. c. The IESBA Code contains specific standards addressing many of the same issues addressed in the AICPA Code of Professional Conduct. d. All of the above statements are correct. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Organizations Affecting the External Auditing Profession DATE CREATED: 1/17/2018 6:30 AM DATE MODIFIED: 1/17/2018 7:42 AM 110. Which of the following is not a primary responsibility of the PCAOB regarding public companies in the U.S.? a. Issuing CPA licenses to auditors who perform audits of public companies. b. Registering audit firms that audit public companies. c. Periodically inspecting registered audit firms. d. Investigating and disciplining registered audit firms for violations of relevant laws and professional standards. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 6:32 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 111. Congress authorized which of the following organizations to establish generally accepted accounting principles? a. SEC. b. PCAOB. c. AICPA. d. FASB. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 6:33 AM DATE MODIFIED: 1/17/2018 7:42 AM 112. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation, then what is Pulley considered to have? a. An immaterial indirect financial interest in cc. b. A material indirect financial interest in the McBurgers Corporation. c. A loophole for claiming independence from McBurgers Corporation. d. A direct financial interest in McBurgers Corporation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:34 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 113. Which of the following employment positions could an auditor’s spouse hold in a client without violating the independence requirements? a. Controller. b. Treasurer. c. Order entry staff. d. Internal audit director. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:35 AM DATE MODIFIED: 1/17/2018 7:42 AM 114. Julie Webb, CPA, takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. Which of the following best describes Julie’s independence status? a. Impaired because Julie has a direct financial interest in FNBW. b. Impaired because Julie has a material indirect financial interest in FNBW. c. Not impaired because Julie has an immaterial indirect financial interest in FNBW. d. Not impaired because Julie is permitted to take normal loans from FNBW. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:36 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 115. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, why is Julie is considered a covered member for FNBW independence purposes? a. She will be working on the engagement. b. She has a direct financial interest in FNBW. c. She graduated in the same area as the client is operating. d. She has an immaterial direct financial interest in FNBW. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:38 AM DATE MODIFIED: 1/17/2018 7:42 AM 116. Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for Accountants but not a principle found in the AICPA Code of Professional Conduct? a. Integrity b. Professional Behavior c. Confidentiality d. Objectivity ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:39 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 117. Which of the following represents a situation in which an auditor is independent of its client? a. The audit fee paid by the client represents 10% of the auditor’s annual gross revenue. b. The auditor takes a personal loan from the president of the company. c. The auditor’s dependent son holds 25 shares of the client’s common stock. d. The auditor has not received payment for the previous audit services. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Professional Code of Conduct DATE CREATED: 1/17/2018 6:41 AM DATE MODIFIED: 1/17/2018 7:42 AM 118. For which of the following engagements are members of the AICPA required to act with integrity and objectivity? a. Tax preparation. b. Financial statement review services. c. Financial statement audits. d. All engagements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:46 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 119. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct? a. A member must not take on an engagement that is beyond the member's professional competence. b. A member must exercise duties prudently and professionally. c. A member must adequately plan and supervise the performance of professional services. d. A member firm must not advertise services to competing clients. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:47 AM DATE MODIFIED: 1/17/2018 7:42 AM 120. A member of the AICPA must safeguard the confidentiality of client information. Which of the following is not a valid reason to disclose information to non-clients? a. To discuss information relating to inadequate disclosure in an audit report. b. To comply with a validly issued and enforceable subpoena or summons. c. To accommodate the review of client audit work papers under AICPA, PCAOB, or State Board of Accountancy authority. d. To explain to shareholders the likelihood that the company will not meet its earnings projections. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:48 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 121. From whom should a CPA not accept a commission for recommending a product or service? a. A tax client. b. An audit client. c. A financial-planning client. d. Any of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:49 AM DATE MODIFIED: 1/17/2018 7:42 AM 122. In which of the following situations would a CPA be considered independent? a. A CPA has obtained an auto loan from a banking client. b. A CPA has obtained a 90-day signature loan from a client. c. A CPA has obtained a loan for investment purposes from a client. d. A CPA has obtained an interest-free loan from a banking client. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:50 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 123. In which of the following situations would a CPA be considered independent? a. A CPA’s brother is the Vice-President of Sales at the CPA’s audit client. b. A CPA’s father was a salesman at the CPA’s audit client, and now a major portion of the father’s pension fund is invested in the audit client. c. A CPA’s cousin works as a web-site designer at the audit client. d. A CPA’s son works summers at the audit client and has earned 10 shares of stock in the audit client. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:51 AM DATE MODIFIED: 1/17/2018 7:42 AM 124. The auditor is normally not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this standard? a. To respond to the information request of a major shareholder. b. To respond to a quality review request of the state board of accountancy. c. To initiate a complaint with the AICPA’s ethics division. d. To ensure adequate disclosure in accordance with GAAP. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:53 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 125. Under the AICPA definition, who among the following would not be considered a covered member? a. An individual on the audit engagement team. b. An individual in a position to influence the audit engagement. c. A partner in the office of the lead engagement partner. d. All would be considered covered members. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:55 AM DATE MODIFIED: 1/17/2018 7:42 AM 126. Rule 201 - General Standards of the AICPA Code of Professional Conduct does not include which of the following factors? a. Due professional care. b. Integrity and objectivity. c. Planning and supervision. d. Sufficient relevant data. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:56 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 127. Independence is required for which of the following types of services? a. Audit work. b. Tax work. c. Consulting. d. Independence is always required of the CPA. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:57 AM DATE MODIFIED: 1/17/2018 7:42 AM 128. Independence in mental attitude is required of auditors on all audit engagements. Which statement best describes the highest goal for independence? a. To comply with the AICPA Code of Professional Conduct. b. To be independent in fact and appearance. c. To be an advocate for shareholders and other users of financial information. d. To comply with SEC regulations. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 6:58 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 129. Under Rule 201, what best describes how an AIPCA member should act? a. With professional competence. b. With due professional care. c. With adequate planning and with appropriate supervision. d. All of the above ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 7:00 AM DATE MODIFIED: 1/17/2018 7:42 AM 130. Commissions and referral fees are not permitted for which types of services? a. Tax services. b. Financial planning services. c. Audits. d. Both B and C. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 7:01 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 131. Auditors of public companies have additional requirements that extend beyond those of the AICPA. Which of the following is not one of those additional requirements? a. Preapproval of audit services and permissible nonaudit services by the client’s audit committee. b. Disclosure by the client of all fees paid to its auditors for audit, audit-related, tax, and other services. c. Changing audit firms every seven years with a two-year cooling off period. d. Rotating lead audit partners every five years with a five-year cooling off period. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 7:02 AM DATE MODIFIED: 1/17/2018 7:42 AM 132. What does utilitarian theory hold? a. There is a decision that exists that is optimal for all people. b. What is ethical is the action that achieves the least bad for the greatest number of people. c. What is ethical is the action that achieves the greatest good for the greatest number of people. d. What is ethical is the action that achieves the greatest good for all people. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: An Ethical Framework DATE CREATED: 1/17/2018 7:04 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 133. An auditor who is professionally skeptical will do which of the following? a. Critically question contradictory audit evidence. b. Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high. c. Reasonably question the authenticity of documentation, while accepting that documents are to be considered genuine unless there is reason to believe the contrary. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Skepticism DATE CREATED: 1/17/2018 7:05 AM DATE MODIFIED: 1/17/2018 7:42 AM 134. Which term best describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest? a. An ethical dilemma. b. An ethical problem. c. An ethical theory. d. None of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: An Ethical Decision-Making Framework DATE CREATED: 1/17/2018 7:06 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 135. Which of following is not part of the ethical framework derived from utilitarianism and rights theories? a. Determination of relevant legal issues. b. Determination of affected parties and their rights. c. Determination of the most important rights. d. Development of alternative courses of action. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: An Ethical Framework DATE CREATED: 1/17/2018 7:08 AM DATE MODIFIED: 1/17/2018 7:42 AM 136. What is the purpose of an ethical framework? a. To provide a defined methodology to solve the ethical problem. b. To provide a defined methodology to aid the user in making complex ethical decisions. c. To provide a defined program to solve ethical dilemmas. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: An Ethical Framework DATE CREATED: 1/17/2018 7:09 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 137. According to the framework for ethical decision making, which of the following should the decision maker consider? a. All possible alternative courses of action. b. The consequences associated with possible actions. c. Whether the rights framework would cause any course of action to be added. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA Code of Professional Conduct DATE CREATED: 1/17/2018 7:10 AM DATE MODIFIED: 1/17/2018 7:42 AM 138. Which of the following is not an action required by utilitarian theory? a. Identify the potential problem. b. Identify the potential impact of actions on each affected party. c. Identify the rights of the affected parties. d. Identify the desirability of each action. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: A Framework for Ethical Decision Making DATE CREATED: 1/17/2018 7:12 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 139. As it relates to an audit, which of the following statements about professional skepticism is true? a. Professional skepticism is not taken into consideration. b. Professional skepticism relates only to the nature of procedures performed. c. Professional skepticism is an attitude. d. Professional skepticism is determined based upon the importance to a user of the financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Skepticism DATE CREATED: 1/17/2018 7:13 AM DATE MODIFIED: 1/17/2018 7:42 AM 140. Which of the following is a reason an audit firm might decide not to accept a company as a client? a. The company is in a weak financial position. b. The company culture does not match the audit firm culture. c. The company is part of an industry that tends to have volatile stock prices. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance Decisions DATE CREATED: 1/17/2018 7:14 AM DATE MODIFIED: 1/17/2018 7:42 AM

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Chapter 01 141. Which of the following is an important consideration in client acceptance and continuance decisions? a. Integrity of the client company’s management. b. Effectiveness of the client company’s internal controls. c. The audit firm’s growth strategy. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance Decisions DATE CREATED: 1/17/2018 7:15 AM DATE MODIFIED: 1/17/2018 7:43 AM 142. The scope of the work to be done by the auditor on the audit is described in which document? a. Contract letter. b. Engagement letter. c. Representation letter. d. Management letter. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Scope of the Audit Engagement DATE CREATED: 1/17/2018 7:19 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 143. Users of financial statements Identify at least three types of users of financial statements. Describe their primary use of the financial statements and how the misstatement of those statements might injure the user. Users of audited financial statements may include: Management uses the audit report to determine whether the financial statements are presented in accordance with GAAP, whether the firm is availing itself of appropriate internal controls, and as a means of evaluating employee performance. Misstatement of the financial statements would cause the client to make erroneous decisions about financial position, internal controls and employee rewards and punishments. ANSWER: A financial institution that is asked to make a loan uses the financial statements to judge the credit worthiness of the borrower. Misstatements in the financial statements lead to errors in lending that jeopardize the assets of the bank and depositors. A vendor who is asked to grant credit uses the statements and faces injury in a manner similar to the financial institution. A third-party stockholder uses the financial statements to determine if the investment will provide the returns consistent with the needs of the investor. Misstatements of the financial statements will lead to different results or possible loss of the investment. Others: Potential stockholders, taxing authorities, regulatory agencies, labor unions, employees, bondholders, court system, retirement plans, or retired employees

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 7:21 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 144. Overview of Financial Statement Audit What is a financial statement audit, and what is the overall objective of the audit? What must the auditor do to accomplish this objective? ANSWER:

A financial statement audit has been defined as a “systematic process of actively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.” The overall objective of a financial statement audit is to obtain reasonable assurance about whether the financial statements are free from material misstatement and to report the auditor’s findings. To accomplish this objective the auditor: (1) complies with relevant ethical and professional conduct requirements; (2) conducts the audit in accordance with professional auditing standards; (3) exercises professional judgment, professional skepticism, and critical thinking; (4) obtains sufficient appropriate evidence, through a structured process, as a basis for the auditor’s opinion on the financial statements. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Defined DATE CREATED: 1/17/2018 7:22 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 145. The Need for Audited Financial Statements Why do financial statement users need independent assurance about information provided by management? ANSWER:

The need for independent assurance arises from several factors: Potential bias—Management has incentives to bias financial information in order to convey a better impression of the financial data than real circumstances might merit. For example, management ’s compensation may be tied to profitability or stock price, so managers may be tempted to “bend” GAAP to make the organization’s performance look better. Remoteness—An organization and the users of its financial information are often remote from each other, both in terms of geographic distance and the extent of information available to the both parties. Most users cannot interview management, tour a company’s plant, or review its financial records firsthand; instead, they must rely on financial statements to communicate the results of management’s performance. This can tempt management to keep information from users or bend GAAP so the organization looks better. Complexity—Transactions, information, and processing systems are often very complex, so it can be difficult to determine their proper presentation. This provides an opportunity for management to deceive users. Consequences—During the past decade, many financial statement users —pension funds, private investors, venture capitalists, and banks —lost billions of dollars because financial information had become unreliable. As an example, the factors leading up to, and the consequences of, unreliable information can be seen in the sub-prime mortgage crisis in the United States. Many borrowers did not provide correct information on their loan applications and lenders sometimes did not perform adequate due diligence in making lending decisions. Consequently, various financial statement users and others suffered significant losses. When financial information is not reliable, investors and other users lose a significant source of information that they need to make decisions that have important consequences. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Demand for Assurances DATE CREATED: 1/17/2018 7:31 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 146. Audit Quality What is audit quality? ANSWER:

A definition published by the GAO (2003) states that a quality audit is one performed “in accordance with generally accepted auditing standards (GAAS) to (1) provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether due to errors or fraud.” POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Quality Audit Defined DATE CREATED: 1/17/2018 7:33 AM DATE MODIFIED: 1/17/2018 7:43 AM 147. Audit Quality Drivers What are the primary drivers of audit quality according to the Financial Reporting Council’s (FRC) “The Audit Quality Framework?” ANSWER:

There are five primary drivers of audit quality, including (1) audit firm culture, (2) the skills and personal qualities of audit partners and staff, (3) the effectiveness of the audit process, (4) the reliability and usefulness of audit reporting, and (5) factors outside the control of auditors that affect audit quality. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditing Quality Drivers DATE CREATED: 1/17/2018 7:35 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 148. Professional and regulatory organizations Identify at least four professional or regulatory organizations that affect the auditing profession. Explain how and why they assist and/or monitor the auditing profession. ANSWER:

Public Company Accounting Oversight Board (PCOAB) is a private sector, nonprofit organization that oversees auditors of public companies. Its primary responsibilities include: setting auditing standards for audits of public companies, registering audit firms that audit public companies, periodically inspecting firms that audit public companies, and investigating and disciplining registered audit firms that violate relevant laws or standards. American Institute of Certified Public Accountants (AICPA) With the establishment of the PCAOB, the role of the AICPA has diminished. The AICPA establishes standards for audits of nonpublic companies and for other attestation services, accounting and review services, consulting, and tax services. It oversees a peer review program, organizes continuing education programs, and administers the Uniform CPA Examination. State Boards of Accountancy license CPAs and are charged with regulating the profession at the state level. Securities and Exchange Commission (SEC) has been granted authority to establish GAAP for publicly traded companies. Its primary mission is to protect the investing public; it has oversight of the PCAOB. Financial Accounting Standards Board (FASB) is responsible for establishing generally accepted accounting principles (GAAP). POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional and Regulatory Organizations DATE CREATED: 1/17/2018 7:36 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 01 149. Professional Decision Making To achieve audit quality, auditors must make quality decisions throughout the audit process. What are the characteristics of quality audit decisions? ANSWER:

Quality decisions by auditors are unbiased, meet the expectations of reasonable users, comply with professional standards, and incorporate sufficient appropriate evidence to support the auditor’s opinion. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.01.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Quality Decisions by Auditors DATE CREATED: 1/17/2018 7:38 AM DATE MODIFIED: 1/17/2018 7:43 AM

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Chapter 02 True / False 1. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:00 AM DATE MODIFIED: 1/20/2018 6:38 AM 2. Asset misappropriations are the primary fraud scheme in small businesses, and the perpetrators are usually the owners. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:02 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 3. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:04 AM DATE MODIFIED: 1/20/2018 6:38 AM 4. Fraud is an intentional act involving the use of deception that results in a misstatement of the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Definition of Fraud DATE CREATED: 1/17/2018 3:06 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 5. An example of fraudulent financial reporting is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:07 AM DATE MODIFIED: 1/20/2018 6:38 AM 6. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers, as though it were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:08 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 7. The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud by falsely including inventory that does not exist. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 3:09 AM DATE MODIFIED: 1/20/2018 6:38 AM 8. The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Triangle DATE CREATED: 1/17/2018 3:10 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 9. Opportunity is one element of the fraud triangle. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:12 AM DATE MODIFIED: 1/20/2018 6:38 AM 10. Rationalization involves the mindset of the fraudster to justify committing the fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:13 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 11. Related-party transactions provide management certain opportunities to manipulate financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:15 AM DATE MODIFIED: 1/20/2018 6:38 AM 12. Pressure upon management to manipulate financial information is a common characteristic in fraud cases. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:16 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 13. Management compensation that is tied to profits may create incentives to commit fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:18 AM DATE MODIFIED: 1/20/2018 6:38 AM 14. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:19 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 15. The onslaught of fraud in financial statements over the past two decades has been the first of its kind in history. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 3:20 AM DATE MODIFIED: 1/20/2018 6:38 AM 16. The auditor should not consider that fraud is present in revenue accounts because revenue recognition does not typically play a role in fraudulent financial reporting. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 3:22 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 17. One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 3:23 AM DATE MODIFIED: 1/20/2018 6:38 AM 18. During the time period 1998 to 2007, the median size of the public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years). a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 3:24 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 19. According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-TheCounter (OTC) market, rather than those listed on the NYSE or NASDAQ. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 3:26 AM DATE MODIFIED: 1/20/2018 6:38 AM 20. The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 3:27 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 21. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:28 AM DATE MODIFIED: 1/20/2018 6:38 AM 22. The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: User Expectations of Auditor Responsibility DATE CREATED: 1/17/2018 3:29 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 23. Fraud detection procedures should only be performed for clients that have had fraud problems in the past. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:31 AM DATE MODIFIED: 1/20/2018 6:38 AM 24. If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:32 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 25. Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all other engagements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:33 AM DATE MODIFIED: 1/20/2018 6:38 AM 26. According to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud "brainstorming" meeting in order to determine the types of fraud that may occur with the client. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment DATE CREATED: 1/17/2018 3:34 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 27. Once the fraud risk assessment is complete in the planning stage, the auditor need not consider fraud further. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures DATE CREATED: 1/17/2018 3:35 AM DATE MODIFIED: 1/20/2018 6:38 AM 28. Audit procedures to detect fraud are generally an expansion of normal audit procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:36 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 29. Auditing standards have historically reflected an expectation that auditors will detect and report every instance of material fraud. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:38 AM DATE MODIFIED: 1/20/2018 6:38 AM 30. Auditors must keep a questioning mind when analyzing management responses to inquiry, and auditors should strive to obtain corroborating evidence before accepting management’s responses. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:39 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 31. The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:41 AM DATE MODIFIED: 1/20/2018 6:38 AM 32. According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:42 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 33. The audit team should develop its own ideas about how fraud may be performed by the client and then covered up. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:43 AM DATE MODIFIED: 1/20/2018 6:38 AM 34. Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:44 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 35. When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:45 AM DATE MODIFIED: 1/20/2018 6:38 AM 36. Various ways by which fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:47 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 37. When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:48 AM DATE MODIFIED: 1/20/2018 6:38 AM 38. Auditors are responsible to detect fraud even if it has an immaterial effect on the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:49 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 39. The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 3:50 AM DATE MODIFIED: 1/20/2018 6:38 AM 40. The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 3:51 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 41. Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Skepticism DATE CREATED: 1/17/2018 3:52 AM DATE MODIFIED: 1/20/2018 6:38 AM 42. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles DATE CREATED: 1/17/2018 3:53 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 43. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the SarbanesOxley Act. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: User Expectations of Auditor Responsibility DATE CREATED: 1/17/2018 3:54 AM DATE MODIFIED: 1/20/2018 6:38 AM 44. The Sarbanes-Oxley Act established the PCAOB, which is an agency of the U.S. government funded by taxpayers. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 3:55 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 45. According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members who are financial experts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 3:56 AM DATE MODIFIED: 1/20/2018 6:38 AM 46. The audit committee is a subcommittee of the board of directors comprised of independent outside directors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 3:58 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 47. Any major disagreement the auditor has with management should be discussed with the audit committee. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Required Audit Firm Communication to the Audit Committee DATE CREATED: 1/17/2018 3:59 AM DATE MODIFIED: 1/20/2018 6:38 AM 48. The audit committee must be composed of outsiders such as the organization's attorney and audit partner. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 4:00 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 49. Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 4:01 AM DATE MODIFIED: 1/20/2018 6:38 AM 50. Management of companies should have the ability to hire and fire the external auditor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 4:02 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 51. The audit committee should have the authority to hire and fire the external auditor. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 4:04 AM DATE MODIFIED: 1/20/2018 6:38 AM 52. A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Effective Corporate Governance DATE CREATED: 1/17/2018 4:05 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 53. Effective corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Effective Corporate Governance DATE CREATED: 1/17/2018 4:07 AM DATE MODIFIED: 1/20/2018 6:38 AM 54. Transparency is a desirable, but not critical, element of effective corporate governance. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Effective Corporate Governance DATE CREATED: 1/17/2018 4:08 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 55. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance Defined DATE CREATED: 1/17/2018 4:09 AM DATE MODIFIED: 1/20/2018 6:38 AM 56. Implementing an effective ethical environment is primarily the responsibility of the audit committee of the board of directors. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance Responsibilities DATE CREATED: 1/17/2018 4:11 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 57. Managers of organizations are hired by boards of directors to perform responsibilities such as the implementation of internal control. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Responsibility for Financial Reporting DATE CREATED: 1/17/2018 4:12 AM DATE MODIFIED: 1/20/2018 6:38 AM 58. Formulating corporate strategy and risk management policy is primarily the responsibility of the board of directors. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance DATE CREATED: 1/17/2018 4:14 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 Multiple Choice 59. Which of the following best represents fraud related to financial reporting? a. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts' expectations this quarter. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 4:15 AM DATE MODIFIED: 1/20/2018 6:38 AM 60. According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting? a. Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter. b. Management reclassifies a negative cash balance by decreasing cash and increasing a current liability. c. Management discloses its failure to meet loan covenants but states that a waiver has been received. d. Management intentionally excludes from its consolidated results a subsidiary that it controls significantly. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 4:17 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 61. What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening? a. Ponzi Scheme. b. Skimming. c. Channel Stuffing. d. Off-Balance Sheet Fraud. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 4:18 AM DATE MODIFIED: 1/20/2018 6:38 AM 62. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? a. A high turnover of senior management. b. A lack of independent checks. c. A strained relationship between management and the predecessor auditor. d. An inability to generate cash flow from operations. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Factors DATE CREATED: 1/17/2018 4:20 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 63. Which of the following is an example of fraud? a. A mistake in processing accounting data. b. An incorrect accounting estimate arising from misinterpretation of facts. c. Misappropriation of an asset. d. A mistake in the application of accounting principles. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 4:22 AM DATE MODIFIED: 1/20/2018 6:38 AM 64. What is the primary determinant in the difference between fraud and errors in financial statement reporting? a. The materiality of the misstatement. b. The intent to deceive. c. The level of management involved. d. The type of transaction affected. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Difference Between Fraud and Errors in Financial DATE CREATED: 1/17/2018 4:24 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 65. Which of the following frauds is most common? a. Chief financial officer’s misappropriation of funds. b. Misapplication of revenue recognition principles. c. Management's theft of cash held in reserve accounts. d. Over-recording expenses related to stock options. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 4:25 AM DATE MODIFIED: 1/20/2018 6:38 AM 66. Which of the following statements about the Bernie Madoff Ponzi scheme is false? a. Madoff took advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments. b. Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud. c. Madoff was sentenced to 150 years in prison. d. The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Madoff Ponzi Scheme DATE CREATED: 1/17/2018 4:44 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 67. The fraud triangle identifies three elements that are generally present in the client’s organization when fraud occurs. Which of the following is not one of those elements? a. Professional skepticism. b. Incentives. c. Opportunity. d. Rationalization. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Fraud Triangle DATE CREATED: 1/17/2018 5:23 AM DATE MODIFIED: 1/20/2018 6:38 AM 68. Which of the following is a common incentive or condition that increases the likelihood for fraudulent financial reporting? a. Ineffective segregation of assets. b. Significant related party transactions. c. Management bonuses based on reported earnings. d. Access to undeposited cash. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Fraud Triangle DATE CREATED: 1/17/2018 5:24 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 69. Which of the following is not an element of the fraud triangle? a. Incentive. b. Rationalization. c. Deception. d. Opportunity ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Fraud Triangle DATE CREATED: 1/17/2018 5:26 AM DATE MODIFIED: 1/20/2018 6:38 AM 70. Management of Premium Discovery Company is compensated through large salaries, stock options, and bonuses tied to the company's working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based solely on the preceding information, which element of the fraud triangle exists at the Premium Discovery Company? a. Incentive. b. Opportunity. c. Rationalization. d. Expectation. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Indicators DATE CREATED: 1/17/2018 5:28 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 71. Sam Jones, controller of Mitnikco, spends three days researching the accounting standards to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather than in later years. In the end, Sam and the other members of management determine that they will reduce the company's deferred revenue accounts and begin accounting for all revenues as agreements are signed. Based solely on the preceding information, which element of fraud is represented by the actions of Mitnikco management? a. Pressures. b. Opportunity. c. Rationalization. d. Skepticism. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Indicators DATE CREATED: 1/17/2018 5:29 AM DATE MODIFIED: 1/20/2018 6:38 AM 72. Which of the following creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Indicators DATE CREATED: 1/17/2018 5:31 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 73. The fraud triangle has three elements. Which of the elements must be present for a fraud to occur? a. All elements must be present for fraud to occur. b. At least two of the three elements must be present for fraud to occur. c. Fraud can occur if any one of the elements is present. d. None of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Elements of Fraud Triangle DATE CREATED: 1/17/2018 5:32 AM DATE MODIFIED: 1/20/2018 6:38 AM 74. Which of the following actions was a key element of the Enron audit fraud? a. Capitalizing line costs rather than expensing them. b. Misrepresenting bribes from suppliers as a reduction of operating costs. c. Shifting debt to off-balance sheet special entities. d. Concealing large losses related to securities investments. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 5:33 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 75. Who is most often involved in perpetrating fraudulent financial reporting? a. The auditors and the attorneys. b. The treasurer and the board of directors. c. The chief executive and chief financial officer. d. The shareholders and the chief operating officer. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Perpetrators of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 5:35 AM DATE MODIFIED: 1/20/2018 6:38 AM 76. Which of the following frauds involved primarily asset misappropriation? a. Enron. b. WorldCom. c. Dell. d. Koss. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 5:36 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 77. Which action was a key element in the WorldCom fraud case? a. Recording bartered exchange transactions as revenue. b. Overstating cash by falsely recording cash held at major banks. c. Recognizing revenue on the sale of impaired assets. d. Concealing large losses related to securities investments. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 5:37 AM DATE MODIFIED: 1/20/2018 6:38 AM 78. Which action was a key element in the Wells Fargo fraud case? a. Inflating assets by falsely overstating cash held in customers’ accounts. b. Creating fake customer accounts to boost employees’ bonuses. c. Employee theft from customers’ accounts. d. Top management’s recording of fictitious fees to increase reported revenues. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: History of Fraudulent Financial Reporting DATE CREATED: 1/17/2018 5:39 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 79. What is the best way an auditor can detect fraud in the financial statements? a. Actively search for errors in the financial statements. b. Understand Generally Accepted Accounting Standards. c. Brainstorm with the client to find the types of fraud occurring. d. Use professional skepticism. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 5:40 AM DATE MODIFIED: 1/20/2018 6:38 AM 80. Which of the following best describes professional skepticism? a. An intent to deceive. b. An attitude of intrusion and obstinacy. c. A firm commitment to auditing standards and ethics. d. A questioning mind. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures DATE CREATED: 1/17/2018 5:42 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 81. Why is fraud detection an important part of the audit? a. Auditors are required to seek out and find all fraud, regardless of its magnitude. b. Auditors expect that management will make them aware of any fraud in the financial statements. c. Society expects that financial statements have not been materially misstated due to fraud. d. Society realizes that some fraud was not intended to be discovered by auditors. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 5:58 AM DATE MODIFIED: 1/20/2018 6:38 AM 82. One of the primary goals of the PCAOB is to restore confidence in which group? a. The SEC. b. Boards of directors. c. Internal auditors. d. Independent auditors. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 5:59 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 83. Which of the following statements reflects an auditor’s responsibility for detecting fraud? a. An auditor is not responsible for discovering fraudulent acts involving employee collusion. b. The audit should be planned to detect only fraud caused by departures from GAAP. c. An auditor is only responsible for detecting fraudulent financial reporting. d. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 6:01 AM DATE MODIFIED: 1/20/2018 6:38 AM 84. How must an auditor address fraud in the planning stage? a. The auditor must test for fraud in the planning stage by sampling accounts. b. The auditor must consider the likelihood of fraud existing in the company in the planning stage. c. The auditor must realize that most people are honest and not automatically assume that fraud exists when planning the audit. d. The auditor must not be aggressive in its initial approach to fraud, as trust may be lost by the client. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 6:04 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 85. What should an audit team do when it discovers that fraud risk factors are present on an audit engagement? a. Withdraw from the engagement and inform regulatory bodies. b. Modify procedures to actively search for the existence of fraud. c. Reduce the amount of evidence required and resort to management inquiry. d. Turn the audit over to forensic accountants. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud DATE CREATED: 1/17/2018 6:05 AM DATE MODIFIED: 1/20/2018 6:38 AM 86. Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit? a. The company's management negotiates deals with vendors in such a manner as to pay lower prices. b. The company's management drives luxury vehicles and takes vacations to exotic places. c. The company's management takes an overly aggressive approach to revenue recognition. d. The company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Indicators of Fraud DATE CREATED: 1/17/2018 6:07 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 87. According to professional audit standards, how might auditors gain an understanding of the nature of fraud that may occur in the client organization? a. Fraud training courses from actual corporate fraud ex-criminals. b. Conducting a brainstorming session with the members of the audit team. c. Circulating a survey to the client company employees for completion. d. Discussions with other audit firms. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment DATE CREATED: 1/17/2018 6:08 AM DATE MODIFIED: 1/20/2018 6:38 AM 88. What should auditors and others involved in the financial reporting process do to mitigate the risk of fraudulent financial reporting? a. Acknowledge that there needs to exist a strong, highly ethical tone at the top of an organization that permeates the corporate culture, including an effective fraud risk management program. b. Continually exercise professional skepticism. c. Remember that strong communication among those involved in the financial reporting process is critical. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures DATE CREATED: 1/17/2018 6:10 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 89. There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection? a. The firm will not be able to apply GAAP to the financial statements. b. The firm will not adequately identify the types of fraud that may occur in the client company. c. The firm will not be able to perform direct tests of account balances. d. The firm will lack the competency and technical training necessary to complete the audit in accordance with GAAS. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Indicators DATE CREATED: 1/17/2018 6:12 AM DATE MODIFIED: 1/20/2018 6:38 AM 90. Which of the following statements about fraud or fraud detection is true? a. Management may physically alter evidence to perpetrate and conceal the fraud. b. Fraudulent financial reporting is generally not material enough to consider. c. Journal entries will supply evidence necessary to detect fraud. d. The advent of new technology prevents fraud, thereby leading to less fraud over time. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Indicators DATE CREATED: 1/17/2018 6:13 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 91. Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures? a. The type of fraud that may occur. b. The potential materiality of fraud. c. The likelihood of fraud occurring. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures DATE CREATED: 1/17/2018 6:15 AM DATE MODIFIED: 1/20/2018 6:38 AM 92. Which of the following statements is true concerning the fraud risk model? a. Assessing incentive is the first phase of the model. b. The fraud risk model should be reviewed with the audit team. c. The fraud risk model should be modified based on a review of internal controls. d. Auditors do not use a fraud risk model. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Fraud-Related Responsibilities DATE CREATED: 1/17/2018 6:16 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 93. How did the Sarbanes-Oxley Act strengthen auditor independence? a. By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act. b. By requiring auditors to report the nature of any auditor-client disagreements to the SEC. c. By requiring the lead partner to rotate off the audit engagement at least every five years. d. By requiring a different audit firm from the one that performs the audit to prepare the client’s tax return. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:18 AM DATE MODIFIED: 1/20/2018 6:38 AM 94. How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers? a. Annually. b. Every two years. c. Every three years d. Every five years. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:19 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 95. The PCAOB has how many board members? a. Three b. Five c. Seven d. Nine ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:20 AM DATE MODIFIED: 1/20/2018 6:38 AM 96. Which of the following is a responsibility of the PCAOB? a. To set financial reporting standards for public companies. b. To set financial reporting standards for private companies. c. To set audit standards for public companies. d. To set audit standards for private companies. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:21 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 97. How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers? a. Annually. b. Every two years. c. Every three years. d. Every five years. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:23 AM DATE MODIFIED: 1/20/2018 6:38 AM 98. According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee? a. Materiality limits for audit testing. b. Critical accounting policies and practices. c. The extent of audit testing in high-risk accounts. d. A list of probable fraud errors identified in audit planning. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:24 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 99. Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence? a. Systems design. b. Tax services. c. Appraisal services. d. Internal audit services. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:26 AM DATE MODIFIED: 1/20/2018 6:38 AM 100. Which of the following items are registered audit firms not required to report to the audit committee? a. Critical accounting policies and practices. b. Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm. c. A list of all audit procedures performed. d. Significant written communications between the audit firm and management. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:27 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 101. Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002? a. Certify in reports filed with the SEC that the report does not contain untrue statements of material facts. b. Disclose material deficiencies in controls to the audit committee. c. Design internal controls. d. Certify in reports filed with the SEC that the company’s internal controls are effective in preventing fraud. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 DATE CREATED: 1/17/2018 6:29 AM DATE MODIFIED: 1/20/2018 6:38 AM 102. Which of the following is a stated principle of a NYSE report identifying key core governance principles? a. The board of directors should consist of an equal number of independent and non-independent directors. b. Effective corporate governance should be viewed as a compliance obligation. c. Effective corporate governance should be integrated with the company’s business strategy. d. The board of directors has the primary responsibility for creating a culture of integrity and ethical behavior. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Principles of Corporate Governance DATE CREATED: 1/17/2018 6:30 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 103. Which of the following is a specific corporate governance responsibility of executive management? a. Approving major changes, such as mergers. b. Approving non-audit work performed by the audit firm. c. Reviewing the budget of the internal audit function. d. Implementing an effective ethical environment. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management’s Responsibility for Corporate Governance DATE CREATED: 1/17/2018 6:32 AM DATE MODIFIED: 1/20/2018 6:38 AM 104. Which of the following is a specific governance responsibility of the board of directors of a public corporation? a. Managing and reviewing operations. b. Approving corporate strategy. c. Implementing effective internal controls. d. Selecting the external audit firm. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance Responsibilities DATE CREATED: 1/17/2018 6:33 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 105. Protection Transparency, Inc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely discover that the controller has been creating fictional sales and posting them to the general ledger. Who should the auditors make aware of this issue? a. The chairman of Protection Transparency’s audit committee. b. The local police. c. Protection Transparency's legal counsel. d. The predecessor auditor of Protection Transparency. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Response to Fraud Detection DATE CREATED: 1/17/2018 6:35 AM DATE MODIFIED: 1/20/2018 6:38 AM 106. Which of the following is a NYSE mandated guideline for corporate governance? a. Boards need to consist entirely of independent directors. b. Boards must have an audit committee with a minimum of three independent directors. c. Boards must have a compensation committee with a minimum of three independent directors. d. CFOs must provide an annual certification of compliance with corporate governance standards. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Improved Corporate Governance DATE CREATED: 1/17/2018 6:37 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 107. Which of the following best describes how corporate governance influences an organization? a. By exerting control over management. b. By holding management accountable for its actions. c. By exerting control and requiring accountability for the resources entrusted to the organization. d. By exerting control over the internal control environment. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Improved Corporate Governance DATE CREATED: 1/17/2018 6:38 AM DATE MODIFIED: 1/20/2018 6:38 AM 108. Who is responsible for operating an enterprise? a. The auditor. b. The audit committee. c. Management. d. The board of directors. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance DATE CREATED: 1/17/2018 6:40 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 109. Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE? a. Discussing the company’s financial statements with the external auditor. b. Setting hiring policies for former employees of the external auditor. c. Creating and implementing internal controls. d. Discussing financial information provided to analysts. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Improving Corporate Governance DATE CREATED: 1/17/2018 6:43 AM DATE MODIFIED: 1/20/2018 6:38 AM 110. Which of the following best describes the audit committee’s oversight responsibility? a. Provide oversight of reporting outside the organization. b. Provide oversight of internal auditing function. c. Provide oversight of the external audit. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Enhanced Role of Audit Committees DATE CREATED: 1/17/2018 6:44 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 111. Under the NYSE corporate governance guidelines, which of the following committees should a corporation’s board of directors establish? a. Nominating/corporate governance committee. b. Audit committee. c. Compensation committee d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Governance Guidelines DATE CREATED: 1/17/2018 6:48 AM DATE MODIFIED: 1/20/2018 6:38 AM 112. Which of the following is not one of management’s responsibilities? a. Developing financial and other reports that meet the needs of users. b. Engaging a qualified auditor. c. Implementing effective internal controls. d. Implementing an effective ethical environment. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Corporate Responsibility for Financial Reporting DATE CREATED: 1/17/2018 6:49 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 Essay 113. Fraudulent financial reporting What are three common ways in which fraudulent financial reporting takes place? ANSWER:

1. Manipulation, falsification, or alteration of accounting records or supporting documents. 2. Misrepresentation or omission of events, transactions, or other significant information. 3. Intentional misapplication of accounting principles. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud DATE CREATED: 1/17/2018 6:51 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 114. Fraud consideration by auditors John Beasley is interviewing with public audit firms to become an auditor. John does not believe that fraud is a "big deal" in client organizations and argues that most individuals in management of companies are "honest people." He believes that auditors are becoming too cynical. Describe your response to John's attitude and discuss the major types of fraud that occur in companies. ANSWER:

Audit firms have taken criticism for failing to discover material frauds. Auditors have a greater responsibility to plan the audit to consider and detect fraud. This is accomplished partially by the auditor's use of professional skepticism. Professional skepticism is not necessarily being cynical; rather, it is performing an audit with a questioning mind. It means that the auditors will obtain persuasive evidence to corroborate management responses to inquiries and to increase the sufficiency of substantive audit evidence. Professional skepticism is exhibited in the auditor's assumption that honesty in people is not a given. Auditors must not only go beyond the evidence in front of them, they must have the mindset of the possibility of fraud in all financial statement engagements. It must also be mentioned that John’s perspective will likely not be acceptable to the audit firm because his attitude toward fraud is not rigorous enough for the profession. John must realize that fraud in organizations usually takes place in one of two areas: (1) Asset misappropriation, such as theft and misuse of assets. (2) Fraudulent financial reporting, such as the overstatement of certain assets and revenues and the understatement of certain liabilities and expenses. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.01 AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Fraud and Auditor’s Responsibility to Detect Fraud DATE CREATED: 1/17/2018 6:54 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 115. Elements of Fraud Research consistently shows that there are three elements associated with most frauds. List these elements and at least three indicators that the element may exist for a particular company. ANSWER:

The three elements of fraud, or the fraud triangle, are incentive, opportunity, and rationalization. Following are some examples of indicators that these elements may exist for a company. Incentives: --Management compensation schemes --Pressure to improve earnings or to improve the balance sheet --Personal financial problems --Required compliance with debt covenants Opportunities: --Ineffective or nonexistent internal controls --Complex or difficult to understand transactions (including SPEs) --Ineffective monitoring by management --Significant related-party transactions --Company’s ability to dictate terms to suppliers or customers --Management’s inconsistency involving subject judgments regarding assets or accounting estimates --Management’s aggressiveness in applying accounting rules Rationalization: --This is necessary to save the company --This is a one-time thing to get us through the current crisis --Everybody cheats a little on the financial statements --We will violate our debt covenants unless we find a way to improve the financial statements --The company doesn’t pay me what I’m worth POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Identify Fraud Risk Factors DATE CREATED: 1/17/2018 7:01 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 116. Enron: A Fraud Example What were the failures that allowed the Enron fraud to occur? ANSWER:

Weak Management Accountability. Management was virtually not accountable to anyone as long as the company showed dramatic stock increases justified by earnings growth. Incompetent Corporate Governance. Although the board appeared to be independent, most of the board members had close ties to management of the company through philanthropic organizations. Accounting Rules. Accounting became more rule-oriented and complex. Accounting allowed practitioners to take obscure pronouncements, such as those dealing with Special Purpose Entities that were designed for leasing transactions, and apply the pronouncement to other entities for which such accounting was never intended. Enthusiastic Financial Analyst Community. Financial analysts that were riding the bubble of the dot-com economy concluded they did not have tools to appropriately value many of the emerging companies. Biased Banking and Investment Banking. Many large financial institutions were willing participants in the process because they were rewarded with large underwriting fees for other Enron work. Lack of an Independent External Auditor. At the time of Enron, the largest five external auditing firms referred to themselves as professional service firms with diverse lines of business. All of the firms had large consulting practices. Arthur Andersen performed internal audit work for Enron, in addition to performing the external audit. The consulting fees of many clients dramatically exceeded the audit fees. Partners were compensated on revenue and profitability. Worse yet, auditors were hired by management who sometimes succeeded in pressuring auditors to acquiesce to aggressive financial reporting preferences. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Major Frauds and Audit Procedures DATE CREATED: 1/17/2018 7:03 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 117. Consideration of fraud in an audit Auditors are required to actively conduct a financial statement audit with the mindset that fraud may exist. What is the general process that an auditor goes through to assess the risk of fraud and test accordingly? 1. ANSWER:

2. 3. 4. 5. 6. 7.

8. 9.

10.

