QUIZ 3 AUDIT 

1. Each of the following might, by itself, form a valid basis for an auditor to decide to omit
a test except for the *
a. Difficulty and expense involved in testing a particular item.
b. Assessment of control risk at a low level.
c. Inherent risk involved.
d. Relationship between the cost of obtaining evidence and its usefulness.
 
2. Which of the following generalizations does not relate to the appropriateness of
evidence? *
a. Audit evidence from external sources (for example, confirmation received from a
third party) is more reliable than that generated internally.
b. An auditor’s opinion, to be economically useful, is formed within reasonable time
and based on evidence obtained at a reasonable cost.
c. Audit evidence generated internally is more reliable when the related accounting
and internal control systems are effective.
d. Audit evidence obtained directly by the auditor is more reliable than that
obtained from the entity.
 
3. Which of the following types of audit evidence is the most persuasive? *
a. Pre-numbered purchase order forms.
b. Client worksheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.
 
4. Which of the following statements concerning evidential matter is true? *
a. Appropriate evidence supporting management’s assertions should be convincing
rather than merely persuasive.
b. Effective internal control contributes little to the reliability of the evidence
created within the entity.
c. The cost of obtaining evidence is not an important consideration to an auditor in
deciding what evidence should be obtained.
d. A client’s accounting records can considered sufficient evidence to support the
financial statements.
e. None of the above.
 
 
5. Which of the following statements is correct concerning the use of negative
confirmation requests? *
a. Unreturned negative confirmation requests rarely provide significant explicit
evidence.
 b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures
are necessary.
d. Negative confirmation requests are effective when understatements of account
balances are suspected.
 
6. An auditor selected items for test counts while observing a client’s physical inventory.
The auditor then traced the test counts to the client’s inventory listing. This procedure
most likely obtained evidence concerning management’s assertion of: *
a. Rights and obligations
b. Existence
c. Completeness
d. Valuation
 
7. Which of the following is/are true? *
a. The quantity of audit evidence needed is affected by the risk of misstatement and
also by the quality of such audit evidence.
b. The reliability of audit evidence is influenced by its source and by its nature and is
dependent on the individual circumstances under which it is obtained.
c. A and B
d. Neither.
 
8. Which of the following is a false statement about audit objectives? *
a. There should be a one-to-one relationship between audit objectives and
procedures.

b. Audit objectives should be developed in light of management assertions about the

financial statement components.
c. Selection of tests to meet audit objectives should depend upon the understanding
of internal control.
d. The auditor should resolve any substantial doubt about any of management’s
material financial statement assertions.
 
9. Which of the following should be considered by the auditor in deciding which means
(or combination of means) to use in selecting items for testing? *
a. The risk of material misstatement related to the assertion being tested.

b. Audit efficiency.
 
10. Confirmation is “the process of obtaining and evaluating a direct communication from
a third party in response to a request for information about a particular item affecting
financial statement assertions.” Two assertions for which confirmation of accounts
receivable balances provides primary evidence are *
a. Completeness and valuation
b. Valuation and rights and obligations
c. Rights and obligations and existence
d. Existence and completeness
 
11. Which of the following is not an example of analytical evidence? *
a. Compared inventory turnover by major class with the prior year on a monthly
and quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had
erroneously recorded ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations
from budgeted amounts
 
12. Which of the following factors is most important in determining the competence of
audit evidence? *
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.
 
13. As part of audit planning, CPAs should design audit programs for each individual audit
and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited.
 
14. The permanent file section of the working papers that is kept for each audit client
most likely contains *
a. Review notes pertaining to questions and comments regarding the audit work
performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client's legal counsel concerning pending litigation.
d. Narrative descriptions of the client's internal control policies and procedures.
 
 
15. With respect to the auditor's planning of a year-end examination, which of the
following statements is always true? *
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures
that will be performed.
d. It is an acceptable practice to carry out substantial parts of the examination at
interim dates.
 
16. Of the following audit procedures, which best supports the valuation objective? *
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.
 
17. Which of the following workpapers would one normally expect to find in the
permanent file? *
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests.
 
18. Of the following procedures, which is not considered part of “obtaining an
understanding of the client’s environment?” *
a. Examining trade publications to gain a better understanding of the client's
industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer
understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.
 
19. Which of the following is a basic tool used by the auditor to control the audit work
and review the progress of the audit? *
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.
 
 
20. Choose the best illustration of objective audit evidence from the following *
a. The paid invoice file containing invoices matched with receiving reports and
purchase orders.
b. Management's assertion that payment procedures require matching of invoice
with receiving report and purchase order.
c. Clerical staff assurances that management policy regarding payment of invoices--
matching of invoice with receiving report and purchase order--is always followed.
d. The treasurer's statement of not remembering any exceptions in which an invoice
was submitted for payment that was not accompanied by a matching receiving
report and purchase order. 

21. Audit working papers are used to record the results of the auditor's evidence-
gathering procedures. When preparing working papers, the auditor should remember
that working papers should be *
a. Kept on the client's premises so that the client can have access to them for
reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are retained by the
auditor.
d. Designed to meet the circumstances and the auditor's needs on each engagement.
 

22. The in-charge auditor decides that work papers are complete: *
a. When satisfied that the audit objectives have been met and the working papers
support the conclusions.
b. When working papers make reference to the steps outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and dated
them.
d. When proper cross-references to other working papers are noted.

