Auditing Theory- Finals

1. Tests of details, rather than analytical procedures are appropriate when all of the following are true
except:
a. Transaction volume is low.
b. The account requires special attention.
c. Planned detection risk is high.
d. Control risk is at the maximum.
2. Which of the following is least likely an accounting estimate?
a. Amortization.
b. Subscription income for magazines.
c. Repair and maintenance expense.
d. Airline passenger revenue.
3. An auditor’s objectives in evaluating accounting estimates include all of the following except to
a. Assure that estimates are reasonable.
b. Assure that estimates are presented in the financial statements in accordance with
GAAP.
c. Provide reasonable assurance that management has developed all material estimates.
d. Develop the estimates and make the journal entries to record them.
4. In evaluating the reasonableness of accounting estimates, the auditor begins by
a. Obtaining an understanding of how management developed the estimate.
b. Developing an independent estimate for comparison purposes.
c. Testing the process used by management to develop the estimate.
d. Reviewing transactions that occurred subsequent to the balance sheet date.
5. Which of the following procedures does the auditor perform when completing an engagement?
a. Performs substantive tests of expenses.
b. Obtains a management representation letter.
c. Performs analytical procedures to plan the audit procedures.
d. Tests controls over revenues.
6. The significance of a related-party transaction is that
a. The PCAOB requires all related-party transactions to be disclosed.
b. Related-party transactions must be described in the notes to the financial statements.
c. Its form may not reflect its economic substance.
d. Related-party transactions are required to be excluded from the financial statements.
7. To aid in the search for related-party transactions, the auditor
a. Considers Type I events.
b. Provides the audit team with the names of known related-parties.
c. Develops a note for the financial statements regarding known related-parties.
d. Makes reference in the audit report to pro forma information.
8. A Type II subsequent event
a. Reveals conditions arising after the balance sheet date that require disclosure in the
financial statements.
b. Is an event occurring on the year-end date that must be included in the financial
statements.
c. Happened after the close of the prior year but before the end of the year under audit.
d. Occurs after the balance sheet date and requires adjustment to the financial statements.
 9. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments,
the auditor should
a. Honor the confidentiality of the client-lawyer relationship.
b. Consider the refusal a scope limitation.
c. Seek to obtain the corroborating information from management.
d. Disclose the fact in a footnote to the financial statements.
10. The final discontinuance, after the balance sheet date, of a subsidiary, which suffered a fire three days
before the year-end date is
a. An item, which is required to be included in the audit report.
b. A Type II subsequent event.
c. An event which must be reported to the SEC.
d. A Type I subsequent event.
11. A written representation letter from a client's management that, among other matters, acknowledges
responsibility for the fair presentation of financial statements, is normally signed by the
a. Chief executive officer and the chief financial officer.
b. Chief financial officer and the chairman of the board of directors.
c. Chairman of the audit committee of the board of directors.
d. Chief executive officer, the chairman of the board of directors, and the client's lawyer.
12. When searching for subsequent events, the auditor
a. Sends positive confirmations to vendors.
b. Performs analytical procedures.
c. Makes inquiries of management.
d. Utilizes a sampling approach for controls.