Understand the nature of fraud, the motivations to commit fraud, and the manner in which fraud may be perpetrated. Exercise “professional skepticism” throughout the entire fraud risk assessment process. “Brainstorm” and share knowledge with other audit team members. Obtain information useful in identifying and assessing fraud risk. Identify the specific fraud risks, including potential magnitude, and areas likely to be affected by a fraud. Evaluate the quality of the company’s internal controls and potential effectiveness in mitigating the risk of fraud. Respond, i.e. adjust audit procedures to assure that the audit adequately addresses the risk of fraud and provides evidence specifically related to the possibility of fraud. Evaluate findings. If evidence signals that a fraud might exist, determine whether or not forensic or specialist auditors are needed to complete the investigation. Communicate the possibility that fraud exists to management, or to the audit committee or the full board if the fraud is material and/or involves members of management. Document the audit approach starting with the step 1 through the completion of all of the steps identified above.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures DATE CREATED: 1/17/2018 7:05 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 118. Auditor’s response to fraud risk factors The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs and controls. How might the auditor respond to the results of the assessment of higher fraud risk? ANSWER:

The auditor should consider: -Professional skepticism a) Obtain more reliable evidence b) Obtain additional corroborating evidence. -Assignment of personnel and supervision--specialists or more experienced personnel -More careful consideration of management’s selection and application of accounting principles -Adding an element of unpredictability to auditing procedures The auditor may change the nature, timing and extent of the audit procedures to be performed by increasing the extent of procedures, making them more persuasive, and moving more of them to the balance sheet date or later. The response may involve the performance of procedures to further consider the risk related to: a) Revenue recognition b) Inventory quantities c) Management estimates Responses to consider the risk of management override of controls may include: a) Examine journal entries and other adjustments made in preparation of financial statements b) Review accounting estimates for biases c) Evaluate business rationale for significant unusual transactions

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Response to Fraud Risk Factors DATE CREATED: 1/17/2018 7:08 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 119. Auditor independence under the Sarbanes-Oxley Act What are four requirements of the Sarbanes-Oxley Act that seek to protect auditor independence? ANSWER:

Sarbanes-Oxley: Auditor Independence 201 Services outside the scope of practice of auditors. There exist a variety of services that registered audit firms may not perform for issuers, such as bookkeeping, systems design, appraisal services, and internal auditing, among others. Tax services may be performed, but only with preapproval by the audit committee. 202 Preapproval requirements. All audit and non-audit services (with certain exceptions based on size and practicality) must be approved by the audit committee of the issuer. 203 Audit partner rotation. The lead partner and reviewing partner must rotate off the issuer engagement at least every five years. 204 Auditor reports to audit committees. Registered audit firms must report to the audit committee issues concerning: • Critical accounting policies and practices • Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm • Significant written communications between the audit firm and management 206 Conflicts of interest. Registered audit firms may not perform audits for an issuer whose CEO, CFO, controller, chief accounting officer, or other equivalent position was employed by the audit firm during the one-year period preceding the audit. This is known as a “cooling off period. ” POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit-Related Provisions of the Sarbanes-Oxley Act DATE CREATED: 1/17/2018 7:10 AM DATE MODIFIED: 1/20/2018 6:38 AM

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Chapter 02 120. Audit Committee Responsibilities Describe the responsibilities of audit committees, and list at least four responsibilities that the NYSE has mandated for audit committees. ANSWER:

Section 301 of the Sarbanes-Oxley Act outlines the responsibilities of audit committee members for publicly traded companies, stating that audit committees are to be directly responsible for the appointment, compensation, and oversight of the work of registered accounting firms; they must be independent; they must establish “whistleblowing” mechanisms within the company; they must have the authority to engage their own independent counsel; and companies must provide adequate funding for audit committees. In addition to these broad responsibilities, the NYSE has mandated certain specific responsibilities of audit committees, including: ∙ Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor ∙ Discussing the company’s financial statements with management and the external auditor ∙ Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts ∙ Discussing in its meetings policies with respect to risk assessment and risk management ∙ Meeting separately with management, internal auditors, and the external auditor on a periodic basis ∙ Reviewing with the external auditor any audit problems or difficulties that they have had with management ∙ Setting clear hiring policies for employees or former employees of the external auditors ∙ Reporting regularly to the board of directors In addition to these responsibilities, in many companies the audit committee also has the authority to hire and fire the head of the internal audit function, set the budget for the internal audit activity, review the internal audit plan, and discuss all significant internal audit results. Other responsibilities might include performing or supervising special investigations, reviewing policies on sensitive payments, and coordinating periodic reviews of compliance with company policies such as corporate governance policies. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Committee Responsibilities DATE CREATED: 1/17/2018 7:12 AM DATE MODIFIED: 1/20/2018 6:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03 1. Internal control helps an organization eliminate the risk of failing to provide users with reliable financial information. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control Over Financial Reporting DATE CREATED: 1/17/2018 7:22 AM DATE MODIFIED: 1/20/2018 6:46 AM 2. After identifying the risks of not achieving reliable financial reporting, management implements controls to provide reasonable assurance that material misstatements do not occur in the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control Over Financial Reporting DATE CREATED: 1/17/2018 7:24 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 3. Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting, compliance with laws and regulations, and operating efficiency. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Defined DATE CREATED: 1/17/2018 7:25 AM DATE MODIFIED: 1/20/2018 6:46 AM 4. Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Defined DATE CREATED: 1/17/2018 7:27 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 5. The organization’s risk assessment process is an example of an entity-wide control. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Controls DATE CREATED: 1/17/2018 7:29 AM DATE MODIFIED: 1/20/2018 6:46 AM 6. Controls to monitor results of operations are considered to be transaction controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Controls DATE CREATED: 1/17/2018 7:31 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 7. The five major components of an organization's internal control are: the control environment, risk assessment, control activities, information and communication, and monitoring. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/17/2018 7:33 AM DATE MODIFIED: 1/20/2018 6:46 AM 8. In addition to controls being specific, they may be broad, such as policies regarding a code of ethics. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/17/2018 7:34 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 9. A strong control environment can reduce all the financial reporting risks to zero. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/17/2018 7:36 AM DATE MODIFIED: 1/20/2018 6:46 AM 10. A company's internal auditing function should not be considered when assessing the effectiveness of internal controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Assessing Effectiveness of Internal Controls DATE CREATED: 1/17/2018 7:41 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 11. An organization's control environment is established and maintained by the internal auditing department. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Control Environment DATE CREATED: 1/17/2018 7:42 AM DATE MODIFIED: 1/20/2018 6:46 AM 12. Corporate policies designed to attract, train, and evaluate competent employees are considered part of the control environment in the COSO framework for internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component- Control Environment DATE CREATED: 1/17/2018 7:45 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 13. Effective internal control requires an organization to establish an appropriate structure and clearly defined lines of responsibility and authority where everyone in the organization has equal responsibility for the effective operation of internal control. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component- Control Environment DATE CREATED: 1/17/2018 7:47 AM DATE MODIFIED: 1/20/2018 6:46 AM 14. Management’s risk identification and analysis should include both internal and external risk factors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Risk Assessment DATE CREATED: 1/17/2018 7:48 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 15. An organization’s risk assessment process should be performed only by senior-level management. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Risk Assessment DATE CREATED: 1/17/2018 7:49 AM DATE MODIFIED: 1/20/2018 6:46 AM 16. Control activities are the component of internal control that includes control actions that have been established by policies and procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Control Activities DATE CREATED: 1/19/2018 6:41 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 17. Control activities implemented to mitigate transaction processing risks that typically affect only certain processes, transactions, accounts, and assertions are referred to as transaction or application controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Control Activities DATE CREATED: 1/19/2018 6:43 AM DATE MODIFIED: 1/20/2018 6:46 AM 18. Preventive controls are designed to prevent the occurrence of a misstatement. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Control Activities DATE CREATED: 1/19/2018 6:44 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 19. Generally, highly regulated entities have more complex control activities than less-regulated entities. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Control Activities DATE CREATED: 1/19/2018 6:44 AM DATE MODIFIED: 1/20/2018 6:46 AM 20. Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Control Activities DATE CREATED: 1/19/2018 6:45 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 21. Segregation of duties is a control activity that is designed to protect against the risk that an individual could both perpetrate and cover up a fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Examples of Control Activities DATE CREATED: 1/19/2018 6:47 AM DATE MODIFIED: 1/20/2018 6:46 AM 22. Physical controls to safeguard assets are not intended to include simple controls such as fences and locks. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Examples of Control Activities DATE CREATED: 1/19/2018 6:48 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 23. Self-checking digit algorithms have been developed to test for transposition errors associated with identification numbers. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Automated Control Activities DATE CREATED: 1/19/2018 6:49 AM DATE MODIFIED: 1/20/2018 6:46 AM 24. Preventive controls are generally more cost-efficient than detective controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Control Activities DATE CREATED: 1/19/2018 6:51 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 25. The payroll department should be responsible for signing payroll checks. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Activities DATE CREATED: 1/19/2018 6:52 AM DATE MODIFIED: 1/20/2018 6:46 AM 26. One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Controls in an Automated Environment DATE CREATED: 1/19/2018 6:52 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 27. A transaction trail includes the documents and records that allow an auditor to trace a transaction from its origination through to its final disposition, or vice versa. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Evaluation of Internal Controls DATE CREATED: 1/19/2018 6:55 AM DATE MODIFIED: 1/20/2018 6:46 AM 28. Segregation of duties is considered a part of the monitoring component of the COSO framework for internal control structure. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 6:56 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 29. Transaction controls are designed to ensure that transactions are properly valued. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 6:58 AM DATE MODIFIED: 1/20/2018 6:46 AM 30. Preventive controls are designed to provide reasonable assurance that the correct program is used for processing, all transactions are processed, and the transactions update appropriate files. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 6:59 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 31. Control activities may be implemented at the organizational level and at the transactional level. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 7:00 AM DATE MODIFIED: 1/20/2018 6:46 AM 32. A whistleblower function within an organization should include a process for bringing important ethical and financial issues to the audit committee. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Information and Communication DATE CREATED: 1/19/2018 7:01 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 33. Within the COSO framework, external communication includes only information sent by the organization to external parties, such as stockholders, customers, and regulators. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Information and Communication DATE CREATED: 1/19/2018 7:03 AM DATE MODIFIED: 1/20/2018 6:46 AM 34. Monitoring internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Monitoring Internal Control DATE CREATED: 1/19/2018 7:04 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 35. Effective monitoring of internal controls not only identifies risks but also responds to these risks appropriately. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Monitoring Internal Control DATE CREATED: 1/19/2018 7:06 AM DATE MODIFIED: 1/20/2018 6:46 AM 36. All organizations should evaluate and communicate internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component – Monitoring Internal Control DATE CREATED: 1/19/2018 7:07 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 37. One of the components of internal control, monitoring, refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Monitoring Internal Control DATE CREATED: 1/19/2018 7:08 AM DATE MODIFIED: 1/20/2018 6:46 AM 38. A walkthrough involves following a transaction back from when it is reflected in the financial records to when it originated to determine if the controls are effectively designed and have been implemented. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 7:09 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 39. Performing a walkthrough provides an understanding of the nature of processing in important accounting applications. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 7:10 AM DATE MODIFIED: 1/20/2018 6:46 AM 40. Management is obligated to report significant deficiencies in the control structure in their annual report on internal control effectiveness required by the Sarbanes-Oxley Act. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management's Responsibilities Related to Internal Control over Financial Reporting DATE CREATED: 1/19/2018 7:11 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 41. Management should test all internal controls for effectiveness when performing their annual evaluation of the internal control structure. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management's Responsibilities Related to Internal Control over Financial Reporting DATE CREATED: 1/19/2018 7:12 AM DATE MODIFIED: 1/20/2018 6:46 AM 42. Walkthroughs and inquiries are often used to obtain an understanding of internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 7:12 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 43. Several significant deficiencies in internal controls may constitute a material weakness. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 7:13 AM DATE MODIFIED: 1/20/2018 6:46 AM 44. Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 7:14 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 45. A deficiency in design of internal controls exists when an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Design Deficiency DATE CREATED: 1/19/2018 7:15 AM DATE MODIFIED: 1/20/2018 6:46 AM 46. A significant deficiency should be reported to the audit committee and to external users of an organization’s financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Deficiencies DATE CREATED: 1/19/2018 7:16 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 47. A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Deficiencies DATE CREATED: 1/19/2018 7:17 AM DATE MODIFIED: 1/20/2018 6:46 AM 48. The quality of an organization's internal control does not affect either the audit approach or the amount of testing required for an engagement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits DATE CREATED: 1/19/2018 7:18 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 49. When auditing the financial statements of a public company, the auditor is required to express an opinion on the company’s internal controls whenever a material weakness in control is identified. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits DATE CREATED: 1/19/2018 7:20 AM DATE MODIFIED: 1/20/2018 6:46 AM 50. An auditor needs to understand a company’s internal controls in order to anticipate the types of material misstatements that may occur. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits DATE CREATED: 1/19/2018 7:21 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 51. What is the primary benefit of effective internal control in an organization? a. Achieving certain organizational goals. b. Completing a successful audit for the entity. c. Maximizing value for shareholders. d. Obtaining profitability and financial strength. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control DATE CREATED: 1/19/2018 7:22 AM DATE MODIFIED: 1/20/2018 6:46 AM 52. The quality of an organization's internal control affects which of the following? a. The reliability of financial data. b. The ability of management to make good decisions. c. The ability to remain in business. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control DATE CREATED: 1/19/2018 7:23 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 53. Internal control is a process designed to achieve objectives in which one of the following categories? a. Reliability of financial reporting. b. Compliance with applicable laws. c. Operational effectiveness. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Internal Control Defined DATE CREATED: 1/19/2018 7:25 AM DATE MODIFIED: 1/20/2018 6:46 AM 54. Which of the following is considered to be an entity-wide control? a. Segregation of duties. b. Controls over management override. c. Authorization procedures for purchasing. d. Adequately documented transaction trails. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Internal Controls DATE CREATED: 1/19/2018 7:26 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 55. Which of the following is not included as a component of an organization's internal control structure in the COSO framework? a. Control risk. b. The control environment. c. Risk assessment. d. Control activities. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:27 AM DATE MODIFIED: 1/20/2018 6:46 AM 56. Which of the following is considered to be a transaction control? a. Controls to monitor other controls. b. Policies that address significant business control practices. c. Centralized processing controls. d. Physical controls to safeguard assets. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Defining Internal Control DATE CREATED: 1/19/2018 7:28 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 57. Internal control is a process effected by the organization’s board of directors, management, and other personnel to provide reasonable assurance of achieving certain objectives. Which of the following does not fit into one of these categories of objectives? a. Reliability of financial reporting. b. Compliance with laws and regulations. c. Continuing existence. d. Effectiveness and efficiency of operations. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:29 AM DATE MODIFIED: 1/20/2018 6:46 AM 58. Which of the following is not true of internal control as defined by COSO? a. It is narrower than internal control over financial reporting. b. It is a process that includes all elements of internal control working together. c. It includes all the people in the organization. d. It starts at the top of the organization in setting a tone. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:30 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 59. Which of the following is not true of the concepts that are embodied in the COSO framework of internal controls? a. Internal controls relate to the organization’s objectives. b. The six components of internal control are logically and operationally intertwined. c. Internal controls apply across all activities of the organization. d. All of the above are true. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:31 AM DATE MODIFIED: 1/20/2018 6:46 AM 60. Which of the following is not part of the control environment of an organization? a. Management’s philosophy and operating style. b. Organizational structure. c. Organization’s commitment to ethical values. d. All of the above are part of the control environment. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:32 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 61. With whom does the tone of internal control typically originate? a. Auditors. b. Employees. c. Management. d. Stockholders. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:34 AM DATE MODIFIED: 1/20/2018 6:46 AM 62. Which of the following COSO components is the foundation for all other components of internal control? a. Control risk assessment. b. Control environment. c. Information and communication. d. Monitoring. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:35 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 63. Which of the following is an example of a control environment deficiency? a. A low level of control consciousness within the organization. b. An audit committee that does not have independent members. c. An audit committee that is not viewed as the client of the external auditor. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Environment DATE CREATED: 1/19/2018 7:36 AM DATE MODIFIED: 1/20/2018 6:46 AM 64. Which of the following is not part of the control environment? a. Management philosophy and operating style. b. Methods of assigning authority and responsibility. c. Personnel policies and practices. d. Control activities. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:37 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 65. The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component? a. Control environment b. Risk assessment c. Control activities d. Monitoring ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Components and Principles of Internal Control DATE CREATED: 1/19/2018 7:38 AM DATE MODIFIED: 1/20/2018 6:46 AM 66. Which of the following is not one of the underlying principles of an effective control environment as developed by COSO? a. The organization demonstrates a commitment to integrity and ethical values. b. The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control. c. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of objectives. d. The organization considers the potential for fraud in assessing risks to the achievement of objectives. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:39 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 67. Which of the following best describes the purpose of personnel policies and procedures? a. Ensure the organization hires the right people. b. Ensure the organization complies with federal and state laws in its hiring and retention decisions. c. Ensure the organization has employees that are properly trained and supervised. d. Ensure the organization performs all of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:40 AM DATE MODIFIED: 1/20/2018 6:46 AM 68. Which of the following is a major component of an organization's internal control structure? a. Major new financing. b. The financial environment. c. Risk assessment. d. Telecommunication equipment. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 7:42 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 69. Which one of the following is an example of an internal risk for an organization? a. Changes in internal information technology. b. Increases in substitute services or products. c. Changes in the reliability of source goods. d. Changes in regulation that make the business model unsustainable. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Risk Assessment DATE CREATED: 1/19/2018 7:43 AM DATE MODIFIED: 1/20/2018 6:46 AM 70. Internal controls may be preventive or detective. Which of the following controls is preventive? a. Requiring two persons to open mail containing payments. b. Reconciling the accounts receivable subsidiary file with the control account. c. Using batch totals. d. Preparing bank reconciliations. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Activities DATE CREATED: 1/19/2018 7:45 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 71. Which of the following is an inherent limitation of internal controls? a. Lack of auditor independence. b. Collusion. c. Separation of duties. d. Employee peer review. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Limitation of Internal Controls DATE CREATED: 1/19/2018 7:46 AM DATE MODIFIED: 1/20/2018 6:46 AM 72. Requiring the mail clerk to prepare a listing of all checks received, with copies of the list going to the cashier and to accounting, is an example of which type of control? a. Preventive. b. Corrective. c. Detective. d. Directive. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Activities DATE CREATED: 1/19/2018 7:47 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 73. Which of the following is another name for transaction controls? a. Entity-wide controls. b. Application controls. c. Supporting controls. d. Detail controls. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 7:49 AM DATE MODIFIED: 1/20/2018 6:46 AM 74. Which of the following is an example of a physical control to safeguard assets? a. Hiring only trustworthy cashiers. b. Separation of duties. c. Locks on the warehouse doors. d. Safety audits on the production line. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Examples of Common Internal Control Activities DATE CREATED: 1/19/2018 7:50 AM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 75. A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an example of which type of control? a. Entity-wide control. b. Processing control. c. Output control. d. Input control. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 7:51 AM DATE MODIFIED: 1/20/2018 6:46 AM 76. Which one of the following is not a control activity implemented in most accounting systems? a. Segregation of duties. b. Competent, trustworthy employees. c. Authorization procedures. d. All of these activities are normally implemented. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Activities DATE CREATED: 1/19/2018 11:06 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 77. An edit test is considered to be which type of control? a. An input control. b. A processing control. c. An output control. d. A supporting control. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:08 PM DATE MODIFIED: 1/20/2018 6:46 AM 78. A control designed to ensure that sales transactions are generated using the company’s most current prices would be considered to be which type of control? a. An input control. b. A processing control. c. An output control. d. A physical control. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:09 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 79. A control designed to ensure that the number of sales transactions recorded in the accounting records matches the number of sales invoices entered during processing is known as which type of control? a. Input control. b. Processing control. c. Output control. d. Edit control. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:10 PM DATE MODIFIED: 1/20/2018 6:46 AM 80. Requiring two signatures on any check in excess of $10,000 is an example of which type of control? a. Input control. b. Preventive control. c. Detective control. d. Processing control. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:11 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 81. A bank reconciliation is an example of which type of control? a. An input control. b. An output control. c. A preventive control. d. A detective control. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:12 PM DATE MODIFIED: 1/20/2018 6:46 AM 82. Security management practices that limit access to technologies is a function included in which COSO component of internal control structure? a. Control environment. b. Risk assessment. c. Control activities. d. Monitoring. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:13 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 83. Which of the following is an example of a detective control in an information system? a. Automated reports to management that specifically identify delinquent receivables. b. A requirement that salaried employees submit written requests to work overtime. c. Assurance from top management that computer centers are kept locked. d. The employment of trustworthy people to enter data into the information system. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component: Control Activities DATE CREATED: 1/19/2018 11:14 PM DATE MODIFIED: 1/20/2018 6:46 AM 84. Which COSO component of internal control concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives? a. Control activities. b. Information and communication. c. Monitoring. d. Control environment. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:15 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 85. Which of the following groups is interested in an organization's control structure? a. Board members. b. Lenders. c. Auditors. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:16 PM DATE MODIFIED: 1/20/2018 6:46 AM 86. The information and communication component of internal control includes which of the following? a. The organization deploys control activities through policies that establish what is expected and in procedures that put policies into action. b. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control. c. The organization identifies and assesses changes that could significantly impact the system of internal control. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: Information and Communication Component DATE CREATED: 1/19/2018 11:17 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 87. Which of the following activities would be an example of an ongoing evaluation? a. Automated review of all payment transactions. b. Monthly bank statement reconciliations. c. Periodic review of employee expense reimbursements. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Monitoring DATE CREATED: 1/19/2018 11:18 PM DATE MODIFIED: 1/20/2018 6:46 AM 88. Which component of COSO’s internal control system concerns the process that provides feedback on the effectiveness of the other four components of internal control? a. Information and communication. b. Monitoring. c. Control activities. d. Risk assessment. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO Component - Monitoring DATE CREATED: 1/19/2018 11:20 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 89. Which statement is true concerning the documentation of internal control? a. Documentation should be sufficient to support the design and operating effectiveness of internal controls. b. Documentation requirements are standardized by the PCAOB. c. Documentation of disbursements requires paper and electronic documentation. d. Documentation of all transaction controls should be tested on an annual basis. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting DATE CREATED: 1/19/2018 11:21 PM DATE MODIFIED: 1/20/2018 6:46 AM 90. Which of the following is not part of management’s report on internal controls? a. A statement that management is responsible for internal control. b. The framework used to evaluate internal control. c. An assessment of the effectiveness of the company's internal control. d. A statement indicating the extent of tests performed to assess controls. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting DATE CREATED: 1/19/2018 11:22 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 91. Which of the following best represents a walkthrough? a. The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries. b. The auditor walks the production line to find inefficiencies in the inventory process and reports them to management. c. The controller takes a sample of recorded write-offs to ensure they have been properly approved. d. The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Evaluation of Internal Controls DATE CREATED: 1/19/2018 11:23 PM DATE MODIFIED: 1/20/2018 6:46 AM 92. Which of the following is not a way management obtains evidence regarding the effectiveness of internal control over the accounting system? a. Performing a walkthrough of the accounting system. b. Making inquiries of banks and attorneys. c. Reviewing system flowcharts. d. Taking plant and operational tours. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Evaluation of Internal Controls DATE CREATED: 1/19/2018 11:24 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 93. Which one of the following represents a control deficiency? a. A missing control that is required for achievement of objectives. b. A control that operates as designed. c. A control that ensures the reliability of financial reporting. d. A control that does not prevent immaterial errors. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Deficiencies DATE CREATED: 1/19/2018 11:25 PM DATE MODIFIED: 1/20/2018 6:46 AM 94. Which of the following is the most severe? a. Material weaknesses in internal control. b. Significant deficiencies in internal control. c. Operational deficiencies in internal control. d. Each is equally severe because it could result in inaccuracies in financial reporting. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Deficiencies DATE CREATED: 1/19/2018 11:26 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 95. In a financial statement audit, what is the external auditor’s primary concern? a. Detecting all errors. b. Determining the effectiveness of operations. c. Determining whether the internal controls are effective. d. Determining whether the internal controls promote efficiency. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control Over Financial Reporting DATE CREATED: 1/19/2018 11:27 PM DATE MODIFIED: 1/20/2018 6:46 AM 96. Which of the following services does the PCAOB require auditors of public companies to perform? a. A financial statement audit and an attest audit. b. A financial statement audit and an assurance audit. c. A financial statement audit and agreed upon procedures. d. A financial statement audit and an examination of the effectiveness of internal controls. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Internal Control in Public Company Audit DATE CREATED: 1/19/2018 11:29 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 97. Which of the following is not a reason that the auditor must gain an understanding of the client’s internal control system? a. Better understand the client, its risks, and how it manages those risks. b. Assess control risk and identify the types of financial statement misstatements that are most likely to occur. c. Plan direct tests of account balances to determine if misstatements have occurred. d. All are reasons why auditors must gain an understanding of the client’s internal control system. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Importance of Auditor’s Understanding Internal Control DATE CREATED: 1/19/2018 11:30 PM DATE MODIFIED: 1/20/2018 6:46 AM 98. Internal control Define the term "internal control" and identify the major components of an internal control system. ANSWER:

Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. The major components of internal control are: 1. control environment 2. risk assessment 3. control activities 4. information and communication 5. monitoring POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:31 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 99. COSO: A Framework for Internal Control What is internal control as defined by COSO? Also, explain the other elements of the definition that are important to internal control. ANSWER:

COSO defines internal control as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) reliability of financial reporting, (2) compliance with applicable laws and regulations, and (3) effectiveness and efficiency of operations. Other elements of the definition that are important: * Is a process designed to accomplish the organization’s objectives. * Starts at the top of the organization with the board of directors and management creating and reinforcing a structure and a tone for controls in the organization. * Directly or indirectly includes all people in the organization, ranging from the shipping clerk to the internal auditor to the chief financial officer. * Is broader than internal control over financial reporting. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:32 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 100. Relationship of the five internal control components The five components of the COSO internal control system are conceptually and logically integrated. List the five components of the model and describe how they are integrated with each other in the internal control process. Use the following format: Components 1 2 3 4 5

Description

ANSWER:

1. Control environment The component of internal control that includes the set of standards, processes, and structures that provides the basis for carrying out internal control across the organization. 2. Risk assessment The component of internal control that is the process for identifying and assessing the risks that may affect an organization from achieving its objectives. 3. Control activities The component of internal control that includes control actions that have been established by policies and procedures. 4. Information and communication The component of internal control that refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives. 5. Monitoring The component of internal control that determines whether the controls, including all five components, are present and continuing to function effectively. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:34 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 101. Entity-Wide and Transaction Controls Distinguish between entity-wide controls and transaction controls. Provide at least three examples of each type. Entity-wide controls operate across an entity and affect multiple processes, transactions, accounts, and assertions. Some examples of entity-wide controls include: Controls related to the control environment Controls over management override The organization’s risk assessment process Centralized processing and controls Controls to monitor results of operations Controls to monitor other controls Controls over the period-end financial reporting process Policies that address significant business control and risk management practices ANSWER: Transaction controls typically affect only certain processes, transactions, accounts, and assertions, and they are not expected to have a pervasive effect throughout the organization. Some examples of transaction controls include: Segregation of duties over cash receipts and recording Authorization procedures for purchasing Reconciliation of bank accounts Physical controls to safeguard assets such as inventory Adequately documented transaction trail for all sales transactions POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Internal Controls DATE CREATED: 1/19/2018 11:35 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 102. Internal Control Principles One of the COSO principles of internal control requires organizations to demonstrate a commitment to attract, develop, and retain competent individuals in alignment with objectives. Discuss how this can be done. ANSWER:

Commitment to competence includes management’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. This commitment is demonstrated through policies and procedures to attract, train, mentor, evaluate, and retain employees POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Control Environment DATE CREATED: 1/19/2018 11:37 PM DATE MODIFIED: 1/20/2018 6:46 AM 103. Internal control components and principles For each of the five components of internal control, list at least two related principles of internal control. n gathering the information and briefly describe each one. ANSWER:

Internal Control Components and Principles COMPONENTS

CONTROL ENVIRONMENT

RISK ASSESSMENT Copyright Cengage Learning. Powered by Cognero.

PRINCIPLES 1. The organization demonstrates a commitment to integrity and ethical values. 2. The board of directors demonstrates independence of management and exercises oversight for the development and performance of internal control. 3. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. 4. The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives. 5. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives. 6. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. 7. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed. 8. The organization considers the potential for fraud in assessing Page 53

Chapter 03 risks to the achievement of objectives. 9. The organization identifies and assesses changes that could significantly impact the system of internal control. 10. The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels. 11. The organization selects and develops general control CONTROL activities over technology to support the achievement of ACTIVITIES objectives. 12. The organization deploys control activities as manifested in policies that establish what is expected and in relevant procedures to effect the policies. 13. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control. 14. The organization internally communicates information, INFORMATION including objectives and responsibilities for internal control, AND necessary to support the functioning of other components of COMMUNICATION internal control. 15. The organization communicates with external parties regarding matters affecting the functioning of other components of internal control. 16. The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. MONITORING 17. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.02 AUDI.JOHN.18.03.03 AUDI.JOHN.18.03.04 AUDI.JOHN.18.03.05 AUDI.JOHN.18.03.06 AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:39 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 104. Internal Control Principles Identify and briefly describe the two principles that should govern the monitoring function. ANSWER:

1. The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. Ongoing evaluation are procedures built into the normal recurring activities of an entity. Separate evaluations are conducted periodically, typically by objective management personnel, internal auditors, or external consultants.

2. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate. Control deficiencies identified through monitoring or other activities need to be communicated to appropriate personnel such as management or the board of directors so that appropriate corrective action can be taken. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.07 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: COSO: A Framework for Internal Control DATE CREATED: 1/19/2018 11:42 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 105. Integrated audit Explain the application of an integrated audit as it relates to regulation. Discuss the reasons that this integrated approach may occur. ANSWER:

The Sarbanes-Oxley Act of 2002 requires reporting by management of publicly-held companies on the effectiveness of internal control over financial reporting. The Public Company Accounting Oversight Board (PCAOB) requires the external auditor to perform an integrated audit of the effectiveness of internal controls and financial reporting. In other words, the same auditor must attest to both the financial statements and management’s assertions regarding the effectiveness of internal controls over financial reporting. Because of the above mentioned regulatory requirements, auditors will perform an audit on both financial statements and internal controls for all public clients. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 AUDI.JOHN.18.03.10 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Integrated Audit DATE CREATED: 1/19/2018 11:43 PM DATE MODIFIED: 1/20/2018 6:46 AM

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Chapter 03 106. Management Evaluation of Internal Controls What are the steps in management’s evaluation of internal control over financial reporting? ANSWER:

Management’s evaluation process includes the following steps: 1. Identify financial reporting risks. 2. Identify controls that mitigate financial reporting risks 3. Assess design effectiveness 4. Select and perform testing procedures to evaluate operating effectiveness 5. Document operating effectiveness 6. Evaluate control deficiencies 7. For public companies, provide public disclosure of management’s report POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Management Evaluation of Internal Controls DATE CREATED: 1/19/2018 11:44 PM DATE MODIFIED: 1/20/2018 6:46 AM 107. IT Controls Integrated into Internal Control Evaluations Explain input controls. ANSWER:

The control procedures designed to assure that the organization fully captures all the transactions between itself and another entity, and to properly record those transactions, are referred to as input controls. Input controls are designed to ensure that authorized transactions are correct, complete, and recorded in a timely fashion and that only authorized transactions exist. They include: * Input validation tests * Self-checking digits POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.03.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations DATE CREATED: 1/19/2018 11:45 PM DATE MODIFIED: 1/20/2018 6:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 04 1. An audit failure occurs when an audit firm issues an inaccurate audit opinion and fails to comply with auditing standards. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:44 AM DATE MODIFIED: 1/20/2018 6:48 AM 2. Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:46 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 3. Claims against auditors based on the deep pocket theory are most likely to occur in courts where damages are based on proportionate liability. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:47 AM DATE MODIFIED: 1/20/2018 6:48 AM 4. Under joint and several liability, users who experience losses from reliance on materially misstated financial statements may recover full damages from any defendant, including the audit firm, regardless of the level of fault for that defendant. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:48 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 5. Contingent fees for lawyers serve as a deterrent to lawsuits filed against audit firms. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:49 AM DATE MODIFIED: 1/20/2018 6:48 AM 6. The expectations gap represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 7:50 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 7. Under common law, liability concepts are developed through court decisions based on ordinary negligence, gross negligence, or fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 7:51 AM DATE MODIFIED: 1/20/2018 6:48 AM 8. Liability concepts developed through court decisions are referred to as statutory law. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 7:52 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 9. Ordinary negligence is the failure to exercise minimal care. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 7:53 AM DATE MODIFIED: 1/20/2018 6:48 AM 10. Gross negligence is a failure to use even minimal care, a reckless disregard for the truth, or reckless behavior. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 7:54 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 11. Fraud occurs when there is an intentional concealment or an unintentional misrepresentation of a material fact that causes damage to those deceived. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 7:55 AM DATE MODIFIED: 1/20/2018 6:48 AM 12. A tort is a civil wrong, other than a breach of contract, based on ordinary negligence, gross negligence, or fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law and Legal Actions Relevant to Auditors DATE CREATED: 1/17/2018 11:03 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 13. Failing to provide the audit report on time is a potential cause of action against the auditor for breach of contract. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability under Contract Law DATE CREATED: 1/17/2018 11:04 PM DATE MODIFIED: 1/20/2018 6:48 AM 14. Professional auditing standards and financial accounting principles are used by courts as criteria for determining an auditor’s duty not to be negligent. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Liability for Negligence DATE CREATED: 1/17/2018 11:06 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 15. An identified user is a specific third party named in the audit engagement letter as a user of the audited financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Liability to Third Parties DATE CREATED: 1/17/2018 11:06 PM DATE MODIFIED: 1/20/2018 6:48 AM 16. Auditors can be held liable to third parties for fraud, but not for ordinary or gross negligence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor's Liability to Third Parties DATE CREATED: 1/17/2018 11:12 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 17. A foreseeable user of audited financial statements is a member of a limited class of users for a particular transaction. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Liability to Third Parties DATE CREATED: 1/17/2018 11:13 PM DATE MODIFIED: 1/20/2018 6:48 AM 18. Under the Securities Act of 1933, the accuracy of the registration statement is determined as of the date normal audit work is completed, which may be several months before the effective date of the registration statement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Liability under Securities Act of 1933 DATE CREATED: 1/17/2018 11:15 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 19. The occurrence of an important event, such as a change in auditors, is reported to the SEC by filing Form 8-K. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Reporting Requirements under Securities Act of 1934 DATE CREATED: 1/17/2018 11:17 PM DATE MODIFIED: 1/20/2018 6:48 AM 20. Both the 1933 and 1934 Securities Acts and the Sarbanes-Oxley Act of 2002 provide for criminal actions against auditors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Criminal Provisions in Federal Statutory Laws DATE CREATED: 1/17/2018 11:18 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 21. Which of the following is not an incentive for filing lawsuits against audit firms? a. Class action lawsuits. b. Increased complexity of accounting standards. c. Contingent-fee-based compensation for law firms. d. Joint and several liability doctrine. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 11:21 PM DATE MODIFIED: 1/20/2018 6:48 AM 22. Which of the following statements regarding liability doctrines is not true? a. Under proportionate liability, a defendant’s share of damages depends on the degree of fault determined by the judge or jury. b. Joint and several liability provides more protection to users who experience losses from relying on misstated financial statements. c. Proportionate liability generally applies to lawsuits filed in federal court. d. Joint and several liability cannot be applied in class-action lawsuits. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 11:22 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 23. Which of the following has contributed to a decrease in federal class actions involving audit firms as co-defendants over the last decade? a. Supreme Court decisions in Janus Capital Group, Inc., and Stoneridge Investment Partners. b. Federal restrictions on contingent fees for lawyers in lawsuits filed under the Securities Act of 1934. c. A growing expectations gap causing investors to view audit reports as insurance against losses. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/17/2018 11:24 PM DATE MODIFIED: 1/20/2018 6:48 AM 24. Which of the following statements describes the expectations gap as it relates to audited financial statements? a. Investors believe that an unqualified audit report guarantees that an investment in the audited company is riskfree. b. Investors believe that an unqualified audit report is an insurance policy against losses from a risky investment. c. Investors believe they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/17/2018 11:25 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 25. A jury has determined that Jason Pruitt, CPA, is 20% at fault for losses suffered by investors who relied on materially misstated financial statements. The jury found that Pruitt’s co-defendants, the client company and the company’s CEO, are each 40% at fault. The company is bankrupt, and only Pruitt and the CEO have adequate resources to pay damages. Under joint and several liability, what is the likely percentage of damages that Pruitt will pay? a. 20%. b. 20% plus a proportionate share of damages attributed to the company. c. 20% plus 50% of damages attributed to the company. d. 100% of damages. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/17/2018 11:26 PM DATE MODIFIED: 1/20/2018 6:48 AM 26. Liability based on federal securities law is known as which type of law? a. Common law. b. Contract law. c. Statutory law. d. Commercial law. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/17/2018 11:27 PM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 27. Under common law, which of the following is a basis for litigation against an auditor for failure to meet professional standards and responsibilities? a. Ordinary negligence b. Gross negligence c. Fraud d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Law and Causes of Legal Action DATE CREATED: 1/18/2018 7:39 AM DATE MODIFIED: 1/20/2018 6:48 AM 28. Which is the best definition of scienter? a. A wrongful state of mind when making a misrepresentation. b. A causal connection between a misstatement and a material loss. c. A material omission of facts. d. Fraudulent conduct in the purchase of a security. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/18/2018 7:41 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 29. Generally, auditors can be sued for breach of contract by which of the following parties? a. Shareholders. b. Third parties other than shareholders. c. Clients. d. All of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/18/2018 7:42 AM DATE MODIFIED: 1/20/2018 6:48 AM 30. Which of the following is not a basis for a third-party lawsuit against an auditor? a. Common law. b. Breach of contract. c. Gross negligence. d. Fraud. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability to Third Parties DATE CREATED: 1/18/2018 7:44 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 31. The concept of the third-party beneficiary test was established by which court case? a. Credit Alliance Corp. v. Arthur Andersen & Co. b. Ultramares Corp. v. Touche. c. Citizens State Bank v. Timm, Schmidt, & Co. d. Rosenblum v. Adler. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability to Third Parties DATE CREATED: 1/19/2018 12:09 AM DATE MODIFIED: 1/20/2018 6:48 AM 32. Which of the following may an auditor use as a defense under the Securities Act of 1933? a. Contributory negligence. b. Scienter. c. Due care. d. Immaterial loss. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/19/2018 12:10 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 33. Which of the following is not a potential cause for action against the auditor for breach of contract? a. Withdrawing from an audit engagement due to unresolved disagreements with management. b. Failing to discover a material error in the financial statements. c. Violating client confidentiality. d. Failing to provide the audit report on time. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Applicable Laws and Causes of Legal Action DATE CREATED: 1/19/2018 12:12 AM DATE MODIFIED: 1/20/2018 6:48 AM 34. Compliance with GAAP was an unsuccessful defense in which of the following court cases? a. Credit Alliance v. Arthur Andersen & Co. b. Ultramares Corp. v. Touche. c. Ernst and Ernst v. Hochfelder. d. Herzfeld v. Laventhol, Krekstein, Horwath & Horwath. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability under the Securities Exchange Act of 1934 DATE CREATED: 1/19/2018 12:13 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 35. Which of the following would be the first form filed with the SEC describing a major change in corporate governance? a. 8-K b. 8-Q c. 10-K d. 10-Q ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Reporting Requirements under the Securities Act of 1933 DATE CREATED: 1/19/2018 12:14 AM DATE MODIFIED: 1/20/2018 6:48 AM 36. To win a lawsuit against an auditor, third parties generally have to prove which of the following? a. The parties suffered a loss. b. A loss occurred due to reliance on misleading financial statements. c. The auditor knew, or should have known, financial statements were misleading. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability to Third Parties DATE CREATED: 1/19/2018 12:15 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 37. Which of the following documents must be filed with the SEC under the Securities Act of 1933 before a company can issue new securities to the public? a. Form 10-K. b. Form 10-Q. c. Prospectus. d. All of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Filing Requirements under the Securities Acts DATE CREATED: 1/19/2018 12:16 AM DATE MODIFIED: 1/20/2018 6:48 AM 38. Expectations Gap What is the expectations gap? ANSWER:

Some investors mistakenly view the unqualified audit report as an insurance policy against any and all losses from a risky investment. When they do suffer losses, these investors believe that they should be able to recover their losses from the auditor. This misperception has elements of an “expectations gap” whereby shareholders believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. This misperception, coupled with joint and several liability, class action lawsuits, and contingent fee compensation for lawyers, encourages large lawsuits against auditors, even for cases in which the auditor is only partially at fault or is not at fault. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms DATE CREATED: 1/19/2018 12:18 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 39. Types of Law Relevant to Auditors’ Legal Liability What are the three types of law that are relevant to auditors’ legal liability? Explain the causes of legal action under each type. ANSWER:

The three types of law most relevant to auditors’ legal liability are: 1) Contract Law – Liability occurs when there is a breach of contract. Usually, the contract is between the client and the external auditor for performance of the financial statement audit. Contract law is governed by common law. 2) Common Law – Auditors have liability to third parties based on ordinary negligence, gross negligence, or fraud under common law. Third parties may include shareholders, creditors, employees, or vendors. Common law is a tradition-based, evolving set of laws resulting from court decisions over the years. 3) Statutory Law – Statutory law refers to laws that have been passed by governmental units and includes federal securities laws and state statutes. Important federal statutes for the auditing profession are the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Law Relevant to Auditor Liability DATE CREATED: 1/19/2018 12:20 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 04 40. Auditor Defenses to Breach of Contract Suits A client seeking to recover damages from an auditor for breach of contract in an action based on negligence must show that the auditor had a duty not to be negligent. Identify at least three defenses an auditor can use against a breach of contract lawsuit. ANSWER:

Defenses an auditor might use in a breach of contract action include: 1) The auditor did not have a duty to perform the service. 2) The auditor exercised due professional care in accordance with the contract. 3) The client was contributorily negligent. 4) The client’s losses were not caused by the breach of contract. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.04.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor Liability under Contract Law DATE CREATED: 1/19/2018 12:21 AM DATE MODIFIED: 1/20/2018 6:48 AM

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Chapter 05 1. The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:25 AM DATE MODIFIED: 1/20/2018 6:53 AM 2. Auditors in the U.S. follow guidance issued by the PCAOB, AICPA, and the IAASB. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:29 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 3. The PCAOB is committed to merging its standards with those of the AICPA and the IAASB. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:30 AM DATE MODIFIED: 1/20/2018 6:53 AM 4. An auditor would follow the PCAOB’s guidance when auditing a company whose stock is traded on the London Stock Exchange if the company conducts operations in multiple U.S. cities. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:31 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 5. The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Principles Underlying the Auditing Standards DATE CREATED: 1/19/2018 12:32 AM DATE MODIFIED: 1/20/2018 6:53 AM 6. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, complying with ethical requirements, and maintaining professional skepticism throughout the audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Principles Underlying the Auditing Standards DATE CREATED: 1/19/2018 12:33 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 7. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Principles Underlying the Auditing Standards DATE CREATED: 1/19/2018 12:34 AM DATE MODIFIED: 1/20/2018 6:53 AM 8. The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Principles Underlying the Auditing Standards DATE CREATED: 1/19/2018 12:35 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 9. PCAOB guidance includes standards on certain auditor responsibilities related to SEC filings. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:46 AM DATE MODIFIED: 1/20/2018 6:53 AM 10. In some circumstances, the auditor will not express an opinion on the financial statements but will instead state that an opinion cannot be expressed. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:47 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 11. The common purpose of auditing standards created by the various authorities is to provide reasonable assurance that audits are conducted in a quality manner. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:47 AM DATE MODIFIED: 1/20/2018 6:53 AM 12. The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining reasonable assurance that the statements are free from misstatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 12:48 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 13. If controls are effective, there is a higher likelihood that the financial statements are free of material misstatement. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Opinion Formulation Process DATE CREATED: 1/19/2018 12:49 AM DATE MODIFIED: 1/20/2018 6:53 AM 14. The activities performed by the auditor throughout the opinion formulation process are determined by whether the auditor is conducting a financial statement audit only or an integrated audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Overview of the Audit Opinion Formulation Process DATE CREATED: 1/19/2018 12:50 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 15. The cycle approach to auditing is a convenient way to break the audit into manageable time periods. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Cycle Approach to Auditing DATE CREATED: 1/19/2018 12:51 AM DATE MODIFIED: 1/20/2018 6:53 AM 16. Comparability is one of the five management assertions. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 12:52 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 17. Making client acceptance and continuance decisions is the first phase of the audit opinion formulation process. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Opinion Formulation Process DATE CREATED: 1/19/2018 12:53 AM DATE MODIFIED: 1/20/2018 6:53 AM 18. An auditor should give equal emphasis to all management assertions when testing accounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 12:54 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 19. The revenue cycles includes transactions related to revenue such as sales, receivables, and gain or loss from disposal of equipment. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Accounting Cycles DATE CREATED: 1/19/2018 12:55 AM DATE MODIFIED: 1/20/2018 6:53 AM 20. An audit firm’s portfolio management includes client acceptance and continuance decisions that occur before the audit opinion formation process is initiated. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance and Continuance Decisions DATE CREATED: 1/19/2018 12:56 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 21. Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for the auditor’s opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Evidence Requirements DATE CREATED: 1/19/2018 12:57 AM DATE MODIFIED: 1/20/2018 6:53 AM 22. Audit documentation would not include analyses prepared by the client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 12:58 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 23. Developing an understanding of the client's business and industry is essential to the auditor’s assessment of risk. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 12:59 AM DATE MODIFIED: 1/20/2018 6:53 AM 24. Tests of controls are a type of substantive procedure. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 1:01 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 25. The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:02 AM DATE MODIFIED: 1/20/2018 6:53 AM 26. Tests of controls are procedures are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 1:03 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 27. The auditor performs substantive procedures to detect material misstatements in account balances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 1:04 AM DATE MODIFIED: 1/20/2018 6:53 AM 28. Audit procedures can be classified as risk assessment procedures, tests of controls, or substantive procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 1:05 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 29. Assertions about existence address whether assets and liabilities exist, and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertion DATE CREATED: 1/19/2018 1:06 AM DATE MODIFIED: 1/20/2018 6:53 AM 30. The first phase in the audit opinion formulation process is performing a risk assessment. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Opinion Formulation Process DATE CREATED: 1/19/2018 1:08 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 31. Physically inspecting a client’s assets is an audit procedure. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 1:09 AM DATE MODIFIED: 1/20/2018 6:53 AM 32. Audit documentation is frequently referred to as working papers. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 1:10 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 33. Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure, and which could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Audit Risk DATE CREATED: 1/19/2018 1:12 AM DATE MODIFIED: 1/20/2018 6:53 AM 34. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Types of Audit Risk DATE CREATED: 1/19/2018 1:13 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 35. There is an inverse relationship between the assessment of risk of material misstatement in an account and the amount of evidence required. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Performing Risk Assessment DATE CREATED: 1/19/2018 1:14 AM DATE MODIFIED: 1/20/2018 6:53 AM 36. The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Program DATE CREATED: 1/19/2018 1:15 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 37. The effectiveness of entity-wide controls may reduce the extent of testing of transaction controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Evidence about Internal Control Effectiveness DATE CREATED: 1/19/2018 1:17 AM DATE MODIFIED: 1/20/2018 6:53 AM 38. When assessing the effectiveness of controls for relevant assertions, the auditor tests only transaction controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Evidence about Internal Control Operating Effectiveness DATE CREATED: 1/19/2018 1:18 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 39. The auditor is not required to test every control related to relevant assertions in a significant account. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Evidence about Internal Control Operating Effectiveness DATE CREATED: 1/19/2018 1:19 AM DATE MODIFIED: 1/20/2018 6:53 AM 40. For an integrated audit, the auditor’s opinion about internal control effectiveness is based on control effectiveness at year-end as opposed to throughout the year. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Evidence about Internal Control Operating Effectiveness DATE CREATED: 1/19/2018 1:20 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 41. A controls reliance audit includes substantive procedures and does not include tests of controls. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Auditor’s Reliance on Internal Controls DATE CREATED: 1/19/2018 1:21 AM DATE MODIFIED: 1/20/2018 6:53 AM 42. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:22 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 43. Presentation and disclosure assertions address whether components of the financial statements are properly classified, described, and disclosed. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:23 AM DATE MODIFIED: 1/20/2018 6:53 AM 44. The PCAOB does not currently have a mandate for convergence with other auditing standards. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements DATE CREATED: 1/19/2018 1:24 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 45. Substantive analytical procedures are optional for significant accounts and disclosures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence DATE CREATED: 1/19/2018 1:25 AM DATE MODIFIED: 1/20/2018 6:53 AM 46. In performing substantive tests on account balances, the auditor performs tests for all five assertions. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence DATE CREATED: 1/19/2018 1:26 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 47. If the auditor assesses internal controls to be effective, substantive testing likely will be performed for some, but not all, significant accounts and disclosures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence DATE CREATED: 1/19/2018 1:27 AM DATE MODIFIED: 1/20/2018 6:53 AM 48. If the auditor’s assessment is that there is high risk due to the subjectivity of the accounting process, substantive procedures should be more rigorous. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence DATE CREATED: 1/19/2018 1:28 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 49. An integrated audit requires the issuance of separate reports for the opinions expressed on the financial statements and on internal control. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Completing the Audit and Making Reporting Decisions DATE CREATED: 1/19/2018 1:31 AM DATE MODIFIED: 1/20/2018 6:53 AM 50. In an integrated audit, the auditor issues an opinion on both the financial statements and internal control. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Completing the Audit and Making Reporting Decisions DATE CREATED: 1/19/2018 1:32 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 51. The PCAOB’s General Auditing Standards requires that an audit be performed by which type of person? a. An auditor with seasoned judgment in varying degrees of supervision and review. b. An auditor having the appropriate professional qualifications. c. An auditor with adequate technical and leadership skills. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:34 AM DATE MODIFIED: 1/20/2018 6:53 AM 52. Which auditing standards apply to private companies? a. The AICPA Standards. b. The IASSB Standards. c. The Standards of the PCAOB. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:35 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 53. The AICPA Principles Governing an Audit include which of the following categories that guide the conduct of an audit? a. Purpose of an audit and premise upon which an audit is conducted. b. Responsibilities. c. Performance. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:36 AM DATE MODIFIED: 1/20/2018 6:53 AM 54. What is the scope of applicability of the auditing standards of the AICPA? a. Nonpublic companies traded in non-U.S. markets. b. Nonpublic companies in the U.S. c. Public companies traded in non-U.S. markets. d. Public companies traded in the U.S. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:37 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 55. Which of the following is not required by the PCAOB’s General Auditing Standards category? a. Exercise due professional care. b. Obtain reasonable assurance as to whether internal controls are effective. c. Maintain an independence in mental attitude. d. Exercise professional skepticism. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:38 AM DATE MODIFIED: 1/20/2018 6:53 AM 56. Which of the following organizations provides auditing standards for public companies? a. GAO. b. AICPA. c. GAAP. d. PCAOB. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:40 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 57. Which of the following factors has the greatest effect on the reliability of financial statements? a. The size of the client b. The industry of the client c. The client’s internal control structure. d. The client’s trend of earnings. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Opinion Formulation Process DATE CREATED: 1/19/2018 1:49 AM DATE MODIFIED: 1/20/2018 6:53 AM 58. What is management’s responsibility with respect to the conduct of an audit? a. Preparing financial statements. b. Maintaining internal control over financial reporting. c. Providing the auditor with relevant information and access to personnel. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Responsibilities of Management DATE CREATED: 1/19/2018 1:50 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 59. Which of the following assertions address whether accounts have been included in the financial statements at appropriate amounts? a. Completeness assertion. b. Valuation or allocation assertion. c. Rights and obligations assertion. d. None of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:51 AM DATE MODIFIED: 1/20/2018 6:53 AM 60. Which of the following is the primary assertion related to testing inventory on hand to see if it includes consignment goods? a. Existence. b. Completeness. c. Valuation. d. Rights and Obligations. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:52 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 61. Which assertion is most closely related to the determination of the adequacy of the allowance for doubtful accounts? a. Existence. b. Valuation. c. Rights and Obligations. d. Presentation and Disclosure. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:53 AM DATE MODIFIED: 1/20/2018 6:53 AM 62. Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? a. Existence. b. Valuation. c. Completeness. d. Rights and Obligations ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:55 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 63. Which assertion addresses whether the financial statement items are properly classified in the financial statements? a. Completeness. b. Existence. c. Valuation. d. Presentation and Disclosure. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 1:56 AM DATE MODIFIED: 1/20/2018 6:53 AM 64. Which of the following groups are committed to the convergence of the auditing standards? a. IAASB. b. PCAOB. c. AICPA. d. Both A and C. e. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 1:57 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 65. Which of the following is a procedure that requests a direct written response to the auditor from a third party? a. Inquiry. b. Confirmation. c. Inspection. d. Observation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Evidence and Audit Procedures DATE CREATED: 1/19/2018 1:58 AM DATE MODIFIED: 1/20/2018 6:53 AM 66. Which of the following is a procedure which analyzes plausible relationships among financial and nonfinancial data? a. Analytical procedures. b. Scanning. c. Reviewing. d. Observation. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Evidence and Audit Procedures DATE CREATED: 1/19/2018 1:59 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 67. What does the quality of the evidence an auditor collects depend upon? a. The nature of the procedures. b. The extent of the procedures. c. The timing of the procedures. d. Both A and C. e. All of the above. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Evidence and Audit Procedures DATE CREATED: 1/19/2018 2:00 AM DATE MODIFIED: 1/20/2018 6:53 AM 68. Which of the following terms describes procedures designed to detect material misstatements in accounts? a. Substantive procedures. b. Control tests. c. Risk assessment procedures. d. Business risk procedures. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Evidence and Audit Procedures DATE CREATED: 1/19/2018 2:01 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 69. When testing accounts receivable, which of the following audit procedures would an auditor likely use with respect to accounts with unusual sales terms? a. Inquiries. b. Confirmation. c. Contract review. d. Aging of receivables. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles DATE CREATED: 1/19/2018 2:02 AM DATE MODIFIED: 1/20/2018 6:53 AM 70. Which of the following statements accurately describes the auditor’s reporting responsibility for a financial statement audit? a. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. b. The auditor will identify in the auditor’s report those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. c. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonably accurate, the auditor must so state in the auditor’s report. d. The auditor will express an unqualified opinion on the financial statements or will conduct additional audit procedures until such an opinion can be expressed. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 2:03 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 71. Which of the following statements about the auditing standards issued by the AICPA is true? a. The auditing standards issued by the AICPA are no longer recognized by the PCAOB. b. The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence. c. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies. d. The auditing standards issued by the AICPA were used by the PCAOB as a starting point. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Professional Auditing Standards DATE CREATED: 1/19/2018 2:05 AM DATE MODIFIED: 1/20/2018 6:53 AM 72. Which of the following is a reason why an auditor needs an understanding of internal controls? a. To provide individual comments on internal control non-compliance. b. To become comfortable that the client will pay its audit bills. c. To assess materiality. d. To assess the risk of possible misstatements in the financial statements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Performing Risk Assessment DATE CREATED: 1/19/2018 2:06 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 73. Which of the following is not a reason why an auditor obtains an understanding of internal controls? a. Understanding the entity's internal control is a requirement of professional auditing standards. b. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. c. It is the primary basis for the audit report. d. It assists the auditor in designing the nature, timing, and extent of further audit procedures. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Performing Risk Assessment DATE CREATED: 1/19/2018 2:07 AM DATE MODIFIED: 1/20/2018 6:53 AM 74. Which type of audit documentation is required by PCAOB standards? a. Flowcharts. b. Narratives. c. Questionnaires. d. A specific form of documentation is not required. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 2:08 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 75. Which of the following is not a typical accounting cycle? a. Revenue. b. Inventory. c. Cash. d. Internal controls. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Accounting Cycles DATE CREATED: 1/19/2018 2:09 AM DATE MODIFIED: 1/20/2018 6:53 AM 76. Which of the following statements about assertions is true? a. All assertions are equally important for all accounts. b. The importance of an assertion depends upon the account. c. Assertions are not related to accounts. d. None of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 2:10 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 77. Which of the following assertions would the auditor usually consider most relevant for accounts payable? a. Existence. b. Valuation. c. Disclosure. d. Completeness. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Financial Statement Assertions DATE CREATED: 1/19/2018 2:11 AM DATE MODIFIED: 1/20/2018 6:53 AM 78. Which of the following is a use of audit documentation? a. Assisting the engagement team in planning and performing the audit. b. Assisting members of the engagement team responsible for supervising and reviewing the audit work. c. Retaining a record of matters of continuing significance to future audits of the same organization. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 2:12 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 79. Which of the following factors influence the risk of material misstatement? a. Business risks. b. Management incentives. c. IT risks. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 2:13 AM DATE MODIFIED: 1/20/2018 6:53 AM 80. What does business risk include? a. Economic factors. b. Competitive factors. c. Regulatory risk. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 2:14 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 81. At what level does the auditor assess the risk of material misstatement? a. The financial statement level. b. The company level. c. The assertion level. d. Both A and C. e. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 2:15 AM DATE MODIFIED: 1/20/2018 6:53 AM 82. What does the effectiveness of internal controls influence? a. Inherent risk. b. Control risk. c. Risk of material misstatement. d. Both B and C. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Effectiveness of Internal Controls DATE CREATED: 1/19/2018 2:16 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 83. Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk? a. Controls over significant, unusual transaction. b. Controls over related-party transactions. c. Controls related to marketable securities. d. Controls related to significant management estimates. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Performing Risk Assessment DATE CREATED: 1/19/2018 2:18 AM DATE MODIFIED: 1/20/2018 6:53 AM 84. Which statement is true concerning materiality? a. Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements. b. Materiality guidelines are specifically prescribed by the PCAOB. c. Materiality is not a useful concept in assessing internal control effectiveness. d. Materiality is a concept applied to financial statement presentation but not to disclosures. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Performing Risk Assessment DATE CREATED: 1/19/2018 2:19 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 85. Which of the following statements is true regarding client acceptance or continuance decisions? a. An audit firm cannot discontinue providing audit services to a client without just cause. b. Potential audit fees are not a valid consideration in the acceptance or continuance decision. c. The client acceptance/continuance decision is one of the most important factors in audit quality. d. Audit firms are not permitted to conduct background checks on the management of a potential client. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Client Acceptance or Continuance Decisions DATE CREATED: 1/19/2018 2:20 AM DATE MODIFIED: 1/20/2018 6:53 AM 86. Which of the following is not a component of business risk? a. Regulatory risk and changes. b. Economic or competitive changes. c. Changes in stock market performance. d. Changes in fair market values of assets or liabilities. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Components of Business Risk DATE CREATED: 1/19/2018 2:21 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 87. With a substantive audit strategy, what is an auditor likely to do? a. Extensively tests internal controls. b. Limit the testing of internal controls. c. Not assess control risks. d. Issue an adverse opinion on the financial statements. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 2:23 AM DATE MODIFIED: 1/20/2018 6:53 AM 88. Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing? a. Is the design of the control effective? b. Does the control promote operational efficiency? c. Is it cost effective to test controls? d. Are controls operating effectively? ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Evidence about Internal Control Effectiveness DATE CREATED: 1/19/2018 2:24 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 89. Which of the following would not affect an auditor's judgment concerning internal controls? a. The assertion being tested. b. The design of the control. c. The operation of the control. d. The level of inherent risk. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Risk Assessment DATE CREATED: 1/19/2018 2:25 AM DATE MODIFIED: 1/20/2018 6:53 AM 90. With a dual-purpose test, what is an auditor likely to do? a. Perform a substantive procedure concurrently with a test of a control. b. Perform a substantive procedure concurrently with a risk assessment test. c. Perform a risk assessment test concurrently with a test of a control. d. None of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:26 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 91. Which statement is correct? a. Assertions affected by highly objective estimates usually require direct tests of balances. b. The materiality of the account totally dictates the substantive procedures to be performed. c. The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed. d. The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts DATE CREATED: 1/19/2018 2:27 AM DATE MODIFIED: 1/20/2018 6:53 AM 92. Which of the following factors affect the substantive procedures performed in an audit? a. The subjectivity of the accounting process. b. Size of the account. c. Effectiveness of the relevant controls. d. All of the above affect the substantive procedures that are performed. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:27 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 93. If the auditor’s assessment of the materiality of the account balance is high, what would be the respective effect on (1) the extent of substantive testing and (2) the nature of procedures performed? a. (1) Less (2) More rigorous b. (1) Less (2) Less rigorous. c. (1) More (2) Less rigorous d. (1) More (2) More rigorous ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts DATE CREATED: 1/19/2018 2:28 AM DATE MODIFIED: 1/20/2018 6:53 AM 94. An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on (1) control effectiveness and for (2) testing controls in the financial statement period? Control Effectiveness Financial Statement a. (1) As of year-end (2) As of year end b. (1) As of year-end (2) Throughout the year c. (1) Throughout the year (2) As of year end d. (1) Throughout the year (2) Throughout the year ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Example: Assessing Control Design Effectiveness DATE CREATED: 1/19/2018 2:30 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 95. Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency? a. The materiality of the related balance. b. The volume of transactions affected. c. The subjectivity of the account balance. d. The nature of the client’s industry. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Example: Assessing Control Effectiveness DATE CREATED: 1/19/2018 2:31 AM DATE MODIFIED: 1/20/2018 6:53 AM 96. Which of the following statements is correct concerning the auditor’s opinion on internal control effectiveness? a. The report describes any material weaknesses and discusses actions taken by management to remediate the problems. b. The report does not discuss whether the control weaknesses were first identified by management or the auditor. c. The report does not recognize the integrated nature of the audit and the effect of the material weakness on the planning of the financial statement audit. d. The report identifies management’s actions to remedy the prior year’s control weaknesses. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Completing the Audit and Making Reporting Decisions DATE CREATED: 1/19/2018 2:32 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 97. The auditing standards What is the structure or format of each auditing standard issued by the AICPA and by the IAASB? What is the purpose of each section? ANSWER:

Introduction explains the purpose and scope of the standard. Objective defines the context in which the requirements are set. Definitions include, where relevant, specific meanings of terms in the standards. Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements are expressed using the words “the auditor should” or “the auditor must.” Application and Other Explanatory Material include cross-references to the requirements and provide further guidance for applying the requirements of the standard POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles DATE CREATED: 1/19/2018 2:33 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 98. What are the AICPA’s fundamental principles? ANSWER:

The AICPA has developed seven fundamental principles that govern audits. The four categories, with their specific principles, are: Purpose of an Audit and Premise upon Which an Audit Is Conducted 1. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statement. This purpose is achieved when an auditor expresses an opinion on the financial statements. 2. An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel. Responsibilities 3. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. Performance 4. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement. 5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks. 6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement. Reporting 7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.0 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: AICPA’s Fundamental Principles DATE CREATED: 1/19/2018 2:35 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 99. Phases of the Audit Opinion Formulation Process Identify the five phases involved in the audit opinion formulation process. ANSWER:

Phase I Phase II Phase III Phase IV

Making Client Acceptance and Continuance Decisions Performing Risk Assessment Obtaining Evidence about Internal Control Operating Effectiveness Obtaining Substantive Evidence about Accounts, Disclosures, andAssertions Completing the Audit and Making Reporting Decisions

Phase V POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Overview of the Audit Process DATE CREATED: 1/19/2018 2:39 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 100. Financial Statement Assertions Identify and describe the five management assertions inherent in financial statement. Provide examples. ANSWER:

Existence or Occurrence: Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred. Example: Management asserts that sales recorded in the income statement represent transactions in which the exchange of goods or services with customers for cash or other consideration had occurred. Completeness: Assertions about completeness address whether all transactions and accounts that should be included in the financial statements are included. Example: Management asserts that notes payable in the balance sheet include all such obligations of the organization. Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included in the financial statements at appropriate amounts. Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while assertions about obligations address whether liabilities are the obligations of the organization. Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity. Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed. Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not mature within one year. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.05 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements DATE CREATED: 1/19/2018 2:40 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 101. What are the five categories of PCAOB standards? What is included in each category? ANSWER:

The categories are: 1) General Auditing Standards—Standards on broad auditing principles, concepts, activities, and communications 2) Audit Procedures—Standards for planning and performing audit procedures and for obtaining audit evidence 3) Auditor Reporting—Standards for auditors’ reports 4) Matters Relating to Filings Under Federal Securities Laws—Standards on certain auditor responsibilities relating to SEC filings 5) Other Matters Associated with Audits--Standards for other work performed in conjunction with an audit POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Overview of PCAOB Standards DATE CREATED: 1/19/2018 2:41 AM DATE MODIFIED: 1/20/2018 6:53 AM 102. Identify at least five purposes served by audit documentation. ANSWER:

The overall purpose of audit documentation is to provide evidence that the audit was planned and performed in accordance with professional auditing standards. Auditing standards note that audit documentation serves other purposes, including: *Assisting the engagement team in planning and performing the audit. *Assisting members of the engagement team responsible for supervising and reviewing the audit work. *Retaining a record of matters of continuing significance to future audits of the same organization. *Enabling internal or external inspections of completed audits. *Assisting auditors in understanding the work performed in the prior year as an aid in planning and performing the current engagement. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.07 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Purposes of Audit Documentation DATE CREATED: 1/19/2018 2:42 AM DATE MODIFIED: 1/20/2018 6:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 05 103. What are the three broad types of audit procedures? What is the purpose of each test? ANSWER:

Risk assessment procedures. Procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion, but are used for purposes of planning the audit. Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level. Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include tests of details and substantive analytical procedures. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:43 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 05 104. Identify at least five specific procedures an auditor can apply to collect audit evidence and provide an example of each. ANSWER:

Audit Procedure (examples in italics) Inspection of documentation Examining a client document for evidence of authorization Inspection of assets Physically examining a client’s equipment Observation Looking at a process or procedure, such as observing the client use of a restricted access area External confirmation Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the amount owed to the client Recalculation Checking the mathematical accuracy of a document or record, such as an inventory count sheet Reperformance Independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation Analytical procedures Analyzing plausible relationships among both financial and non-financial data Scanning Performing a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance Inquiry Seeking information of persons within or outside of the client organization, such as communicating with the CFO or general counsel about changes in accounting policy POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.05.06 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB - Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:45 AM DATE MODIFIED: 1/20/2018 6:53 AM

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Chapter 06 1. Audit evidence used to support an audit opinion is obtained solely from audit procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Sufficient Appropriate Audit Evidence DATE CREATED: 1/19/2018 2:48 AM DATE MODIFIED: 1/20/2018 7:32 AM 2. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Amount and Quality of Audit Evidence DATE CREATED: 1/19/2018 2:51 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 3. The auditor uses professional judgment to determine which audit procedures to perform. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Selecting Audit Procedures DATE CREATED: 1/19/2018 2:52 AM DATE MODIFIED: 1/20/2018 7:32 AM 4. Audit evidence consists of both information that corroborates management’s assertions and information that contradicts such assertions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Sufficient Appropriate Audit Evidence DATE CREATED: 1/19/2018 2:53 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 5. The reliability of audit evidence relates to the connection between the audit procedure being performed and the assertion being audited. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Audit Evidence DATE CREATED: 1/19/2018 2:54 AM DATE MODIFIED: 1/20/2018 7:32 AM 6. The type of audit procedure known as inquiry does not ordinarily provide sufficient audit evidence of the absence of a material misstatement, nor is it alone sufficient to test the operating effectiveness of controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:55 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 7. A limitation of observation is that observing a process on one day does not necessarily indicate how the transactions were processed on a different day or over a relevant period of time. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 2:56 AM DATE MODIFIED: 1/20/2018 7:32 AM 8. Relevance and reliability of evidence make up the appropriateness of audit evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence DATE CREATED: 1/19/2018 2:57 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 9. Evidence can be directly or indirectly relevant to an assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence DATE CREATED: 1/19/2018 2:58 AM DATE MODIFIED: 1/20/2018 7:32 AM 10. Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence DATE CREATED: 1/19/2018 2:59 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 11. Internal documentation is generally less reliable than external documentation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence DATE CREATED: 1/19/2018 3:33 AM DATE MODIFIED: 1/20/2018 7:32 AM 12. Confirmation statements from banks are an example of third-party external documents. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence DATE CREATED: 1/19/2018 3:35 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 13. Inspection of tangible assets generally provides reliable evidence with respect to the completeness of the assets, but not necessarily about the existence of the assets. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures and Management Assertions DATE CREATED: 1/19/2018 3:35 AM DATE MODIFIED: 1/20/2018 7:32 AM 14. Vouching recorded transactions involves taking a sample entry from a journal and obtaining the original source documents to ensure the transaction occurred. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 3:38 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 15. Tracing is a process that helps establish that recorded transactions are valid. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Appropriate Audit Evidence DATE CREATED: 1/19/2018 3:40 AM DATE MODIFIED: 1/20/2018 7:32 AM 16. One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 3:41 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 17. The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 3:42 AM DATE MODIFIED: 1/20/2018 7:32 AM 18. The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 3:43 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 19. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 3:44 AM DATE MODIFIED: 1/20/2018 7:32 AM 20. Ulanda and Mudana, CPAs, are performing an audit on McArnee, Inc. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 3:45 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 21. The auditor's concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Audit Evidence DATE CREATED: 1/19/2018 3:46 AM DATE MODIFIED: 1/20/2018 7:32 AM 22. While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 3:47 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 23. Auditors should mail third-party confirmations through the client's mailroom. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 3:49 AM DATE MODIFIED: 1/20/2018 7:32 AM 24. Inspection of an asset generally provides reliable evidence about the rights and obligations assertion related to that asset. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPORG: Comprehension - BUSPORG:Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Relating Audit Procedures to Assertions DATE CREATED: 1/19/2018 3:50 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 25. Audit documentation serves as support for the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 3:52 AM DATE MODIFIED: 1/20/2018 7:32 AM 26. The greatest risk of recording transactions in the incorrect period occurs during the roll-forward period. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Timing of Audit Procedures DATE CREATED: 1/19/2018 3:53 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 27. The primary importance of the audit program is its guidance of the overall conduct of the audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Audit Program DATE CREATED: 1/19/2018 3:54 AM DATE MODIFIED: 1/20/2018 7:32 AM 28. Inquiries of client personnel are not a frequent means of evidence gathering by an auditor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 3:56 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 29. The purpose of performing analytical procedures in the planning stage of an audit is to gather audit evidence and make conclusions about account balances. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Type and Timing of Audit Procedures DATE CREATED: 1/19/2018 3:58 AM DATE MODIFIED: 1/20/2018 7:32 AM 30. An example of physical observation is the auditor's testing of inventory by counting it to substantiate the existence assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Procedures and Management Assertions DATE CREATED: 1/19/2018 3:59 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 31. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recalculation by footing. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Types of Audit Procedures DATE CREATED: 1/19/2018 4:00 AM DATE MODIFIED: 1/20/2018 7:32 AM 32. Some audit procedures may be performed prior to the end of the year under audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Timing of Audit Procedures DATE CREATED: 1/19/2018 4:01 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 33. The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Role of Audit Programs DATE CREATED: 1/19/2018 4:02 AM DATE MODIFIED: 1/20/2018 7:32 AM 34. The auditor utilizes the same audit program and the same procedures each year for each client in order to ensure that nothing is missed in the current year audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Role of Audit Programs DATE CREATED: 1/19/2018 4:04 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 35. In a reasonableness test, the auditor develops an expected value of an account by using data wholly or partly independent of the client’s accounting information system. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reasonableness Tests DATE CREATED: 1/19/2018 4:05 AM DATE MODIFIED: 1/20/2018 7:32 AM 36. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 4:06 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 37. An outside specialist may assist the auditor in obtaining sufficient, appropriate evidence concerning the analysis of complex tax compliance issues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using a Specialist to Assist with Obtaining Evidence DATE CREATED: 1/19/2018 4:07 AM DATE MODIFIED: 1/20/2018 7:32 AM 38. Audit documentation should generally be retained for at least seven years. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Retention of Audit Documentation DATE CREATED: 1/19/2018 4:10 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 39. Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentations DATE CREATED: 1/19/2018 4:11 AM DATE MODIFIED: 1/20/2018 7:32 AM 40. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Audit Evidence DATE CREATED: 1/19/2018 4:12 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 41. The client’s verbal evidence is more reliable than evidence from independent outside sources. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Audit Evidence DATE CREATED: 1/19/2018 4:13 AM DATE MODIFIED: 1/20/2018 7:32 AM 42. Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Underlying Accounting Records DATE CREATED: 1/19/2018 4:14 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 43. The relevance of audit evidence depends on the audit assertion being tested. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Relevance of Audit Evidence DATE CREATED: 1/19/2018 4:15 AM DATE MODIFIED: 1/20/2018 7:32 AM 44. Analytical procedures are a type of substantive evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/19/2018 4:16 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 45. While inspecting documents, the reliability depends on the nature and source of the documentation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Evidence DATE CREATED: 1/19/2018 4:17 AM DATE MODIFIED: 1/20/2018 7:32 AM 46. The auditor’s job is to gather sufficient appropriate audit evidence on which to base an opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Audit Evidence DATE CREATED: 1/19/2018 4:19 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 47. Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Audit Evidence DATE CREATED: 1/19/2018 4:20 AM DATE MODIFIED: 1/20/2018 7:32 AM 48. Audit findings represent a summary of incorrect transactions detected during the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Documenting Audit Evidence DATE CREATED: 1/19/2018 4:21 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 49. Liabilities and expenses are most often tested for overstatements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Evidence DATE CREATED: 1/19/2018 4:22 AM DATE MODIFIED: 1/20/2018 7:32 AM 50. Many related-party transactions have no higher risk of material misstatement than similar transactions between unrelated parties. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Related-Party Transactions DATE CREATED: 1/19/2018 4:24 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 51. Appropriateness of evidence is a measure of which of the following? a. Quantity of evidence. b. Quality of evidence. c. Sufficiency of evidence. d. Meaning of evidence. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:25 AM DATE MODIFIED: 1/20/2018 7:32 AM 52. Two determinants of the persuasiveness of evidence include which of the following? a. Competence and sufficiency. b. Relevance and reliability. c. Appropriateness and sufficiency. d. Independence and effectiveness. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:26 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 53. Directional testing involves testing transactions or balances for which type of error? a. Overstatement. b. Understatement. c. Either overstatement or understatement. d. Neither overstatement nor understatement. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 4:28 AM DATE MODIFIED: 1/20/2018 7:32 AM 54. Which one of the following would be considered the most reliable type of audit evidence? a. Purchase orders from vendors. b. Customer accounts receivable files. c. Computerized general ledger. d. Confirmations from banks. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:29 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 55. Which one of the following would be the most reliable type of evidence? a. Photocopies. b. Indirectly obtained evidence. c. Observation of assets. d. Inquiry with the in-house attorney. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:30 AM DATE MODIFIED: 1/20/2018 7:32 AM 56. Which one of the following would be the least reliable type of evidence? a. Confirmations returned by bank directly to the auditor. b. Letters of communication from the Securities Exchange Commission. c. Physical examination of perpetual inventory. d. Evidence from an easily overridden information system. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:32 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 57. An example of an external document would include which of the following? a. Vendor invoices. b. Customer orders. c. Confirmation replies from customers. d. All the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills TOPICS: External Document DATE CREATED: 1/19/2018 4:33 AM DATE MODIFIED: 1/20/2018 7:32 AM 58. Which of the following is an example of inspection of documentation? a. Review shipping documents. b. Estimate the expected amount of interest income. c. Observe controls. d. Recalculate the total amount include on a sales invoice. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 4:35 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 59. The process of vouching helps establish which of the following regarding recorded transactions? a. Transactions have been recorded. b. Transactions are complete. c. Transactions are valid. d. Transactions are presented properly. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:37 AM DATE MODIFIED: 1/20/2018 7:32 AM 60. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence? a. Reprocessing. b. Recalculation. c. Vouching. d. Examination of documentation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 4:39 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 61. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions? a. Occurrence. b. Rights. c. Existence. d. Completeness. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures and Assertions Tested DATE CREATED: 1/19/2018 4:40 AM DATE MODIFIED: 1/20/2018 7:32 AM 62. Sufficient evidence gathered by the auditor involves which of the following? a. The quantity of evidence to be obtained. b. The type of evidence to be obtained. c. Obtaining limited evidence to achieve efficiency. d. The use of an audit program to obtain evidence. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:43 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 63. An audit program provides an effective means for which of the following? a. Reviewing the completeness and persuasiveness of procedures performed. b. Recording the audit work performed and those responsible for performing the work. c. Organizing and distributing the work. d. All the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Role of Audit Programs DATE CREATED: 1/19/2018 4:45 AM DATE MODIFIED: 1/20/2018 7:32 AM 64. The reliability of a client's internal documentation is most affected by which of the following? a. The auditor's independence. b. Management's motivation to misstate accounts. c. The type of audit report that will be issued. d. Management's ability to understand generally accepted audit standards. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:46 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 65. External documentation may lack reliability. Which of the following is the most probable reason for that? a. The external party may be competent in performing duties. b. The documentation may be properly understood by the client in the response. c. The auditor may decide not to use the documentation and replace it with other documents. d. The documentation may have been altered if the process is not controlled from inception. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 4:47 AM DATE MODIFIED: 1/20/2018 7:32 AM 66. When may audit procedures be performed? I - on the balance sheet date. II - prior to the balance sheet date. III - subsequent to the balance sheet date. a. I only. b. I and III only. c. II only. d. I, II, and III. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Timing of Audit Procedures DATE CREATED: 1/19/2018 4:49 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 67. An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following? a. Directional testing for existence. b. Directional testing for completeness. c. Direct testing for valuation. d. Direct testing for rights. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 4:50 AM DATE MODIFIED: 1/20/2018 7:32 AM 68. Directional testing is important to an auditor because of which of the following factors? a. Certain accounts are more prone to be misstated by overstatement than others. b. The auditor must remain organized when conducting an audit. c. The primary concern of the auditor is the understatement of asset and revenue accounts. d. It tests for existence and completeness simultaneously. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Directional Testing DATE CREATED: 1/19/2018 4:52 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 69. Which of the following assertions is the primary assertion that is satisfied by physically observing the client's count of inventory? a. Rights. b. Valuation. c. Completeness. d. Existence. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures and Assertions Tested DATE CREATED: 1/19/2018 4:54 AM DATE MODIFIED: 1/20/2018 7:32 AM 70. When using the audit procedure vouching, the auditor is primarily concerned with which of the following assertions? a. Completeness. b. Existence. c. Authorization. d. Classification. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures and Assertions Tested DATE CREATED: 1/19/2018 5:31 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 71. Observation suffers from which of the following limitations? a. Observation of processing is rarely unobtrusive. b. Observation of processing on one day does not necessarily indicate how transactions were processed on a different day. c. All the above. d. None of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 5:32 AM DATE MODIFIED: 1/20/2018 7:32 AM 72. The extent of procedures is affected mostly by which of the following factors? a. The sheer volume of procedures to be applied by the auditor. b. The time of year in which the client takes a physical inventory in the warehouse. c. The auditor's judgment that misstatements are probable in certain balances. d. The availability of the client's staff at or near the balance sheet date. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Extent of Procedures DATE CREATED: 1/19/2018 5:34 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 73. An audit program is created to specify which of the following? a. The type of audit opinion to be rendered based upon procedures performed. b. The audit procedures that will be performed every year for the client. c. How an auditor should think while performing audit procedures. d. Audit objectives and procedures to be followed during the audit process. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Role of Audit Programs DATE CREATED: 1/19/2018 5:35 AM DATE MODIFIED: 1/20/2018 7:32 AM 74. Which one of the following is the primary reason for documenting audit work? a. To prevent litigation by other parties that question the audit performance. b. To provide a stand-alone medium that gives audit conclusions and supports the opinion. c. To give the client a full reporting of all work performed on their behalf. d. To supply a point of reference for all auditors performing the work subsequently. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 5:48 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 75. To be considered reliable evidence, confirmations must be controlled by which of the following parties? a. A client employee responsible for accounts receivable. b. An external auditor. c. A client’s internal audit department. d. A client’s controller or CFO. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 5:49 AM DATE MODIFIED: 1/20/2018 7:32 AM 76. Conclusions are typically documented by auditors in which type of work paper? a. Audit planning memo. b. Audit program. c. Audit memoranda. d. Representation letter. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 5:50 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 77. Which of the following is not a characteristic of quality audit documentation? a. Clear communication as to how testing was performed, the results of testing, and conclusions. b. Organization and assembly of documentation in an orderly fashion. c. Headings that include the name and signature of the client representative that the auditor interacted with while performing testing. d. Authenticated identification of the person responsible for completing the procedure and conclusions. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 5:52 AM DATE MODIFIED: 1/20/2018 7:32 AM 78. The processes used by management in developing estimates include which of the following? a. Controls over the process. b. The reliability of underlying data in developing the estimate. c. Use of outside experts by management (for example, how they were used and their expertise). d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Management’s Estimates in Financial Statements DATE CREATED: 1/19/2018 5:53 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 79. Which of the following is the primary source for evidence to corroborate the existence of pending litigation? a. Vendor confirmations. b. Disclosures in financial statements. c. Management representation letters. d. Attorney confirmations. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures and Assertions Tested DATE CREATED: 1/19/2018 5:54 AM DATE MODIFIED: 1/20/2018 7:32 AM 80. Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to do which of the following? a. Decrease. b. Increase. c. Remain the same. d. Become more difficult to ascertain. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Timing of Audit Procedures DATE CREATED: 1/19/2018 5:55 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 81. What is determined to be appropriate and sufficient will be affected by which of the following? a. The client’s risk of material misstatement. b. The risk of material weakness in internal controls. c. Either a or b. d. None of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness and Sufficiency of Evidence DATE CREATED: 1/19/2018 5:56 AM DATE MODIFIED: 1/20/2018 7:32 AM 82. Audit documentation should contain which of the following? a. A heading that includes the name of the audit client, an explanatory title, and the balance sheet date. b. The initials or electronic signature of the auditor performing the audit test and the date the test was completed. c. The initials or electronic signature of the manager or partner who reviewed the documentation and the date the review was completed. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 5:57 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 83. Which of the following is not an estimate that requires significant auditor judgment and skepticism? a. Obligations for pension plans. b. Valuation of goodwill. c. Allowance for bad debt. d. Common stock and related additional paid-in capital. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Management’s Estimates in Financial Statements DATE CREATED: 1/19/2018 5:58 AM DATE MODIFIED: 1/20/2018 7:32 AM 84. Which of the following is not a type of internal documentation? a. Legal documents. b. Business documents. c. Third-party documents. d. Accounting documents. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Internal Documentation DATE CREATED: 1/19/2018 6:00 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 85. Which of the following is a factor that the auditor should consider as they affect the reliability and relevance of information produced by a management’s specialist? a. Competence, capabilities, and objectivity of that specialist. b. Work performed by that specialist. c. Appropriateness of that specialist’s work as audit evidence for the relevant assertion. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Management’s Specialist DATE CREATED: 1/19/2018 6:01 AM DATE MODIFIED: 1/20/2018 7:32 AM 86. When using confirmations with outside parties, the auditor must assure which of the following about the outside party? a. The outside party exists. b. The outside party is able to respond objectively and independently. c. The outside party is unbiased in responding. d. All the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 6:02 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 87. Each of the audit procedures that an auditor could select possesses which of the following characteristics? a. Audit procedures take time, effort, and money. b. Audit procedures are difficult to perform. c. Audit procedures require multiple people from the firm to perform. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 6:03 AM DATE MODIFIED: 1/20/2018 7:32 AM 88. Which of the following types of audit evidence is the most reliable? a. Evidence from the client’s organization. b. Evidence from a poorly controlled system. c. Directly observable evidence. d. Facsimiles of documents. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Evidence DATE CREATED: 1/19/2018 6:04 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 89. Which of the following types of audit evidence is the least reliable? a. Evidence from the client’s organization. b. Evidence derived from a well-controlled system. c. Evidence from independent outside sources. d. Original documents. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Reliability of Evidence DATE CREATED: 1/19/2018 6:05 AM DATE MODIFIED: 1/20/2018 7:32 AM 90. In evaluating cost of evidence, which of the following evidence qualities of the audit usually has the lowest cost? a. High quality. b. Medium quality. c. Low quality. d. All cost the same. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Cost of Evidence DATE CREATED: 1/19/2018 6:06 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 91. Recalculations of the client’s computations would not include which of the following procedures? a. Cutoff. b. Footing. c. Extension. d. Cross-footing. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 6:08 AM DATE MODIFIED: 1/20/2018 7:32 AM 92. Vouching of transactions deals with which of the following? a. Testing forward. b. Testing backward. c. Testing at a point in time. d. Directional testing either forward or backward. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 6:09 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 93. Reprocessing of transactions involves which of the following? a. Testing forward. b. Testing backward. c. Testing at a point in time. d. Directional testing either forward or backward. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures DATE CREATED: 1/19/2018 6:10 AM DATE MODIFIED: 1/20/2018 7:32 AM 94. Which of the following characteristics are not normally included in quality audit documentation? a. Initials of the person preparing and reviewing the document. b. An assessment of whether the test indicates the possibility of material misstatement in an account. c. A cross-reference. d. All are included in quality audit documentation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 6:11 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 95. A date at which audit evidence is collected earlier than the balance sheet date is referred to as what? a. Subsequent date. b. Cutoff period. c. Significant date. d. Interim date. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Timing of Audit Procedures DATE CREATED: 1/19/2018 6:13 AM DATE MODIFIED: 1/20/2018 7:32 AM 96. The auditor normally considers both underlying accounting records and corroborating information in the audit process. Underlying accounting records do not include which of the following items? a. Evidence of controls. b. Minutes of meetings. c. Checks, invoices, and contracts. d. General and subsidiary ledgers. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Underlying Accounting Records DATE CREATED: 1/19/2018 6:14 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 97. The written record that forms the basis for the auditor’s conclusions is referred to as what? a. Audit documentation. b. Audit adjustment. c. Accounting records. d. Footing. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation DATE CREATED: 1/19/2018 6:30 AM DATE MODIFIED: 1/20/2018 7:32 AM 98. The auditor may use analytical procedures during which phase of the audit? a. Planning the audit. b. Substantive testing. c. Completing the audit. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/19/2018 6:31 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 99. Which of the following is not a factor that would impact the effectiveness of a substantive analytical procedure? a. Nature of the assertion being tested. b. Plausibility and predictability of the relationships in the data. c. Excessive disaggregation of the relevant data. d. Rigor of the analytical procedure employed. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/19/2018 6:32 AM DATE MODIFIED: 1/20/2018 7:32 AM 100. Appropriateness of Audit Evidence Why is the appropriateness of audit evidence obtained by the auditor important in forming an audit opinion? Describe the qualities information should have to be considered appropriate by the auditor. ANSWER:

Appropriateness is a measure of the quality of evidence. Audit evidence that is considered appropriate contains the characteristics of relevance and reliability. Relevant evidence refers to the assertion being tested. Reliability refers to the relative truthfulness of the assertion. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/19/2018 6:35 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 101. Directional testing Explain the meaning of "directional testing" and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions. ANSWER:

Directional testing involves testing transactions or balances primarily for one type of error, either overstatement or understatement, but not for both at the same time. For example, an audit test for an understatement of Accounts Payable also tests for an understatement of Purchases. Directional testing also leads to audit efficiency for the following reasons: Misstatements of some accounts are more likely to occur in one direction than the ∙ other. Directional testing of an account balance provides evidence on a complementary ∙ set of accounts. Specific assertions are normally tested directionally. An example is the testing of ∙ the existence assertion for overstatements or the completeness assertions for understatements. An example of directional testing for existence includes the sampling of assets recorded on the balance sheet, such as fixed assets and tracing those items back through the system to original source documents such as vendor invoices. This procedure tests for the possible overstatement of the fixed assets. Item(s) selected from the general ledger that are found to lack adequate supporting vendor invoices to substantiate existence are evidence of the overstatement of assets. Testing directionally for completeness, on the other hand is just the opposite. Source documents are sampled and traced forward through the journals, ledgers and to the general ledger. An example may be vendor invoices for expenses. Invoices that are not found in the general ledger balance prove that the system is incomplete. In the example of an expense, net income would be overstated and liabilities may be understated. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:53 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 102. Proper audit documentation Audit documentation serves as the primary support of an audit. Give at least six examples of the components of proper working paper documentation. ANSWER:

Audit documentation serves as the primary evidence in support of the auditor's opinion. Well prepared documentation should include: A heading that includes the name of the audit client, an explanatory title, and the ∙ balance sheet date. The initials or electronic signature of the auditor performing the audit test and the ∙ date the test was completed. The initials or electronic signature of the senior, manager, or partner who reviewed ∙ the working papers and the date the review was completed. ∙ A description of the nature of the test performed and the findings. An assessment of whether the test indicates the possibility of material misstatement ∙ in the account. Manual or electronic tick marks and a legend indicating the nature of the work ∙ performed by the auditor. A section that identifies all significant issues that arose during the audit and how ∙ they were resolved ∙ A cross-reference or electronic link to related working papers. Many of these components are electronic in nature and are resident in a paperless audit software and storage combination. Nonetheless, such components remain vital in proper documentation of audit testing and conclusions. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:55 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 103. Reliability of audit evidence The Auditing Standards Board established guidelines to assist auditors in evaluating the reliability of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each. ANSWER:

Evidence that is considered to be more reliable includes: ∙ Directly observable evidence such as counting inventory or observing fixed assets. Evidence derived from a client's strong internal control structure such as ∙ reconciliations or the information system itself. Evidence from independent external sources such as confirmations from banks, ∙ customers and attorneys. Examples provided by the students may vary and the instructor must use his or her judgment. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:56 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 104. Appropriateness and sufficiency of evidence Discuss the importance of the phrase "sufficient appropriate evidence is to be obtained..." How do auditing standards define sufficiency and appropriateness? ANSWER:

Audit standards states that auditors must obtain sufficient appropriate evidence by performing various audit procedures in order to support the audit opinion regarding the financial statements under audit. The AICPA’s AU-C 500 defines sufficiency as “the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such evidence.” The AICPA’s AU-C 500 defines appropriateness as “the measure of the quality of audit evidence (that is, its relevance and reliability in providing support for the conclusions on which the auditor’s opinion is based).” POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:57 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 105. Audit assertions and procedures for testing cash balances Identify and demonstrate the audit assertions and different approaches to obtaining audit evidence for an audit of cash balances in a financial statement audit. ANSWER:

In performing the audit of cash, the auditor is most concerned with the existence, valuation, and rights assertions. The audit of cash may use the following approaches: Observe the client's handling of the petty cash fund and the control over incoming ∙ cash and cash storage. Observe the process of cash received in the mailroom, deposits to the bank, and reconciliation by a separate individual. ∙ Physically count the petty cash, cash in drawers, and cash in safes. ∙ Examine documents such as the bank statement. Make inquiries of personnel concerning the handling of daily deposits or the mail ∙ receipts. Confirm the bank balance with financial institutions using proper confirmation ∙ procedures. Recalculate the bank reconciliation computation and trace the book balance to the ∙ general ledger. ∙ Inquire of materially aged outstanding checks and deposits in transit. Trace outstanding checks and deposits in transit clearing subsequent bank ∙ statements from a qualified source. ∙ Vouch material and unusual entries in the cash account. ∙ Perform an analysis of bank transfers at or near cutoff. Use analytical procedures to determine the reasonableness of the reported cash ∙ balance. This response is only intended to be a sample. The instructor must evaluate the quality of the student responses. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:58 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 106. Internal and external documentation Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable? ANSWER:

Internal documentation involves the auditor’s examination of documents that have been prepared and used within the client’s organization and are retained without ever going to an outside party. Examples would include duplicate sales invoices, employees’ time reports, and inventory receiving reports. External documentation involves the auditor’s examination of documents that have been in the hands of someone outside the client’s organization. Examples include vendors’ invoices, cancelled checks, cancelled notes payable, and insurance policies. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:59 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 107. Audit program Discuss the purpose of the audit program and its importance to the auditor. ANSWER:

An audit program specifies the actual procedures to be performed in gathering the required audit evidence about the assertions embodied in the client's financial statements. Because the audit program guides the overall conduct of the audit it is the single most important piece of documentation in an audit engagement. The program is an effective means for: ∙ Organizing and distributing audit work. ∙ Monitoring the audit process and progress. ∙ Reviewing for possible omission of material areas from the audit. ∙ Recording the audit work performed. ∙ Reviewing the completeness and persuasiveness of procedures performed. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 6:00 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 108. Audit standards of proper documentation Discuss the audit standards that must be applied to the auditor's documentation. Give five examples of the types of documentation found in the audit work papers. ANSWER:

Auditing standards require that the auditor obtains sufficient appropriate evidence before issuing an opinion, and requires auditors to document (and retain such documentation for at least seven years) that evidence and judgments based upon it. Pursuant to all of these requirements, audit work papers will include such items as: 1. Evidence of planning such as the planning memo, risk assessments, and the audit program. 2. Evidence of the auditor's understanding and assessment of internal control over the client organization. 3. The client's trial balance and proposed audit adjustments. 4. Copies of certain internal and external documents such as letters of communication with the client and returned confirmations. 5. Audit memoranda documenting the testing process, auditor reasoning, and conclusions. 6. Results of analytical procedures and audit testing. 7. Auditor generated analysis of account balances such as the allowance for doubtful accounts. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 6:01 AM DATE MODIFIED: 1/20/2018 7:32 AM

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Chapter 06 109. Audit procedures Discuss how each of the following procedures could be used in the audit of fixed assets, e.g., various types of equipment used in the business. Procedure How used Observation Physical examination Inquiry Confirmation Examination of documents Recomputation Reprocessing Vouching Analytical Procedures ANSWER:

Procedure Observation Physical examination Inquiry

Confirmation Examination of documents Recomputation Reprocessing Vouching

Assertion(s) tested

How used Assertion(s) tested Observe taking of inventory of Existence assets Inspect existence and condition of Existence, Valuation assets. Inquire of management of assets not recorded or that have been sold Existence, Completeness or discarded. Existence, Valuation, Confirm details of purchase with Presentation and seller of asset. Disclosure, Rights Existence, Valuation, Examine supporting documentation. Rights Recompute depreciation Valuation Reprocess a sample of purchase Existence transactions Vouching a sample of recorded Existence, Valuation, assets Rights Analysis depreciation Valuation, Completeness expense

Analytical Procedures POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 6:02 AM DATE MODIFIED: 1/20/2018 7:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06 110. Audit procedures Businesses often have litigation against them that the auditor has to identify and adequately disclose. List the financial assertions that apply to Contingencies. For each assertion indicate two or three audit procedures that would address that assertion. Organize you answer as follows: Financial statement assertion

ANSWER:

Audit procedure(s)

Financial statement assertion Existence Completeness

Rights and Obligations

Valuation and Allocation

Presentation and Disclosure

Audit procedure(s) Inquiry of management Send confirmation request to legal counsel Inquiry of management Vouch legal expenses Review nature of legal services to determine if a liability might exist Inquiry of management Confirmation from legal counsel Examine payments related to in-progress litigation Inquiry of management Confirmation of legal counsel Review court rulings Inquiry of management Confirmation of legal counsel

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.06.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 6:04 AM DATE MODIFIED: 1/20/2018 7:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06