13. Which of the following auditing procedures is ordinarily performed last?

a. Reading of the minutes of the director's meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing controls over the purchasing function.
14. An unasserted claim is
a. A claim for which a plaintiff may have a legal right but has not yet taken action.
b. One made by plaintiffs who have filed suit.
c. A claim, which the potential plaintiff has notified the client it will not pursue.
d. One made by attorneys, but not by plaintiffs.
15. Management's refusal to furnish a written representation on a matter, which the auditor considers
essential, constitutes
a. Prima facie evidence that the financial statements are not presented fairly.
b. A violation of the Foreign Corrupt Practices Act.
c. An uncertainty sufficient to preclude an unqualified opinion.
d. A scope limitation sufficient to preclude an unqualified opinion.
16. An auditor would choose to utilize a non-statistical sampling, rather than a statistical, plan for which of
the following reasons?
a. The cost to randomly select sampling units exceeds the expected benefits.
b. There is a need to quantify sampling risk.
c. No errors are expected in the sample
d. The auditor wishes to reduce non-sampling risk.
17. The desired allowance for sampling risk is also called
a. Desired standard deviation.
b. Desired acceptable risk of incorrect rejection.
c. Desired precision.
d. Planned sampling risk.
18. Three conditions must be met for difference or ratio estimation to be used. Which of the following is
not one of the three conditions?
a. Each population item must have a book value.
b. There must be some differences between the audited values and the recorded book
values.
c. The total population book value must agree to the sum of the individual population book
values.
d. The expected error rate must be more than the tolerable error rate.
19. The risk of incorrect rejection and the risk of assessing control risk too high relate to the
a. Efficiency of the audit.
b. Effectiveness of the audit.
c. Selection of the sample.
d. Audit quality controls.
20. In making an estimate of the dollar amount of misstatements on sales invoices using probability-
proportional-to-size sampling, which of the following is true?
a. The risks of incorrect acceptance and incorrect rejection are greater than for a classical
variables sampling plan.
b. An amount for tolerable misstatement cannot be utilized in a PPS plan.
c. An invoice with a large balance has a greater chance of being selected than one with a
smaller balance.
d. The estimate will not be valid if the rate of error found in the sample is small.
21. Which of the following best describes sampling risk?
a. The sample may not be representative of the population.
b. The auditor may select audit procedures that are not appropriate to achieve the specific
objective.
c. An auditor may fail to recognize errors in the documents examined for the chosen
sample.
d. The documents supporting the sample items may not be available for inspection.
22. Variables sampling plans focus on
a. Rates of deviation from prescribed control procedures.
b. Monetary balances.
c. Assessing the effective operation of management’s controls.
d. The risk of assessing control risk too high.
23. The primary advantage of using systematic selection is that population items
a. Do not have to be pre-numbered to use the method.
b. May be arranged in a systematic order, which makes the sample more representative of
the population.
c. May be included more than once in a sample.
d. Containing errors will automatically be included in the sample.
24. In attributes estimation, which of the following must be known to evaluate the results of the auditor's
sample?
a. Estimated dollar value of the population.
 b. Standard deviation of the population.
c. Actual occurrence rate of the attribute in the population.
d. Sample size.
25. An auditor is evaluating the results of a probability-proportional-to-size (PPS) sampling plan. Assuming
the incremental allowance is $10,500 and the allowance for sampling risk is $45,000, what is basic
precision for the sampling plan?
a. $34,500.
b. $45,000.
c. $55,500.
d. Not determinable from the facts given.
26. Which of the following is an element of sampling risk?
a. Choosing an audit procedure that is inconsistent with the audit objective.
b. Choosing a sample size that is too small to achieve the sampling objective.
c. Failing to detect an error on a document that has been inspected by the auditor.
d. Failing to perform audit procedures that are required by the sampling plan.
27. Which of these sampling methods is most useful to auditors performing tests of controls?
a. Discovery sampling.
b. Attribute estimation.
c. Variable sampling.
d. Difference estimation.
28. The auditor increases the expected population deviation rate. This results in a sample size that is
a. Smaller.
b. Larger.
c. The same size.
d. Cannot be determined from the information given.
29. An advantage of statistical sampling is that it
a. Has been found in court to be superior to non-statistical sampling.
b. Eliminates the need for the auditor’s judgment.
c. Objectively measures risk.
d. Defines the appropriate confidence level for the sample.
30. Probability-proportional-to-size (PPS) sampling is most appropriate when
a. The auditor anticipates a few understatement errors.
b. The auditor anticipates many overstatement errors.
c. The auditor expects no errors.
d. The audit is a new engagement for the auditor.