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Chapter 07 1. Materiality relates to the significance or importance of an item. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Defined DATE CREATED: 1/19/2018 6:55 AM DATE MODIFIED: 1/20/2018 7:38 AM 2. Auditors and management should agree on what is considered material. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments DATE CREATED: 1/19/2018 6:58 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 3. A misstatement is an error, either intentional or unintentional, that exists in a transaction or financial statement account balance. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Misstatement Defined DATE CREATED: 1/19/2018 6:59 AM DATE MODIFIED: 1/20/2018 7:38 AM 4. As detection risk increases, the amount of evidence an auditor needs to obtain decreases. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Model DATE CREATED: 1/19/2018 7:00 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 5. When business risk is low, the auditor does not have a high degree of concern about the ability of the organization to operate effectively or profitably. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Business Risk DATE CREATED: 1/19/2018 7:02 AM DATE MODIFIED: 1/20/2018 7:38 AM 6. Only public companies have to be concerned with business risk. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Business Risk DATE CREATED: 1/19/2018 7:04 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 7. Touring a company’s plant offers much insight into potential audit issues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Client Business Risks DATE CREATED: 1/19/2018 7:05 AM DATE MODIFIED: 1/20/2018 7:38 AM 8. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management’s integrity. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Management Integrity DATE CREATED: 1/19/2018 7:06 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 9. News media and web searches can provide useful information related to client management’s integrity and the risk of material misstatement in the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Management Integrity DATE CREATED: 1/19/2018 7:07 AM DATE MODIFIED: 1/20/2018 7:38 AM 10. LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Management Integrity DATE CREATED: 1/19/2018 7:09 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 11. The purpose of the auditor’s consideration of the effectiveness of internal controls is to determine the nature, extent, and timing of substantive testing. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Effectiveness of Internal Controls DATE CREATED: 1/19/2018 7:10 AM DATE MODIFIED: 1/20/2018 7:38 AM 12. Trend analysis deals with the relationship between two or more accounts within the current year. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Trend Analysis DATE CREATED: 1/19/2018 7:11 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 13. One potential limitation to using industry data in planning analytical procedures is that the data from the client may not be directly comparable to the data of the industry. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/19/2018 7:12 AM DATE MODIFIED: 1/20/2018 7:38 AM 14. Brainstorming sessions should be led by the engagement team. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures and Brainstorming DATE CREATED: 1/19/2018 7:14 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 15. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures and Brainstorming DATE CREATED: 1/19/2018 7:15 AM DATE MODIFIED: 1/20/2018 7:38 AM 16. The usual length of a brainstorming session is about four hours. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures and Brainstorming DATE CREATED: 1/19/2018 7:16 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 17. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Detection Risk DATE CREATED: 1/19/2018 7:17 AM DATE MODIFIED: 1/20/2018 7:38 AM 18. Detection risk is measured on a scale of 0% to 5%. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Detection Risk DATE CREATED: 1/19/2018 7:18 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 19. A risk of material misstatement of 100% indicates that material misstatement is highly likely. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/19/2018 7:19 AM DATE MODIFIED: 1/20/2018 7:38 AM 20. The internal controls of an organization have no impact on the efficiency of an audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risks of Material Misstatement DATE CREATED: 1/19/2018 7:21 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 21. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risks of Material Misstatement DATE CREATED: 1/19/2018 7:22 AM DATE MODIFIED: 1/20/2018 7:38 AM 22. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Inherent Risk DATE CREATED: 1/19/2018 7:23 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 23. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:25 AM DATE MODIFIED: 1/20/2018 7:38 AM 24. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:26 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 25. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:27 AM DATE MODIFIED: 1/20/2018 7:38 AM 26. Audit procedures have to be announced or be completed at predictable times. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:28 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 27. All audit procedures must be completed before year end. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:29 AM DATE MODIFIED: 1/20/2018 7:38 AM 28. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/19/2018 7:30 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 29. Inherent and control risks are risks controlled by the auditor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement DATE CREATED: 1/19/2018 7:31 AM DATE MODIFIED: 1/20/2018 7:38 AM 30. A risk factor indicating a heightened risk of fraud would be considered a significant risk. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/19/2018 7:32 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 31. The existence of one or more risk factors means that there is a material misstatement present. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/19/2018 7:34 AM DATE MODIFIED: 1/20/2018 7:38 AM 32. In most audits, materiality is most commonly expressed as a percentage of net income. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality DATE CREATED: 1/19/2018 7:35 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 33. Auditors are only concerned with materiality for the financial statements as a whole. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/19/2018 7:36 AM DATE MODIFIED: 1/20/2018 7:38 AM 34. Material Misstatement and Importance of Materiality Judgments a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/19/2018 7:37 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 35. In planning the audit, auditors consider planning materiality in terms of the largest aggregate level of misstatement that could occur in the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality DATE CREATED: 1/19/2018 7:40 AM DATE MODIFIED: 1/20/2018 7:38 AM 36. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/19/2018 7:41 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 37. The auditor typically sets posting materiality at 50 to 75% of overall materiality. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:30 AM DATE MODIFIED: 1/20/2018 7:38 AM 38. The lower the dollar amount of the performance materiality the more audit evidence is required. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:32 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 39. A significant risk is the same as a material risk. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement DATE CREATED: 1/20/2018 3:33 AM DATE MODIFIED: 1/20/2018 7:38 AM 40. If performance materiality for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if performance materiality were $100,000. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:34 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 41. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Defined DATE CREATED: 1/20/2018 3:36 AM DATE MODIFIED: 1/20/2018 7:38 AM 42. The quick ratio is useful for analyzing inventory accounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Planning Analytical Procedures DATE CREATED: 1/20/2018 3:37 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 43. Detection risk is controllable by the client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Model DATE CREATED: 1/20/2018 3:38 AM DATE MODIFIED: 1/20/2018 7:38 AM 44. Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Inherent Risk DATE CREATED: 1/20/2018 3:39 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 45. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2? a. “amount of a misstatement or omission” b. “in light of surrounding circumstances” c. “probable that the judgement of a reasonable person” d. “significantly altered the total mix of information available” ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality DATE CREATED: 1/20/2018 3:41 AM DATE MODIFIED: 1/20/2018 7:38 AM 46. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts? a. $20,000 b. $25,000 c. $40,000 d. $15,000 ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:43 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 47. Which of the following best describes the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct? a. Posting materiality. b. Performance materiality. c. Overall materiality. d. Tolerable error. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:45 AM DATE MODIFIED: 1/20/2018 7:38 AM 48. If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial materiality setting? a. The auditor reassesses those previous decisions. b. The auditor repeats all audit procedures performed prior to the change in materiality judgments. c. The auditor modifies the audit opinion to note the change in materiality judgements. d. No action is required. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Material Misstatement and Importance of Materiality Judgments DATE CREATED: 1/20/2018 3:48 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 49. Which item is correct concerning the risk of material misstatement? a. Risk of material misstatement arises because audit procedures have been misapplied. b. Risk of material misstatement can be controlled and changed by the auditor. c. Risk of material misstatement must be assessed in non-quantitative terms. d. Risk of material misstatement is controllable by the client. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement DATE CREATED: 1/20/2018 3:49 AM DATE MODIFIED: 1/20/2018 7:38 AM 50. What is the nature of the relationship between risk of material misstatement and audit risk? a. Direct. b. None. c. Correlational. d. Inverse. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks of Material Misstatement DATE CREATED: 1/20/2018 3:51 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 51. Detection risk is affected by which aspects of substantive audit procedures? a. Nature. b. Timing. c. Extent. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks of Material Misstatement DATE CREATED: 1/20/2018 3:53 AM DATE MODIFIED: 1/20/2018 7:38 AM 52. Which of the following factors would lead an auditor to assess inherent risk at a higher level? a. The account balance is easily determined without estimation. b. The account balance is composed of a high volume of nonroutine transactions. c. The account balance is composed of simple transactions. d. All of the above would lead the auditor to assess a higher level of inherent risk. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Inherent Risk DATE CREATED: 1/20/2018 3:55 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 53. To learn more about a company and its inherent risks, auditors can use which of the following resources? a. Management inquiries. b. Economic statistics. c. Online searches. d. Any of the above could be used. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Inherent Risk DATE CREATED: 1/20/2018 3:56 AM DATE MODIFIED: 1/20/2018 7:38 AM 54. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor? a. Data is under court order. b. They must always respond. c. The client does not approve of confidential information being shared. d. Both A and C are correct. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assess Factors Affecting Inherent Risk DATE CREATED: 1/20/2018 3:58 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 55. Which of the following factors will result in control risk being assessed at a higher level? a. Controls are well designed. b. There is a lack of supervision of accounting personnel. c. Accounting staff are well trained and educated. d. The control environment is operating effectively. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assess Factors Affecting Control Risk DATE CREATED: 1/20/2018 3:59 AM DATE MODIFIED: 1/20/2018 7:38 AM 56. Which of the following are two frequently used planning analytical procedures? a. Reasonableness tests and economic analyses. b. Trend analyses and reasonableness tests. c. Ratio analyses and economic analyses. d. Ratio analyses and trend analyses. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 4:01 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 57. Which of the following best describes year-to-year comparisons of account balances? a. Time analyses. b. Reasonableness tests. c. Ratio analyses. d. Trend analyses. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 4:03 AM DATE MODIFIED: 1/20/2018 7:38 AM 58. Which of the following ratios provides information about liquidity? a. Net profit margin. b. Current ratio. c. Inventory turnover. d. Sales to assets. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 4:04 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 59. Which of the following would be a reason that industry and client data were not directly comparable? a. Broad industry. b. Use of different accounting principles. c. Neither of the above. d. Both A & B are correct. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 4:06 AM DATE MODIFIED: 1/20/2018 7:38 AM 60. Which of the following are common brainstorming session guidelines? a. Freedom of expression. b. Respectful communication. c. Suspension of criticism. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Guidelines for Brainstorming Sessions DATE CREATED: 1/20/2018 4:08 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 61. What is the main reason to establish guidelines for brainstorming sessions? a. To clearly identify lines of authority. b. To comply with SEC requirements. c. To encourage interactive and constructive group dialogue and idea exchange. d. To pass information up to top-level management efficiently. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Guidelines for Brainstorming Sessions DATE CREATED: 1/20/2018 4:09 AM DATE MODIFIED: 1/20/2018 7:38 AM 62. What type of relationship exists between audit risk and detection risk? a. Direct. b. Inverse. c. Indirect. d. No relationship. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Model DATE CREATED: 1/20/2018 4:12 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 63. What is the typical range for the setting of audit risk? a. 1%–10% b. 1%–5% c. 0%–5% d. 0%–10% ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Setting Audit Risk DATE CREATED: 1/20/2018 4:15 AM DATE MODIFIED: 1/20/2018 7:38 AM 64. Which of the following would be the likely risk results from using a 1% level of detection risk? a. High detection risk and low audit risk. b. High detection risk and high audit risk. c. Low detection risk and high audit risk. d. Low detection risk and low audit risk. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Decisions about Detection Risk and Audit Risk DATE CREATED: 1/20/2018 4:17 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 65. Which of the following risks are controllable by the auditor? a. Audit risk and detection risk. b. Audit risk and control risk. c. Risk of material misstatement. d. None of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Model DATE CREATED: 1/20/2018 4:20 AM DATE MODIFIED: 1/20/2018 7:38 AM 66. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work? a. Increases. b. Decreases. c. Stays the same. d. Becomes less reliable. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risks of Material Misstatement DATE CREATED: 1/20/2018 4:22 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 67. Which of the following statements best describes what is meant by setting control risk at 100%? a. Controls are effective. b. Controls are relevant. c. Controls are ineffective. d. Cannot be determined from the information given. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:24 AM DATE MODIFIED: 1/20/2018 7:38 AM 68. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of substantive testing performed by the auditor? a. Increase in substantive testing. b. Decrease in substantive testing c. No change in substantive testing. d. Substantive testing is not needed. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:26 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 69. Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk? a. Audit risk model. b. Risk of misstatement model. c. Significance model. d. Materiality equation. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Risk Model DATE CREATED: 1/20/2018 4:28 AM DATE MODIFIED: 1/20/2018 7:38 AM 70. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated? a. Substantive testing. b. Tests of controls. c. Tests of details of balances. d. Substantive analytical procedures. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:30 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 71. Which of the following terms best describes the types and appropriateness of audit procedures used? a. Nature of detection risk. b. Material misstatement risk. c. Nature of auditing procedures. d. Nature of risk response. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:32 AM DATE MODIFIED: 1/20/2018 7:38 AM 72. Appropriateness addresses which aspect of audit procedures? a. Relevance. b. Reasoning. c. Reliability. d. Both A & C. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:33 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 73. Which of the following best describes what is meant by the timing of risk response? a. Where procedures are conducted. b. When procedures are conducted. c. How procedures are conducted. d. Who conducts the procedures. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risk of Material Misstatement DATE CREATED: 1/20/2018 4:36 AM DATE MODIFIED: 1/20/2018 7:38 AM 74. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year? a. Introduce unpredictability. b. Confuse the client. c. Gather information during different times of the year. d. Finish the audit sooner. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/20/2018 4:38 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 75. Which of the following approaches can be used to introduce unpredictability into the audit? a. Assessing high risk accounts. b. Performing procedures on an unannounced basis. c. Performing the audit in the same location each year. d. Selecting items that would normally be tested. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/20/2018 4:40 AM DATE MODIFIED: 1/20/2018 7:38 AM 76. What procedure has to be completed at or after the end of the period? a. Assessment of control risk. b. Engagement letter. c. Evaluation of adjusting journal entries. d. All procedures must be completed prior to period end. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/20/2018 4:42 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 77. An increase in the risk of material misstatement would lead to which of the following responses? a. Increase in the extent of audit procedures. b. Decrease in the extent of audit procedures. c. Earlier performance of audit procedures. d. No change in the extent or timing of audit procedures. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Assessed Risk of Material Misstatement DATE CREATED: 1/20/2018 4:43 AM DATE MODIFIED: 1/20/2018 7:38 AM 78. Which of the following risk factors suggests a heightened level of risk of material misstatement? a. Having a stable product. b. The departure of key personnel of a company. c. Few immaterial related-party transactions. d. Declining a merger with another company. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/20/2018 4:45 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 79. Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements? a. Audit risk. b. Control risk. c. Detection risk. d. Inherent risk. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/20/2018 4:47 AM DATE MODIFIED: 1/20/2018 7:38 AM 80. Which of the following statements regarding detection risk is true? a. Detection risk incorporates both substantive analytical procedures and tests of details. b. Detection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk. c. A low level of detection risk means the auditor needs to obtain more evidence from substantive procedures. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Detection Risk DATE CREATED: 1/20/2018 4:48 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 81. In which of the following situations will auditors typically rely on internal controls over financial reporting? a. If control risk is assessed at a high level. b. If the controls are determined to be designed and operating effectively. c. If the client asks the auditor to test controls. d. If the controls are sufficient to increase control risk to an acceptable level. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Control Risk DATE CREATED: 1/20/2018 4:50 AM DATE MODIFIED: 1/20/2018 7:38 AM 82. The risk of material misstatement refers to which of the following? a. Inherent risk. b. Control risk and acceptable audit risk. c. The combination of inherent risk and control risk. d. Inherent risk and audit risk. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risk of Material Misstatement DATE CREATED: 1/20/2018 4:52 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 83. Which of the following statements is false? a. Inherent risk is inversely related to the level of control risk. b. Inherent risk is directly related to the amount of evidence required in account testing. c. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls. d. Inherent risk and control risk are assessed by the auditor and controlled by the client. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Inherent Risk DATE CREATED: 1/20/2018 4:55 AM DATE MODIFIED: 1/20/2018 7:38 AM 84. Which of the following is a factor that would cause an increase in the assessment of control risk? a. New products have uncertain likelihood of success. b. Little interaction between senior management and operating staff. c. A new business strategy is improperly implemented. d. The industry is mature and declining. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Factors Affecting Control Risk DATE CREATED: 1/20/2018 4:57 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 85. Obtaining Understanding of Client’s Business and Business Risks Identify at least five procedures an auditor might perform to obtain an understanding of a client’s business and the associated business risks.

ANSWER:

Procedures an auditor might perform to obtain an understanding of a client’s business and associated risks include: ∙ Make inquiries of management and other knowledgeable individuals at the client. ∙ Monitor the financial press. . Review the client’s budget. ∙ Tour the client’s plant and operations. ∙ Reference the audit firm’s knowledge management system. ∙ Review SEC filings. ∙ Review the client’s website. ∙ Review relevant government regulations and client’s legal obligations. ∙ Conduct online searches. ∙ Review economic statistics related to client’s industry. ∙ Review professional practice bulletins issued by the AICPA and SEC.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 4:59 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 86. Inherent risk List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level. ANSWER:

Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include: ∙ The company lacks personnel or expertise to deal with the changes in the industry. ∙ New products and service offerings have uncertain likelihood of successful introduction and acceptance by the market. ∙ The use of information technology is incompatible across systems and processes. ∙ Expansion of the business for which the demand for the company’s products or services has not been accurately estimated. ∙ A new business strategy is incompletely or improperly implemented. ∙ Financing is lost due to the company’s inability to meet financing requirements. ∙ Concerns exist regarding the competence and integrity of financial and accounting management. ∙ Potential incentives to misstate the financial statements have been identified. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:03 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 87. Brainstorming What are the steps of the brainstorming process?

ANSWER:

The steps of the brainstorming process are: 1. Review prior year client information. 2. Consider client information, particularly with respect to the fraud triangle. 3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud in the engagement. 4. Identify audit responses to fraud risks.

ANSWER:

An auditor should do the following when considering risk responses: 1. Evaluate the reasons for the assessed risk of material misstatement. 2. Estimate the likelihood of material misstatement due to the inherent risks of the client. 3. 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 (thereby necessitating tests of controls) or whether the auditor needs to conduct a more substantive audit. 4. Obtain more relevant and reliable audit evidence as the auditor’s assessment of the risk of material misstatement increases.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:09 AM DATE MODIFIED: 1/20/2018 7:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07 89. Importance of materiality judgments Explain how auditors determine planning materiality and performance materiality. What happens if performance materiality is set too high or, alternatively, too low. ANSWER:

The auditor uses planning materiality (or overall materiality) in determining whether the financial statements overall are materially correct. In planning the audit, auditors consider planning materiality in terms of the smallest aggregate level of misstatements that could be material to any one of the financial statements. After determining planning materiality, the auditor uses performance materiality to determine significant accounts and the audit procedures to perform for those accounts. Performance materiality might be calculated at 75% of planning materiality. For example, if planning materiality is set at $100,000, performance materiality would be $75,000. While the auditor might use 75% of planning materiality to set performance materiality, a range of 50% to 75% is typically used. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. If performance materiality is set too high, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. If performance materiality is set too low, the auditor might perform more substantive procedures than necessary. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.01 AUDI.JOHN.18.07.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:11 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 07 90. Relationships between risks Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will affect planned audit evidence. ∙ Audit risk ∙ Inherent risk ∙ Control risk ∙ Detection risk ANSWER:

An increase in audit risk decreases planned evidence. An increase in inherent risk increases planned evidence. An increase in control risk increases planned evidence. An increase in detection risk decreases planned evidence. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:13 AM DATE MODIFIED: 1/20/2018 7:38 AM 91. Predecessor auditor Discuss the required communications between predecessor and successor auditors. ANSWER:

Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the initiation of communication rests with the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements that related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.07.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 5:15 AM DATE MODIFIED: 1/20/2018 7:38 AM

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Chapter 08 1. Audit sampling implies the gathering of evidence to use as a basis for making valid inferences about the characteristics of the population as a whole without examining every transaction. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Audit Sampling DATE CREATED: 1/19/2018 11:49 PM DATE MODIFIED: 1/20/2018 7:41 AM 2. Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Audit Sampling DATE CREATED: 1/19/2018 11:51 PM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 3. When performing substantive tests using sampling methods, the auditor's main concern is the risk of incorrect rejection. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/19/2018 11:52 PM DATE MODIFIED: 1/20/2018 7:41 AM 4. The risk of incorrect acceptance of an account balance as correct, when in fact it is not correct, bears directly on the effectiveness of an audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/19/2018 11:54 PM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 5. The tolerable misstatement is the level of misstatement the auditor expects to detect in the population. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances and Assertions DATE CREATED: 1/19/2018 11:57 PM DATE MODIFIED: 1/20/2018 7:41 AM 6. Statistical sampling is used when an auditor chooses to examine all purchases of equipment exceeding $1,000.00 and to test the remaining items by analytical procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/19/2018 11:58 PM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 7. The most efficient method of testing a large population is the use of nonstatistical sampling. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/19/2018 11:59 PM DATE MODIFIED: 1/20/2018 7:41 AM 8. Statistical sampling assists auditors in determining the sufficiency of evidence gathered. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/20/2018 12:00 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 9. When testing controls, the use of haphazard selection of a sample allows for random, statistical evaluation. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:01 AM DATE MODIFIED: 1/20/2018 7:41 AM 10. The tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:03 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 11. The expected population deviation rate is the auditor's best estimate of the percentage of transactions processed for which a control is not effectively applied. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:04 AM DATE MODIFIED: 1/20/2018 7:41 AM 12. An attribute is defined as a characteristic of the population of interest to the auditor. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:05 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 13. The sample size decreases as the risk of overreliance decreases. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:06 AM DATE MODIFIED: 1/20/2018 7:41 AM 14. For tests of controls, the most commonly used statistical method is attributes sampling. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:07 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 15. Increasing the expected failure rate will cause the sample size to increase. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:08 AM DATE MODIFIED: 1/20/2018 7:41 AM 16. Sample size varies directly with sampling risk. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 12:09 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 17. Statistical sampling used in control testing eliminates the need for evaluation of errors from a qualitative perspective. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:10 AM DATE MODIFIED: 1/20/2018 7:41 AM 18. The auditor must define the population to which sampling relates if the auditor is to use statistical sampling for substantive tests of account balances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances and Assertions DATE CREATED: 1/20/2018 12:11 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 19. The individual auditable elements defined by the auditor are the sampling units. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Audit Sampling DATE CREATED: 1/20/2018 12:12 AM DATE MODIFIED: 1/20/2018 7:41 AM 20. The most common statistical approaches for substantive testing are classical variables sampling and MUS. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances and Assertions DATE CREATED: 1/20/2018 12:13 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 21. Nonstatistical samples should be based on the same audit considerations as those used for statistical sampling. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/20/2018 12:15 AM DATE MODIFIED: 1/20/2018 7:41 AM 22. Random sampling can be used even if the auditor does not plan on using statistical sampling. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical and Statistical Sampling DATE CREATED: 1/20/2018 12:16 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 23. Either nonstatistical or statistical sampling is appropriate for substantive tests of details. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical and Statistical Sampling DATE CREATED: 1/20/2018 12:17 AM DATE MODIFIED: 1/20/2018 7:41 AM 24. Monetary unit sampling (MUS) is designed to test whether there is an acceptable risk of account balance understatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:18 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 25. Monetary unit sampling (MUS) results in an efficient sample size and concentrates on the dollar value of the account balances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:19 AM DATE MODIFIED: 1/20/2018 7:41 AM 26. Sample size in a MUS sample is a function of risk of incorrect acceptance, tolerable misstatement, and expected misstatement. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:20 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 27. The population for MUS is defined as the number of dollars in the population being tested. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:21 AM DATE MODIFIED: 1/20/2018 7:41 AM 28. Sampling risk is defined as the risk that an inference drawn from a sample will be incorrect. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 12:22 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 29. Projected misstatements are developed by extrapolation from the misstatements in sample items to the population. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances and Assertions DATE CREATED: 1/20/2018 12:26 AM DATE MODIFIED: 1/20/2018 7:41 AM 30. When evaluating an MUS sample, if the auditor finds no misstatements in the sample, the misstatement projection is zero dollars, and the total estimated misstatement will equal the projected misstatement for items in lower-stratum. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:27 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 31. Population items with zero balances have no chance of being selected using PPS sampling. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: PPS Sampling DATE CREATED: 1/20/2018 12:28 AM DATE MODIFIED: 1/20/2018 7:41 AM 32. Population items with a zero balance have the same chance of being chosen as those with dollar balances when using MUS sampling. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:29 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 33. Evaluating statistical sample results is one of the tasks that can be performed by data analytics tools. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Data Analytics Tools DATE CREATED: 1/20/2018 12:38 AM DATE MODIFIED: 1/20/2018 7:41 AM 34. In sampling for substantive tests of details, the population is a group of items in an account balance that the auditor wants to test. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Sampling for Substantive Tests of Details DATE CREATED: 1/20/2018 12:39 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 35. Tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances and Assertions DATE CREATED: 1/20/2018 12:40 AM DATE MODIFIED: 1/20/2018 7:41 AM 36. Extracting data from the client’s computer system is one of the tasks that can be performed by data analytics tools. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Data Analytics Tools DATE CREATED: 1/20/2018 12:41 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 37. Statistical sampling combines the theory of probability and statistical inference with audit judgment and experience. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/20/2018 12:42 AM DATE MODIFIED: 1/20/2018 7:41 AM 38. An example of attributes testing involves obtaining evidence that the client has matched the vendor invoice details with a purchase order and receiving report before payment approval. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:43 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 39. A sample which exceeds the tolerable rate of deviation results in the auditor’s reliance on internal control effectiveness. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:44 AM DATE MODIFIED: 1/20/2018 7:41 AM 40. Attributes sampling for testing controls should only be done by the auditor at the end of the fiscal period under audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:45 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 41. In analysis of the results of an attributes sampling plan, an auditor may determine that the sample size must be increased. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:46 AM DATE MODIFIED: 1/20/2018 7:41 AM 42. Simple random sampling, systematic sampling, and block sampling are acceptable sample selection methods for statistical sampling. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Sample Selection Methods DATE CREATED: 1/20/2018 12:47 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 43. Random number, haphazard selection, and block sampling are acceptable sample selection methods for nonstatistical sampling. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Sample Selection Methods DATE CREATED: 1/20/2018 12:48 AM DATE MODIFIED: 1/20/2018 7:41 AM 44. By using data analytics tools, the auditor can potentially audit the whole population rather than taking a sample. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Data Analytics Tools DATE CREATED: 1/20/2018 12:49 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 45. Using attributes sampling the auditor can test for multiple attributes using the same source documents. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:50 AM DATE MODIFIED: 1/20/2018 7:41 AM 46. The audit objective of attributes sampling is to test the correctness of an account balance. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:51 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 47. Stratification of the population into several homogeneous subpopulations generally creates audit efficiency. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Stratification of the Population DATE CREATED: 1/20/2018 12:51 AM DATE MODIFIED: 1/20/2018 7:41 AM 48. In attributes sampling, if the upper limit of the possible deviation rate exceeds the tolerable rate, the auditor can rely upon the control as being effective. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:52 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 49. In MUS sampling basic precision is the upper misstatement limit when no misstatements are detected in a MUS sample. It is computed by multiplying the sampling interval by the error expansion factor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 12:54 AM DATE MODIFIED: 1/20/2018 7:41 AM 50. In attributes sampling if the selected item cannot be located, the auditor should assume that the control procedure was not followed and assess that item as a failure. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:55 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 51. Which of the following is not considered when obtaining audit evidence through sampling? a. The effectiveness of control procedures. b. The efficiency of control procedures. c. The dollar accuracy of account balances. d. The dollar accuracy of classes of transactions. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Audit Sampling DATE CREATED: 1/20/2018 12:56 AM DATE MODIFIED: 1/20/2018 7:41 AM 52. For which of the following audit procedures would sampling be most appropriate? a. Inquiry. b. Observation. c. Confirmation. d. Analytics. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Overview of Audit Sampling DATE CREATED: 1/20/2018 12:57 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 53. Which one of the following is not a decision the auditor makes when using attributes sampling? a. Sample size. b. Selection of items included in the sample. c. Evaluation of sample information. d. Whether to document all phases of the sampling process. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:58 AM DATE MODIFIED: 1/20/2018 7:41 AM 54. Which one of the following is a decision the auditor makes when using attributes sampling? a. The sampling unit. b. Period covered by testing. c. Completeness of the population. d. All of the above are auditor decisions. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 12:59 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 55. Which of the following is not considered to be nonsampling risk? a. Misinterpretation of information. b. Use of improper audit procedure. c. The sample does not represent the population. d. Carelessness of the auditor. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:01 AM DATE MODIFIED: 1/20/2018 7:41 AM 56. Which of the following describes sampling risk? a. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. b. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect. c. The auditor incorrectly applies sampling methodology. d. The sample size will be larger than needed. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:02 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 57. Which of the following occurs when, based on sample results, control risk is assessed excessively high? a. Audit inefficiency. b. A less expensive audit. c. Reduction of substantive testing. d. Errors that are more likely to occur than anticipated. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:03 AM DATE MODIFIED: 1/20/2018 7:41 AM 58. Concluding that the book value of inventory is correct when it is materially misstated is an example of which of the following risks? a. Incorrect rejection. b. Incorrect acceptance. c. Insufficient sample size. d. None of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:04 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 59. Incorrect acceptance is directly related to which of the following? a. The efficiency of the audit. b. The ineffectiveness of the audit. c. The cost of the audit. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:05 AM DATE MODIFIED: 1/20/2018 7:41 AM 60. When performing sampling, the auditor is most concerned with which of the following? a. Risk of incorrect rejection. b. Risk of incorrect acceptance. c. Risk of excess sample size. d. Risk of errors in the population. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:06 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 61. While auditors may use either statistical or nonstatistical sampling, some auditors restrict the use of nonstatistical sampling for what reason? a. It is less effective. b. It is less objective. c. It is less efficient. d. It is less risky. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/20/2018 1:07 AM DATE MODIFIED: 1/20/2018 7:41 AM 62. Which of the following applications are incorporated into statistical sampling? a. Binomial and confidence intervals. b. Random and haphazard selection. c. Hypergeometric distribution with audit risk. d. Probability and statistical inference with audit judgment. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Statistical Sampling DATE CREATED: 1/20/2018 1:14 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 63. Which one of the following issues need not be addressed when planning an audit sample to test control procedures? a. Audit objective of the test. b. Minimum failure rate. c. Expected population deviation rate. d. Auditor's allowable risk of assessing control risk too low. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:19 AM DATE MODIFIED: 1/20/2018 7:41 AM 64. Which of the following is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances? a. Tolerable failure rate. b. Allowable risk of assessing control risk too low. c. Expected failure rate. d. Allowance for sampling error. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:21 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 65. Which of the following statistical sampling methods is most commonly used to test control procedures? a. Variable sampling. b. Ratio estimation sampling. c. Attributes sampling. d. Dollar unit sampling. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:22 AM DATE MODIFIED: 1/20/2018 7:41 AM 66. Which one of the following is not a typical step used to implement an attributes sampling plan? a. Define the attributes of interest and what constitutes failure(s). b. Select and test the sample items. c. Evaluate the sample results. d. Define the nonstatistical sampling method that is most effective and efficient. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:23 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 67. When performing attributes sampling, which of the following varies directly with the sample size? a. The expected failure rate. b. The tolerable failure rate. c. The risk of overreliance. d. The nonsampling risk. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:24 AM DATE MODIFIED: 1/20/2018 7:41 AM 68. In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners? a. Qualitatively and quantitatively. b. Absolutely and proportionately. c. Haphazardly and randomly. d. Methodically and systematically. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances DATE CREATED: 1/20/2018 1:25 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 69. In testing account balances, haphazard sampling is an acceptable method of sampling provided the auditor believes the sample to be which of the following? a. Statistically sound. b. Representative of the population. c. Representative of the sample. d. In the upper stratum. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Haphazard Sampling DATE CREATED: 1/20/2018 1:26 AM DATE MODIFIED: 1/20/2018 7:41 AM 70. When determining sample size in attributes sampling, which of the following is usually true? a. Sampling risk will be too high. b. Tolerable misstatement amount is determined. c. A failure rate is not to be expected. d. Population size is not a major factor. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:28 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 71. Which of the following is not an item the auditor needs to determine in designing sampling for substantive testing? a. The audit objective. b. The method of selecting a sample. c. Expected misstatement conditions. d. Expected deviation rate. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling for Substantive Testing DATE CREATED: 1/20/2018 1:29 AM DATE MODIFIED: 1/20/2018 7:41 AM 72. Which of the following is a method of reducing nonsampling risk? a. Proper supervision and instruction of the client’s employees. b. Proper supervision and instruction of the audit team. c. The use of attributes sampling rather than variables sampling. d. Controls to ensure that the sample drawn is random and representative. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:30 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 73. Which of the following is a factor that the auditor should consider when choosing between nonstatistical and statistical sampling? a. Whether the audit staff is adequately trained to use statistical sampling. b. Whether the population lends itself to a random-based selection method. c. Whether the auditor wants a statistical measure of the risk of drawing a wrong conclusion. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical vs. Statistical Sampling DATE CREATED: 1/20/2018 1:31 AM DATE MODIFIED: 1/20/2018 7:41 AM 74. When confirming receivables in testing for overstatements, assume that there are few or no misstatements expected and the selection will be based on the dollar value of individual items. Which of the following is the auditor most likely to use? a. MUS sampling. b. Stratified mean-per-unit sampling. c. Ratio estimation sampling. d. Attribute sampling. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:32 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 75. The results of MUS sampling will be unacceptable when the total estimated misstatement exceeds which of the following? a. The tolerable error rate. b. The tolerable misstatement amount. c. The expected deviation rate. d. The expected deviation amount. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:33 AM DATE MODIFIED: 1/20/2018 7:41 AM 76. MUS is based on which of following? a. Attributes sampling. b. Classical variables sampling. c. Population variability sampling. d. Expected error sampling. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:35 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 77. MUS is designed to test for which of the following? a. Overstatements. b. Understatements. c. Neither understatements nor overstatements. d. Either understatements or overstatements. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:36 AM DATE MODIFIED: 1/20/2018 7:41 AM 78. Which of the following does the design of a MUS sample not require the auditor to determine? a. Risk of incorrect acceptance. b. Inherent risk. c. Ratio of expected misstatement to tolerable misstatement. d. Ratio of tolerable misstatement to the total population value. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:37 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 79. When using MUS, an auditor found that the sampling interval should be $15,755. If selecting the sample manually, the auditor should round the sample interval to which of the following amounts? a. $16,000. b. $15,000. c. $14,000. d. $10,000. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:38 AM DATE MODIFIED: 1/20/2018 7:41 AM 80. When planning a test of details using MUS sampling, tolerable misstatement is usually set at what level? a. Higher than performance materiality. b. Lower than performance materiality c. Higher than the expected error amount. d. Lower than the expected error amount. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:39 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 81. In MUS, what is meant by a sampling interval of 900? a. Every

item will be selected.

b. Every

dollar will be selected.

c. Expected misstatement is 900. d. Tolerable misstatement is 900. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:41 AM DATE MODIFIED: 1/20/2018 7:41 AM 82. In using MUS, once the auditor has determined the sample size, which of the following is needed to determine the sampling interval? a. Expected misstatement. b. Tolerable misstatement. c. Population size. d. Mean. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:43 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 83. Which one of the following is a proper course of action for the auditor when the total estimated misstatement exceeds the tolerable misstatement? a. The auditor can ask the client to correct the known misstatements. b. The auditor will analyze the detected misstatements for some common problems. c. The auditor can expand the sample. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances DATE CREATED: 1/20/2018 1:45 AM DATE MODIFIED: 1/20/2018 7:41 AM 84. MUS sampling has all of the following advantages over other statistical methods except which of the following? a. Easier to apply than other statistical sampling approaches. b. Sample sizes are relatively small. c. It is a relatively easy way to make sure that negative balances and zero balances are included in the sample. d. Usually results in a highly efficient sample size. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:46 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 85. Which of the following is a disadvantage of MUS sampling? a. Sample selection is relatively easy. b. Sample sizes are relatively small. c. It is not designed to test for understatement. d. It directly controls for the risk of incorrect acceptance. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:47 AM DATE MODIFIED: 1/20/2018 7:41 AM 86. The auditor will do which of the following when the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement? a. Issue a disclaimer of opinion. b. Throw out the sample. c. Propose adjustments to the client. d. Disclose the misstatement in the client's financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Test Account Balances DATE CREATED: 1/20/2018 1:49 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 87. Which of the following is not a type of statistical method that provides results in dollar terms? a. Variables sampling. b. Attributes sampling. c. Monetary unit sampling. d. Probability proportional to size sampling. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Statistical Sampling Methods DATE CREATED: 1/20/2018 1:50 AM DATE MODIFIED: 1/20/2018 7:41 AM 88. When an auditor uses MUS and analyzes misstatements in the lower stratum, which of the following will be multiplied by the sampling interval to calculate the projected misstatement for each misstated item? a. Audit value. b. Tolerable misstatement. c. Sampling interval. d. Tainting percentage. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 1:51 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 89. In attributes sampling, which of the following does the risk of incorrect acceptance deal with? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:53 AM DATE MODIFIED: 1/20/2018 7:41 AM 90. In attributes sampling, the risk of incorrect rejection deals with which of the following? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:55 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 91. Which of the following is a factor of nonsampling risk? a. Not carrying out the appropriate audit procedure. b. Having a sample which does not represent the population. c. Using a random sample selection. d. Using nonstatistical sampling. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 1:56 AM DATE MODIFIED: 1/20/2018 7:41 AM 92. Attributes sampling is used in which of the following situations? a. Testing rates of deviations of controls. b. Testing the reasonableness of account balances. c. Testing accuracy of estimates in accounts. d. Both A and B. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:57 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 93. In selecting a sample for attributes testing, systematic selection involves which of the following approaches? a. Each item in the population having an equal chance of selection. b. Every nth item being selected after a random start. c. An arbitrary selection with no conscious bias. d. Selecting all items on a day or week. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling DATE CREATED: 1/20/2018 1:58 AM DATE MODIFIED: 1/20/2018 7:41 AM 94. In selecting a sample for attributes testing, haphazard selection involves which of the following approaches? a. Each item in the population having an equal chance of selection. b. Every nth item being selected after a random start. c. An arbitrary selection with no conscious bias. d. Selecting all items on a day or week. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Testing DATE CREATED: 1/20/2018 2:00 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 95. In selecting a sample for attributes testing, block sampling involves which of the following approaches? a. Each item in the population having an equal chance of selection. b. Every nth item being selected after a random start. c. An arbitrary selection with no conscious bias. d. Selecting all items on a day or week. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Block Sampling DATE CREATED: 1/20/2018 2:03 AM DATE MODIFIED: 1/20/2018 7:41 AM 96. Sampling risk deals with which of the following? a. Not carrying out the appropriate audit procedure. b. Drawing an incorrect inference from the sample results. c. Inappropriately diagnosing client’s problems. d. Both A and C. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks Associated with Sampling DATE CREATED: 1/20/2018 2:04 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 97. Which of the following are limitations of using the MUS sampling method? a. MUS is not very useful in testing for understatement. b. MUS is not very useful in testing for zero and negative amounts. c. MUS is not very useful in testing if the auditor expects numerous misstatements. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 2:05 AM DATE MODIFIED: 1/20/2018 7:41 AM 98. In testing the reasonableness of an account balance, if MUS sampling cannot be used because of its limitations, what is an alternative statistical method? a. Attribute sampling. b. Classical variables sampling. c. Discovery sampling. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 2:06 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 99. When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process using which of the following components? a. Basic precision. b. Projected misstatement for items in lower-stratum. c. Incremental Allowance for Sampling Error. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling DATE CREATED: 1/20/2018 2:08 AM DATE MODIFIED: 1/20/2018 7:41 AM 100. Which of the following tasks is not performed by data analytics tools? a. Footing a file. b. Obtaining file statistics. c. Checking for gaps in processing sequences. d. Preparing custom reports. e. All of the above tasks can be performed using data analytics tools. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.01 STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Data Analytics Tools DATE CREATED: 1/20/2018 2:09 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 101. Dividing the population into relatively homogeneous groups in order to reduce sample size is the definition of which of the following terms? a. Ratio estimation. b. Difference estimation. c. Stratification. d. MUS sampling. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Stratified Sample DATE CREATED: 1/20/2018 2:49 AM DATE MODIFIED: 1/20/2018 7:41 AM 102. Blockchain is a rapidly evolving phenomenon that is useful in recording which of the following types of transactions? a. Multi-national transactions. b. Digital currency transactions. c. Transactions requiring a high level of authorization. d. Related party transaction. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Blockchain Technology DATE CREATED: 1/20/2018 2:51 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 103. Which of the following is not one of the processes involved in data mining? a. Data capture and cleaning. b. Deploying models. c. Data exploration. d. Data architecture. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Data Mining DATE CREATED: 1/20/2018 2:52 AM DATE MODIFIED: 1/20/2018 7:41 AM 104. Which of the following data analytics tools might an auditor use to test the completeness assertion for sales? a. Analyze data to assess the proper operation of sales cutoff tests around year-end. b. Age accounts receivable. c. Use data visualization tools to evaluate disclosures about sales and profitability. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Data Analytics Tools DATE CREATED: 1/20/2018 2:53 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 105. Sampling factors List the four important decisions an auditor must make when deciding to use sampling. ANSWER:

When deciding to use sampling techniques the auditor must decide the following: ∙ Population - Which population should be tested and for what characteristics? ∙ Sample size - How many items should be selected for audit testing? ∙ Selection - Which items should be included in the sample? Evaluation - What inferences can be made about the overall population from the ∙ sample? POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 2:54 AM DATE MODIFIED: 1/20/2018 7:41 AM 106. Nonsampling risk What is nonsampling risk and how can it be eliminated? ANSWER:

Nonsampling risk includes all aspects of audit risk that are not due to sampling. Nonsampling risk would include using auditors who are not properly trained, inadequate supervision, use of an improper or incorrect audit procedure, or the misinterpretation of information. Nonsampling risk cannot be eliminated on an audit, but it can be guarded against. Implementation of good quality-control practices, carefully designed audit programs, and assignment of qualified personnel to each audit will help minimize nonsampling risk. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 2:56 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 107. Risks of sampling in tests of controls Define the following terms as they relate to sampling for tests of controls: 1. tolerable failure rate 2. expected failure rate ANSWER:

Tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances. Expected failure rate is an anticipation of the deviation rate in the entire population. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 2:57 AM DATE MODIFIED: 1/20/2018 7:41 AM 108. Planning and documentation of an attributes sampling plan What are the steps to implement an attributes sampling plan? ANSWER:

The auditor should include the following in his or her working papers for adequate documentation involving sampling: 1. Define the attributes of interest and what constitutes failure(s). 2. Define the population from which the sample is to be taken. 3. Determine the sample size. 4. Determine the method of selecting the sample. 5. Select the sample items and perform the test of control. 6. Evaluate the sample results and consider the effect on planned substantive procedures. 7. Document all phases of the sampling process. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 2:58 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 109. Evaluating misstatements when using sampling to test account balances Explain the term "misstatement" as it applies to sampling during substantive procedures and explain how the term may be interpreted differently by different auditors. ANSWER:

A misstatement is an error, either intentional or unintentional, that exists in a transaction or financial statement account balance. When sampling for substantive tests of details, a misstatement involves differences between recorded values and audited values. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 2:59 AM DATE MODIFIED: 1/20/2018 7:41 AM 110. Choosing sampling methods Identify the factors that an auditor would consider when choosing between nonstatistical sampling and statistical sampling. ANSWER:

When choosing between statistical and nonstatistical sampling the auditor would consider: ∙ Whether the audit staff is adequately trained to properly use statistical sampling. Whether the added costs of designing, selecting, and evaluating a statistical sample ∙ are justifiable in the circumstances. Whether the auditor wants an objective measure of the risk of drawing a wrong ∙ conclusion based on the sample. ∙ Whether the population lends itself to a random-based selection method. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:00 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 111. Using MUS sampling Describe MUS sampling and identify the conditions that would cause an auditor to choose to use MUS sampling. ANSWER:

MUS sampling is an adaptation of attributes sampling methods to dollar value testing. It was developed specifically for use in auditing. MUS sampling is most effective when testing for overstatements in situations when few misstatements are expected. Individual book values must be available for testing. The population for MUS sampling is defined as the number of dollars in the account balance being tested. Each dollar in the population has an equal chance of being chosen, but each dollar is associated with a particular item such as an inventory item. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:01 AM DATE MODIFIED: 1/20/2018 7:41 AM 112. Sampling and nonsampling risk Discuss what is meant by “sampling risk” and “nonsampling risk”. ANSWER:

Sampling risk occurs when the sample is not representative of the population; that is, the characteristics of interest in the sample are not the same as those in the population. 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. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk is referred to as nonsampling risk. Nonsampling risk occurs when audit tests do not uncover existing exceptions in the sample. Nonsampling risk could also be due to a lack of knowledge of the auditor performing the audit procedure. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:02 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 113. Application of MUS Explain why monetary unit sampling is not useful for detecting understatements. ANSWER:

Monetary unit sampling is a technique that assigns physical units to an item in the population based on the dollar value of the item. Larger dollar items are more likely to be chosen for the sample than smaller items. So, if a client has understated an item there is less likelihood that the item will be selected. Consequently, auditors do not commonly use MUS when they are concerned with understatements. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:04 AM DATE MODIFIED: 1/20/2018 7:41 AM 114. Advantages of MUS sampling Discuss the advantages of monetary unit sampling over other sampling methods. ANSWER:

∙ MUS is generally easier to apply than other statistical sampling approaches. ∙ MUS automatically selects a sample in proportion to an item’s dollar amount, thus providing automatic stratification of the sample. ∙ If the auditor expects (and finds) no misstatements, MUS usually results in a highly efficient sample size. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:05 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 115. Upper Misstatement Limit When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process. Describe the four components that make up this total. ANSWER:

The total estimated misstatement is computed by adding together four components: Factual misstatement for items in the top-stratum. Basic Precision - The amount of uncertainty associated with testing only a part of the population (sampling error). It is equal to the UML if no errors are found in the sample. Most Likely Misstatement (MLM) - The best estimate of the actual amount of dollar misstatements that exist in the account balance. This is also called projected misstatement. Incremental Allowance for Sampling Error - An increase in the upper misstatement estimate caused by the statistical properties of misstatements found. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:06 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 116. Sample selection Before procedures using statistical or nonstatistical sampling methods begin, the auditor must determine how the sample will be selected. Discuss the various types of sample selection, when they are used and, generally, how they are used. Give examples. ANSWER:

Simple random selection Simple random selection is an efficient use of sample selection if random numbers can be related to the population. An example of this is in sampling customer invoices that are sequentially numbered. The sequence can be used as the range for random number selection. Random selection is known to be representative of the population and is required for statistical sampling methods. Systematic selection Systematic selection is also a random technique and is acceptable for statistical methods. It is used when sequential numbering is not used in the population or is difficult to use for sampling. An example of this is in sampling inventory for valuation. If the database table keeps inventory items by a unique product number that has alphanumeric characters, then the product number can be used with systematic selection. However, in order to use systematic selection, the auditor must (a) establish that the population is complete, and (b) be sure that there is not a systematic pattern in the population. An interval must be used to sample every nth item in the population. Every item in the population then has an equal chance of being selected. Haphazard selection Items may be arbitrarily selected from the population using no conscious basis. This haphazard selection process is not considered random and is not used in statistical methods. Block sampling Similar to haphazard selection, the auditor may wish to select all transaction in a given day or week. This selection process may not give the auditor the representation of the transactions as they occurred for a more extended period of time. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:07 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 08 117. Nonstatistical sampling Describe nonstatistical sampling for tests of account balances and how it is used by the auditor. ANSWER:

Nonstatistical samples should be based on the same audit considerations as those used for statistical sampling. There is no way to mathematically control for and measure sampling risk in a nonstatistical sample; the auditor can project only the detected misstatements and make a judgment as to whether the account is likely to be materially misstated, and then decide whether more audit work is needed. In determining sample size, all significant items should be tested. The auditor should select all items over a specific dollar amount, and then, depending on audit objectives, select items with other characteristics, such as items billed in the last week or billed to specific parties. The sample size of the other items to be tested should be based on the same factors used in statistical sampling. In terms of selecting the sample, the auditor should take steps to increase the likelihood that the sample is representative of the population. The auditor may obtain a representative sample using a random based method or haphazard sampling. The auditor then has to evaluate the sample results. While statistical sampling methods automatically builds in an allowance for sampling risk given the defined parameters provided by the auditor, now the auditor has to judgmentally consider that allowance. For example, using the example provided in the text, a misstatement of $900 out of a sample of $310,000 given a population of $2,500,000 results in a projected error of $7,258. $900/$310,000 × $2,500,000 = $7,258 If tolerable misstatement is $8,000, even though the projected misstatement is less than tolerable misstatement the auditor may still reject the account balance as being materially misstated. However, if tolerable misstatement is $15,000 then the auditor may very well be willing to accept the account balance as not being materially misstated. The point is that now the auditor has to judgmentally evaluate the point at which he would be satisfied to sign off on the appropriateness of the account balance. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.08.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking DATE CREATED: 1/20/2018 3:08 AM DATE MODIFIED: 1/20/2018 7:41 AM

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Chapter 09 1. The revenue cycle considered by auditors includes the sales process but not collections. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:14 AM DATE MODIFIED: 1/20/2018 7:49 AM 2. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction, and collecting the receivable. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:16 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 3. The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:17 AM DATE MODIFIED: 1/20/2018 7:49 AM 4. Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement of all open items. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:17 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 5. Invoices are normally prepared when the organization receives confirmation that goods were delivered to customers. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:18 AM DATE MODIFIED: 1/20/2018 7:49 AM 6. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 3:19 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 7. In a control risk assessment questionnaire, each negative (or “No”) answer to a question represents a potential internal control deficiency. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Control Risks DATE CREATED: 1/20/2018 3:20 AM DATE MODIFIED: 1/20/2018 7:49 AM 8. Formal procedures for approving acceptance of returns are an appropriate control procedure for identifying and recording returned goods. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 3:21 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 9. One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 3:22 AM DATE MODIFIED: 1/20/2018 7:49 AM 10. Substantive tests of details for revenue transactions focus primarily on the completeness assertion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Tests of Revenue Transactions DATE CREATED: 1/20/2018 3:23 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 11. An appropriate mix of evidence for a low-risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high-risk client could include 60% tests of details, 20% analytics, and 20% tests of controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Response to Identified Risk of Material Misstatement DATE CREATED: 1/20/2018 3:25 AM DATE MODIFIED: 1/20/2018 7:49 AM 12. As required by auditing standards, auditors should ordinarily presume there is a risk of material misstatement caused by fraud relating to revenue recognition. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks in the Revenue Cycle DATE CREATED: 1/20/2018 3:27 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 13. A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery to the warehouse as revenue. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 3:30 AM DATE MODIFIED: 1/20/2018 7:49 AM 14. The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 3:31 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 15. The basic concept for revenue recognition is the realization of cash. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 3:32 AM DATE MODIFIED: 1/20/2018 7:49 AM 16. A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks in the Revenue Cycle DATE CREATED: 1/20/2018 3:33 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 17. A consistent pattern of earnings growth would eliminate the auditor’s concern for fraud in revenue recognition. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks in the Revenue Cycle DATE CREATED: 1/20/2018 3:34 AM DATE MODIFIED: 1/20/2018 7:49 AM 18. When lapping occurs, all or most customer account balances will be overstated at any one time, making it relatively easy for auditors to detect the scheme. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Fraud Risk in the Revenue Cycle DATE CREATED: 1/20/2018 3:35 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 19. The auditor should be alert to the risk of material misstatements when cash flows from operations are negative and net income and revenues have increased. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 3:35 AM DATE MODIFIED: 1/20/2018 7:49 AM 20. Ratio analysis performed by the audit team may include the comparison of gross profit percentage to industry averages. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 3:37 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 21. The auditor's determination that the number of days’ sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 3:37 AM DATE MODIFIED: 1/20/2018 7:49 AM 22. Edge and Gregg, LLP would most likely discover a client’s first-time use of channel stuffing through the use of trend analysis. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/20/2018 3:38 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 23. Use of reasonableness tests by Bono Mullins, PC, will include relationships between financial but not non-financial data. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytics DATE CREATED: 1/20/2018 3:40 AM DATE MODIFIED: 1/20/2018 7:49 AM 24. The auditor has determined that the control risk for the existence assertion is low; therefore, the auditor may reduce the number of items tested on a substantive basis. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Control Risk DATE CREATED: 1/20/2018 3:41 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 25. Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:42 AM DATE MODIFIED: 1/20/2018 7:49 AM 26. When the auditor seeks evidence concerning the allowance for doubtful accounts, he or she would most likely use an aged trial balance to help identify past due balances. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:44 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 27. Current auditing standards do not require the confirmation of receivables if accounts receivable are not material. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:45 AM DATE MODIFIED: 1/20/2018 7:49 AM 28. Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:46 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 29. Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:47 AM DATE MODIFIED: 1/20/2018 7:49 AM 30. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks in the Revenue Cycle DATE CREATED: 1/20/2018 3:48 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 31. Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:48 AM DATE MODIFIED: 1/20/2018 7:49 AM 32. When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high, the auditor is more likely to use negative confirmations. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 3:49 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 33. The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 3:50 AM DATE MODIFIED: 1/20/2018 7:49 AM 34. An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Controls DATE CREATED: 1/20/2018 3:51 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 35. An auditor would test controls over the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Controls DATE CREATED: 1/20/2018 3:52 AM DATE MODIFIED: 1/20/2018 7:49 AM 36. If control risk is assessed high, the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Considering the Results of Tests of Controls DATE CREATED: 1/20/2018 3:54 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 37. In planning an audit for the revenue cycle, the auditor must consider the integrated relationship of evidence found between the accounts receivable and the notes payable accounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 3:55 AM DATE MODIFIED: 1/20/2018 7:49 AM 38. A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Completeness of Sales DATE CREATED: 1/20/2018 3:56 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 39. Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Presentation of Accounts Receivable DATE CREATED: 1/20/2018 3:57 AM DATE MODIFIED: 1/20/2018 7:49 AM 40. The use of data analytics tools makes the audit of the revenue cycle more effective, but not more efficient. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 3:58 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 41. Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 3:59 AM DATE MODIFIED: 1/20/2018 7:49 AM 42. Valid evidence obtained in an audit for testing the cutoff of sales includes receiving reports for returned merchandise. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Sales Cutoff DATE CREATED: 1/20/2018 4:00 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 43. An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 4:01 AM DATE MODIFIED: 1/20/2018 7:49 AM 44. Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Confirming Accounts Receivable DATE CREATED: 1/20/2018 4:01 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 45. Exceptions found in the confirmation of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:03 AM DATE MODIFIED: 1/20/2018 7:49 AM 46. A timing difference type of exception in the confirmation process may arise when goods are in transit at the confirmation date. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:04 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 47. Negative confirmations are considered to be more persuasive than positive confirmations. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:05 AM DATE MODIFIED: 1/20/2018 7:49 AM 48. Confirmation of accounts receivable is generally not effective in addressing the existence of fictitious sales recorded by the client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:05 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 49. An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:06 AM DATE MODIFIED: 1/20/2018 7:49 AM 50. Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Indicators DATE CREATED: 1/20/2018 4:07 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 51. The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Indicators DATE CREATED: 1/20/2018 4:08 AM DATE MODIFIED: 1/20/2018 7:49 AM 52. Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Estimate of Allowance for Doubtful Accounts DATE CREATED: 1/20/2018 4:09 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 53. An auditor might test the reasonableness of the client’s estimate of the allowance for doubtful accounts by developing an independent estimate of the allowance for doubtful accounts that is compared to the recorded allowance. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Estimate of Allowance for Doubtful Accounts DATE CREATED: 1/20/2018 4:10 AM DATE MODIFIED: 1/20/2018 7:49 AM 54. While electronic confirmations of receivables are more efficient, they are seldom used because they are not considered as reliable as paper confirmations. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Confirming Receivables DATE CREATED: 1/20/2018 4:11 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 55. Pre-numbered shipping and billing documents are examples of controls related to the completeness of sales transactions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Completeness of Sales Transactions DATE CREATED: 1/20/2018 4:12 AM DATE MODIFIED: 1/20/2018 7:49 AM 56. An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Estimate of Allowance for Doubtful Accounts DATE CREATED: 1/20/2018 4:13 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 57. Which of the following processes are not included in the revenue cycle? a. Sending payments to suppliers. b. Obtaining credit approval. c. Preparing and sending monthly statements to customers. d. Shipping products to customers. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 4:14 AM DATE MODIFIED: 1/20/2018 7:49 AM 58. Which of the following is the fifth step in the five-step revenue recognition process prescribed by ASC 606? a. Satisfaction of a performance obligation. b. Execution of an enforceable contract for the transfer of goods or services. c. Collection of substantially all of the transaction price from the customer. d. None of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition Process DATE CREATED: 1/20/2018 4:15 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 59. Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper? a. Sales invoice. b. Receiving report. c. Bill of lading. d. Purchase order. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 4:16 AM DATE MODIFIED: 1/20/2018 7:49 AM 60. Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives? a. To determine revenue recognition policies. b. To ensure customer satisfaction. c. To prevent lapping by the accounts receivable department. d. To minimize credit losses. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 4:17 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 61. Sales transactions should be documented at initiation in order to accomplish which of the following objectives? a. To provide the customer a copy of the transaction. b. To provide evidence of authorization and recording. c. To offer credit to customers. d. To generate back orders. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 4:18 AM DATE MODIFIED: 1/20/2018 7:49 AM 62. The purpose of the bill of lading is to provide which of the following? a. The warehouse personnel with the product that must be shipped to customers. b. Invoices to customers for proper collection. c. A credit application for customer approval. d. Evidence of title transfer of goods to customers. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle DATE CREATED: 1/20/2018 4:19 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 63. The risk of material misstatement due to fraud relating to revenue recognition should be a. approached in a manner that is identical to control risk assessment. b. given lower priority to the risk of embezzlement. c. ordinarily presumed by the auditor. d. assumed to have been considered by the FASB. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk DATE CREATED: 1/20/2018 4:21 AM DATE MODIFIED: 1/20/2018 7:49 AM 64. A method used by companies to fraudulently inflate revenues includes which of the following? a. Use of hidden “side letters” giving the customer an irrevocable right to return the product. b. Recording of fictitious sales. c. Shipment of product not ordered by customers. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 4:22 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 65. Which of the following evidences delivery of product to customers sufficient for company recording as revenues? a. A check received from the customer. b. An agreement to purchase product signed by the customer. c. A pick ticket in the warehouse. d. A bill of lading and tracking number with the shipper. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 4:23 AM DATE MODIFIED: 1/20/2018 7:49 AM 66. Which of the following must exist prior to the recognition of revenue by a company from the sale of a product? a. Cash is realized on the sale of the product. b. A price is discussed based upon the customer's resale of the product. c. The customer is given the option to return the product at any time. d. The product is transferred to the customer. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 4:24 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 67. Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations? a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors. b. Gross margin is equivalent in the current period to previous periods and is below that of the industry. c. Sales are higher in the month preceding each quarter end. d. Sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/20/2018 4:26 AM DATE MODIFIED: 1/20/2018 7:49 AM 68. Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following? a. Trend analysis. b. Ratio analysis. c. Reasonableness testing. d. Nonstatistical sampling. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/20/2018 4:27 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 69. An analysis of monthly sales compared with past years and budgets is a form of what type of testing? a. Regression analysis. b. Common size analysis. c. Ratio analysis. d. Trend analysis. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/20/2018 4:28 AM DATE MODIFIED: 1/20/2018 7:49 AM 70. Lithgow and Harris, CPAs, are performing the audit of Wild Flower Grocery Stores. Lithgow and Harris relates annual revenue to sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing? a. Ratio analysis. b. Critical analysis. c. Reasonableness tests. d. Nonstatistical analysis. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/20/2018 4:29 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 71. In an audit of financial statements, risks related to a high rate of return of products sold include which of the following? a. Sales that are recorded improperly. b. An estimate of accrued returns that reduces net income. c. A reduction of net sales for an increase to the sales returns and allowance account. d. Consignment goods that are returned and forwarded to third parties. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks DATE CREATED: 1/20/2018 4:30 AM DATE MODIFIED: 1/20/2018 7:49 AM 72. The major risk associated with receivables is related to which of the following? a. They may be sold to a bank with recourse. b. They may be recorded as long-term when in fact they will be realized in the current period. c. They will not be realized for the entire amount due. d. They are pledged as collateral as disclosed in the footnotes to financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Risks DATE CREATED: 1/20/2018 4:33 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 73. Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger? a. Electronic authorization prior to posting. b. Use of sequentially numbered sales documents. c. Random statements to customers. d. Review of transactions by upper management or the board. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 4:35 AM DATE MODIFIED: 1/20/2018 7:49 AM 74. A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following? a. Use of prenumbered shipping, invoice and sales documents. b. Use of prenumbered statements, inventory lists and credit memos. c. Reconciliation of invoices with customer statements. d. Use of pre-authorized price lists. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 4:38 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 75. The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total. This process is performed for which purpose? a. Drafting financial statements. b. Monitoring revenue transactions. c. Providing management reports to the controller. d. Providing suggestions for operational improvement. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 4:39 AM DATE MODIFIED: 1/20/2018 7:49 AM 76. Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following? a. Substantiate cutoff and the occurrence of net sales transactions. b. Test the sufficiency of cash balances to cover refunds. c. Monitor customer satisfaction for disclosure. d. Assess the nature of procedures that will be performed for the next period's audit. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue Cycle Accounts DATE CREATED: 1/20/2018 4:40 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 77. The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate which assertion? a. Existence of receivables. b. Cutoff of receivables. c. Valuation of receivables. d. Rights to receivables. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:42 AM DATE MODIFIED: 1/20/2018 7:49 AM 78. What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate? a. Accounts receivable aging schedule. b. Copies of checks received from customers. c. Confirmations returned without exception. d. Stock prices of customer companies. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:44 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 79. Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks? a. Examining sales contracts and inquiry of management. b. Confirming sales with customers. c. Discussing the transactions with qualified members of the Financial Accounting Standards Board. d. Comparing shipping documents with invoices. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 4:45 AM DATE MODIFIED: 1/20/2018 7:49 AM 80. The auditor traces recorded sales to invoices, sales orders, and shipping documents in order to substantiate which assertion? a. Cutoff. b. Completeness. c. Legality. d. Occurrence. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 4:46 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 81. In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test which of the following assertions? a. Existence of sales. b. Presentation and disclosure of receivables. c. Cutoff of sales transactions. d. Completeness of receivables. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 4:48 AM DATE MODIFIED: 1/20/2018 7:49 AM 82. Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following? a. Shipping documents and tracing them to the sales journal. b. Accounts receivable and tracing them to cash receipts. c. Recorded sales transactions and tracing them to the general ledger. d. Inventory records and tracing them to the shipping documents. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Revenue DATE CREATED: 1/20/2018 4:49 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 83. Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions? a. Existence of related party transactions. b. Existence of accounts receivable. c. Obligation of debt. d. Cutoff of the allowance for bad debt. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:50 AM DATE MODIFIED: 1/20/2018 7:49 AM 84. The aged accounts receivable report is utilized by the auditor to accomplish which of the following? a. Encourage the client to collect on receivables that are long past due. b. Select the type of confirmations that will be sent to banks. c. Assess the adequacy of the allowance for doubtful accounts. d. Identify debits in the receivables balance that should be reclassified to payables. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:51 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 85. According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations? a. On every audit engagement. b. If the client agrees in writing to the procedure. c. If the accounts receivable balance is material. d. If environmental risk is low. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:53 AM DATE MODIFIED: 1/20/2018 7:49 AM 86. The primary difference between positive and negative confirmations used in the audit of accounts receivable is which of the following? a. The mode of response. b. The amount of information included. c. The control of the confirmation process by the auditor. d. The method in which accounts are selected for confirmation. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:54 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 87. For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate? a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle. b. A utility company with control risk over the revenue cycle assessed high. c. A mortgage banking company with excellent control over the purchasing cycle. d. A cable company with control risk over the revenue cycle assessed low. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:55 AM DATE MODIFIED: 1/20/2018 7:49 AM 88. Accounts receivable confirmations usually provide strong evidence about which of the following? a. The existence of receivables. b. The completeness of receivables. c. The presentation and disclosure of receivables. d. The obligations of receivables. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:56 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 89. Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms? a. Direct confirmations. b. Indirect confirmations. c. Positive confirmations. d. Negative confirmations. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 4:57 AM DATE MODIFIED: 1/20/2018 7:49 AM 90. Which one of the following procedures would be considered improper by the auditor in the process of confirming receivables? a. The auditor allows the client's staff to prepare the confirmation letters after the auditor has chosen the items to be confirmed. b. The auditor allows the client to sign the confirmations after they are prepared. c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters. d. The auditor asks the addressee to return the confirmation to the audit firm's office. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:04 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 91. An auditor's examination of the sales account using a cutoff test would most likely detect which of the following? a. Kiting. b. Sales made with improper credit terms. c. Lapping of accounts receivable. d. Sales recorded in the wrong period. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Cutoff DATE CREATED: 1/20/2018 5:05 AM DATE MODIFIED: 1/20/2018 7:49 AM 92. Alternative procedures that would provide evidence of the existence of receivables would include which of the following? a. Physical observation of customer facilities. b. Review of subsequent collections. c. Analysis of the aged trial balance. d. A confirmation to the client management for customer accounts. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:06 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 93. Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons? a. Confirmations are selected based upon zip codes. b. A P.O. box is more reliable than a street address. c. Confirmations should be sent only to business addresses and not residential. d. The address may be routed to the client for retrieval and fraudulent signing. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:07 AM DATE MODIFIED: 1/20/2018 7:49 AM 94. Unreturned positive confirmations for accounts receivable warrant which of the following actions? a. Replacing the sample selection with a new customer. b. Sending second requests and possibly performing subsequent procedures. c. The projection of larger misstatements to the population. d. Requesting that the client send additional audit correspondence to customers. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:09 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 95. An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions? a. Inquiry of management. b. Tracing source documents to recorded amounts. c. Review of subsequent collections on account by the client. d. Providing an estimate of the allowance for doubtful accounts to be recorded by the client. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:10 AM DATE MODIFIED: 1/20/2018 7:49 AM 96. A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following? a. Customer collections that are over 90 days past due. b. Credit entries in customer accounts receivable for authorized write-offs. c. Recurring entries in the sales journal. d. Altered shipping documents and invoices. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Indicators DATE CREATED: 1/20/2018 5:11 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 97. In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following? a. All material accounting estimates have been developed properly. b. The estimates are reasonable. c. The estimates are presented in accordance with GAAP. d. All of the above are true. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit of Allowance for Doubtful Accounts DATE CREATED: 1/20/2018 5:12 AM DATE MODIFIED: 1/20/2018 7:49 AM 98. The allowance for doubtful accounts balance will not be a precise amount because of which of the following reasons? a. It is an accounting estimate based upon judgment. b. GAAP is not clear on the calculation of the allowance. c. It is merely a reserve that is reversed by the client as income is needed for profitable results. d. The precision is determined by the results of confirmation responses. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit of Allowance for Doubtful Accounts DATE CREATED: 1/20/2018 5:13 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 99. To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely perform which of the following procedures? a. Examine subsequent collections. b. Test a sample of transactions to the general ledger. c. Review loan agreements and board of directors' meeting minutes. d. Derive an independent estimate of the allowance and compare it to pledged assets. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:14 AM DATE MODIFIED: 1/20/2018 7:49 AM 100. Which of the following criteria must be met in order to recognize revenue in the current accounting period? a. Goods or services have been transferred to the customer. b. The transaction price has been determined. c. Collectability is reasonably assured. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 5:15 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 101. Management has been found involved in many fraudulent schemes; a common one is “channel stuffing.” What does “channel stuffing” involve? a. Overly complex transactions. b. Growth through stock acquisitions. c. Shipment of goods not ordered. d. Management compensation schemes. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 5:16 AM DATE MODIFIED: 1/20/2018 7:49 AM 102. Which of the following is not a form of ratio analysis? a. Turnover of receivables. b. Monthly sales analysis compared with past years. c. Gross margin analysis. d. Sales in last month to total sales. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/20/2018 5:21 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 103. Sources of audit planning information may come from which of the following? a. Knowledge of client’s business and industry. b. Assessment of risk of material misstatement. c. Results of analytical procedures. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audit Planning DATE CREATED: 1/20/2018 5:23 AM DATE MODIFIED: 1/20/2018 7:49 AM 104. Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales? a. Trace bill of lading to sales invoice and sales journal. b. Confirm balances of unpaid invoices with customers. c. Examine subsequent collections. d. Scan sales journal for duplicate entries. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Tests of Revenue DATE CREATED: 1/20/2018 5:24 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 105. Substantive tests of the revenue cycle typically do not provide evidence of which of the following? a. Sales transactions exist and are properly valued. b. Accounts receivable exist. c. The balance in the allowance account is correct. d. Fraudulent transactions are not included in the financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Tests of Revenue DATE CREATED: 1/20/2018 5:25 AM DATE MODIFIED: 1/20/2018 7:49 AM 106. A sample of positive confirmations is mailed for material accounts receivable balances. Frequently there is a lack of response. Which of the following is not an acceptable alternative procedure? a. Reviewing collections on the account subsequent to the confirmation date. b. Inquiry of management. c. Mailing second and third confirmations. d. Examination of supporting documents. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Confirmations DATE CREATED: 1/20/2018 5:26 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 107. Internal control over the revenue cycle White Floyd, Inc., a retail store, is concerned about the lack of control procedures over the recording of sales transactions. The company is concerned that the transactions might not be recorded accurately and valued properly in accordance with GAAP. Recommend control procedures to help ensure that transactions are recorded accurately and valued properly. ANSWER:

Control procedures that should be implemented to ensure that sales transactions are properly recorded are: ∙ Sales orders are filled by authorized personnel following an authorized price catalog. ∙ Sales prices are to be maintained on the computer and access to the computer file is restricted to those authorized to change it. ∙ Internal audit department periodically should perform tests of sales invoices to see if the terms agree with authorized price lists. ∙ Executive approval should be required of all large, unusual, or complex sales transactions. ∙ Oral or written verification of prices with customers should be required for all nonstandard sales. ∙ Products shipped and billed must be checked against an existing product list. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 5:27 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 108. Controls over completeness for the revenue cycle What control procedures should be implemented to ensure the completeness objective is met with respect to sales? ANSWER:

Control procedures to ensure that the objective of completeness is met for the revenue accounts are: ∙ Prenumbered shipping and invoice documents should be used and accounted for periodically. ∙ Online computer input of all transactions and independent logging of the transactions should be created for subsequent use in performing reconciliations. ∙ Recorded transactions should be reviewed periodically, compared with budgets, and variances investigated. ∙ Monthly statements should be mailed regularly to customers. ∙ Subsidiary ledgers should be reconciled periodically to the general ledger and any differences investigated. ∙ A separate department should investigate all customer accounts receivable inquiries. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Controls DATE CREATED: 1/20/2018 5:28 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 109. Accounts receivable risks In the financial statements, there are many risks associated with an audit that must be considered. Identify and discuss five separate risks that may exist related to accounts receivable. ANSWER:

Potential risks associated with accounts receivable include: ∙ Sales of receivables made with recourse and recorded as sales transactions rather than financing transactions. ∙ Receivables pledged as collateral against specific loans with restricted use. Disclosures of such restrictions are required. ∙ Receivables incorrectly classified as current when the likelihood of collection during the next year is low. ∙ Collection of a receivable contingent on specific events that cannot currently be estimated. ∙ Payment is not required until the purchaser sells the product to its end customers. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Cycle Risks DATE CREATED: 1/20/2018 5:30 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 110. Substantive procedures for sales and receivables assertions The auditor for Knowles, Inc. is attempting to determine whether the recorded sales and accounts receivable are supported by valid transactions. Identify the assertions being tested and develop the substantive procedures to be used to satisfy the auditor's objectives. ANSWER:

The auditor is testing the existence and occurrence assertion as the concern is from recorded amounts in the direction of source documents and transactions. The auditor would most likely perform the following substantive procedures: ∙ Confirm balances or invoices with customers based on a sample that is representative of the receivables (and possibly sales) population. ∙ Send second and possibly third confirmation requests. ∙ Examine subsequent collections on account for receivables. ∙ Scan sales journal for duplicate entries. ∙ Trace recorded amounts of sales and receivables to customer sales invoices, orders and bills of lading POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Tests for Revenue Cycle Accounts DATE CREATED: 1/20/2018 5:31 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 111. Accounts receivable presentation and disclosure Develop a list of substantive tests to test whether pledged, discounted, assigned, and related-party accounts receivable are properly disclosed. ANSWER:

The substantive procedures that would be used to determine whether all appropriate disclosures are made concerning accounts receivable and sales would include the following: ∙ Obtain confirmations from banks and financial institutions. ∙ Inquire of management. ∙ Review work performed in other audit areas. ∙ Review trial balance of accounts receivable for related parties. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:32 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 112. Improper revenue recognition Historically the accounting profession has come under fire for fraudulent financial reporting due to questionable improper revenue recognition. Identify at least six examples of questionable revenue recognition practices that an auditor must consider in performing an audit engagement. ANSWER:

Questionable and improper revenue recognition practices would include: ∙ Recording of sales in earlier periods, including channel stuffing. recording sales under "bill and hold" agreements, that is, recording a sale but Not ∙ shipping the goods or shipping at a later date, pending customer approval. ∙ Recording shipments to the company's own warehouse as sales to a customer. Undisclosed side agreements with customers giving them an unconditional right to ∙ return the product. ∙ Shipment of unfinished product or shipment before agreed to by customer(s). ∙ Over-shipment of products. ∙ Recording consignment sales as final sales. Recording sales with rights of return when the likelihood of return is high without a ∙ proper corresponding estimate for returns. Recording the entire amount of transactions involving operating leases up-front as ∙ sales transactions. ∙ Recording fictitious sales that never occurred. ∙ Shipping used goods that were previously returned as new. ∙ Applying revenue recognition principles improperly and aggressively. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Revenue Recognition DATE CREATED: 1/20/2018 5:34 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 113. Analytical Procedures Explain ratio analysis as an analytical procedure used by auditors. Give examples of the ratios that auditor might want to compute for revenue cycle accounts. ANSWER:

Ratio analysis is useful in highlighting account balances that are out of line or different from reasonable expectations. Ratios can be compared across time for a client, as well as compared with the industry ratios. The approach to ratio analysis is similar to what a financial analyst would perform in examining a financial statement. Auditors might want to compute ratios like: *Gross margin analysis, including a comparison with industry averages and previous year’s averages for the client *Turnover of receivables (ratio of credit sales to average net receivables) or the number of days’ sales in accounts receivable *Average balance per customer *Receivables as a percentage of current assets *Aging of receivables *Allowance for uncollectible accounts as a percentage of accounts receivable *Bad debt expense as a percentage of net credit sales *Sales in the last month to total sales *Sales discounts to credit sales *Returns and allowances as a percentage of sales POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.05 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/20/2018 5:35 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 09 114. Requirements for confirming accounts receivable Confirmation of accounts receivable is required by auditing standards unless certain conditions exist. Identify the conditions that will be present in an audit that does not confirm accounts receivable. ANSWER:

The auditor is required to confirm accounts receivable unless one of the following conditions exist: ∙ Accounts receivable are not material (or there are no receivables). The use of confirmations would be ineffective (recipients would not give full ∙ consideration). The auditor's combined assessment of inherent risk and control risk is low, and that ∙ assessment, in conjunction with the evidence provided by other substantive tests, is sufficient to reduce audit risk to an acceptably low level. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:37 AM DATE MODIFIED: 1/20/2018 7:49 AM 115. Confirmations of receivables You are performing the financial statement audit of Maple Bank. Maple has a large number of customers with consumer loan accounts. The loan accounts have balances averaging $800 in a homogeneous population and the customers usually pay close attention to their balances. Your preliminary assessment of internal control over the loan area is that control risk is low and results of tests of controls support that assessment. Inherent risk is deemed to be lower as well. Discuss the confirmation process and the types of confirmations that may be used for the audit of Maple Bank. Which confirmation type would you select for Maple and why? ANSWER:

Auditors may select positive or negative confirmations depending on the circumstances. Positive confirmations are used in most situations where the client’s customers are asked to respond to the request in writing whether they agree or disagree with its contents. Negative confirmations, on the other hand, are only returned by the client’s customers if they disagree with the information listed. Negative confirmations may be used only in certain situations. In the case of Maple Bank, an argument could be made for either form of confirmation to substantiate certain assertions relating to the loan receivable balances. Positive confirmations could be used with statistical sampling methods; however, the auditor may forgo efficiency because of the tedious nature of positive form confirmation. Negative confirmations may be used if it is concluded that the balances represent a large number of bank customers

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Chapter 09 and are small, environmental risk is assessed low, and the customer is expected to give full consideration to the request. It may be a good idea for the auditor to use negative form confirmations in the case of Maple as consumer loans are usually smaller in balance ($800 average), the balances represent a large base of customers, and control risk and inherent risk are lower. The banking customers may also be expected to read the confirmation and to check it against their balances. This form, however, may not be used with statistical methods of selecting the sample and projecting errors. {Note: A student may also conclude that the balances are not small enough to use negative confirmations. This assessment is judgmental in nature and more information and experience would be needed to make this determination. The objective of this essay is to assess the student's understanding of positive versus negative confirmations and the confirmation process.} The auditor must also keep control of the confirmations as the sample is selected; confirmations are prepared, mailed, and then returned to the audit firm location. Though the confirmation may be on client letterhead and signed by the appropriate officer, the auditor will mail the confirmations and offer a return envelope addressed to the audit firm offices. The auditor will also prepare a confirmation summary if positive confirmations are selected. This summary will assist the auditor in monitoring the extent of exceptions, including errors, and following up on such matters and non-returned confirmation letters. It will also be used in determining the extent of misstatements found in the sample for projection back to the population. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Receivable DATE CREATED: 1/20/2018 5:38 AM DATE MODIFIED: 1/20/2018 7:49 AM 116. Confirmations of receivables at an interim date When internal controls are strong, the auditor may decide to confirm receivables before year end. Roll-forward procedures are then used to obtain adequate evidence for the roll-forward period. Discuss why the auditor would want to confirm receivables before balance sheet date, the risks involved, and at least three of the roll-forward procedures that the auditor performs to gain assurance on the roll-forward period. ANSWER:

The auditor usually prefers to perform as many audit procedures as possible before balance sheet date in order to better spread out the work since many clients have a December 31 year-end. However, collecting evidence before year-end increases the risk that the account may be materially misstated since the evidence is collected before the completion of the entire year. As a result, the auditor has to perform a cost/benefit analysis as to whether it is beneficial to gather evidence at the interim. If there are good controls and a high degree of reliability can be achieved using roll-forward

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Chapter 09 procedures for the roll-forward period then performing confirmations at the interim makes sense, e.g., with property, plant and equipment accounts. Depending upon their materiality and risk of misstatement, confirming receivables at the interim may or may not be a useful procedure since there may be no reduction of work after the balance sheet date. The auditor is responsible to gather sufficient, competent evidence for the entire fiscal year, not just up to the roll forward period. If the auditor decides that it is useful to confirm receivables at the interim, the evidence must be collect to extent that conclusion to the year-end. Common roll forward procedures to do this are: * Compare individual balances at the interim with the year-end and confirm any that have substantially increased. * Compare monthly sales, collection, sales discounts, and sales returns and allowances during the roll forward period with those for prior months and prior years to see if they appear out of line, in which case corroborative evidence of management’s explanation has to be collected. * Reconcile receivable subsidiary records to the general ledger at both the interim and the year-end dates. * Test the cut-off of sales, cash collections, and credit memos for returns and allowances at year-end. * Scan journals to identify receivables postings from unusual sources and investigate unusual items. * Compute the number of days’ sales in receivables at both the confirmation date and year-end, and compare these data with each other and with data from prior periods. * Compute the gross profit percentage during the roll-forward period, and compare that to the percentage for the year and for prior periods. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.09.08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Confirmations of Receivables at an Interim Date DATE CREATED: 1/20/2018 5:49 AM DATE MODIFIED: 1/20/2018 7:49 AM

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Chapter 10 1. A risk of fraud is not associated with petty cash funds because of the small amounts of money involved. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Petty Cash Funds DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 2. Automated controls over cash eliminate the inherent risks associated with the cash account. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 3. In auditing cash accounts, auditors typically focus primarily on the existence/occurrence and completeness assertions. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 4. Planning analytical procedures for cash balances typically include trend analysis and ratios for comparison with the auditor’s expectations. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 5. The audit of the cash account is inherently risky due to volume of activity, liquidity, and the account's susceptibility to fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 6. The existence of debt covenants with restrictions related to cash or working capital increase the risks of material misstatement in cash accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 7. The existence or occurrence assertion as related to cash is concerned with proper classification on the balance sheet. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 8. A lockbox is a mailbox type of depository device that is located in front of the client's premises, allowing customers to remit payment in a timely manner. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Cash Management DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 9. An assessment of the client's internal control over cash and marketable securities should take place during the performance of the substantive tests on these accounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 10. Cash and cash equivalents reported on the balance sheet may include debt securities that mature less than six months from the balance sheet date. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Presentation/Disclosure of Cash and Cash Equivalents DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 11. Skimming occurs when an employee makes a sale but does not record it and steals the cash. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 12. Because substantive audit procedures are largely ineffective for cash accounts, auditors typically focus on tests of controls when the risk of material misstatement is assessed at a high level. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 13. Electronic funds transfers have controls built into the process and do not require further reconciliation by the client. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 14. The auditor’s performance of an independent reconciliation of the client’s bank accounts provides evidence as to the rights and obligations of the year-end cash balances. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 15. Customer checks received at the client company should be restrictively endorsed within one week of receipt. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 16. A turnaround document is an effective control because it contains information useful for further processing of a payment received from a customer. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 17. In assessing risk relating to fraud, auditors brainstorm about potential fraud risks. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 18. Auditors usually perform relatively limited substantive analytical procedures for cash accounts and instead focus on substantive tests of details. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 19. Client management’s review of monthly bank reconciliations prepared by employees is an example of a control over the accuracy of cash balances that the auditor might test. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 20. Periodic bank reconciliations should be performed by the individual who makes the client’s bank deposits. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 21. Internal audits are seldom an effective deterrent to the theft of cash. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 22. Independent reconciliations of bank statement balances with the balance on the books should identify misstatements and any unusual banking activity. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 23. The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 24. Kiting is an example of a technique used to intentionally overstate cash. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-03 AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 25. The standard bank confirmation is used by the auditor to test for lapping. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 26. The standard bank confirmation should be sent to all banks used by the client during the year except those banks holding client accounts with a zero balance at year-end. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 27. The auditor may discover evidence of kiting by preparing an interbank transfer schedule. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 28. The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 29. Money laundering is designed to create the appearance that large sums of cash obtained from criminal activities, such as drug trafficking, originated from legitimate business sources. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 30. Smurfing involves the overstatement of a bank account by transferring funds at the end of the year to another bank account and failing to record the disbursement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 31. The cutoff statement is mailed to the client for an agreed-upon date and then copied for the audit files. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 32. The valuation/allocation and completeness assertions are usually the most relevant for auditing cash. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 33. The recording of a marketable security depends, in large part, on management’s intention with the investment. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 34. Notes issued by major corporations are known as commercial paper. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 35. The auditor obtains the current market value of marketable securities by confirmation with the holder of the security. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 36. Commercial paper is the term applied to notes issued by major corporations with poor credit ratings. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 37. Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 38. The valuation assertion is most relevant to the audit of marketable securities. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 39. Testing debt securities and commercial paper would typically include an analysis of interest income. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 40. Gains and losses are not considered by auditors in testing marketable securities, as they do not need to be disclosed. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 41. The ending price of securities can be verified through reliable publications and websites such as the Wall Street Journal. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 42. All marketable securities are carried at fair market value on the balance sheet. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - -BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 43. Thinly traded securities have a greater inherent risk related to valuation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 44. Effective internal control over the cash account requires that the person responsible for making the bank deposit does not post the increase to cash in the accounting system. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 45. When there is a ready market for a financial instrument, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Financial Instruments DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 46. When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Financial Instruments DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 47. Many financial instruments offer a potentially higher return for investors along with a reduced level of risk. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-10 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Financial Instruments DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 48. Which one of the following risks is not a risk associated with cash? a. Large volume of transactions. b. Importance of meeting debt covenants. c. Complex valuation issues. d. Easy to manipulate. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 49. Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk? a. Client has cash holdings in foreign currency in a politically unstable country. b. Client has cash holdings in multiple U.S. financial institutions over a wide geographic area. c. Client holds investments in complex financial instruments. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 50. The cash account is significant to the auditor for which of the following reasons? a. The cash account balance is the culmination of a large volume of transactions. b. The cash account is not as susceptible to fraud as most other accounts. c. Cash is the only account that provides opportunity for fraud. d. Automated systems do not possess the capability to maintain strong internal controls over cash. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 51. Which of the following situations would normally be discovered by testing the bank reconciliation? a. Failure to bill a customer. b. Failure to include a deposit in transit on the bank reconciliation. c. Duplicate payment of a vendor’s invoice. d. Payment to an employee for more hours than she worked. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 52. Which of the following is not a normal edit test as part of computerized control for checks? a. Field checks. b. Self-checking digits. c. Cross-references. d. Reasonableness tests. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 53. Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Segregation of duties. b. Electronic payments. c. Authorization of transactions. d. Periodic internal audits. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 54. During the testing of a year-end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end did not clear the bank until the middle of the subsequent month. Which of the following is a likely explanation? a. A high probability of kiting. b. A high probability of lapping. c. The year-end cash disbursements records had been closed prior to year-end. d. Checks were issued before year-end but not mailed until the subsequent period. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 55. As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties? a. Segregation of duties becomes less important. b. Segregation of duties becomes more important. c. The importance of segregation of duties does not change. d. Segregation of duties becomes completely computerized without human involvement. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 56. Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail? a. Custody of receipts by the accounts receivable manager. b. Restrictive endorsements placed on checks as soon as they arrive. c. Weekly deposits to a secure bank. d. Reconciliation of bank accounts each month. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 57. Which of the following controls over cash would an auditor expect to observe? a. Reconciliation of the general ledger to the subsidiary ledger. b. Checks permanently marked "for deposit only" with the proper routing information. c. Internal audits of marketable securities held in the company's lockbox. d. Authorization privileges given only to those employees using the accounting system. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 58. What form of evidence is used by the auditor to verify bank reconciliation items? a. Cash counting observation. b. General ledger. c. Bank confirmation d. Cutoff statement. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 59. Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? a. Roles and activities falling within appropriate segregation of duties. b. Identification cards with picture identification. c. Encrypted passwords memorized by employees. d. The principle of "absolute knowledge." ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 60. Which of the following describes documents that accompany customer payments to help the clerk identify the payments? a. Receipts such as register tapes. b. Accommodation certificates such as authenticated customer tokens. c. Turnaround documents such as remittance advices. d. Checks stamped with restrictive endorsements such as customer signatures. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 61. Which of the following best describes kiting? a. Theft of cash for personal use and cover-up using the bank statement. b. A fraudulent scheme to overstate cash at year-end by manipulating year-end transfers between bank accounts. c. Manipulation of financial reporting by increasing both cash and debt by the same amount. d. Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 62. Which of the following represents a typical substantive audit procedure for cash balances? a. Verify material deposits in transit to subsequent statements. b. Review cash confirmations received by the client from the bank. c. Foot cutoff bank statements provided by the financial institutions. d. Perform kiting techniques to transfer cash between two client accounts. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 63. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash? a. The auditor sends the reconciliation to the bank for independent verification. b. The auditor performs the reconciliation for the client to record the proper cash balance. c. The auditor traces the book balance of the reconciliation to the cutoff bank statement. d. The auditor tests deposits in transit and outstanding items to other corroborating evidence. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 64. Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement? a. Verify the balance of cash per the bank's general ledger at the balance sheet date. b. Verify the reconciling items on the year-end bank reconciliation. c. Test for intentional lapping of bank transfers. d. Foot the cutoff bank statement for completeness. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 65. The auditor will send a standard bank confirmation to which of the following? a. Financial institutions of customers using the lockbox. b. Financial institutions for which the client has a balance greater than $0 at the end of the year. c. Financial institutions with which the client has transacted during the year. d. Financial institutions used by significant shareholders. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 66. The ease with which cash can be stolen is most related to which of the following risks? a. Control risk. b. Inherent risk. c. Detection risk. d. Liquidity risk. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in Cash Accounts DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 67. Which of the following best describes a fraudulent scheme to overstate cash assets at year-end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred? a. Lapping of cash. b. Kiting of cash. c. Embezzlement of cash. d. Restrictive endorsements of cash. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 68. The emphasis in verifying petty cash is normally on which of the following? a. Year-end balance. b. Controls over petty cash. c. Transactions for the period. d. Balance sheet classification. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 69. When auditing marketable securities, the auditor will do which of the following? a. Examine broker's advices evidencing purchase of securities. b. Recompute income. c. Foot schedule. d. Both A and B. e. All of the above. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 70. The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures? a. Comparing the values to those securities held by the auditing firm. b. Confirming the fair values with the client as of the close of the year. c. Comparing the fair values with the fair values of similar securities. d. Comparing the fair values to credible publications and websites. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 71. Which of the following items would not normally appear on bank reconciliations? a. Balance per bank. b. Outstanding deposits list. c. Balance per books. d. Outstanding checks list. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 72. Investments in securities are classified as which of the following? a. Held-to-maturity. b. Trading securities. c. Available-for-sale securities. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 73. Which of the following is the most relevant assertion with regards to the audit of cash? a. Existence b. Rights and obligations. c. Valuation and allocation. d. Presentation and disclosure. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions in Auditing Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 74. Which of the following would not be used as part of analytical procedures for marketable securities? a. Develop expectations about the level of amounts in ending balances. b. Develop expectations about the relationship between the balances. c. Verify ending balances prior to calculating the percent change. d. Review changes in the balances, risk composition, and classification types. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 75. Which of the following would the auditor use to test the existence of investments? a. Footing the schedule of recorded investments. b. Confirming or examining recorded investments. c. Reviewing a schedule of investments sold during the year. d. Recomputing interest and/or gains and losses. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 76. Which assertion related to investments is tested when the auditor examines the documents for any restrictions? a. Existence. b. Rights. c. Completeness. d. Valuation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 77. Which of the following types of securities is valued at amortized cost, subject to an impairment test? a. Held-to-maturity securities. b. Available-for-sale securities. c. Cash equivalent securities. d. Trading securities. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 78. Which of the following procedures does the auditor typically perform when testing the existence of cash? a. Counting cash at the depository institution. b. Inquiry of management. c. Sending a standard bank confirmation. d. Tracing the bank reconciliation to the general ledger. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 79. When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Rights. b. Valuation. c. Existence. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 80. Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end. Which of the following would the auditor likely suspect from this observation? a. Vendors are eager to get their payments. b. The reconciliation is accurate. c. Cash does not exist. d. The presence of held checks at period-end. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 81. The standard bank confirmation includes a designated place for the financial institution to report which of the following? a. Loans and collateral. b. A reconciliation of the lockbox. c. Cash held on consignment. d. Maturity dates for certificates of deposit. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 82. Which of the following is not a common test of controls for marketable securities? a. Review the minutes of the board meetings. b. Review broker’s advice for accurate recording of security. c. Inquire of management about its process for reclassifications. d. Review reports of internal audits. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 83. Which of the following would be used by the auditor to address the possibility of kiting? a. Cut-off bank reconciliations. b. Interbank transfer schedules. c. Bank confirmations of account balances. d. Bank confirmations of loan guarantees. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 84. Interbank transfer schedules are used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Embezzlement by omitting outstanding checks on reconciliation. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 85. The cutoff bank statement is used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Omitting outstanding checks on reconciliations. d. All of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 86. Which of the following would not be included as part of the documentation related to the substantive procedures for marketable securities? a. A schedule of marketable securities prepared by the client. b. Reports of any outside valuation experts. c. Calculation of any potential impairments. d. Policies over purchase or sale of marketable securities. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 87. Which of the following is not an internal control the auditor would expect to find in place for all cash processing systems? a. Restrictive endorsement of checks. b. Independent reconciliation. c. Walkthrough. d. Prenumbered cash receipt documents. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 88. Which of the following is a cash management technique frequently used by management? a. Cash management agreement with financial institutions. b. Lockboxes. c. Electronic funds transfers. d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 89. The auditor prepares a schedule for marketable securities. Which of the following is not one of the items in the schedule related to the value of the securities? a. Cost. b. Year-end market value. c. Carrying value for debt instruments. d. Interest and dividends. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 90. Which of the following types of financial instruments is a contract between a buyer and a seller in which the buyer has the right (but not the obligation) to buy an agreed quantity of a specified commodity or financial instrument at a certain time for a certain price. a. Put option. b. Call option. c. Hedge. d. Collateralized purchase option. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-10 STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Complex Financial Instruments DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM

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Chapter 10 91. Which of the following is a risk associated with complex financial instruments? a. Management’s objectives in entering into such transactions may relate to misstating the financial statements. b. Management and/or those charged with corporate governance may lack experience with complex financial instruments. c. Management may enter into such transactions without proper oversight from those charged with corporate governance. d. All of the above are risks. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-10 STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Complex Financial Instruments DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 12:55 PM 92. Auditing marketable securities

List the common substantive procedures used to address the risks relating to fraud in investments: ANSWER:

• Employment of a specialist to assist in fair value measurements. • Conduct background checks on and credit ratings of employees who have access to investment accounts, or the authorization to purchase or sell securities. • Require that the client produce original documentation of securities, not copies or faxes. • Trace dividend payments, interest payments, and sales of securities to cash deposits recorded on the bank statement. • Trace purchases of securities to cash disbursements on the bank statement. • Review any unusual journal entries in investment accounts.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Audits of Marketable Securities DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 1:07 PM

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Chapter 10 93. Types of Controls

Identify the types of controls used to minimize potential misstatements of cash. ANSWER:

In order to minimize possible misstatements of cash, the auditor expects to find the following internal controls: • Separation of duties • Restrictive endorsements of customer checks • Independent bank reconciliations • Computerized control totals and edit tests • Authorization of transactions • Prenumbered cash receipt documents and turnaround documents • Periodic internal audits • Competent, well-trained employees

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 1:09 PM

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Chapter 10 94. Fraud by kiting

Describe the concept of kiting and identify the best method for the auditor to use to detect kiting. ANSWER:

Kiting involves the transfer of cash from one bank account owned by the client to another account owned by the client for the purpose of fraudulently overstating the cash accounts. The overstatement is generated by recording the deposit at the end of the year but failing to record the disbursement from the other account at that time. The most effective and efficient method of uncovering kiting is the preparation of an interbank transfer schedule by the auditor. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 1:10 PM 95. Auditing marketable securities - assertions

Identify at least eight sources of evidence and testing the auditor may use in the audit of marketable securities by major assertion tested. ANSWER:

The auditor may use the following sources of evidence and testing in the audit of marketable securities: Assertion Evidence/Testing Existence Confirmation of securities held by trustees. Existence Observation of securities held by the client. Presentation & Disclosure Review of investment agreements, including specification of collateral. Presentation & Disclosure Determine management's intent to hold securities as short-term investments or for the longer term and document those intentions in the management representation letter. Presentation & Disclosure Determine whether securities are properly classified and disclosed as trading, available-for-sale, held to maturity or on the equity method and that any restrictions are appropriately disclosed. Valuation Review of collateral if the auditor determines that the collateral is important to the valuation of the account. Valuation Determine fair market value of recorded securities through reference to a credible financial publication or

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Chapter 10

Rights

Completeness

Completeness/Valuation Completeness

trusted financial website. Examine securities and related documents to ensure that the investments are in the name of the organization and that there are no restrictions. Review of broker's advices evidencing the cost or sales price of the securities and the timing of transactions for cutoff. Analytical review for reasonableness of interest and dividend income. Obtain and foot a schedule of all marketable securities held at period-end.

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Chapter 10 96. Financial Statement Assertions

Describe the management assertions relevant to cash and other liquid assets. ANSWER:

The five management assertions relevant to cash and other liquid assets are as follows: 1. Existence—cash balances exist at the balance sheet date 2. Completeness—cash balances include all cash transactions that have taken place during the period 3. Rights and obligations—the organization has title to the cash accounts as of the balance sheet date 4. Valuation—recorded balances reflect the true underlying economic value of those assets 5. Presentation and disclosure—cash and other liquid assets are properly classified on the balance sheet and disclosed in the footnotes

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Cash DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 1:13 PM

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Chapter 10 97. Bank confirmations

There are two parts in a standard bank confirmation. Discuss the purposes and what would be requested by each part and to whom it would be sent. ANSWER:

The standard bank confirmation is sent to each bank that the company has transacted business with during the year, whether it currently has a balance or not. Even though the cash balance is zero there may be loans or contingencies with a financial institution that require disclosure in the financial statements. The first part seeks information on the client’s deposit balances, on the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for all loans outstanding with the bank at year-end. The second part seeks information about any contingent liabilities. If loans are outstanding the auditor normally asks for copies of contracts and checks them for loan covenants that restrict the ability of the organization to act freely. Frequently the entire loan becomes due and payable if the loan covenants are violated. The auditor also usually makes inquiries about any cash management or other programs the client may have with the financial institution.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 12:55 PM DATE MODIFIED: 1/25/2018 1:14 PM

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Chapter 10 98. Cutoff statement

What is a bank cutoff statement and how is it used by an auditor? ANSWER:

The bank cutoff statement is a bank statement for the client prepared at an agreed-upon interim date which is sent directly to the auditor. Usually the auditor asks the client to have the bank prepare the cutoff statement for some period 10 to 15 days after the close of the year. The primary purpose of the cutoff statement is to enable the auditor to verify the reconciling items on the client's year-end bank reconciliation. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.10-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 1:02 PM DATE MODIFIED: 1/25/2018 1:06 PM

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Chapter 11 1. The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 2. The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accounts payable, and other expense accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 3. An indication of potential inventory fraud is that inventory levels are growing faster than sales. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 4. The acquisition process begins with a purchase of goods or services. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 5. Supply chain management has helped many companies improve the efficiency of operations. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Supply Chain Management DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 6. Management may intentionally misstate inventory balances by overvaluing items that are obsolete. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 7. Understatement of either purchases or ending inventory will result in a lower cost of goods sold and higher net income. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 AUDI.JOHN.18.11-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 8. Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 9. A networked software system linking a company’s information system to vendors whose offerings and prices have been preapproved by appropriate management is called an automated purchasing system. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 10. Cycle counts involve periodic testing of the accuracy of the perpetual inventory records. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Internal Controls in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 11. A purchase order identifies the quantity and description of products that have been received. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 12. Auditors should consider the inherent risk that management is more likely to understate, rather than overstate, accounts payable and expenses. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 13. A new vendor should be added to an authorized vendor database by an individual in the purchasing department. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 14. The auditor's primary concern with accounts payable is that of existence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Accounts Payable DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 15. Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 16. Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase order, and the receiving report. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 17. The purchasing department should make sure that only authorized goods are received, the goods meet order specifications, an accurate count of the goods received is taken, and that accountability is established to assure that all receipts are recorded. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 18. In an audit where there is a heightened risk of fraud related to inventory, the auditors may want to observe all inventory locations simultaneously. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 19. The use of substantive analytical procedures applied to related expense accounts would not be used to determine if accounts payable were understated. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 20. Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 21. Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 22. When auditing accounts payable, the auditor would most likely review a sample of cash disbursements throughout the year to determine whether disbursements for goods and services are applicable to the subsequent year. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 23. The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 24. The lower of cost or market assumption is not important to valuation of inventory. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Inventory DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 25. Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 26. Many frauds are committed by overstating inventory accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 27. Inventory may become obsolete because of technological advances even though there are no signs of physical wear. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Obsolescence DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 28. Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Obsolescence DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 29. Auditing standards require the auditor to observe the client taking physical inventory. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 30. One reason for observing inventory is to determine the accuracy of client counting procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 31. Test counts are performed by the auditor only when it is not possible for the auditor to observe the client taking a physical inventory. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 32. It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient for the auditor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 33. During the inventory counting process, the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as “after inventory.” a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 34. Legal expenses are reviewed by auditors for possible litigation that would require recording or disclosure. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 35. A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and payment cycle. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 36. The cash account is not part of the acquisition and payment cycle. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 37. The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 38. Valuation is the most complex assertion related to inventory. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Inventory DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 39. Auditors observe the client taking physical inventory at year-end primarily to obtain assurance about the value of inventory. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 40. The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 41. Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 42. In computerized purchasing operations, the computer matches three documents—the purchase order, the receiving report, and the monthly statement—and if the three match within a prespecified tolerable limit, the invoice is approved for payment. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 43. The tracing of a sample of receiving reports through the recording process tests the completeness assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 44. Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts and agreeing them to general ledger and supporting documentation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 45. In observing the client’s inventory at year-end, the auditor makes test counts that are later traced into the client’s inventory compilation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM 46. Stable relationships are expected between specific accounts (for example, cost of goods sold and sales) that can be investigated for unusual discrepancies. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 8:13 PM DATE MODIFIED: 1/25/2018 8:13 PM

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Chapter 11 47. Which of the following activities is not included in the acquisition and payment cycle? a. Receipt of goods and services. b. Approval of items for payment. c. Application of cash receipts. d. Authorized request for goods and services. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 48. Which of the following accounts is not a major account in the acquisition and payment cycle? a. Inventory. b. Cost of goods sold. c. Accounts payable. d. All of the above are major accounts. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 49. Which of the following is a significant risk related to purchasing? a. Competitive bids are not required for purchases below a specified dollar amount. b. Purchase orders are generated electronically. c. Purchasing agents may enter into kickback arrangements with vendors. d. All of the above are significant risks. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 50. When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of which of the following? a. Performing kiting. b. Committing embezzlement. c. Receiving kickbacks. d. Stealing company assets. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 51. Reducing the risk of understated payables can be accomplished by focusing on which assertion? a. Existence. b. Rights. c. Presentation and disclosure. d. Completeness. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Accounts Payable DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 52. Which of the following is not a management assertion relevant to inventory? a. Existence or occurrence. b. Completeness. c. Rights and obligations. d. Accuracy. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Inventory DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 53. Which of the following is not an indicator of fraud in the acquisition and payment cycle? a. Theft of inventory by employees. b. Inventory shrinkage. c. Large manual adjustments to inventory accounts. d. Excess inventory because of a production slowdown. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 54. The internal control that requires that “checks are pre-numbered and accounted for” satisfies which assertion? a. Accuracy. b. Existence. c. Completeness. d. Posting and summarization. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 55. Which of the following would meet the need for additional control procedures when using computer-generated purchase orders? a. Establishment of maximum quantity limits that can be ordered within a given time period. b. Automated acceptance for high dollar levels. c. Purchase order copies sent by purchasing to receiving. d. Accounts payable department entering new vendors into the system. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 56. Which of the following signals a potential fraud that may cause the overstatement of inventory accounts? a. Reserves for contingencies are reducing rapidly. b. Inventory amounts are growing faster than sales. c. Repairs and maintenance accounts have significant credit entries. d. The purchase of manufacturing equipment is occurring at a rapid rate. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 57. Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements? a. Balance sheet. b. Income statement. c. Statement of cash flows. d. Both A and B. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 58. Which of the following is a major factor in management's ability to overvalue inventory without rapid detection by auditors? a. The limited volume of transactions in the inventory accounts. b. The auditor's assessment of inventory as a low-risk area. c. Complexity in the valuation of inventory. d. Consideration by the auditor of non-financial indicators of inventory fraud. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in Inventory DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 59. Which of the following is an example of the type of analytical procedures that an auditor would use for inventory? a. Number of day's sales in receivables compared to industry averages. b. Inventory turnover for the previous five years. c. Days outstanding in accounts payable. d. Salaries of marketing personnel as a percent of total inventory. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 60. Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle? a. Unexpected increases in the number of suppliers. b. A reduction in raw material costs. c. Maturing capital assets with no plan for replacement. d. Sales expenses growing in proportion to sales revenue. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 61. During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for? a. Occurrence. b. Presentation and disclosure. c. Completeness. d. Valuation or allocation. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Relevant Assertions in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 62. Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable? a. Examine a sample of cash disbursements made after year-end to determine whether the disbursements were for goods acquired in the previous year.

b. Reconcile vendor's statements with the accounts receivable trial balance. c. Examine production equipment for useful lives. d. Gather purchase orders immediately previous to and subsequent to year-end. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 63. Why should the client’s legal expenses be examined? a. To compare with previously released attorneys’ letters. b. To determine the types of fraud occurring in the organization. c. To ensure proper recording of vendor payables. d. To determine if there is any litigation pending or threatened. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Expenses DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 64. Which assertion has the greatest emphasis when auditing accounts payable? a. Existence. b. Completeness. c. Presentation. d. Obligations. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Accounts Payable DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 65. An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures? a. Analytical procedures. b. Tagging and tracing. c. Alternative procedures. d. Subsequent proof of cash. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 66. Which of the following is a required disclosure for inventory? a. Inventory valuation method used (FIFO, LIFO, moving average) and percentage of inventory valued under each method. b. LIFO or current cost if the inventory is valued using FIFO. c. Type of inventory system used (periodic or perpetual). d. All of the above. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Disclosures DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 67. A primary feature of automated control in the acquisition cycle includes which of the following? a. Authorization is no longer required. b. Limits as to the number of items that can be received by the warehouse. c. Calculated order quantities based on set criteria. d. Funds transfer at the request of the controller. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 68. Bar code scanning may best be utilized in the receiving process to accomplish which of the following? a. Match incoming goods with purchase orders. b. Notify the shipper that product has arrived. c. Order new items on behalf of the purchasing department. d. Record inventory that has been written off the books. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 69. When auditing expense accounts, which of the following would the auditor be least likely to subject to a detailed test of transactions? a. Legal expense. b. Utilities expense. c. Repairs and maintenance expense. d. Travel expense. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Expenses DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 70. Identify the proper sequence of the acquisition and payment cycle:

1. Approval of items for payment. 2. Authorized requisition for goods or services. 3. Cash disbursements. 4. Receipt of goods and services. 5. Authorized purchase of goods or services. a. 2, 5, 4, 1, 3 b. 2, 4, 5, 1, 3 c. 2, 1, 4, 5, 3 d. 2, 5, 1, 4, 3 ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:27 PM

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Chapter 11 71. Which one of the following accounts would an auditor most likely test by performing analytical procedures? a. Sales commissions expense. b. Legal expenses. c. Repairs and maintenance expense. d. Travel expense. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Testing Expenses DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 72. Which of the following is NOT a reason why inventory is a complex accounting and auditing area? a. Diversity of items in inventory. b. Low volume of activity. c. Easily transportable. d. Difficulty in applying the lower of cost or market principle. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Related to Inventory DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 73. Which of the following might an auditor do in testing for the existence of accounts payable? a. Review client’s financial statement disclosure. b. Review long-term purchase commitments. c. Perform a cutoff test of purchases and cash disbursements. d. Perform analytical review of related expense accounts. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Tests of Accounts Payable DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 74. Which of the following is not an inherent risk associated with inventory? a. Inventory accounts typically have a high volume of activity. b. Inventory is easily transportable. c. Inventory may become obsolete. d. Inventory costing methods frequently change from one year to the next. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 75. Which of the following is not an element of internal control for inventory? a. Authorization for all purchases. b. Proper accounting for receipt of inventory. c. Perpetual inventory system. d. Rapid introduction of new products without market studies. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Controls DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 76. Which of the following would the auditor most likely do when testing the existence assertion for inventory? a. Observe the client's count of the annual physical inventory and perform test counts. b. Review vendor invoices for the amounts recorded. c. Review open purchase orders at year-end. d. Trace raw material purchases to invoices and to the general ledger. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 77. Which of the following would the auditor most likely do when testing the valuation assertion for inventory? a. Confirm inventory on consignment. b. Examine receiving reports for inventory, tracing the recorded amounts. c. Observe the taking of physical inventory. d. Vouch inventory purchases to vendor invoices. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 78. The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion? a. Existence. b. Cutoff. c. Valuation. d. Rights. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 79. Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists? a. Confirmation of inventory with customers. b. Footing the inventory subsidiary ledger. c. Tracing inventory ordered by the client to receiving reports. d. Analysis of inventory turnover and sales reports. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 80. A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following? a. It requires that a full inventory count be taken at year-end by all warehouse employees. b. It allows management to calculate cost of goods sold at year-end. c. It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.

d. It better controls the receipt of goods. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inventory Systems DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 81. Which of the following is not a procedure that the auditor should perform related to the physical inventory count? a. Document the first and last tag numbers used. b. Take notations of all items that appear to be obsolete or are in questionable condition. c. Make counts of all items and record the counts for subsequent tracing into the client‘s inventory compilation. d. Observe whether there is any physical movement of goods during the counting of the inventory. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 82. The principle of lower of cost or market and the potential obsolescence of inventory are concerns for the audit team because of which of the following? a. They are uncommon and may not exist. b. They are a burden to the auditor in the undue amount of work caused. c. They are likely to occur in the last month of the year and cause cutoff problems. d. They are an inherent component of complexity related to valuation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 83. An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion? a. Existence. b. Completeness. c. Rights and obligations. d. Valuation. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 84. Which of the following is not an item reviewed by the auditor to test the client’s assertion related to the presentation and disclosure of inventory? a. The inventory valuation methods used. b. The amount of obsolete inventory on hand. c. The existence of contingent losses associated with long-term purchase commitments. d. The classification of inventory as raw material, work in process or finished goods. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 85. Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts? a. Send blank confirmations to vendors that ask them to furnish information about all outstanding invoices, payment terms, and payment histories.

b. Scan journals for unusual or large year-end transactions and adjustments. c. Obtain and examine documentation for payments of invoices that are for amounts just under the limit that typically requires some level of approval.

d. All the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 86. When testing a standard cost system, the auditor does not normally make which of the following inquiries? a. The method for developing standard costs. b. The method for identifying components of overhead and of allocating overhead to products. c. The method for identifying sales cutoff. d. The method used for allocating variances to inventory and cost of goods sold. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 87. The acquisition cycle begins with which of the following? a. A payment. b. A purchase order. c. A requisition. d. A receiving report. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 88. Which of the following is not a potential fraud indicator in the acquisition and payment cycle? a. Expenses that are significantly above or below industry norms. b. Expense accounts that have significant debit entries. c. Unexpected increases in gross margin. d. Capital assets that seem to be growing faster than the business. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify Risks of Material Misstatement DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 89. Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end? a. Observe the client taking inventory. b. Make selected test counts and trace into client’s inventory compilation. c. Look for slow-moving, obsolete, or damaged inventory. d. Review disclosure of inventory valuation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM 90. Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year-end? a. The control risk over inventory is high. b. The auditor will be able to review material transactions in the roll-forward period. c. The auditor can effectively test the year-end balance through a combination of analytical procedures and selective testing of transactions between the physical count and the year-end.

d. The auditor reviews the intervening transactions for evidence of any manipulation or unusual activity. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:21 PM DATE MODIFIED: 1/25/2018 8:21 PM

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Chapter 11 91. Acquisition and payment processes

What are the five major phases of the acquisition and payment process? ANSWER:

The five phases of the acquisition and payment process are:

1. Requisition for goods or services. 2. Purchase of goods or services according to company policies. 3. Receipt of goods or services. 4. Approval of items for payment. 5. Cash disbursements. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Acquisition and Payment Cycle DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:29 PM

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Chapter 11 92. Management assertions for inventory and accounts payable

Identify and describe the management assertions relevant to: (a) inventory and (b) accounts payable. Which assertion(s) is usually the most relevant for each account? ANSWER:

(a) The five management assertions relevant to inventory are: 1. Existence/occurrence—Inventory balances exist at the balance sheet date. 2. Completeness—Inventory balances include all inventory transactions that have taken place during the period. 3. Rights and Obligations—The organization has title to the inventory as of the balance sheet date. 4. Valuation or allocation—The recorded balances reflect the true underlying economic value of the inventory. 5. Presentation and disclosure—Inventory is properly classified on the balance sheet and disclosed in the notes to the financial statements. (b) The five management assertions relevant to accounts payable are: 1. Existence/occurrence—Accounts payable balances exist at the balance sheet date. 2. Completeness—Accounts payable balances include all accounts payable transactions that have taken place during the period. 3. Rights and Obligations—The organization actually owes a liability for the accounts payable as of the balance sheet date. 4. Valuation or allocation—The recorded balances reflect the true underlying economic value of the liability. 5. Presentation and disclosure—Accounts payable is properly classified on the balance sheet and disclosed in the notes to the financial statements. The existence and valuation assertions are usually the most relevant for inventory. Completeness is usually the most relevant assertion for accounts payable. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Inventory and Accounts Payable DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:35 PM

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Chapter 11 93. Standard cost systems

When auditing a manufacturing concern, what inquiries would the auditor likely make about the standard cost system? ANSWER:

An auditor would be likely to make the following inquiries about a standard cost system used by a manufacturing concern: ∙ The method for developing standards costs. ∙ How recently the standards have been updated. ∙ The method for identifying components of overhead and allocating overhead to products. ∙ The methods used for identifying variances, following up on their causes, and allocating them to inventory and cost of goods sold. ∙ Procedures for assigning raw material costs to products or cost centers.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Standard Cost Systems DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:37 PM

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Chapter 11 94. Preparing for an inventory observation

In the audit of inventory the auditor must perform important procedures prior to the actual observation. Identify the steps the auditor must take prior to the day the inventory is actually counted. ANSWER:

Prior to inventory-taking day the auditor should: ∙ Meet with the client to discuss procedures, timing, location, and personnel involved in the taking of inventory. ∙ Review the client's plans for counting and tagging inventory items; determine that the procedures are sufficient to ensure an accurate inventory. ∙ Review the inventory-taking procedures with all audit personnel; familiarize them with the nature of the inventory, potential problems, and any other information they may need. ∙ Determine whether specialists are needed to identify, test, or assist in correctly identifying inventory items.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Inventory DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:38 PM

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Chapter 11 95. Physical inventory procedures

Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken. ANSWER:

∙ Obtain a map of the area and a schedule of inventory counts to be made for each area. ∙ Obtain a list of sequential tag numbers to be used. ∙ Observe the procedures the client has implemented to shut down receipt or shipment of goods. ∙ Observe that the client has shut down production. ∙ Obtain document numbers for the last shipment and receipt of goods before inventory is taken. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Inventory DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:39 PM

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Chapter 11 96. Auditing accounts payable

What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three. Which primary assertion is tested through these approaches? ANSWER:

When auditing accounts payable, the auditor may: 1. Reconcile vendor statements or returned confirmations with recorded payables. This yields a higher level of assurance. 2. Test subsequent disbursements for proper recording as a payable as of either the balance sheet date under audit or in the subsequent period, as appropriate. This yields a moderate level of assurance. 3. Analytical review of related expense accounts to determine which accounts appear to be understated. This yields a very low level of assurance and should only be used where control risk and fraud risk are assessed as low for payables.

The primary assertion tested using the three approaches above is that of completeness. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Accounts Payable DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:40 PM

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Chapter 11 97. Physical inventory procedures

Discuss the procedures the audit team will most likely perform during the physical observation of inventory. ANSWER:

The audit team will observe the counting of inventory and note the following on inventory count working papers. ∙ The first and last tag number used in the section. ∙ All tag numbers and the disposition of all tag numbers in the sequence. ∙ The product identification, product description, units of measure, and number of items on a count sheet. ∙ Items that appear to be obsolete or of questionable value. ∙ All high-dollar-value items included in inventory. ∙ Movement of goods into or out of the company during the process of inventory taking.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Inventory DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:40 PM

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Chapter 11 98. Inventory obsolescence procedures

Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances. ANSWER:

Below are seven audit procedures that may be performed by the audit team for determining obsolete inventory items: 1. Noting potential obsolete inventory when observing the client’s physical inventory. 2. Calculating inventory turnover, number of days’ sales in inventory, date of last sale or purchase, and other similar analytic techniques to identify potential obsolescence. 3. Calculating net realizable value for products by referring to current selling prices, cost of disposal, sales commissions, and so on. 4. Monitoring trade journals and the Internet for information regarding the introduction of competitive products. 5. Inquiring of management about its approach to identifying and classifying obsolete items. 6. Comparing current sales with budgeted sales. 7. Adjusting for poor condition of inventory, reported as part of periodic cycle counts.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Inventory DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:41 PM

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Chapter 11 99. Inventory controls

What are some of the important controls that are expected to be included in a well-conceived inventory control system? ANSWER:

A well-conceived inventory control system should ensure the following: · All purchases are authorized. · There is a timely, accurate, and complete recording of inventory transactions. · Receipt of inventory is properly accounted for and independently tested. · Costs are properly identified and assigned to products; variances are analyzed, investigated and properly allocated to inventory and cost of goods sold. · A perpetual inventory system serves as the basis for management’s reports and assists in managing inventory. · Products are systematically reviewed for obsolescence, and appropriate accounting action is taken. · Inventory is periodically reviewed by management and appropriate action taken for excess inventory and technological obsolescence. · Market studies and quality control tests are run before new products are introduced. · Long-term contracts are closely monitored.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.11-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 8:25 PM DATE MODIFIED: 1/25/2018 8:44 PM

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Chapter 11 100. Comparison of Controls in Traditional and Automated Systems

Discuss the differences between a traditional receiving system and an automated integrated receiving system. ANSWER:

Traditional Receiving System ∙ Purchase orders are prepared and sent to vendors. ∙ Purchase orders are based on projected sales or production, or current inventory levels. ∙ Price is either negotiated or competitively bid among a number of vendors. ∙ Independent receiving function exists. ∙ Independent, sequentially numbered receiving documents are prepared. ∙ Accounts payable department matches purchase order, receiving document, and invoice and accrues accounts payable. ∙ Differences between goods received and goods ordered are identified before payments are made. Automated Integrated Receiving System ∙ Long-term contract is signed with vendor. ∙ Quantities are based on production plans or sales programs. Quantities and delivery times are updated monthly or biweekly depending on scheduling and shipping constraints. ∙ Price is locked in with a preferred vendor. ∙ Goods are delivered to production line. ∙ Accruals are set up based on contract. ∙ Payments are electronically transferred to vendor based on contractual terms. ∙ Processes are described in the contract to resolve difference between goods received and goods that were shipped by vendor.

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Chapter 12 1. Long-lived assets include only the tangible assets of an organization. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Significant Accounts, Disclosures, and Relevant Assertions DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 2. Long-lived assets typically represent the smallest single category of assets in many organizations. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Significant Accounts, Disclosures, and Relevant Assertions DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 3. Much of the inherent risk related to long-lived assets is due to the importance of management estimates. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 4. The auditor’s procedures should include a determination of the reasonableness of management’s estimate of useful lives of tangible assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 5. Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 6. To identify possible impairment of manufacturing equipment, the auditor can tour the facility during operations to determine if any of the machines are idle. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 7. Internal controls over long-lived assets should provide reasonable assurance that all purchases are authorized and properly valued. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 8. An inherent risk related to asset impairment is that management normally does not have incentives to write down asset values. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 9. The client should have methods in place to identify and account for intangible-asset impairments. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 10. A common technique used to fraudulently misstate financial statements involves the undervaluing of existing longlived assets. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 11. The auditor would be most likely to request a schedule of repairs and maintenance expense to test the existence of long-lived assets. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 12. The auditor would most likely review the depreciation policy and test depreciation calculations to test the valuation of long-lived assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 13. The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 14. The auditor typically makes a physical inspection of most of the material fixed asset acquisitions. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 15. An auditor is required to gain an overall understanding of internal controls related to long-lived assets for integrated audits, but not for financial statement only audits. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Control Risks DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 16. Asset impairment is not typically assessed by the auditor since it is a subjective management estimate. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 17. Knowledge of industry product trends is crucial to the auditor's identification of the potential for the impairment of assets. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 18. When the value of a long-lived asset has been impaired, the organization must write down the asset reflecting the decline in economic benefit of the asset. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 19. When an organization disposes of a long-lived asset, it should determine and record the gain or loss on the disposal of the asset. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Long-Lived Asset Accounts DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 20. Effective internal controls over long-lived assets include the use of identification tags secured to assets for proper tracking. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Internal Controls for Long-Lived Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 21. Estimating the amount of reclamation costs is an inherent risk associated with natural resources. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Natural Resources DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM 22. An inherent risk associated with intangible assets, such as a patent, is the accounting for research and development costs. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Intangible Assets DATE CREATED: 1/25/2018 9:48 PM DATE MODIFIED: 1/25/2018 9:48 PM

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Chapter 12 23. Brown, Inc., obtained a patent for its product five years ago and should expense the entire amount of the unamortized balance if the product is no longer sold. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Intangible Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 24. Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for long-lived assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 25. It is not important for an organization to have controls to track the location, quantity, condition, maintenance, and depreciation status of long-lived assets because the auditor gathers evidence related to these issues. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 26. Intangible assets are not subject to potential impairment of value because they lack physical substance. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Intangible Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 27. Natural resource companies cannot reassess the amount of reserves even if more information becomes available during the course of mining, harvesting, or extracting resources. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 28. When testing the existence/occurrence assertion for long-lived assets, the focus is typically on disposals of assets that took place during the year. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Long-Lived Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 29. Auditors must understand the business and economics of the client’s business in order to perform meaningful planning analytical procedures for long-lived assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 30. If planning analytical procedures identify some unexpected relationships, the auditor would conclude that there may be a heightened risk of material misstatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 31. Audit procedures for leases consist primarily of examining lease documents to determine the substance of the lease transaction and the proper accounting treatment. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Leases DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 32. The FASB standard on accounting for leases issued in 2016 requires most leases to be reported on the lessee’s balance sheet, which is a significant change from the previous accounting requirements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Accounting for Leases DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 33. If unusual or unexpected relationships related to long-lived assets are identified during planning analytical procedures, the planned audit procedures (tests of controls and substantive procedures) would be adjusted to address the risk of material misstatement. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 34. An auditor should compare the unaudited financial statements with both past results and industry trends to gain an indication about the possibility of fraud. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 35. If control deficiencies related to long-lived assets are identified, the auditor will automatically assess those deficiencies as significant deficiencies. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 36. The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 37. Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that includes analyzing depreciation expense as a percent of assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 38. Audit firms that have developed standardized programs for auditing long-lived assets do not need to customize the audit programs based on assessed risk of material misstatement because inherent risks related to long-lived assets are the same for all clients. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 39. If a company has only a few long-lived assets of relatively high value, the most efficient approach for an auditor would be to use tests of details for obtaining evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 40. The risk of material misstatement related to the existence of long-lived assets at Client A is considered low, while this risk at Client B is considered high. Sufficiency of evidence for testing the existence of equipment would be higher for client B. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 41. An inherent risk related to long-lived assets is the incomplete recording of disposals. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 42. For integrated audits, the auditor will test the operating effectiveness of important controls throughout the year with a greater focus on controls as of the client’s year-end. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 43. The auditor selects entity-wide controls for testing, but not transaction controls specific to long-lived assets. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 44. Goodwill is the excess of the purchase price over the fair market values of the acquired company’s tangible assets, identifiable intangible assets, and liabilities. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 45. Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 46. Goodwill has to be evaluated for impairment once a year, as well as on an interim basis at the time events and circumstances warrant. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 47. If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate income. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 48. In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 49. When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 50. Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 51. Audits of Level 3 assets are the most straightforward as they involve an observable, active market. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 52. Under accounting guidance issued by the FASB in 2017, a goodwill impairment loss will be recognized when the fair value of the reporting unit is less than its carrying value even if the difference is attributable to the fair value of other assets in the reporting unit being less than their respective carrying values. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM

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Chapter 12 53. An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:49 PM DATE MODIFIED: 1/25/2018 9:49 PM 54. Which one of the following factors is not an inherent risk associated with long-lived assets? a. Obsolescence of assets. b. Impairment of assets. c. Incomplete recording of disposals. d. Lack of physical controls over the long-lived assets. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 55. Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Obtaining knowledge of the client business. b. Reviewing the business plan related to major acquisitions. c. Reviewing the minutes of board of directors’ meetings. d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 56. Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate book value of new equipment. b. Impaired value of new equipment. c. Impaired value of old equipment. d. Inappropriate depreciation calculation for new equipment. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 57. Which of the following factors is not an inherent risk related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, effective controls, and professional judgment.

d. All of the above are inherent risk factors. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 58. The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Whether all purchases are authorized. b. Whether any machinery is inoperative in the production cycle. c. Management's strategy for assessing impairment. d. Estimates of depreciation expense. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 59. Which one of the following is not a management assertion relevant to long-lived assets? a. Existence. b. Completeness. c. Valuation. d. Reporting. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 60. Which of the following statements is true? a. Intangible assets should be recorded at fair market value. b. Intangible assets should be recorded at cost. c. Intangible assets should be recorded at future market value. d. Intangible assets should not be recorded. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 61. Which of the following is not a circumstance indicating potential impairment of intangible assets? a. A change in circumstances, such as the legal environment or business climate, that could affect the asset’s value. b. An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset.

c. The asset generates just as much cash flow as in the past. d. Losses or projections indicating continuing losses associated with an asset used to generate revenue. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 62. Which of the following expense accounts is associated with intangible assets with a definite life? a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. None of the above. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Long-Lived Asset Accounts DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 63. Which of the following expense accounts is associated with natural resources? a. Depreciation expense. b. Amortization expense. c. Depletion expense. d. Capitalization expense. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Long-Lived Asset Accounts DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 64. Which of the following long-lived assets presents the most difficulty in determining its cost? a. Equipment. b. Inventory. c. Patent. d. All the above are equally difficult in determining cost. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 65. Which of the following actions is not a potential fraud scheme related to long-lived assets? a. Impairment losses on long-lived assets are not recognized. b. Costs that should have been expenses are improperly capitalized. c. Amortization of intangible assets is miscalculated. d. All the above are potential fraud schemes. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 66. Which statement is true? a. Management is always reluctant to write down asset values. b. Intangible assets do not require effective controls because they have low inherent risk. c. Complex ownership structures may create challenges in the recording of assets. d. The incomplete recording of asset disposals understates the asset balance. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 67. Which of the following controls is not a typical control that affects multiple assertions for long-lived assets? a. Reviewing insurance policies for adequate replacement coverage of assets. b. Formal budgeting process with appropriate follow-up variance analysis. c. Periodic comparison of physical assets to subsidiary records with the general ledger. d. Periodic reconciliations of subsidiary records with the general ledger. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 68. Which of the following controls related to management’s asset impairment judgments does the auditor need to understand? a. A systematic process to identify assets that are not currently in use. b. Projections of future cash flows that is based on management’s strategic plans and economic conditions. c. Systematic development of current market values of similar assets prepared by the client. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 69. For intangible assets, controls should be designed to do which of the following? a. Identify and account for intangible asset impairments. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset.

c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures.

d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 70. Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 71. Which of the following information should be included in management’s documentation regarding intangible assets? a. Manner of acquisition. b. Basis for the capitalized amount c. Expected period of benefit. d. All the above should be included. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 72. When performing planning analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 73. An auditor’s review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Existence. b. Completion. c. Valuation. d. Rights and obligations. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 74. Audit procedures should be proportional to which of the following? a. Size of the client. b. Size of the firm. c. The assessed risks. d. The assessed misstatements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risks of Material Misstatement DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 75. Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Valuation. b. Cutoff. c. Existence. d. Rights. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 76. If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being tested? a. Completeness. b. Rights and obligations. c. Existence. d. Valuation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 77. Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected? a. Asset depreciation. b. Asset amortization. c. Asset impairment. d. Asset disposal. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 78. In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? a. Completeness. b. Existence. c. Rights. d. Presentation and disclosure. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 79. The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit procedure primarily tests which of the following assertions for the equipment account? a. Existence. b. Presentation and disclosure. c. Rights. d. Valuation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 80. Which one of the following does not constitute a probable relationship between accounts? a. Equipment and depreciation. b. Patent and amortization. c. Assets under capital leases and amortization. d. Oil reserves and depreciation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 81. Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Completeness. b. Rights and obligations. c. Existence. d. Valuation. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 82. If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Completeness. c. Presentation and disclosure. d. Rights and obligations. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 83. A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control? a. Inquiry. b. Observation. c. Inspection of documentation. d. Review of financial statements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 84. The auditor performs substantive procedures related to property, plant, and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing? a. Valuation. b. Rights. c. Completeness. d. Existence. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Tests DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 85. Which of the following assertions are usually the two most relevant assertions related to long-lived assets? a. Existence and presentation. b. Completeness and existence. c. Existence and valuation. d. Valuation and completeness. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 86. If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested? a. Presentation and disclosure. b. Existence. c. Completeness. d. Valuation. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 87. Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets? a. Make client inquiries. b. Examine property tax records. c. Send confirmations to insurance agents. d. Examine scrap sales accounts. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 88. Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion? a. Assess management’s impairment estimates. b. Examine documents of title. c. Recalculate amortization expense. d. Inquire of management about assets that are idle. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 89. As natural resources are used up, the client has to recognize which of the following types of expense? a. Depreciation expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Long-Lived Asset Accounts DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 90. After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the land to its original condition. What is the cost of this restoration called? a. Impairment expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 91. Which of the following items is not used by natural resource companies to estimate the asset value of natural resources over the life of the resource, e.g., oil or coal? a. Reserves. b. Depletion rate. c. Reclamation expense. d. Restoration rate. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 92. Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived assets? a. Assess management’s impairment estimates. b. Inquire of management about assets that are idle. c. Develop an independent estimate of amortization expense. d. All of the above are procedures used for testing the valuation assertion. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 93. Which of the following is not a typical internal control over long-lived assets? a. Reconcile physical asset inventory with the property ledger. b. Periodically reassess the appropriateness of depletion categories. c. Identify obsolete or scrapped equipment and write it down to scrap value. d. Periodically review management strategy and systematically assess the impairment of assets. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 94. Which of the following is not a typical internal control over intangible assets? a. Procedures to provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures.

b. Development of amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets.

c. Procedures to identify and account for intangible asset impairment. d. All of the above are typical controls for intangible assets. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Controls Over Long-Lived Assets DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 95. Which statement is true about a company’s choice of capitalization policy? a. All assets with a useful life of more than one year must be capitalized. b. The company’s policy must meet the minimum capitalization amounts established by GAAP. c. The company’s policy is usually determined relative to materiality. d. The company may elect to capitalize operating expenses which exceed the minimum threshold for asset capitalization. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 96. Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors? a. Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents.

b. Use the work of a specialist for asset valuations, including impairments. c. Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction. d. All of the above are fraud-related audit procedures. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 97. If no control deficiencies are identified, how will the extent of substantive testing required differ from a setting where deficiencies in internal control were identified? a. The extent of testing will be more. b. The extent of testing will be less. c. The extent of testing will be the same in the two settings. d. The extent of testing is not affected by control deficiencies. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 98. Which of the following is not a substantive audit procedure for leases? a. Obtain and read copies of lease agreements and develop a schedule of leases. b. Review relevant expense accounts and determine if there are entries related to leases. c. For all operating leases, determine that the client has recorded assets and lease obligations properly. d. Review the client’s disclosure of lease obligations for compliance with GAAP. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 99. Which of the following is a true statement about accounting for leases under the FASB standard issued in 2016? a. Fewer leases will be capitalized under the new standard. b. The standard does not require capitalization of any lease embedded in another contract. c. Classification criteria under the new standard apply only to lessees and not to lessors. d. The new standard requires companies to move leased assets and related liabilities out of footnote disclosures and onto the balance sheet.

ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 100. Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions? a. Valuing the assets upon acquisition. b. Valuing the liabilities upon acquisition. c. Measuring restructuring charges. d. Measuring the qualifications of personnel from the acquired company. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 101. Which one of the following is not an audit procedure used when testing restructuring charges? a. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring.

b. Evaluate the qualifications of management. c. Mathematically test the estimates. d. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 102. Which of the following is false regarding the valuation of goodwill? a. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit. b. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit.

c. Goodwill is tested for impairment quarterly. d. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities.

ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 103. Which of the following approaches for determining fair value of Level 3 assets is used by the auditor? a. Determining appropriate model and sensitivity of model. b. Reviewing contracts to determine if loss is other than temporary. c. Performing an analysis of volume of trading activity. d. Performing an analysis of trades on similar assets. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 104. Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets? a. Determining identical assets and active markets. b. Assessing client methodology and cash flows to originally estimate value. c. Determining appropriate model and inputs expected cash flows. d. Determining similar assets and relevant markets. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 105. Which of the following should the client have as part of its process for estimating fair value? a. A systematic process to identify each asset that is subject to realizable value estimation. b. A process to identify relevant historical values. c. An analysis of transactions that have taken place within the client’s organization. d. A realistic process to estimate future cash flows to discount back to a present value. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 106. In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1? a. Observable information on similar items. b. Nonexistence of active markets. c. Quoted prices on identical items. d. Relevant economic and industry factors. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 107. In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets? a. The correspondence of the client’s assets to similar assets in an active market. b. Contingent liabilities. c. Sensitivity of model used for marking to model. d. The performance of tests of controls. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 108. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3? a. Quoted prices for identical items in active, liquid, and visible markets. b. Unobservable inputs to be used in illiquid situations. c. Observable information for similar items in active or inactive markets. d. Unobservable inputs to be used in situations where markets do not exist. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 109. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective? a. Level 0. b. Level 1. c. Level 2. d. Level 3. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM 110. Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value? a. Mark to market model. b. Replacement model. c. Mark to model. d. Historical cost model. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment DATE CREATED: 1/25/2018 9:52 PM DATE MODIFIED: 1/25/2018 9:52 PM

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Chapter 12 111. Repairs and maintenance

Assume that an auditor determines that a client’s policy related to recording repairs and maintenance is reasonable, but the auditor has concerns about whether the policy is adhered to. What might cause such concerns and how will the auditor adjust the substantive procedures to be performed? ANSWER:

Some clients might be motivated to record some asset purchases as an expense in order to reduce taxable income. Management might attempt to not comply with the policy because of incentive to manipulate reported earnings, for example, decrease reported earnings in a good period and vice versa in a poor period. These incentives might arise because of compensation plans.

If the auditor perceives that such risks are applicable to a particular client, the auditor will adjust the procedures, usually by requesting that the client prepare a schedule of both fixed-asset additions and repair and maintenance expense transactions. Selected transactions from both schedules can be vouched to vendor invoices, work orders, or other supporting evidence to determine their proper classification. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Risks of Material Misstatement DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 9:56 PM

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Chapter 12 112. Relevant assertions for long-lived assets

List the five management assertions relevant for long-lived assets and explain how each one is relevant. ANSWER:

A. Existence or occurrence - The long-lived assets exist at the balance sheet date. The focus is typically on additions during the year. B. Completeness - Long-lived asset account balances include all relevant transactions that have taken place during the period. C. Rights and obligations - The organization has ownership rights for the long-lived assets as of the balance sheet date. D. Valuation or allocation - The recorded balances reflect the balances in accordance with GAAP. E. Presentation and disclosure - The long-lived asset balance is reflected on the balance sheet in the noncurrent section. The disclosures for depreciation methods and capital lease terms are adequate. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Assertions Relevant to Long-Lived Assets DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 9:56 PM

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Chapter 12 113. Audit approach for leases

Describe the substantive procedures typically used to test leases. ANSWER:

General substantive procedures for leases include: • Obtain copies of lease agreements, read the agreements, and develop a schedule of lease expenditures. • Review the lease expense account, select entries to the account, and determine if there are entries that are not covered by the leases obtained from the client. Determine if the expenses are properly accounted for. • Review the relevant criteria from the FASB’s codified standards (ASC) to determine which leases meet the requirement of capital leases. • For all capital leases, determine that the assets and lease obligations are recorded at their present value. Determine the economic life of the asset. Calculate amortization expense and interest expenses, and determine any adjustments to correct the financial statements. • Develop a schedule of all future lease obligations or determine whether the client’s schedule is correct by referring to underlying lease agreements. • Review the client’s disclosure of lease obligations to determine that it is in accordance with GAAP. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 9:57 PM

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Chapter 12 114. Fraud Risks

List potential fraud schemes related to long-lived assets. ANSWER:

∙ Overstatement of assets through overvaluing existing assets. ∙ Sales of assets are not recorded, and proceeds are misappropriated. ∙ Assets that have been sold are not removed from the books. ∙ Inappropriate residual values or lives are assigned to the assets, resulting in miscalculation of depreciation. ∙ Amortization of intangible assets is miscalculated. ∙ Costs that should have been expenses are improperly capitalized. ∙ Impairment losses on long-lived assets are not recognized. ∙ Fair value estimates are unreasonable or unsupportable. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 9:58 PM

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Chapter 12 115. Control Risks

What are some typical controls that affect multiple assertions for long-lived assets? ANSWER:

∙ Formal budgeting process with appropriate follow-up variance analysis. ∙ Written policies for acquisition and disposals of long-lived assets, including required approvals. ∙ Limited physical access to assets, where appropriate. ∙ Periodic comparison of physical assets to subsidiary records. ∙ Periodic reconciliations of subsidiary records with the general ledger. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 9:59 PM

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Chapter 12 116. Asset impairment

Describe what is meant by asset impairment and identify the sources of inherent risks related to asset ANSWER:

Asset impairment deals with management’s recognition that a significant portion of long-lived assets is no longer as productive as had originally been expected. When assets are so impaired, the assets should be written down to their expected economic value. ∙ Normally, management is not interested in identifying and writing down assets. ∙ Sometimes, management wants to write down every potentially impaired asset to a minimum realizable value. ∙ Determining asset impairment, especially for intangible assets, requires a good information system, a systematic process, good controls, and professional judgment. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 10:03 PM

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Chapter 12 117. Intangible assets - patents

Define what is meant by the term intangible asset, provide an example, and identify typical controls over intangible assets. ANSWER:

An intangible asset is one that lacks physical substance, such as patents. ∙ Management authorizations are required for intangible asset transactions. ∙ Documentation regarding intangible assets should be maintained, and such documentation should include: o Manner of acquisition (for example, purchased, developed internally) o Basis for the capitalized amount o Expected period of benefit o Amortization method o Amortization periods and calculations should be approved and periodically reviewed by appropriate personnel. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.12-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks DATE CREATED: 1/25/2018 9:53 PM DATE MODIFIED: 1/25/2018 10:04 PM

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Chapter 13 1. Valuation is a relevant assertion when auditing bond premium or discount. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 2. Stock issuances generally do not present valuation problems because most stock is issued in exchange for cash. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 3. Relevant accounts when auditing stockholders’ equity include dividends per share. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 4. Bonds are issued to finance major expansions or to refinance existing debt. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 5. The auditor is primarily concerned with overstatement when auditing bonds. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 6. An organization typically has many debt transactions during the year, with each individual transaction being material. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 7. A bond premium/discount amortization spreadsheet can be used to help assure that the bond is appropriately valued and disclosed in the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 8. Typically, the most relevant assertion related to debt is existence. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 9. Inherent risks related to debt primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 10. Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 11. Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 12. When an auditor is investigating the inherent risk associated with stock issuances/sales that are recorded in the wrong period, the auditor is most likely assessing the risks of material misstatements associated with the existence assertion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 13. Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 14. Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 15. Rights/obligations is the most relevant audit assertion associated with an inherent risk for finding stock options or warrants being granted without being properly approved. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 16. A potential fraud risk associated with debt is the intentional misclassification of short-term debt as long-term debt. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 17. If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 18. As part of brainstorming activities, the auditor might identify possible fraudulent transactions related to stockholders’ equity accounts that are the result of charging expenses directly to retained earnings rather than to the appropriate expense accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 19. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level only. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 20. Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt and stockholders’ equity transactions, the auditor needs to understand the controls that the client has designed and implemented to address those risks. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 21. A typical control for stockholders’ equity transactions is for the board of directors to approve all stock transactions (including options and warrants). a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 22. When identifying and assessing control risks of material misstatement associated with debt and stockholders’ equity transactions, documentation is only required for integrated audits, not financial statement only audits. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 23. Normally, an auditor can gain an understanding of internal controls by means of a walkthrough of the process, inquiry, observation, and review of the client’s documentation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 24. When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 25. When planning the audit related to stockholders’ equity transactions, the auditor is not required to perform planning analytical procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 26. Trend analyses are typically used as planning analytical procedures related to debt. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 27. If planning analytical procedures do not identify any unexpected relationships related to debt, the auditor would conclude that there is not a heightened risk of material misstatements in these accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 28. If there were unusual or unexpected relationships, the planned audit procedures (tests of controls, substantive procedures) would be adjusted to address the potential material misstatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 29. When planning the audit related to debt, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 30. Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt, including interest, using only substantive procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 31. Using substantive procedures to test debt is most appropriate because there are a relatively large number of transactions involving immaterial dollar amounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 32. A substantive approach using only tests of controls is most commonly used to audit equity accounts. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 33. For both debt accounts and stockholders’ equity accounts, evidence would typically be obtained only through substantive procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 34. When obtaining evidence about internal control operating effectiveness, the auditor will select only entity-wide controls for testing. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 35. For integrated audits, a typical test of controls may include an inquiry of personnel performing the control. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 36. For financial statement audit purposes, when auditing debt and stockholders’ equity transactions, the auditor will most likely perform a substantive audit, and therefore will not perform tests of controls for the debt and equity accounts. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 37. If the auditor identifies control deficiencies, the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 38. Confirmations are not a substantive procedure designed to obtain evidence on the completeness of debt. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 39. Stockholders’ equity accounts typically will be tested with only substantive analytical procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 40. The transactions in the stockholders’ equity accounts are typically tested using a statistical sampling approach. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 41. If interest expense recorded by the client is significantly lower than the auditor’s expectation, it may mean that interest payments have not been properly recorded, possibly having been charged to principal. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 42. When performing a substantive analytical procedure related to interest expense, the auditor will likely not test the client’s internal controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 43. A starting point for substantive tests of details on debt is to have the client provide a cash flow statement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 44. For additions to debt, the auditor traces the proceeds into the cash receipts records and the bank statement. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 45. To determine whether notes have been paid in full, the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 46. As a starting point for testing capital stock and equity transactions, the auditor should review a copy of the client’s articles of incorporation. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 47. When auditing debt and equity transactions, the auditor should be skeptical, and therefore alert to the possibility that management is managing earnings by not appropriately recording expenses, such as charging expenses directly to retained earnings or under-recording interest expense. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 48. If the auditor identifies a risk of material misstatement due to fraud related to debt or stockholders’ equity accounts, the auditor needs to determine the appropriate responses, potentially including changing the nature, timing, and extent of audit procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 49. Auditors can choose to test the client’s warranty reserves using primarily tests of controls and substantive analytical procedures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM 50. When auditing pension obligations, the auditor may hire an actuarial specialist to assist the audit team. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:23 PM DATE MODIFIED: 1/25/2018 11:23 PM

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Chapter 13 51. Which of the following is the auditor’s primary objective when auditing debt? a. Understatement of the debt obligation focusing on the completeness assertion. b. Proper valuation of bond premium or bond discount, including amortization valuation. c. Valuation of gains or losses on refinancing debt. d. Proper presentation and disclosure, including important restrictions contained in the debt. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 52. Which of the following is not typically included in the audit of debt? a. Interest expense. b. Interest income. c. Notes payable. d. Bonds payable. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 53. How are most bonds marketed? a. Through the board of directors. b. Through an underwriter. c. Through auditors. d. Through employees. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 54. Which of the following statements about bonds is false? a. They may be issued to finance major expansions. b. They may be issued to refinance existing debt. c. They account for many of the organization’s transactions. d. They are generally highly material to the financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 55. Which assertion is generally the most relevant when auditing the restrictions contained in debt? a. Completeness. b. Valuation. c. Proper presentation and disclosure. d. Existence. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 56. Which of the following is not a common debt covenant restriction? a. Maintenance of a minimum level of retained earnings before dividends can be paid. b. Maintenance of a minimum working-capital ratio. c. Specification of a maximum debt-equity ratio. d. Specification of a minimum earnings per share. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 57. Which of the following is not a relevant account when auditing stockholders’ equity? a. Treasury stock. b. Dividends. c. Sinking fund for plant expansion. d. Retained earnings. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 58. Which of the following is not a common transaction affecting stockholders’ equity? a. The purchase of treasury stock. b. The declaration and payment of dividends. c. The exercises and expirations of stock options and warrants. d. Bond amortization. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 59. Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation? a. When stock is issued for land. b. When stock is exchanged for another business. c. When stock options are issued and exercises occur. d. When stock is issued for cash. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 60. How would an auditor generally measure the value of a stock option expense? a. Fair value. b. Appraised value. c. By computing a weighted average value of all classes of stock authorized. d. All of these methods can be used. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 61. In auditing equity accounts, the auditor primarily focuses on which of the following two assertions? a. Valuation and completeness. b. Valuation and existence. c. Presentation and disclosure and valuation. d. Presentation and disclosure and completeness. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 62. When auditing the gains or losses on refinancing debt, the auditor primarily focuses on which assertion? a. Completeness. b. Existence. c. Valuation. d. Presentation and disclosure. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 63. When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion? a. Existence. b. Completeness. c. Presentation and disclosure. d. Valuation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 64. Which of the following would a bond indenture not provide information about? a. The time period before repayment. b. Whether the bond is convertible. c. Whether the bond is callable. d. The date the bond will be called. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 65. Which of the following would not typically be included as part of the balance sheet disclosures related to stockholders’ equity? a. Accumulated other comprehensive income b. Details on stock repurchases. c. Price/earnings ratios for stock. d. Prior period adjustments to retained earnings. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 66. Which of the following is not an inherent risk typically associated with the existence of dividends? a. Dividends are recorded in the wrong period. b. Dividends are recorded before declared. c. Dividends are not properly amortized. d. Dividends have not been approved before being declared. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 67. Which of the following is not an inherent risk typically associated with debt covenant compliance issues? a. Whether debt covenants are calculated accurately. b. Whether debt payment transactions are properly initiated. c. Whether compliance with debt covenants is appropriately disclosed. d. Whether compliance with debt covenants is appropriately reviewed. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 68. Which of the following is not an inherent risk typically associated with recording debt transactions? a. Interest expense not being properly recorded. b. Failure to accrue interest expense. c. Debt not being properly classified. d. Debt not being properly authorized. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 69. The inherent risk of proceeds from stock sales not being received is most likely related to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 70. An auditor determines that there is an inherent risk that all stock repurchased is not recorded as treasury stock. This determination is most likely tied to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 71. An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 72. An auditor determines that there is an inherent risk that a company has not included both the basic earnings per share and diluted earnings per share amounts in financial statements even though significant dilutive securities are part of the company’s complex capital structure. This determination is most likely tied to which of the following management assertions? a. Valuation. b. Presentation and disclosure. c. Rights and obligations. d. Existence. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 73. An auditor determines that there is an inherent risk that stock options exercised or expired remain on the organization’s books. This determination is most likely tied to which of the following management assertions? a. Valuation. b. Presentation and disclosure. c. Rights and obligations. d. Existence. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 74. Which of the following is not a potential fraud related to debt? a. Long-term or short-term debt is misclassified. b. Entire loan payments are charged to either principal or interest. c. Dividends are paid in violation of restrictive covenants. d. Debt is not properly authorized. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 75. Which of the following is not a potential fraud related to stockholders’ equity accounts? a. Stock sales or issuances are not authorized. b. Entire loan payments are charged to either principal or interest. c. Dividends are paid in violation of restrictive covenants. d. Stock options are back-dated. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 76. What type of risk is intentional failure by management to accurately disclose violations of debt covenants? a. Inherent risk. b. Fraud risk. c. Control risk. d. Detection risk. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 77. Which of the following statements is true regarding the identification and assessment of the risks of material misstatements by the auditor? a. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level.

b. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the assertion level.

c. As part of brainstorming activities, the auditor should identify possible frauds that could occur. d. All of these statements are true. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 78. Which of the following would an auditor not typically perform as part of gaining an understanding of the client’s controls related to debt? a. Review policies related to approval required for new debt. b. Inquire of management about the process for reviewing compliance with debt covenants. c. Review the client’s documentation of controls. d. Recalculate interest expense. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 79. In general, which of the following would an auditor not typically perform as part of gaining an understanding of the client’s controls? a. A walkthrough of the process. b. Inquiry. c. Observation. d. All of these are used to gain an understanding of the controls. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 80. Which of the following does an auditor consider when gaining an overall understanding of the client’s internal controls? a. Entity-wide controls at the account level only. b. Transaction controls at the account level only. c. Entity-wide controls at the assertion level only. d. Both entity-wide controls and transaction controls at the account and assertion levels. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 81. Which of the following would the auditor consider as part of the control environment related to debt? a. Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. b. Recalculation of the underwriter’s commission. c. Independence of the board of directors with respect to long-term financing. d. Inspection of documentation to confirm refinancing of debt. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 82. Which of the following are entity-wide components of internal control that can mitigate the risk of material misstatement related to debt? a. Risk assessment. b. Information and communication. c. Monitoring controls. d. All of these are entity-wide components of internal control. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 83. Which of the following is a typical control for debt? a. The board of directors approves all new debt. b. The stockholders approve all new debt. c. The CFO approves all new debt. d. Upper managers approve all new debt. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 84. Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants? a. The proper accounting for stock option grants is researched by the organization’s accountant. b. The analysis of the accountant regarding stock option grants is reviewed by the CFO. c. The analysis of the accountant regarding stock option grants is reviewed by the organization’s legal counsel. d. The analysis of the accountant regarding stock option grants is reviewed by the board of directors. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 85. Which of the following statements is true regarding planning analytical procedures for debt and stockholders’ equity transactions? a. Trend analysis would not typically be performed for debt. b. The long-term debt to equity ratio could be considered by the auditor as part of the planning analytical procedures. c. Because there are typically only a few stockholders’ equity transactions, the auditor is not required to perform planning analytical procedures for stockholders’ equity accounts.

d. If unusual or unexpected relationships are identified by planning analytical procedures, the auditor should stick with the original expectations of misstatements, because this could be an anomaly and bias the audit overall.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 86. Which of the following is not an example of typical analytical procedures related to debt? a. Perform a trend analysis of the balances in notes payable, interest expense, and accrued interest with prior periods, considering known client activities related to debt.

b. Calculate the total debt-to-equity ratio and perform a trend analysis with prior periods. c. Calculate the times interest earned ratio and perform a trend analysis with prior periods. d. Calculate the current ratio and perform a trend analysis with prior periods. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 87. Which of the following is not true regarding planning analytical procedures performed by the auditor when planning the audit? a. The primary planning analytical procedure for stockholders’ equity accounts is a comparison of current year account balances with prior year account balances.

b. If there are unusual or unexpected relationships, the planned audit procedures would be adjusted to address the potential material misstatements.

c. The auditor should have an expectation as to the nature and magnitude of any account balance changes. d. Auditors show focus on just the numbers when performing analytical procedures. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Planning Analytical Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 88. Which of the following statements is true regarding the appropriate audit procedures to perform for debt and stockholder’s equity accounts? a. The auditor will usually decide to test debt, including interest, using only substantive procedures. b. Testing debt, including interest, is typically accomplished using only control procedures. c. When auditing stockholders’ equity transactions, the auditor commonly uses a control procedure approach, but uses only substantive procedures to test debt obligation transactions.

d. None of these statements is true. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 89. Which of the following is not true about auditing stockholders’ equity transactions? a. The auditor usually uses a substantive approach. b. The number of equity transactions with outside parties is usually small. c. The dollar amount is usually immaterial. d. An approach using only tests of details is most commonly used to audit equity accounts. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 90. For integrated audits, when does the auditor test the operating effectiveness of important controls? a. As of the beginning of the client’s fiscal year. b. As of the client’s year end. c. As of the end of the second quarter of the client’s fiscal year. d. None of these answers is correct. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 91. Which of the following is not true regarding appropriate tests of controls? a. The auditor selects controls that are important to the auditor’s conclusion about whether the organization’s controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts.

b. The client’s audit committee selects controls that are important to the auditor’s conclusion about whether the organization’s controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts.as of the client’s year end.

c. The auditor will select both entity-wide and transaction controls for testing. d. If the auditor wants to rely on controls for the financial statement audit, the auditor would test the operating effectiveness of those controls throughout the year.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 92. If tests of controls result in identified control deficiencies, how will the auditor assess those deficiencies? a. By estimating interest expense based on average interest rates and average debt outstanding. b. By comparing current year account balances with prior year account balances. c. By determining their severity and the impact on the opinion of internal control effectiveness. d. By calculating the long-term debt-to-equity ratio and performing a trend analysis with prior periods. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 93. Which of the following is not a typical test of controls when auditing debt and equity transactions? a. Inquiry of personnel performing the control. b. Comparing current year account balances with prior year account balances. c. Observation of the control being performed. d. Reperformance of the control by the auditor testing the control. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-07 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 94. Which of the following procedures would be included in the auditor’s audit program for long-term debt? a. Investigation of credits to the bond interest income account. b. Inspection of the accounts payable master file. c. Verification of the existence of the bondholders. d. Review debt loan agreements. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 95. Which of the following is not true regarding the testing of transactions in the stockholders’ equity accounts? a. The transactions are typically tested on a 100% basis. b. The transactions are typically tested on a sampling basis. c. The number of transactions is typically small. d. Most of these transactions are highly material. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 96. When auditing debt, which of the following is the primary substantive analytical procedure? a. Reading loan agreements. b. Developing an independent expectation of interest expense. c. Tracing bond proceeds to cash receipts. d. Confirming transactions with outside parties. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 97. Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure? a. Determine average interest rates. b. Determine average debt outstanding. c. Examine disaggregated data by type of debt. d. Examine an interest revenue schedule. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 98. Which of the following will an auditor not perform when looking for additions to debt? a. Trace the proceeds into the cash receipts records. b. Examine canceled notes. c. Obtain assurance regarding board approval of the debt through review of board meeting minutes. d. Trace the proceeds into the bank statement. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 99. Which of the following will an auditor not perform when looking for debt reductions? a. Examine proceeds into the cash receipts records. b. Examine canceled checks. c. Examine payments through the cash disbursements records. d. Examine canceled notes. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 100. Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt? a. Recalculating accrued interest. b. Reviewing debt agreements for the restrictive covenants. c. Using analytical procedures to analyze interest expense. d. Confirming debt with relevant outside parties. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 101. Which of the following procedures is a typical substantive procedure related to the relevant assertion of valuation and allocation for debt? a. Determine the related parties resulting from debt transactions. b. Reviewing debt agreements for the restrictive covenants. c. Recalculating accrued interest. d. Confirming debt with relevant outside parties. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 102. Which of the following is a typical substantive procedure related to the relevant assertion of presentation and disclosure for debt? a. Vouching additions and deletions to debt. b. Reviewing debt agreements for the restrictive covenants. c. Recalculating accrued interest. d. Confirming debt with relevant outside parties. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 103. If the auditor determines that the client’s current ratio is below a particular covenant level, which of the following would the auditor not do? a. Assess the effects of the violation. b. Assume that the debt will need to be reclassified, if the violation is not waived. c. Consider that the debt will be due and payable, if the violation is not waived. d. Issue an adverse audit opinion. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 104. As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform? a. Trace the proceeds of stock sold to the cash receipts journal. b. Review the minutes of the board of directors’ meetings. c. Examine documentation maintained by the transfer agent. d. Review a copy of the client’s articles of incorporation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 105. For those clients with treasury stock, which of the following would the auditor be least likely to perform? a. Obtaining confirmations from the stock transfer agent. b. Tracing transactions through the cash receipts journal. c. Tracing transactions through the cash disbursements journal. d. Reviewing a copy of the client’s articles of incorporation. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 106. Which of the following is not a substantive test of details for dividends? a. Calculation of the dividend payout ratio. b. Examination of the minutes of the board of directors’ meetings for authorization of the dividend per share amount. c. Examination of the minutes of the board of directors’ meetings for the dividend record date. d. Agreement of the dividend amount with the payment in the cash disbursements journal. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 107. If the auditor wants to obtain evidence as to whether the dividend payment was made to the stockholders who owned the stock as of the dividend record date, which of the following would the auditor do? a. Recalculate the dividends per share. b. Examine the minutes of the board of directors’ meetings for authorization. c. Trace the payee’s name on the canceled check to the dividend records. d. Determine that dividend restrictions are adequately disclosed in the financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 108. Which of the following is not true regarding restrictions on dividend payments? a. These restrictions typically arise when loan agreements prohibit the registrant from paying cash dividends without the consent of the lender.

b. In certain cases, restrictions at a subsidiary-company level exist such that the registrant’s subsidiary companies may not transfer amounts to the registrant without the consent of a third party.

c. Amounts subject to restrictions must be disclosed. d. The auditor will typically confirm with shareholders whether there are any side agreements regarding dividend restrictions.

ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 109. In those audits where there is a heightened risk of fraud related to debt, which of the following will the auditor not typically perform? a. Search public records to identify debt. b. Vouch and trace loan proceeds and debt payments. c. Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants. d. Obtain photocopies of supporting documents. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 110. In those audits where there is a heightened risk of fraud related to stockholders’ equity accounts, which of the following will the auditor typically not perform? a. Confirm terms of equity arrangements and shares held directly with shareholders. b. Account for and vouch all proceeds from stock issues. c. Confirm with shareholders whether there are any side agreements. d. Review equity authorizations in the board meeting minutes. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 111. Which of the following is not important documentation for substantive procedures for debt? a. Copies of the debt agreements. b. The client’s articles of incorporation. c. A summary of the calculations supporting compliance with debt covenants. d. Identification of the specific items tested. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 112. Which of the following is not important documentation for substantive procedures for capital stock and equity transactions? a. Confirmations with transfer agent or shareholders. b. The client’s articles of incorporation. c. A summary of the changes in equity accounts. d. A memo regarding audit ideas generated during the brainstorming session regarding potential frauds applicable to the capital stock and equity transactions.

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Chapter 13 113. Why is valuation of most stock issuances usually considered to be relatively straightforward? a. The number of transactions is small. b. The transactions are typically material. c. Most stock is issued for cash. d. There are no disclosure issues to worry about, since stock amounts are reported in the body of the balance sheet. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 114. Which of the following is not a long-term liability account with a high risk of material misstatement? a. Warranty reserves. b. Pension obligations. c. Other postemployment benefits. d. Marketable securities. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 115. Which of the following is not a key type of evidence that the auditor needs to examine with respect to pensions and postemployment benefits? a. Whether the actuarial firm hired by management is independent, capable, and objective. b. The appropriateness of the actuarial firm’s work. c. The reasonableness of significant interest rate assumptions. d. The length of illnesses that pension recipients contract. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 116. Which of the following is not an element of pensions and other postemployment benefits that is difficult to estimate? a. Projected lifetime of former employees that will receive a pension. b. The future earnings of employees prior to retiring for defined benefit plans. c. Long-term interest rates to discount future costs back to present value. d. Current amounts earned on pension plan assets. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM

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Chapter 13 117. Which of the following factors would be least likely to affect the estimate of the warranty liability? a. Changes in the product. b. Changes in the nature of the warranty. c. Changes in the sales staff. d. Changes in sales volume. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 118. An audit of the other postemployment benefits does not require estimates with respect to which of the following? a. Changes in medical expenses. b. Changes in coverage. c. Changes in average life expectancies. d. Changes in human resources personnel in charge of postemployment benefits. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-09 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities DATE CREATED: 1/25/2018 11:27 PM DATE MODIFIED: 1/25/2018 11:27 PM 119. Listed below are several inherent risks associated with stockholders’ equity.

REQUIRED: List the assertion associated with each of these. Inherent Risk 1. Proceeds are not received. 2. All stock repurchased is not recorded as treasury stock. 3. The cost of treasury stock that is subsequently retired is not Copyright Cengage Learning. Powered by Cognero.

Related Assertion

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Chapter 13 properly allocated among the appropriate accounts. 4. Dividends are recorded in the wrong period. 5. Stock options exercised or expired remain on the organization’s books. 6. Stock issued in exchange for goods/services is not properly valued. 7. Issuances/sales are not authorized in accordance with organization’s bylaws. 8. Dividends may be recorded and paid before being declared.

ANSWER:

Inherent Risk Related Assertion 1. Proceeds are not received. Existence 2. All stock repurchased is not recorded as treasury Completeness stock. 3. The cost of treasury stock that is subsequently retired Valuation is not properly allocated among the appropriate accounts. 4. Dividends are recorded in the wrong period. Existence 5. Stock options exercised or expired remain on the Rights/Obligations organization’s books. 6. Stock issued in exchange for goods/services is not Valuation properly valued. 7. Issuances/sales are not authorized in accordance with Existence organization’s bylaws. 8. Dividends may be recorded and paid before being Existence declared.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:32 PM

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Chapter 13 120. Barley Company is a medium-sized industrial firm that has been audited by your firm for several years. The only

interest-bearing debt owed by Barley is long-term notes payable of $300,000 held by First National Bank. The notes were issued 4 years earlier and will mature in 8 more years. Barley is highly profitable, has no pressing needs for additional financing, and has excellent internal controls of the recording of loan and related interest cost transactions. REQUIRED: 1. Based on this scenario, describe the auditing procedures that you think will be necessary for notes payable and related interest accounts. 2. How will your answer differ if instead Barley Company was unprofitable, needed additional financing, and had ineffective internal controls? ANSWER:

1. Auditing procedures necessary for Barley’s notes payable and related interest accounts in this scenario would be minimal. Aside from checking interest calculations and postings to the proper accounts as a matter of audit routine, the only major audit procedure would be to confirm the amount and provisions of the note with First National Bank. 2. If Barley was unprofitable, needed additional financing, and had ineffective internal controls, the story would be much different. It would be necessary to search for unrecorded notes by obtaining standard bank confirmations with specific reference to the existence of notes payable, reviewing the bank statements and reconciliations for new notes credited directly to the bank account by the bank, and analyzing interest expense to uncover a payment to a creditor who is not included on the notes payable schedule. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:33 PM 121. A CPA firm is engaged to audit the financial statements of Garrison Corporation. The company’s financial

statements have never been audited before. The stockholders’ equity section of Garrison Corporation’s balance sheet at year-end follows: Stockholders’ Equity: Capital stock—20,000 shares of $10 par value authorized: 5,500 shares issued and outstanding Capital contributed in excess of par value of capital stock Retained earnings Copyright Cengage Learning. Powered by Cognero.

$ 55,000 63,800 110,000 Page 61

Chapter 13 Total stockholders’ equity $228,800 Founded four years ago, Garrison Corporation has ten stockholders and serves as its own registrar and transfer agent. It has no capital stock subscription contracts in effect. REQUIRED: Prepare the detailed audit program for the examination of the three accounts composing the stockholders’ equity section of Garrison Corporation’s balance sheet. (Do not include in the audit program the verification of the results of the current-year operations.) ANSWER:

Audit Program for Stockholders’ Equity 1. Examine articles of incorporation, the bylaws, and minutes of the board of directors from inception to determine the provisions or decisions relating to the capital accounts. (Necessary only for the first year of the audit. Subsequent years will update the information.) Determine that the accounting records are in accordance with the provisions and that appropriate footnote disclosure is made. Extract pertinent date for the permanent file. 2. Examine stock certificate stub book and determine if it agrees with the capital stock account. Alternatively, if the stock is listed with an independent agent, confirm the stock transactions and current outstanding stock with the independent stock agent. 3. Schedule all entries to the accounts since inception. Vouch (examine documentation) supporting all entries into the accounts. Recompute major transactions to determine that the accounts have been properly classified and amounts credited to capital in excess are properly computed. 4. Examine retained earnings from inception: ∙ Schedule all entries into the account noting all that come from other than the annual closing of income and expense summaries. ∙ Examine support for all entries to retained earnings to determine if classification is correct. ∙ All stock dividends, or cash dividends, should be examined to determine appropriate valuation to retained earnings.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-06 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:42 PM

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Chapter 13 122. James Carson and Martin Tighe, CPAs have audited all the accounts on the balance sheet. James Carson argues with Martin Tighe that since retained earnings is a balancing amount, it requires no further examination. Martin Tighe, however, disagrees and argues that they should still choose to audit retained earnings. Who do you agree with and why? ANSWER:

Martin Tighe is correct. The retained earnings account should be audited because these audit procedures help to provide reasonable assurance that: ∙ no important items were overlooked in the examination of the account; ∙ the account is handled in accordance with GAAP, for example, only prior period correcting entries are recorded directly in retained earnings; and ∙ stock dividends are recorded correctly.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:43 PM 123. Stark Company’s 15% stock dividend should be accounted for as a debit to retained earnings for the fair market

value of the dividend and credited to capital stock and capital in excess of par. The auditor should be sure the board of directors authorized the dividend through review of the board minutes and should examine The Wall Street Journal or another financial reporting service to determine the fair market value of the dividend at the time of declaration. The auditor could then trace the amounts to their recording in the general ledger to determine if they were properly accounted for. ANSWER: Answer goes here POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:44 PM 124. The following covenants are extracted from the indenture for McMorris Industries’ 20-year bond. The indenture

provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance. Copyright Cengage Learning. Powered by Cognero.

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Chapter 13 REQUIRED: Assume that each of these is an independent scenario and identify the audit steps that should be taken or reporting requirements necessary in connection with (a) through (d). a. The debtor company shall endeavor to maintain a working capital ratio of 2.5 to 1 at all times, and, in any fiscal year following a failure to maintain this ratio, the company shall restrict compensation of the CEO and executive officers to a total of no more than $1,000,000. Executive officers for this purpose shall include the chairman of the board of directors, the president, all vice presidents, the secretary, and the treasurer. b. The debtor company shall insure all property that is security for this debt against loss by hurricane to the extent of 90% of its actual value. Insurance policies securing this protection shall be filed with the trustee. c. The debtor company shall pay all taxes legally assessed against the property that serves as security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee. d. A sinking fund shall be established and deposited with the trustee by semiannual payments of $450,000, from which the trustee shall, at his/her discretion, purchase bonds of this issue. ANSWER:

Any failure, or likely failure, of McMorris Industries to comply with the covenants should be reported in a note to the financial statements. Audit steps for each independent scenario follow: a. The balance sheets should be reviewed for each applicable period to determine compliance with the covenant. If the company is below the stated ratio, the auditor should review officer compensation to determine if it is in compliance with the covenant. b. Examine client copies of insurance policies or certificates of insurance to determine compliance with the covenant. The auditor should prepare a summary of all the scheduled information contained in the policies. In addition, the auditor should confirm the existence of the policies with the trustee. c. Examine vouchers supporting tax payments on all property covered by the indenture. If vouchers are questionable, confirm tax payments with the trustee who holds the tax receipts. d. Vouch the payments to the sinking fund. Confirm bond purchases and the sinking fund balance with trustee. Confirm any cancellation of bonds with the trustee or observe the canceled bond.

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Chapter 13 DATE MODIFIED:

1/25/2018 11:45 PM

125. You are engaged in the audit of Bordon Corporation, whose records have not previously been audited by your

firm. The company has an independent transfer agent, as well as a registrar for its capital stock. The transfer agent maintains the record of stockholders, while the registrar checks that there is no overissue of stock. Both the transfer agent and registrar are required to validate stock certificates. One of the seniors on the audit proposes that confirmations be obtained from both the transfer agent and registrar regarding the outstanding stock balance at the balance sheet date. If the confirmations agree with the books, then he proposes that no additional work is to be performed on the capital stock account. REQUIRED: Do you agree or disagree that this will be sufficient? If yes, give the justification for your position. If no, state specifically all additional steps you would take and why you would take them. ANSWER:

The senior’s proposal of limiting work to the confirmations is not justified by the facts in the scenario. Although the transfer agent and the registrar know the number of shares issued, they do not necessarily know the number of shares outstanding. Furthermore, an audit of capital stock includes more than just determining the number of shares outstanding. For example, do authorizations exist for the issuance of shares? What assets were received in payment of shares? How were the transactions recorded? Are there any subscription contracts? Confirmation from the registrar could not help in determining these things. Additional audit steps that need to be taken for the Bordon Corporation audit are: 1. Examine the corporation charter to determine the number of shares authorized and the special provisions for each class of stock if more than one class is authorized. 2. Examine minutes of stockholders' and directors' meetings to determine authorization for appointments of the registrar and the transfer agent; to determine authorization for the issuance or reacquisition of shares. 3. Examine provisions regarding capital stock in the corporation law of the state of incorporation—to determine any special provisions, such as those for the issuance of no par stock. 4. Analyze the capital stock accounts to obtain an orderly picture of stock transactions for use as a guide to other auditing procedures and as a permanent record. 5. Trace the consideration received for capital stock into the records—to determine what consideration has been received and how it has been recorded. 6. Examine and schedule treasury stock and review entries for treasury stock—to determine the existence of treasury stock as authorized and to determine that a proper record has been made. 7. Review registrar's invoices and cash disbursements—to determine that original issue taxes have been paid. 8. Compare dividends with stock outstanding at dividend dates—to determine that dividends have been properly paid and also to substantiate the stock outstanding.

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Chapter 13 9. Review subscription and option contracts, etc.—to determine the facts in regard to subscriptions and options and to determine that these facts have been properly recorded and that they are adequately disclosed. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:46 PM 126. The Thomas Corporation took out a 20-year mortgage on a new headquarters building on June 30, 20Y8, for

$3,000,000 and pledged its only manufacturing facility and the land on which it stands as collateral. The monthly payment to the mortgagor is $25,000 and was first paid on July 1,20Y8. Your firm has audited this client before, but the client has never had a mortgage in previous years. You are in charge of the current year audit for Thomas, which has a balance sheet date of December 31, 20Y8. REQUIRED: 1. Explain why it is desirable to prepare a schedule for the permanent file regarding the mortgage. What type of information should this include? 2. Explain why the audit of mortgage payable, interest expense, and interest payable should all be performed together. 3. List audit procedures that are typically performed to verify the issue of the mortgage, the mortgage and the interest payable account balances at December 31, 20Y8, and the balance in interest expense for 20Y8. 4. What type of information should be disclosed in the footnotes for this mortgage to help the auditor determine whether the completeness and presentation/disclosure assertions are satisfied? ANSWER:

1. It is a good idea to prepare an audit schedule for the permanent file for the mortgage information concerning the mortgage so it will be conveniently available for future years' audits. This information should include all the provisions of the mortgage as well as the purchase price, date of purchase, and a list of items pledged as collateral. It may also contain an amortization schedule of principal and interest. 2. The audit of mortgage payable, interest expense, and interest payable should all be performed together since these accounts are related and the results of testing each account affect the other accounts. The likelihood of misstatement in the client's records is determined more efficiently and effectively by performing these procedures together. 3. The audit procedures that should ordinarily be performed to verify the issue of the

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Chapter 13 mortgage, the balance in the mortgage and interest payable, and the balance in the interest expense accounts are: a. Determine if the mortgage was properly authorized. b. Obtain the mortgage agreement and schedule the pertinent provisions in the permanent file, including the face amount, payments, interest rate, restrictions, and collateral. c. Confirm the mortgage amount, terms, and collateral with the lending institution. d. Recompute interest payable at the balance sheet date and reconcile interest expense to the decrease in principal and the payments made. e. Test interest expense for reasonableness. 4. Generally accepted accounting principles require disclosures related to long-term debt. The terms of the mortgage are to be disclosed, including interest rates, maturity dates, five-year payment information, assets pledged as collateral, among other items. Significant restrictions on the activities of the company, such as maintaining cash or other compensating balances or restricting the amount of dividends that can be paid, should be disclosed. Thus, auditors should obtain copies of the mortgage agreement to determine that the client’s disclosures are complete and accurate. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.13-08 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity DATE CREATED: 1/25/2018 11:28 PM DATE MODIFIED: 1/25/2018 11:48 PM

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Chapter 14 1. Review activities that are completed towards the end of the audit are quite varied. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Completion Activities DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 2. Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 3. At the end of an audit, adjustments for misstatements that are “waived” will remain uncorrected. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 4. The auditor compares the total likely misstatements to each significant segment of the financial statements, such as total current assets, total noncurrent assets, total current liabilities, total noncurrent liabilities, owners’ equity, and pretax income, to determine if they are, in aggregate, material to the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 5. The total likely misstatements found during the audit are equal to the sum of known and projected misstatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 6. The materiality of a misstatement is based on only the quantitative amount of the misstatement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 7. An audit firm culture that emphasizes “doing the right thing” encourages auditors to deal with difficult issues in a short period of time. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 8. A culture that encourages auditors to seek consultation with other members of the audit firm will be more likely to result in auditors who will acquiesce to inappropriate or aggressive client preferences. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 9. Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 10. Clients can waive audit adjustments, but only for misstatements that are immaterial. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 11. If the client is publicly traded, Section 10A(b) of the Securities Exchange Act requires auditors to take action upon discovery of an illegal act if the act has a material effect on the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 12. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of the client’s internal control over financial reporting. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 13. The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 14. The SEC’s Staff Accounting Bulletin 108 mandates what is termed a dual approach to assessing materiality of uncorrected misstatements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 15. A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 16. When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 17. FASB has set forth four categories of potential losses that can be reasonably estimated. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 18. Auditors are responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 19. The primary source of evidence concerning contingencies is the client’s external attorney. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 20. Regarding loss contingencies, legal counsel should be instructed by the client to respond directly to the auditors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 21. If a lawyer refuses to furnish the requested information about the client’s contingencies to the auditor, the auditor should issue an unqualified audit opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 22. If the auditor determines that informative disclosures are not reasonably adequate, the auditor must identify that fact in the auditor’s report. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 23. Disclosures can be made either on the face of the financial statements in the form of classifications or parenthetical notations, or they can be made in the notes to the statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 24. A disclosure checklist is a convenient documentation format for evidence that the auditor adequately evaluated the client’s disclosures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 25. The auditor should consider matters for disclosure only while gathering evidence during the course of the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 26. The auditor’s report specifically covers the statements and disclosures made by management in the “Management Discussion and Analysis” (MD&A) section of the annual report. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 27. Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying notes. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 28. Noncompliance with laws and regulations includes only acts of omission by the entity that are considered to be unintentional and contrary to the prevailing laws or regulations. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 29. Auditing standards recognize that there are inherent limitations in an auditor’s ability to detect material misstatements relating to the entity’s compliance with laws and regulations. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 30. Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatements, including material misstatements related to noncompliance with laws and regulations. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 31. When obtaining reasonable assurance that the financial statements are free from material misstatements, auditors should consider the applicable legal and regulatory frameworks that apply to the entity. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 32. If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations, then the auditor should withdraw from the engagement. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 33. According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and design and maintain an adequate system of internal accounting controls. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 34. If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA), the auditor should notify the CFO about the violations, their circumstance, and the effect on the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 35. If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials, this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA). a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 36. Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period into the foreseeable future. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 37. If the auditor continues to have substantial doubt about the client continuing as a going concern, the auditor should evaluate the adequacy of the client’s related disclosures. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 38. An audit opinion is a guarantee that the business is a going concern. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 39. The going-concern assumption must be based on separate procedures that test the client’s ability to continue as a going concern. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 40. Two paragraphs should be added to the auditor’s report when the auditor concludes that substantial doubt remains about the client’s ability to continue as a going concern for a reasonable period of time. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 41. Management will often resist a going-concern modification because investors, lenders, and customers may lose faith in the business. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 42. Some auditors may be reluctant to issue a going-concern audit opinion because it may hasten the failure of the client company. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 43. Significant changes in the competitive market and a decrease in the competitiveness of the client’s products are potential indicators of going-concern problems. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 44. A number of studies of bankruptcies have shown that certain combinations of ratios, like the Altman Z-score, have good predictive power in indicating the likelihood of bankruptcy. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 45. Review analytical procedures help auditors assess the overall presentation of the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 46. By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 47. Analytical procedures may indicate that new controls need to be designed before completing the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 48. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful in assessing whether certain relationships make sense in light of knowledge obtained during the audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 49. Analytical procedures conducted during the final review phase of the audit should corroborate conclusions formed during the audit, which enables the auditor to draw conclusions upon which to base the audit opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 50. When management is unable to provide an explanation for a previously unrecognized risk identified through the review analytical procedures, the auditor must issue an adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 51. The auditor’s expectation when performing review analytical procedures will be more precise than if the auditor were performing substantive analytical procedures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 52. Type I subsequent events indicate conditions that did not exist at the balance sheet date, but that may require disclosure. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 53. An example of a Type I subsequent event would be a significant lawsuit that is initiated relating to an incident that occurred after the balance sheet date. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 54. Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 55. When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if this fact had been known at year-end. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 56. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report due to subsequent events after issuance of the audit report, the auditor should not try to obtain client cooperation, but should immediately notify any regulatory agency having jurisdiction over the client, such as the SEC, that the audit report should no longer be associated with the client’s financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 57. An additional procedure related to subsequent events is the reading of the meeting minutes for the board of directors meeting. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 58. Auditors should obtain a management representation letter at the end of each audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 59. Management’s refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 60. The auditor generally reports things that management could do better in a management letter as a constructive part of the audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 61. A management letter is the same as a management representation letter. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 62. A management letter is not required. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 63. As part of a quality audit, the audit firm must have policies and procedures in place for conducting an engagement quality review of each audit before issuing the audit opinion for public companies. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 64. If an experienced reviewer who was not a part of the audit team, but who has appropriate competence, independence, integrity, and objectivity, performs an independent quality review, this is referred to as a reoccurring partner review. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 65. The engagement quality review is a risk-based review. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 66. The audit documentation when performing an engagement quality review should include information such as how much the firm paid for the review. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 67. It is important that the auditor have a constructive and detailed dialogue with the audit committee on important aspects of the audit. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 68. The audit committee is an independent subcommittee of the board of directors. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 69. All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 70. The auditor should discuss with the audit committee any control deficiencies that were identified and were not remediated prior to year-end. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 71. Most audit firms use a schedule, often referred to as a summary of unadjusted audit differences (SUAD), to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements. Which of the following statements regarding this process is false? a. Individually immaterial misstatements are not entered on the SUAD. b. Possible adjustments to the financial statements that are left uncorrected are referred to as waived. c. Tax effects are shown on the SUAD. d. The nature of the misstatement, as well as the quantitative amount, is considered in the judgment of materiality. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 72. During the course of an audit, misstatements that are individually immaterial may be detected. What should the auditor do with these? a. Permanently pass on these immaterial misstatements as they do not individually impact the financial statements. b. Request that management footnote the immaterial misstatements in the financial statements for fair presentation. c. Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate. d. Roll them forward for three years when they will become material enough to adjust. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 73. Which of the following is one of the most important drivers of audit quality in cases where an auditor may feel some pressure to acquiesce to management’s demands to not require that misstatements be corrected in order to preserve a harmonious working relationship? a. Firm culture. b. Ethics training. c. Annual income of the CPA firm. d. PCAOB guidance. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 74. Which of the following would be considered “the nature of a misstatement” that might make it material? a. Comparing the sum of known and projected misstatements to total current assets. b. Comparing the sum of known and projected misstatements to total current liabilities. c. Comparing the sum of known and projected misstatements to pretax income. d. Having the effect of changing a positive earnings trend to a negative earnings trend. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 75. An audit firm culture that emphasizes “doing the right thing” does not incorporate which of the following to enhance audit quality? a. Encouraging auditors to seek consultation with other members of the audit firm. b. Yielding to management’s demands in order to promote additional service engagements. c. Taking sufficient time to deal with difficult client issues. d. Emphasizing long-term reputation over the immediate satisfaction of client preferences. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 76. According to the SEC’s Staff Accounting Bulletin 108, what approach is used when assessing uncorrected misstatements? a. Matrix approach. b. Dual approach. c. Percentage approach. d. Judgmental approach. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 77. Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to determine which of the following? a. Materiality. b. Quantitative effect. c. Aggregate effects. d. Nature of misstatement. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 78. The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and should not fall victim to an “all estimates are subjective” argument in order to waive which of the following? a. Contingent liability. b. Material misstatements. c. Unrecorded liability. d. Material adjustments. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 79. Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement? a. Rollover method. b. Iron curtain method. c. Percentage approach. d. Judgmental method. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 80. Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years? a. Rollover. b. Iron curtain. c. Dual. d. Percentage. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 81. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of which of the following? a. The client’s external controls. b. The client’s interim financial statements. c. The client’s internal controls over financial reporting. d. The client’s segment reports. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 82. Which of the following is required by the dual approach for assessing uncorrected misstatements? a. The application of the rollover method. b. The application of the iron curtain method. c. Simultaneous application of both the rollover and iron curtain methods. d. Sequential application of both the rollover and iron curtain methods. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 83. Which of the following is a category that does not reflect the contingent nature of losses and the guiding criteria organized around probability of outcomes as provided by the FASB? a. Guaranteed. b. Reasonably possible. c. Remote. d. Probable. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 84. Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies? a. Information about major contracts in which contingencies may be present. b. Documentation of communication with internal and external legal counsel of the client. c. Accounts receivable confirmations. d. Documentation of contingent liabilities contained in corporate minutes, correspondence from governmental agencies, and bank confirmations.

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Chapter 14 85. Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims? a. A letter of audit inquiry. b. A management representation letter. c. A management letter. d. A loss reserve confirmation. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 86. Which of the following items is not typically requested from the lawyer of a company regarding contingencies? a. Any limitations on the lawyer’s response such as not devoting substantial attention to the item or that the amounts are not material.

b. Information about the attorney’s other clients with similar contingencies. c. A description of each contingency, as well as progress and action that the company plans to take. d. A comment on the completeness of management’s list of contingencies and an evaluation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 87. When responding to the auditor as a result of the audit client's letter of inquiry, how might the attorney limit the response? a. Limit the response to litigations in process. b. Limit the response to asserted claims. c. Limit the response to matters to which the attorney has given substantive attention in the form of legal consultation or representation.

d. Limit the response to items which the attorney believes will result in loss to the client. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 88. Which of the following parties has the responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies? a. Management. b. The auditor. c. The audit committee. d. The client's attorney. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 89. When requiring a letter of audit inquiry from the client's attorney, which of the following information will be requested? a. A statement regarding conflicts of interest that the attorney may have with the client. b. The attorney's expert opinion of proper GAAP treatment related to client contingencies. c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies. d. Possible auditor defenses for third-party litigation related to ordinary negligence claims. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 90. Assume a situation in which an attorney who provided significant litigation counsel to a client refuses to furnish information requested in an audit. Which of the following descriptions best describes this situation from the auditor’s perspective? a. A departure from GAAP. b. A scope limitation. c. A violation of the attorney-client privilege. d. A contingent liability. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 91. Fulton Educational Company, Inc. has a matter of material litigation that is threatened, but that has not gone to trial. The auditor's consideration of such a matter will not include which of the following? a. Sending a letter to the client's attorneys for more information. b. Discussing the matter with the client and their insurance adjuster. c. Confirming with the harmed party regarding the amount that will be claimed. d. Assessing whether accrual or disclosure by the client was reported in accordance with GAAP. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 92. In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by management to the auditor, which of the following is the client’s lawyer not requested to provide? a. Information on the completeness of management’s list. b. Information on the compliance of the disclosures with GAAP. c. Information on the likelihood and range of possible losses. d. Information on any limitations on the lawyer’s response. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 93. Which of the following is false regarding the use of an audit checklist for disclosures? a. It is a convenient documentation format. b. It reminds the auditor of matters that should be considered for disclosure. c. It can be organized to include relevant professional guidance. d. It covers all potential unusual circumstances. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 94. Which one of the following is false regarding the adequacy of disclosures in a financial statement audit? a. The auditor should consider matters for disclosure while gathering evidence during the course of the audit, not just at the end of the audit.

b. One of the key disclosures is a summary of significant accounting policies used by the company. c. Disclosures should be limited to only checklist items. d. The auditor’s report does not specifically cover the statements made by management in the “Management Discussion and Analysis” (MD&A) section of the annual report.

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Chapter 14 95. Assessing disclosures does not require reasonable assurance of which of the following? a. The disclosures are understandable to users. b. Disclosed events and transactions have occurred and pertain to the entity. c. All material and immaterial disclosures have been reported. d. The information is disclosed accurately and at appropriate amounts. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 96. Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures? a. Management representation letter. b. GAAS. c. Inquiry of the CFO. d. Checklists. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 97. Which of the following is not an inherent limitation in an auditor’s ability to detect material misstatements relating to a client’s compliance with laws and regulations? a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relating to financial reporting may not capture noncompliance.

b. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and are not a matter about which the auditor can resolve.

c. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor.

d. Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the entity. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 98. What should an auditor do when becoming aware of violations of the FCPA? a. Contact foreign officials in the country where the client has business operations. b. Notify the audit committee about the violations, their circumstance, and the effect on the financial statements. c. Contact the U.S. marshals. d. Design internal controls to deter improper payments. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 99. Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA)? a. No U.S. person or companies that have securities listed on U.S. markets may make a payment to a foreign official for the purpose of obtaining or retaining business.

b. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company.

c. Designing and maintaining internal accounting controls is the role of internal auditors when management conducts business in a foreign country.

d. Certain payments made to an official to expedite the performance of the duties that the official would already be bound to perform are acceptable.

ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 100. On what information does the auditor base a going concern evaluation? a. On separate procedures. b. On the management discussion and analysis (MD&A). c. On information obtained from normal audit procedures performed to test management’s assertions. d. On the statement of cash flows for the current period. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 101. Which of the following is not an indicator of a potential going-concern problem? a. Negative trends in profitability. b. External matters increasing regulatory requirements. c. Significant changes in competition. d. An Altman Z-score above 3.0. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 102. If the auditor concludes that there may be a going-concern problem, which of the following is not typically evaluated to determine the reasonableness of management’s plans to overcome this problem? a. Management’s assumption about increasing prices or market share in relationship to current industry developments. b. Management’s assumptions about cost savings related to a reduction in the work force should be recomputed and evaluated to determine any hidden costs.

c. Management’s past track record related to delaying unnecessary expenditures. d. Management’s assumptions about selling off assets and their relationship to current market prices. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 103. If the auditor concludes that there may be a going-concern problem, which of the following should the auditor do? a. Withdraw from the engagement. b. Issue a qualified or adverse opinion. c. Identify and assess management's plan to overcome the problem. d. Communicate this fact with management that is one level above the controller. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 104. If the auditor concludes that there may be a going-concern problem with the client, which of the following is the best course of action for the auditor to follow? a. Issue a qualified opinion. b. Identify and assess management's plan to overcome the situation. c. Chart the negative trends as an addendum to the audit report. d. Increase fees to cover the probable exposure. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 105. Which one of the following would the auditor consider to be an indication of a potential going-concern problem? a. Loss of the controller to a competitor. b. Improper reporting of internal controls by management. c. Adverse key financial ratios. d. Large increase to sales in the month previous to year-end. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 106. Which one of the following is not a key condition indicating doubt about a client’s ability to continue as a goingconcern? a. Adverse key financial ratios. b. Employee strike that halts operations for several months. c. Company has not paid dividends to date. d. Default on bank debt. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 107. The auditor is responsible for evaluating the likelihood of a client continuing as a going concern for a reasonable period of time. What is considered to be a reasonable time period? a. One year from the audit report date. b. One year from the last day of field work. c. One year from the balance sheet date. d. Two years from the balance sheet date. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 108. The auditor is responsible for evaluating the likelihood of a client not being a going concern for the next 12 months. What basis will the auditor use to assess this issue? a. Management integrity. b. Control environment. c. Absolute assurance. d. Substantial doubt. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 109. Which of the following is not a potential indicator of going-concern problems for a client? a. Negative trends in key financial ratios. b. Loss of key personnel. c. Plan to sell nonessential assets. d. Default on a loan. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 110. If substantial doubt remains about going concern for a client at the end of the audit, then which of the following reports should the auditor typically issue? a. Issue an unqualified audit report. b. Issue an unqualified audit report with an explanatory paragraph. c. Issue a qualified report. d. Issue an adverse report. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 111. Which of the following is not a typical analytical procedure for the completion of the audit? a. Ratio analysis. b. Common-size analysis. c. Changes from the prior year. d. All of the above would typically be used. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 112. Before releasing the audit report, which of the following would the auditor most likely do? a. Issue a management letter. b. Perform an analytical review. c. Check on a schedule of partner rotation. d. Estimate client fee for subsequent services to be performed. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 113. During which of the following phases of the audit are analytical review procedures required by the auditing standards? a. The planning phase of the audit. b. The final review phase of the audit. c. Both the planning and final review phases of the audit. d. Performance of tests of controls. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 114. Which of the following statement is false regarding analytical procedures that help auditors assess the overall final presentation of the financial statements? a. By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report.

b. A basic five-step process for using analytical procedures applies. c. Analytical procedures provide evidence on whether certain relationships make sense in light of the knowledge obtained during the audit.

d. Auditing standards require the use of analytical procedures in the final review phase of the audit to assist in identifying ending account relationships that are unusual.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 115. Which of the following activities is not a step in the process for using analytical procedures? a. Define when the difference between the auditor’s expectation and the client’s balance would be considered significant.

b. Compute the difference between the auditor’s expectation and the client’s balance. c. Perform appropriate follow-up on all material and immaterial differences. d. Develop an expectation. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 116. Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What is typically another purpose of analytical procedures at the end of the audit? a. To document planning in accordance with GAAS. b. To provide the client with a value-added service in conjunction with audit activities. c. To ask "hard questions" about the company's results and its relationship to external factors. d. To increase the number of items reported in the management letter. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 117. Which of the following procedures is the least useful analytical procedure to indicate that further audit work needs to be performed before rendering the audit opinion? a. Developing a common-size analysis. b. Analyzing the dollar and percentage changes in each income statement item over the previous year. c. Comparing current earnings per share with earnings per share of the client’s primary competitor. d. Developing a ratio analysis. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 118. The date of the audit opinion of Upton Industries, Inc. reads: March 7, 20Y8 except for Note D, as to which the date is March 12, 20Y8. What is this an example of? a. Improper reporting. b. A GAAP violation. c. Dual dating. d. A contingent event. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 119. Assume that a major customer of the company that you are auditing files for bankruptcy during the subsequent period because of a deteriorating financial condition. Neither you nor the client becomes aware of the event until the bankruptcy filing is reported. What type of subsequent event would this be? a. Type I subsequent event b. Type II subsequent event c. Neither Type I or Type II d. Both Type I and Type II ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 120. Which of the following would be a Type II subsequent event? a. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end.

b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end. c. A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-pershare figures should be adjusted to show the retroactive effect of the stock dividend or split.

d. A material change occurs in the value of investment securities after the balance sheet date. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 121. Which one of the following subsequent events will least likely result in an adjustment to the financial statements? a. Material change in the amount of settlement of a lawsuit which had been estimated at year end. b. Bankruptcy of a customer who owes your client a material amount on open account at year end for which there is an inadequate allowance estimate.

c. Sale of a large block of inventory at a price materially below carrying value. d. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 122. Which one of the following would be the most effective procedure for discovering material Type II subsequent events? a. Updating the search for unrecorded liabilities. b. Resending all bank confirmations returned. c. Reading of the minutes of board of directors' meetings. d. Surprise cash count at random locations. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 123. After completing the audit report of Blair Corporation, but before delivering the audit report to the client, a tornado demolished the main production facility. In this case, what option is available to the auditor other than dual dating the report? a. Use the original audit report date. b. Go back to the client's office and extend testing to the date of the tornado, thereby taking responsibility for all events up to the date of the tornado.

c. Report the situation in the management representation letter. d. Issue a scope limitation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 124. When a subsequent event provides evidence about conditions that existed at the balance sheet date, what is the best course of action for the auditor to follow? a. Assign a specialist. b. Ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures.

c. Shop for an opinion that fits the desired type of event. d. Provide management with a new engagement letter to document the terms of the revised arrangement. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 125. When a subsequent event provides evidence about conditions that did not exist at the balance sheet date, what is the best course of action for the auditor to follow? a. Ensure that any necessary footnote disclosures be included with the statements. b. Ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures.

c. Give an inappropriate opinion. d. Provide management with a new engagement letter to document the terms of the revised arrangement. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 126. Which of the following is the best example of a Type I subsequent event? a. A related-party transaction occurs during the course of the audit. b. The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion.

c. Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for an amount in excess of estimates.

d. The company initiates an initial public offering subsequent to year-end. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 127. Which one of the following is not an example of an additional procedure that typically relates to the discovery of subsequent events? a. Partner review of all workpapers. b. Reading interim financial statements and comparing them to the audited statements to note significant changes. c. Reading the board of directors' minutes for all meetings during the year and after year-end through the end of field work.

d. Management inquiry. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 128. Which one of the following is the best example of a Type II subsequent event? a. Election of new board members. b. Change in auditors. c. Inability to collect from a significant customer. d. Acquisition of a subsidiary. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 129. Which of the following correctly states the period for which the auditor is responsible for subsequent events? a. The balance sheet date to the date the audit report is issued. b. The balance sheet date to the end of field work. c. The balance sheet date to the date of subsequent discovery of omitted procedures. d. All of the above. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 130. Which of the following is not a purpose of the management representation letter? a. It reminds management of its responsibility for the financial statements. b. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.

c. It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations. d. It implies that the auditor is responsible for the design of the internal controls. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 131. Management of AllTech, Inc. refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy. What does this refusal constitute? a. A violation of full and fair disclosure. b. A securities law violation. c. A scope limitation. d. A breakdown in internal controls. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 132. Which one of the following is not a purpose of the management representation letter? a. It clearly documents the audit procedures that were performed by the auditors. b. It further acknowledges management's responsibility for the financial statements. c. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.

d. It reduces the possibility of misunderstanding concerning the matters that are the subject of the representations. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 133. Which of the following individuals should sign the management representation letter? a. The members of the audit committee and board of directors. b. The chief executive officer and the chief financial officer. c. The chief financial officer and the treasurer. d. The controller and the auditor. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 134. What is the letter called that is drafted by the auditor and reports observations to management which may help management perform more effectively? a. The letter of reportable conditions. b. The management representation letter. c. The management letter. d. The contingent events document. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 135. Which of the following is false regarding the management letter? a. The management letter is not required b. The management letter is the same as the management representation letter. c. The management letter helps to provide management comfort that the auditor has done a quality job. d. The management letter helps provide management with information that the auditor knows and understands the client’s business.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 136. Where would the auditor make mention of issues noted during audit procedures that are not of audit significance? a. Engagement letter. b. Management letter. c. Representation letter. d. Attorney letter. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 137. Which of the following procedures is not performed as part of an engagement quality review? a. Evaluate judgments about materiality and the disposition of corrected and uncorrected identified misstatements. b. Call each board member to discuss the potential for fraud. c. Confirm with the lead audit partner that there are no significant unresolved matters. d. Evaluate whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 138. Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for audits of public companies? a. Subsequent event review. b. Engagement quality review. c. Disclosure of all contingent liabilities. d. Seven-year client rotation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 139. The partner performing an engagement quality review will review the working papers and financial statements but will not perform which of the following? a. Assess completeness of the audit work and sufficiency of the evidence. b. Determine the adequacy of financial statement disclosures. c. Raise questions about the reasonableness of various financial statement presentations. d. Perform a substantial portion of the audit procedures as an additional check. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 140. An additional partner review of the audit and its findings is typically performed by an experienced member of the firm. Which of the following individuals is most qualified to perform this concurring partner review? a. The engagement partner who has worked on the client for three years. b. An employee of the enforcement division of the SEC. c. An experienced partner of the firm who did not actively participate on the audit. d. A partner of another firm or office who knows the client well and who was a vital member of the audit team. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 141. Which of the following is not a typical communication between the auditor and the audit committee? a. The auditor should clearly communicate the auditor’s responsibility under Generally Accepted Auditing Standards (GAAS).

b. The auditor should clearly communicate the planned scope of the audit engagement with the audit committee and discuss its adequacy.

c. The auditor and management should discuss issues related to the retention of both client staff and audit firm staff during the period of audit.

d. All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee.

ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 142. If the audit team encounters difficulties in performing an audit, who should the audit team communicate these matters to? a. The SEC. b. The audit committee. c. Management. d. The PCAOB. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 143. Which of the following is not a required communication with the audit committee? a. Auditor’s responsibility under GAAS. b. Analytical review. c. Audit adjustments. d. Uncorrected misstatements. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM 144. Which of the following is not a required communication with the audit committee? a. Accounting policies. b. Accounting estimates. c. Economic trends. d. Difficulties encountered. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:13 AM

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Chapter 14 145. Adjustments

In your audit of Lomar Company, you find a number of items that you believe represent possible adjustments to the company’s books. Management does not want to make any adjustments. REQUIRED: Assuming that Lomar is a public company, describe how the adjustments might impact your audit report on internal control over financial reporting. ANSWER:

Auditors of public companies must evaluate the noted adjustments to determine their impact on the auditor’s report on internal control over financial reporting. The audit of the financial statements and the audit of internal control over financial reporting for a public company are to be integrated. Public company auditors must consider the results of audit procedures performed to issue the audit report on the financial statements when issuing the audit report on internal control. For example, if the possible adjustments identified for Lomar Company are deemed to be material misstatements that were not initially identified by the company’s internal controls, the auditor should consider this as at least a significant deficiency, if not a material weakness for purposes of reporting on internal control. In this case, the auditor’s report on Lomar’s financial statements would be unqualified as long as management corrected the misstatement before issuing the financial statements. However, the auditor’s report on internal control over financial reporting would include an adverse opinion if the auditor concludes that the company has one or more material weaknesses. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:25 AM

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Chapter 14 146. Contingent liabilities

The auditor will discuss contingencies with the appropriate executives and management of the company. Identify at least five sources of evidence to corroborate management's representations regarding contingencies. ANSWER:

Corroborating evidence of contingent liabilities includes: ∙ letter of audit inquiry ∙ correspondence and invoices from lawyers ∙ corporate minutes ∙ contracts ∙ correspondence with governmental agencies ∙ bank confirmations POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:26 AM

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Chapter 14 147. Contingencies

Define what a contingency is, describe the auditor’s main concerns about them, and indicate how contingencies should be dealt with by management and the auditor. Besides litigation, claims, and assessments, what are some other types of contingencies? ANSWER:

Contingencies are potential gains or losses that management may incur because of what may or may not occur in the future, e.g., a lawsuit against the client. In ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies”), the FASB provides the standard by which they are to be judged and dealt with. If they are judged to be probable and reasonably estimable as of year-end, then management is responsible to accrue any losses (gains are not recognized). Disclosure is required of contingencies that are probable but not estimable or that are reasonably possible. Contingencies that are remote of occurrence don’t require disclosure unless it is a common practice, for example, the guarantee of another company’s debt. Besides litigation, claims, and assessments, other types of contingencies include purchase and sales commitments, agreements to repurchase receivables that have been sold, and guarantees of the debts of others. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:27 AM

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Chapter 14 148. Litigation, claims, and assessments

Discuss the information management should provide related to litigation, claims, and assessments. Also describe the purpose of the letter of audit inquiry, who writes it, who it is addressed to, and the important inquiries that are made of the client’s lawyer in the letter of audit inquiry. ANSWER:

Management is the primary source of information concerning litigation, claims, and assessments and should provide the auditor with a description and evaluation of litigation, claims and assessments against them and assurance that the accounting and disclosure requirements under SFAS No. 5 have been met. A level of materiality should be agreed to between the client and the auditor. To corroborate the information provided by management, other sources of information used by the auditor include correspondence and invoices from the lawyers, corporate minutes, contracts, and bank confirmations. The letter of audit inquiry though, written by the client to their chief legal counsel, is the primary source of corroborative evidence concerning the litigations, claims and assessments against the client. Because of the privileged relationship between the client and the lawyer, the client has to request any information from the lawyer. The lawyer is requested to comment on the completeness of management’s list and to describe the nature, progress, and likelihood and range of possible losses of those cases that they have devoted substantial time to and to respond directly to the auditor. The lawyer should also indicate any limitations in the response. A lawyer’s refusal to respond adequately is a scope limitation on the audit that would preclude an unqualified opinion, but an inability to evaluate likelihood and range of loss because of inherent uncertainties is not considered a scope limitation.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:28 AM

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Chapter 14 149. Disclosures

You are a staff auditor on the audit of Cosmo Technologies, Inc. The audit partner asks you to carefully read the new mortgage contract with the Hometown Bank and abstract all pertinent information that might be needed for a financial disclosure. Required: (1) List the information in a mortgage that is likely to be relevant to the auditor. (2) What are the pros and cons of using a disclosure checklist for this task? ANSWER:

(1) The information in a mortgage that is likely to be relevant to the auditor includes the following: 1. The parties to the agreement 2. The effective date of the agreement 3. The amounts included in the agreement 4. The repayment schedule required by the agreement 5. The definition and terms of default 6. Prepayment options and penalties specified in the agreement 7. Assets pledged or encumbered by the agreement 8. Liquidity restrictions imposed by the agreement 9. Purchase restrictions imposed by the agreement 10. Operating restrictions imposed by the agreement 11. Requirements for audit reports or other types of reports on compliance with the agreement 12. The interest rate specified in the agreement 13. Any other requirements, limitations, or agreements specified in the document (2) While a checklist helps remind the auditor of matters that should be considered for disclosure and provides a convenient format for the documentation of evidence, there may be items that should be disclosed but that are not covered by the audit firm’s checklist. The auditor, therefore, cannot blindly follow a checklist, but should also use good audit judgment especially when there are unusual circumstances of which the users should be aware. For example, what if Cosmo Technologies has a controlling interest in Hometown Bank? This would be a related-party issue.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:29 AM 150. Review Analytical Procedures and Disclosures Copyright Cengage Learning. Powered by Cognero.

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Chapter 14

When auditing Global Alliance Industries, Inc., the auditor performed extensive analytical procedures and found the following: (a) The commission expenses as a percentage of sales has stayed constant for several years, but it has increased significantly in the current year. However, commission rates have not changed. (b) The rate of inventory turnover has steadily decreased for the past four years. (c) The inventory as a percentage of current assets has steadily increased for the past four years. (d) The number of days’ sales in accounts receivable has steadily increased for three years. (e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for three years. (f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets are significantly smaller than in the preceding year. REQUIRED: (1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of financial statements. (2) When assessing disclosures, what criteria do auditors use? ANSWER:

(1) a. The commission expense could be overstated during the current year or could have been understated during each of the past several years. It is also possible that sales may have been understated during the current year or could have been overstated in each of the past several years. b. It is very possible that obsolete or unsalable inventory may be present and may require markdown to the lower of cost or market. c. When this item is combined with the potential high likelihood that obsolete or unsalable inventory may be present, as mentioned previously, it makes sense that inventory may have been maintained at a higher level than is necessary for the company. d. The collection of accounts receivable appears to be a problem. It is very possible that an adjustment provision for uncollectible accounts may be necessary. e. When combined with (d) above, the allowance for uncollectible accounts may be understated. f. It is very likely that depreciation expenses may be understated for the year. (2) When assessing disclosures, the auditor should have reasonable assurance that: • Disclosed events and transactions have occurred and pertain to the entity • All disclosures that should have been included are included • The disclosures are understandable to users • The information is disclosed accurately and at appropriate amounts

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/29/2018 8:12 PM 151. Review analytical procedures

What is the purpose of using review analytical procedures in the final stages of the audit? ANSWER:

Review analytical procedures are required in the concluding stages of the audit to serve as an analysis of last resort for potential misstatements in the financial statements. The reading of financial statements while considering the adequacy of evidence gathered in response to unusual or unexpected balances or relationships identified in planning the audit or during the course of the audit is an important reason for the final review stage. It is also possible that unusual or unexpected balances or relationships may not appear until the audit has been performed and proposed adjusting entries have been made. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:31 AM

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Chapter 14 152. Management representation letters

Describe the purpose of the management representation letter. ANSWER:

The purposes of the management representation letter are: ∙ It reminds management of its responsibility for the financial statements. ∙ It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. ∙ It reduces the possibility of misunderstanding concerning matters that are the subject of representations. The letter is typed on the client's letterhead, addressed to the auditor and signed by the CEO and the CFO. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:33 AM 153. Management representation letters

Barrett Jennings, CPA, has prepared a letter of representation for the president and controller to sign. The following items are contained in it: (a) Inventory is fairly stated at the lower of cost or market and includes no obsolete items. (b) All actual and contingent liabilities are properly included in the financial statements. (c) All subsequent events, relevant to the financial statements, have been disclosed. Required: (1) Why is it desirable to have a letter of management representation letter from the client concerning these matters when the evidence accumulated during the course of the audit is meant to verify the same information? (2) How is the letter of management representation useful as audit evidence? (3) What are several other types of information commonly included in the management representation letter? ANSWER:

(1) It is desirable to have a management representation letter in addition to the accumulated audit evidence to impress upon management its responsibility for the representations in the financial statements and to formally document the responses from the client to auditor inquiries about various aspects of the audit. It also helps reduce the possibility of misunderstanding concerning matters that are the subject of

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Chapter 14 representations. (2) The management representation letter is not very useful as audit evidence since it is a written statement from a nonindependent source. In effect, the client being audited makes certain representations related to the audit. (3) Other types of information include: 1. Financial statements Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP). Management’s belief that the financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP). 2. Completeness of information Availability of all financial records and related data Completeness and availability of all minutes or meetings of stockholders, directors, and committees of directors Absence of unrecorded transactions 3. Recognition, measurement, and disclosure Management’s belief that the effects of any uncorrected financial statement misstatements are immaterial to the financial statements Information concerning fraud involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements Information concerning related party transactions and amounts receivable from or payable to related parties Unasserted claims or assessments that the entity’s lawyer has advised are probable of assertion and must be disclosed in accordance with FASB standards Satisfactory title to assets, liens or encumbrances on assets, and assets pledged as collateral Compliance with aspects of contractual agreements that may affect the financial statements 4. Subsequent events Bankruptcy of a major customer with an outstanding account receivable at the balance sheet date A merger or acquisition after the balance sheet date 5. Internal controls Management’s acknowledgement of its responsibility for establishing and maintaining effective internal controls over financial reporting. Management’s conclusion about the effectiveness of internal control over financial reporting as of the end of the fiscal period. Disclosure to the auditor of all deficiencies in the design or operation of internal control over financial reporting identified as part of management’s assessment, including separate disclosure of significant deficiencies and material weaknesses. Management’s knowledge of any material fraud or other involving senior management or other employees who have a significant role in the company’s internal control over financial reporting. Copyright Cengage Learning. Powered by Cognero.

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Chapter 14 POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:34 AM 154. Subsequent events

What are the two types of subsequent events identified in the accounting literature and what is required when each occurs? Provide an example of each type of subsequent event. ANSWER:

The two types of subsequent events are Type I and Type II events. Type I subsequent events provide evidence about conditions that existed at the balance sheet date. The financial statements should be adjusted to reflect this type of subsequent event. Type II subsequent event indicates conditions that did not exist at the balance sheet date. The financial statements should not be adjusted for these events, but they should be considered for disclosure. An example of a Type I subsequent event is a lawsuit that occurred before the balance sheet date that the client had accrued a loss for as of year-end, but which was settled in early January for a much larger sum of money. The client would have to accrue as of year-end the additional loss from the settlement of the lawsuit. An example of a Type II subsequent event is where a natural disaster occurs after year-end in early January and destroys a major warehouse or significant asset of the client. If the loss is material enough then the client will need to disclose it in the notes to the financial statements but would not have to accrue it since the event does not reflect conditions existing as of year-end.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:35 AM

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Chapter 14 155. Testing subsequent events

List the audit procedures to be performed to determine if subsequent events have occurred and have been appropriately addressed. ANSWER:

The audit procedures performed when testing for subsequent events would include: ∙ Read the minutes of the meetings of the board of directors, stockholders, and other authoritative groups. ∙ Read interim financial statements and compare them to the audited financial statements, noting significant changes. Investigate significant changes. ∙ Inquire of management concerning: - any significant changes noted in the interim statements - the existence of significant contingent liabilities or commitments at the balance sheet date or date of inquiry - any significant changes in working capital, long-term debt, or owners' equity - the current status of items for which tentative conclusions were drawn earlier - any unusual adjustments made to the records after year-end. ∙ Inquire of management and its legal counsel concerning contingencies. ∙ Obtain a management representation letter. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:37 AM

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Chapter 14 156. Type I subsequent events

Provide two examples of a Type I subsequent event and explain how these events would be treated in the financial statements. ANSWER:

The instructor must review the student's responses, as they may vary. Examples may include, but are not exclusive to: 1. Large customers who file for bankruptcy. 2. Settled contingencies and other liabilities. 3. Disposal of material property or equipment for a significant loss. Type I subsequent events reflect conditions existing as of the balance sheet date. All of the above require adjustments to estimates before the financial statements are finalized.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:38 AM

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Chapter 14 157. Type II subsequent events

Provide two examples of a Type II subsequent event and explain how these events would be treated in the financial statements. ANSWER:

The instructor must review the student's responses, as they may vary. Examples may include, but are not exclusive to: 1. Significant unrealized losses on securities held as investments. 2. Issuance of stocks, options, warrants and/or bonds. 3. Acquisition of subsidiary. 4. Public offering. 5. Entering into material agreements. 6. Uninsured loss of significant assets. Type II subsequent events do not reflect conditions existing as of the balance sheet date and so do not require adjustment but may require disclosure in the financial statements.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:39 AM

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Chapter 14 158. Dual-dating opinions

Describe the concept and the purpose of dual-dating an audit report. ANSWER:

Dual-dating the audit report reduces the auditor's responsibility. In normal situations, the auditor takes responsibility for all events up to the report release date. The auditor is responsible only for events that occurred after this date for which he or she has knowledge. If the auditor becomes aware of a subsequent event after this date that requires adjustment or discloser then the auditor may either use the date of the subsequent event as the date of the audit report or the auditor may dual-date the report using the original report release date and the date of the subsequent event. The advantage of dual dating the audit report is that the auditor limits their responsibility. The date for everything other than the subsequent event is the original report release date. The alternative is to date the audit report as of the subsequent event. In that case the auditor has to extend their procedures up to the later date in providing assurance that subsequent events have been appropriately adjusted or disclosed.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-01 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:40 AM 159. Engagement Quality Review

Morgan Thompson, CPA is a partner in a medium-sized CPA firm and takes an active part in the conduct of every audit she supervises. She follows the practice of reviewing all audit files of staff auditors on her team as soon as it is convenient, rather than waiting until the end of the audit. When the audit is nearly finished, Thompson reviews the audit files again to make sure that she has not missed anything significant. Because she makes most of the major decisions on the audit, there is rarely anything that requires further investigation. When she completes the review, she prepares a draft of the financial statements, gets them approved by management, and has them assembled in her firm’s office. No other partner reviews the audit documentation, because Thompson is responsible for signing the audit reports. REQUIRED: (1) Evaluate the practice of not having a concurring partner review of the audit documentation by another partner in the firm, (2) explain some of the procedures the reviewer should perform as part of the review process, and (3) what documentation should be included. Copyright Cengage Learning. Powered by Cognero.

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Chapter 14 ANSWER:

(1) By not having a review of the audit documentation by another partner in the firm, there is no check against any bias and unintentional error that may exist on the part of the auditor. An independent review is essential in this case. Such a review is required for public company audits. (2) Some of the procedures the reviewer should perform as part of the review process include: • Discussing with the audit team any significant matters related to the financial statements and internal controls, including the audit team’s identification of material weaknesses and audit procedures to address significant risks • Evaluating judgments about materiality and the disposition of corrected and uncorrected identified misstatements • Reviewing the engagement team’s evaluation of the firm’s independence in relation to the engagement • Reviewing the related audit documentation to determine its sufficiency • Reading the financial statements, management’s report on internal control, and auditor’s report • Confirming with the lead audit partner that there are no significant unresolved matters • Determining if appropriate consultations have taken place on difficult or contentious matters • Evaluating whether the auditor documentation supports the conclusions reached by the engagement team with respect to the matters reviewed • Assessing whether appropriate matters have been communicated to audit committee members, management, and other appropriate parties • Evaluating whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit (3) The audit documentation should include evidence on the performance of the engagement quality review. This documentation should include the following information: • Who performed the engagement quality review • Documents reviewed by the engagement quality reviewer • Date the engagement quality reviewer provided concurring approval of issuance

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:42 AM

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Chapter 14 160. Management letters to clients

What is a management letter and how does it differ from a management representation letter? ANSWER:

The management letter is a letter from the auditor to the client about the auditor's observations of management weaknesses. The management letter is not required. Its purpose is to provide useful advice and information to the client so as to improve their operations. Many of the observations likely will relate directly to control deficiencies or operational matters. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter DATE CREATED: 1/27/2018 11:13 AM DATE MODIFIED: 1/27/2018 11:43 AM

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Chapter 15 1. As described by the AICPA, the purpose of an audit is to enhance the degree of confidence that users can place in the financial statements. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 2. The audit report is usually written but, in certain circumstances, can be in the form of a verbal presentation to the audit committee. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and IAASB. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the financial statements are fairly stated in all material respects. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 5. The audit report delineates the responsibility of client management and that of the audit firm. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a qualified or adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 7. For some engagements, the financial statements might be audited in accordance with multiple auditing standards. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 8. The PCAOB's reporting standard AS 3101 adopted in 2017 retains the "pass/fail" opinion that has been in effect for many decades. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 9. The SEC has established reporting deadlines for public companies ranging from 60 to 90 days after year-end depending on the industry in which the company operates. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 10. Modification of the audit report is required when another audit firm performs part of the financial statement audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 11. A justified departure from GAAP will result in the issuance of an adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 12. When financial statements contain generally accepted accounting principles in the current year that are different from the generally accepted accounting principles used in the preceding year, the auditor will typically make mention of it in the report. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 13. After the balance sheet date but prior to the audit report date, the client decides to acquire Bargain Company to obtain a significant increase in revenues. The auditor's report would probably include the statement: "except for the acquisition of Bargain Company...". a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 14. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the financial statements a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 15. The phrase "substantial doubt about the company's ability to continue as a going concern" is used in an unqualified opinion with an additional paragraph explaining the auditor's conclusions regarding the going concern assumption. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 16. Under international auditing standards, when the audit client has engaged other audit firms to audit remote locations around the country, the principal auditor must mention the other audit firms in the audit report. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 17. An auditor is not required to inform the reader of an audit report when there has been a change in accounting principles that materially affects the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 18. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor determined that the financial statements are fairly presented, except for this specifically identifiable GAAP departure, and therefore would issue a disclaimer of opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 19. The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP violation that is not pervasive. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from GAAP and will receive a qualified or adverse opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified or Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 21. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the auditor to issue either a qualified or an adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely choose between a qualified and an adverse opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified or Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a qualified audit report. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor should issue an adverse opinion. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 26. If scope limitations that are not client-imposed exist and make it impossible for the auditor to form an opinion, the auditor should render an adverse opinion. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Scope Limitations DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of opinion by the auditor. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 28. When the auditor is unable to obtain sufficient, appropriate evidence concerning the beginning inventory, which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and appropriate modification to the auditor's responsibility paragraph. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 29. The client will not allow Collier and Company, CPAs, to read the minutes of the board of director's meetings that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a disclaimer. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 30. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue a disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 31. For a client with serious going concern issues, the auditor has to make a choice between issuing an unqualified audit report with an explanatory paragraph or a disclaimer. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate evidence. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be issued. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 34. Under PCAOB standards (AS 3101) approved in 2017, all U.S. public companies will be required to disclose whether any critical audit matter (CAM) arose during the current period audit or state that there was none. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Critical Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 35. Critical audit matters (CAMs) include matters that are material to the financial statements but do not relate to accounts or disclosures. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Critical Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 36. The AICPAs Auditing Standards Board voted in 2017 to consider aligning its guidance with PCAOB standards related to disclosure of critical audit matters. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Critical Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 37. IAASB standards require disclosure of key audit matters (KAMs) related to five specific topics. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Key Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 38. The auditor is only concerned about the aggregate internal control deficiencies when determining the appropriate opinion on internal control over financial reporting (ICFR). a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material weakness in ICFR. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 40. The auditor will modify the audit report on ICFR effectiveness when management's annual certification pursuant to Section 302 of the Sarbanes-Oxley Act is misstated. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15 41. If the auditor determines that management's annual report on internal controls is incomplete or not properly presented, the auditor's report will include an explanatory paragraph that describes the reasons for this determination. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not differ from the corresponding decision as it relates to the audit of the financial statements. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 43. If an omission of an important audit procedure is discovered, the auditor should immediately issue a disclaimer of opinion for the audit. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 44. If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify the report, if necessary. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 45. Typically, omissions may be discovered when audit documentation is reviewed as part of an external or internal review program. a. True b. False ANSWER: True POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 46. When it is discovered that an important audit procedure was not performed, the SEC imposes sanctions against the audit firm responsible. a. True b. False ANSWER: False POINTS: 1 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.14-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 47. Audit reporting standards for financial statement and integrated audits require auditors to provide which of the following? a. Positive assurance. b. Negative assurance. c. Materiality assurance. d. No assurance. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 48. Which of the following statements is true regarding audit reporting? a. The auditor should provide an opinion based on the audit evidence obtained. b. Auditing standards require auditors to provide positive assurance. c. The auditor's opinion should state whether the financial statements are presented fairly. d. All of the above statements are true. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 49. What can a user of financial statements infer from an unqualified opinion on the financial statements? a. The auditor found no instances of error or fraud. b. The auditor has no reservations about the fairness of presentation. c. The auditor is satisfied that management is both credible and competent. d. All of the above can be inferred by the user. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 50. According to the AICPA's audit reporting principles, which of the following is incorrect? a. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statements. b. The purpose of an audit is achieved when an auditor expresses an opinion on the financial statements. c. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed.

d. The auditor provides positive assurance that the financial statements are free of errors, either intentional or unintentional.

ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-01 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 51. Which of the following is not a change included in PCAOB's new reporting standard AS 3101? a. Specific mention of comprehensive income and notes to the financial statements. b. An affirmative statement that the audit firm is registered with the PCAOB. c. A new disclosure that includes the year in which the audit firm began serving consecutively as the client's auditor. d. A new report title, "Report of Independent Registered Public Accounting Firm." ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: PCAOB Reporting Standards DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 52. Which of the following is an example of the contents of an opinion paragraph found in an unqualified audit report? a. "We have audited...." b. "Nothing came to our attention..." c. "The financial statements referred to above present fairly..." d. "An audit includes examining, on a test basis..." ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 53. In which one of the following instances would an auditor most likely issue an unqualified opinion without explanatory language? a. Management's disclosures are missing or inadequate. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a significant limitation on the scope of the engagement. d. There is an immaterial deviation from GAAP related to capitalizing repairs. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 54. If the auditor has no reservations about the fairness of the financial statements but believes there is a remote possibility that resolution of an uncertainty will have a material effect on the financial statements, which of the following would the auditor issue? a. A disclaimer of opinion. b. An unqualified opinion with no report modifications. c. An adverse opinion. d. An unqualified opinion with explanatory paragraphs. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 55. Audit reports are designed to promote clear communication between the auditor and the financial statement user. Which of the following is not delineated in the audit report? a. What was audited and the relative responsibilities of the client and the auditor. b. The experience level of the audit team. c. The nature of the audit opinion formulation process. d. The auditor's opinion on the fairness of the financial statements. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 56. If the auditor decides to draw attention to large related party transactions occurring in the financial statements of the client, which report will most likely be issued? a. Qualified opinion. b. Unqualified opinion with an explanatory paragraph. c. Adverse opinion. d. Consolidated opinion. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 57. The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to do which of the following? a. Merge with the other CPA firm. b. Perform a peer review on the other CPA firm. c. Ensure the independence of the other CPA firm of the client. d. List the other firm in the footnotes to the client's financial statements. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 58. Which of the following is an instance where the auditor would add a paragraph in a report expressing an unqualified opinion? a. There is serious doubt that the client can continue as a going concern. b. Management's disclosures are not adequate. c. There are significant uncertainties that are not properly disclosed in the footnotes. d. There is a material dollar misstatement in the financial statements. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 59. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion will the auditor most likely issue? a. Adverse. b. Unqualified with explanatory language. c. Qualified. d. Disclaimer of opinion. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 60. Which of the following would not result in an unqualified audit report with an explanatory paragraph? a. Going concern issue. b. Scope limitation. c. Emphasis of a matter. d. Consistency of presentation. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 61. How would the auditor categorize a situation when the financial statements do not contain a note the auditor believes is necessary for fair presentation? a. A scope limitation. b. An uncertainty. c. A departure from GAAP. d. An act discreditable. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 62. In which one of the following cases would an auditor most likely issue a qualified opinion? a. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142. b. There is a change in accounting principles promulgated by the FASB. c. There is an immaterial dollar misstatement on the financial statements. d. There is one material departure from GAAP that affects only two accounts. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 63. Qualified opinions can only be issued by auditors for which of the following? a. Violations of GAAP. b. Scope limitations. c. Going concern. d. Lack of independence. e. Either A or B. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 64. Violations of GAAP resulting in qualified opinions affect the audit report through which of the following? a. Modifying the auditor's responsibility paragraph. b. Adding an explanatory paragraph. c. Modifying the opinion paragraph to read "except for." d. Both B and C. e. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 65. Which of the following is an example of circumstances that would not limit the audit scope? a. An inadequacy in the accounting records. b. The inability to gather sufficient competent evidence. c. Emphasis of an important matter. d. The timing of the fieldwork. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 66. Which of the following phrases should not be used when the auditor is qualifying the audit opinion? a. Except for. b. Subject to. c. With the exception of. d. With the qualification of. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 67. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated over their useful lives, which of the following would be incorrect? a. A qualified opinion would be appropriate. b. The opinion paragraph should be modified to include language such as: "except for the effects of not capitalizing the acquisition costs of some assets..."

c. An explanatory paragraph should include the effects of the subject matter of the qualification, where practicable. d. An explanatory paragraph should be modified to include language such as: "subject to the qualified act..." ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 68. Adverse opinions can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Scope limitations. c. Going concern. d. Lack of independence. e. Either B or D. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 69. Adverse opinions affect the audit report in which of the following ways? a. Modifying the auditor's responsibility paragraph. b. Adding an explanatory paragraph. c. Modifying the opinion paragraph to read "does not present fairly." d. Both B and C. e. All of the above. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 70. The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not present fairly." Which type of audit opinion is this? a. Improper. b. Adverse. c. Disclaimer. d. Qualified. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 71. An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has been marked up to the owners' expectation of market values. Such a situation will most likely result in which type of opinion? a. Disclaimer. b. Review. c. Adverse. d. Unqualified with explanatory language. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 72. In which one of the following instances would an auditor most likely issue an adverse opinion? a. Management declines to present earnings per share in the income statement. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a material dollar misstatement that is pervasive in the financial statements. d. The client does not allow the auditor to send confirmations to its three largest customers. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 73. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following should the audit report contain? a. An unqualified opinion. b. A qualified opinion with an explanatory paragraph. c. An adverse opinion. d. A disclaimer of opinion. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 74. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company's financial statements? a. The client has had significant transactions with related entities that the auditor wants to emphasize. b. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases. c. The auditor is not independent. d. There is substantial doubt about the entity's ability to continue as a going concern. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 75. When an auditor issues an adverse opinion, which of the following should be included in the opinion paragraph? a. The financial statement effects of the departure from GAAP. b. A statement that indicates that the financial statements are fairly stated except for a reason that is described in the separate paragraph.

c. A reference to a separate paragraph that describes the reason for the adverse opinion. d. The reasons that the financial statements are misleading. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 76. In which one of the following instances would an auditor most likely issue a disclaimer of opinion? a. Management will not sign a management representation letter. b. Management declines to provide a statement of cash flows. c. The auditor is independent of the client. d. The auditor is unable to confirm receivables but performs alternative procedures. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 77. In which one of the following instances would an auditor not issue a disclaimer of opinion? a. The auditors are not invited to observe the periodic inventory at year-end. b. There are significant misstatements in the financial statements. c. There is a significant limitation on the scope of the engagement. d. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 78. When an auditor lacks independence with respect to a client, which of the following should the auditor issue? a. A disclaimer of opinion. b. An adverse opinion. c. A qualified opinion with explanatory paragraph. d. An unqualified opinion. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 79. Disclaimers of opinion can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Substantial scope limitations. c. Going concern. d. Lack of independence. e. Either B or D. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 80. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report through which of the following? a. Modifying the introductory paragraph b. Eliminating the scope paragraph. c. Adding an explanatory paragraph before the disclaimer paragraph. d. Both B and C. e. All of the above. ANSWER: e POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 81. A justified departure from GAAP may result in which of the following? a. A disclaimer of an audit opinion. b. An unqualified audit opinion with an explanatory paragraph. c. An adverse opinion. d. A qualified opinion. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 82. An emphasis of a matter may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion. c. An adverse opinion. d. An unqualified audit opinion with an explanatory paragraph. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Opinion with Report Modifications DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 83. Which of the following requires that key audit matters (KAMs) be included in audit reports, effective for audits of financial statements for periods ending on or after December 15, 2016? a. Standards issued by AICPA's Auditing Standards Board. b. Standards issued by PCAOB. c. Standards issued by IAASB. d. Standards issued by PCAOB and IAASB. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Key Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 84. Which of the following statements regarding key audit matters (KAMs) is not correct? a. The auditor issues a separate opinion on identified KAMs. b. The order of presentation of individual KAMs is a matter of professional judgment. c. KAMs are a subset of matters communicated to those charged with corporate governance. d. The nature of a KAM will vary according to the client's industry. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Key Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 85. Which of the following statements regarding the reporting of critical audit matters (CAMs) under PCAOB guidance is incorrect? a. Matters that are material to the financial statements but do not relate to accounts or disclosures are not CAMs. b. If no CAMs arose during the audit, the audit report should not contain any reference to CAMs. c. The disclosure of CAMs under PCAOB guidance is similar to disclosure of KAMs under IAASB guidance. d. All of the above are incorrect. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Critical Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 86. A critical audit matter (CAM) to be disclosed under PCAOB guidance meets which of the following criteria? a. Any matter communicated or required to be communicated to the audit committee. b. A matter that relates to accounts or disclosures that are material to the financial statements. c. A matter involving especially challenging, subjective, or complex auditor judgment. d. All of the above. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-05 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Critical Audit Matters DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 87. PCAOB guidance does not identify which of the following situations as one in which the auditor will modify the audit report on ICFR effectiveness? a. When there is a restriction on the scope of the engagement. b. When there is other information contained in management's annual report on ICFR. c. When elements of management's annual report on internal control are incomplete or improperly presented. d. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-Oxley Act. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 88. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement, what should the auditor do? a. The auditor will either withdraw from the engagement or disclaim an opinion. b. The auditor will issue an adverse opinion. c. The auditor will issue an opinion on the ICFR based on another audit firm's work. d. The auditor will report this directly to the Treadway Commission. ANSWER: a POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 89. In which of the following situations would the auditor modify the audit report on ICFR? a. When the auditor relies on the work of other auditors but decides not to include a reference to the other auditors. b. When the auditor is unable to perform all procedures needed to evaluate the internal controls. c. When the auditor concludes that management's report on ICFR is not complete or is improperly presented. d. When the auditor identifies multiple unrelated significant deficiencies in ICFR. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 90. When management chooses to include information in its report on ICFR that is in addition to the information required to be provided, what should the auditor do? a. The auditor must endorse the information. b. The auditor must include the information as part of the opinion. c. The auditor will disclaim an opinion on that additional information. d. The auditor will present the information in a separate schedule in the footnotes. ANSWER: c POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-06 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control Over Financial Reporting DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 91. After an audit report is issued, the auditor discovers through a peer review that an important audit procedure has been omitted. In this case, what should the auditor do? a. Notify all parties known to be relying on the report. b. Immediately request the client recall the report. c. Contact his or her professional liability insurance carrier. d. Determine whether the report can still be supported in light of the omitted procedure. ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM 92. If the auditor failed to confirm receivables when that should have been done and it may be too late to confirm now, what should the auditor do? a. Issue an adverse opinion. b. Extend the previous work done on subsequent collections to help determine that the receivables existed and were properly valued at the balance sheet date.

c. Automatically decide that the previously issued audit report cannot be supported in light of the omitted procedures. d. Issue a disclaimer of opinion. ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-7 NATIONAL STANDARDS: United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date DATE CREATED: 1/30/2018 10:44 AM DATE MODIFIED: 1/30/2018 10:44 AM

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Chapter 15 93. Types of Audit Opinions

What are the five basic types of financial statement audit reports? ANSWER:

Audit reports can be: 1. Unqualified/unmodified report 2. Unqualified opinion with report modifications. 3. Qualified report 4. Adverse report 5. Disclaimer of opinion report

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 AUDI.JOHN.18.15-03 AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 10:49 AM

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Chapter 15 94. Types of Audit Opinions

Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the time that the customer orders are placed on the website, rather than when goods are shipped. Goods are typically shipped two days after the order is placed. The auditor determines that the amount of orders placed but not shipped as of the balance sheet date is not material. REQUIRED: Which type of audit report would you suggest be issued and why? ANSWER:

Although the client is not following GAAP on revenue recognition, the amount is immaterial. Therefore, the standard unqualified report would be the most probable type of report to issue.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 10:51 AM

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Chapter 15 95. Types of Audit Opinions

A CPA is engaged in the audit of financial statements of a large manufacturer with branch offices that are widely dispersed. This CPA is not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts, the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the cutoff of cash receipts. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

Because the auditor was able to obtain alternative evidence, no scope qualification is necessary. If there were such a qualification, it would be a qualified scope and opinion or a disclaimer, depending on materiality. However, in this case, it appears as if an unqualified opinion with standard wording is most likely. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Unqualified/Unmodified Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 10:52 AM

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Chapter 15 96. Unqualified audit reports

For each of the following situations, define the type of problem encountered and provide an explanation as to the type of report which was issued. Situation Report Issued The auditor is unable to confirm three Unqualified/Unmodified customer accounts receivable. The client forgot to accrue a contingent liability.Unqualified/Unmodified The auditor believes there is substantial doubt regarding the client's ability to continue as a Unqualified with Explanatory Paragraph going concern. The client properly adopts a new accounting Unqualified with Explanatory Paragraph principle promulgated by the FASB.

ANSWER:

Type of Problem Scope limitation GAAP violation

Going concern Change in accounting principle in accordance with GAAP.

Issues Giving Rise to Report Alternative procedures probably performed. Most likely immaterial or the client adjusted the financial statements to appropriately reflect the contingency. Probably not a significant enough uncertainty to give rise to disclaimer. Adequate GAAP treatment. Auditor draws attention to the change.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-02 AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports Unqualified Audit Reports with Explanatory Language DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:06 AM

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Chapter 15 97. Unqualified reports

Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory paragraph? ANSWER:

An explanatory paragraph would be added to an otherwise unqualified report when: ∙ The client has changed an accounting principle or method of application that has a material effect on the financial statements, but such change is in accordance with GAAP. ∙ A justified departure from GAAP. ∙ The auditor has significant doubt about whether the client can continue as a going concern. ∙ The auditor wishes to emphasize some matter. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:07 AM

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Chapter 15 98. Types of Audit Opinions

A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended December 31, 20Y8. Prior to 20Y8, the company depreciated its trucks over 10 years. However, during 20Y8, the company determined that a more realistic estimated life for its trucks was 8 years and computed the 20Y8 depreciation on the basis of the revised estimate. The CPA is satisfied that the 8-year estimate is reasonable, but the change will have a material effect on the comparability of the company's financial statements. The company adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 20Y8 income in a note to the financial statements. REQUIRED: Which type of audit report would you suggest be issued on the 20Y8 financial statements and why? ANSWER:

The auditor should issue an unqualified audit report with an explanatory paragraph. This is due to a lack of consistency, because there is a change of estimated life that results in a material effect as far as comparability and is not a change in accounting principles. As the scenario notes, adequate disclosure is provided. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Unqualified Audit Reports with Explanatory Language DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:08 AM

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Chapter 15 99. Types of Audit Opinions

Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

Since the principal audit firm chooses to mention the other firm in the audit report, the wording of the standard unqualified report is modified, and no additional paragraph is needed. The resulting opinion is unqualified unless there are other reasons for expressing a different opinion. The most extensive change appears in the introductory paragraph to indicate the shared responsibility for the overall opinion, including the magnitude of the amounts audited by the other firm. The scope and opinion paragraphs are also modified to reference the other auditor. For nonpublic clients, the extensive change would appear in the auditor's responsibility section; and the opinion paragraph would include a reference to the other auditor. The name of the other audit firm is mentioned only with its express permission and if its report is also included in the document.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Unqualified Audit Reports with Explanatory Language DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:10 AM

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Chapter 15 100. Types of Audit Opinions For each of the following independent situations, determine the type of opinion that will most likely be issued by the firm auditing the financial statements of a U.S. company. 1. The client will not allow the auditor to view the minutes for the entire year under audit and beyond. 2. The auditor finds that the firm is not independent of the client on the last day of fieldwork. 3. The client declines to include a statement of cash flow in the financial statements. 4. The client fails to record an immaterial amount of insurance paid in advance as an asset. 5. The client does not record impairment of goodwill and will not depreciate property and equipment. Both are considered very material. 6. There is substantial doubt about the client's ability to continue as a going concern. ANSWER:

1. Qualified or disclaimer of opinion (although most auditors will disclaim a clientimposed scope limitation). 2. Disclaimer of opinion for the auditor's impaired independence. 3. Qualified opinion because of the GAAP violation that does not overshadow the remainder of the financial statements. 4. Unqualified opinion with no modifications due to immateriality. 5. Most likely adverse due to the extent of materiality and the pervasiveness to the financial statements. 6. Most likely unqualified with an explanatory paragraph. In some reporting situations, doubt about the client continuing as a going concern is such that the auditor does not believe that an additional paragraph to an unqualified opinion is appropriate.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-03 AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:14 AM

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Chapter 15 101. Qualified opinions

Under what circumstances would an auditor issue a qualified opinion? ANSWER:

The auditor would be likely to issue a qualified opinion when the auditor has completed the audit and has concluded that the financial statements, taken as a whole, are fairly stated except for the following situations: There is a material, unjustified departure from GAAP, but the auditor believes that the financial statements taken as a whole are fairly presented except for this specifically identifiable GAAP departure. Not overshadowing to the remainder of financial statement. Management's disclosures are not adequate, but the lack of disclosure is not pervasive. The auditor has conducted the audit and is unable to obtain sufficient appropriate evidence on a particular area because of scope limitations or the lack of such evidence. (Not significant enough to render disclaimer of opinion).

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:17 AM

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Chapter 15 102. Types of Audit Opinions

On January 2, 20Y9, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices were being increased by 10%, effective immediately. Based on this notice, Zoom revalued its December 31, 20Y8, inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of the revaluation was material to current assets, but not to total assets or net income. The increase is adequately disclosed in the footnotes. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

This is a failure to follow GAAP and a qualified opinion should be issued. Zoom Detail Shoppe has used a replacement cost inventory approach rather than a lower of cost or market approach. It is most likely not sufficiently material to require an adverse opinion. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Qualified Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:18 AM

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Chapter 15 103. Types of Audit Opinions

Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA learned that a recent fire caused significant damage to one of the client's two manufacturing facilities. However, the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

Disclosure of this information is required in a note to the financial statements. According to the information, this event is highly material or material, depending upon the amount of the loss and the auditor's preliminary judgment about materiality. Failure to disclose the event is a violation of GAAP and is likely to result in a qualified opinion, or it could be so material that it requires an adverse opinion. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Qualified Audit Reports Adverse Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:19 AM

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Chapter 15 104. Types of Audit Opinions

For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial statements in each of the five years. The CPA was allowed to observe physical inventories for the current year ended December 31, 20Y8, because the client's bank would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 20Y8. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

The scope of the audit has been restricted by inability to assess the inventory. Based on the information, this appears to be highly material or material, depending upon the auditor's preliminary judgment about materiality. Because the auditor was unable to obtain sufficient appropriate evidence on the beginning inventories, it would be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning of the year balance sheet. The choice of a qualified or disclaimer opinion would depend upon materiality. If highly material, then a disclaimer is the best choice. If material, then a qualified scope and opinion might be more appropriate. An unqualified opinion could be issued for the current period balance sheet. POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Qualified Audit Reports Audit Report with Disclaimer of Opinion DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:20 AM

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Chapter 15 105. Adverse opinions

Under what circumstances would an auditor issue an adverse opinion? ANSWER:

The auditor would be likely to issue an adverse opinion when the auditor has finished the audit and has concluded that the financial statements, taken as a whole, are very materially misstated and therefore, taken as a whole, are not fairly presented due to: ∙ material departures from GAAP that pervade the financial statements. ∙ a lack of important disclosures that is pervasive, as this is a departure from GAAP. The GAAP deviation is typically pervasive to the entire financial statement when an adverse opinion is issued.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:21 AM

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Chapter 15 106. Disclaimers

Discuss what a disclaimer is and when it is issued. ANSWER:

A disclaimer may be issued for a pervasive scope limitation or for lack of independence of the practitioner. A disclaimer basically says that the practitioner performed no procedures and provides no assurances on the financial statements. In some cases, a disclaimer will be issued when there is substantial doubt about the client being a going concern. When the CPA is not independent of the client, professional standards forbid any expression of assurance by the auditor on the financial statements. Lack of independence results in a one-paragraph disclaimer stating that the practitioner is not independent with respect to the client and did not audit the financial statements and does not express any opinion on the financial statements. Scope limitations result from the inability to gather sufficient evidence to express an opinion and may result from the client's actions or the situation. When imposed by the client or when the client has a pervasive scope limitation, such as the practitioner not being able to observe ending inventory because of when the engagement started, then the practitioner normally issues a disclaimer. If the scope limitation is not imposed by the client and is limited then the practitioner usually expresses a qualified opinion.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:22 AM

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Chapter 15 107. Types of Audit Opinions

During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to inspect the minutes from the board of director's meetings. The CPA is instead offered a certified copy of all resolutions and actions involving accounting matters. REQUIRED: Which type of audit report would you suggest be issued this year and why? ANSWER:

The auditor should issue a disclaimer of opinion. Failure of the client to allow the auditor to inspect the minutes of board meetings would be a material client-imposed restriction. Due to the importance of the minutes, a disclaimer would be necessary. The certified copy of all resolutions and actions is not a satisfactory alternative procedure.

POINTS: 1 QUESTION TYPE: Essay HAS VARIABLES: False LEARNING OBJECTIVES: AUDI.JOHN.18.15-04 NATIONAL STANDARDS: United States - BUSPROG: Communications United States - BUSPROG: Comprehension TOPICS: Audit Reports with a Disclaimer of Opinion DATE CREATED: 1/30/2018 10:46 AM DATE MODIFIED: 1/30/2018 11:23 AM

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