23. The main advantage of properly indexed working papers is to *

a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team.
d. Facilitate the efficient use of audit staff.
 
24. Audit evidence can come in different forms with different degrees of persuasiveness.
Which of the following is the least persuasive type of evidence? *
a. Documents mailed by outsiders to the auditor.
b. Correspondence between the auditor and vendors.
c. Sales invoices inspected by the auditor.
d. Computations made by the auditor.
 
25. Which of the following statements relating to the competence of evidential matter is
always true? *
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are
more relevant than data developed under unsatisfactory internal control
conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered
competent.
 
 
26. Which of the following is not a consideration in the development of audit programs? *
a. Internal control over the recording of plant asset additions and repairs and
maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility
during the year under audit.
c. The client is a private university located in the Midwest.
d. The client's board or directors is elected by the stockholders at the annual
meeting.
 
 
27. An auditor test counted a batch of inventory. This is an example of what kind of
evidence? *
a. Analytical
b. Documentary.
c. Physical.
d. Hearsay.
 
28. During the course of an audit engagement, an auditor prepares and accumulates audit
working papers. The primary purpose of the audit working papers is to *
a. Aid the auditor in adequately planning his work.
b. Provide a point of reference for future audit engagements.
c. Support the underlying concepts included in the preparation of the basic financial
statements.
d. Support the auditor's opinion.
 
 
29. A CPA, in performing an independent audit, would most likely use recalculation as a
substantive test for which of the following expense-related accounts? *
1/1

a. Purchases of supplies.
b. Interest expense
c. Advertising expense.
d. Repairs and maintenance expense.
 
30. Which of the following is an example of inferential evidence? *
a. The auditor observes the taking of the client's physical inventory and performs
test counts.
b. The auditor inspects marketable securities for existence.
c. An auditor, who notes that customer accounts receivable have increased
significantly in the current year as a percentage of sales, suspects that a larger
proportion of the accounts will prove uncollectible.
d. The auditor counts cash on hand at year-end.
 
31. In evaluating the reasonableness of advertising expense, which of the following would
be the best evidence? *
a. Oral evidence obtained through discussions with company marketing executives
and representatives of the advertising agency retained.
b. Documentary evidence obtained by vouching charges to the account and by
retracing charges from source documents to the account.

c. Analytical evidence developed by comparing the ratio of advertising expenses to

sales with historical data for the company and industry.
d. Arithmetical evidence developed by re-computing charges submitted by the
advertising agency and paid by the company.
 
32. As one of the year-end audit procedures, the auditor instructed the client's personnel
to prepare a standard bank confirmation request for a bank account that had been closed
during the year. After the client's treasurer had signed the request, it was mailed by the
assistant treasurer. What is the major flaw in this audit procedure? *
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed.
c. The CPA did not sign the confirmation request before it was mailed.
d. The request was mailed by the assistant treasurer.
 
 
33. An auditor should perform alternative procedures to substantiate the existence of
accounts receivable when *
 a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectability of the receivables is in doubt.
d. Pledging of the receivables is probable.
 
34. During the working paper review, an audit supervisor finds that the auditor's
reported findings are not adequately cross-referenced to supporting documentation. The
supervisor will most likely instruct the auditor to *
a. Prepare a working paper to indicate that the full scope of the audit was carried
out.
b. Familiarize him/herself with the sequence of working papers so that he(she) will
be able to answer questionsabout the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is
unclear.
d. Provide a workpaper indexing system that shows the relationship between
findings, conclusions, and the related facts.
 
 
35. An auditor would primarily rely upon which type of evidential matter when
evaluating the collectability of accounts receivable? *
a. Positive confirmation.
b. Negative confirmation.
c. Aged accounts receivable listing.
d. Management's representations.
 
36. Sales commissions as a percentage of sales declined significantly during the year
under audit. Of the following possible causes, the most likely is *
a. Sales increased during the year.
b. The sales force was reduced at the end of the year.
c. Sales commission rates were increased at the beginning of the year.
d. Fictitious sales were recorded at year-end to inflate earnings. Commissions were
not recorded on these sales.
 
 
37. A client who wishes to inflate earnings decides to hold the sales record open beyond
year-end and record Year 2 sales in Year 1. Although the invoices are dated as of year end,
the shipments were made in the following period. Moreover, the goods were included in
the ending inventory of the period under audit. Which of the following auditing
procedures would not assist in detecting this form of fraudulent financial reporting?  *
a. The auditor confirms accounts receivable on a positive basis as of year-end.
 b. The auditor examines shipping documents relating to sales recorded during the
last few days of the year.
c. The auditor examines shipping documents relating to sales recorded during the
first few days of the year following the period under audit.
d. The auditor applies analytical procedures that compare gross profit rates and
sales volume by month for the current and preceding years.
 
38. Which of the following is not an example of confirmation evidence? *
a. Requesting the client's outside legal counsel to evaluate the possible outcome of
pending litigation.
b. Questioning the client's employees about existing internal control policies and
procedures.
c. Requesting the client's customers to verify year-end accounts receivable balances.
d. Requesting payees to respond in writing to the terms contained in notes payable
appearing in the client's ledger.
 
39. Two types of accounts receivable confirmation requests are used in practice-positive
and negative. Negative confirmations may be used *
a. When internal control over sales and accounts receivable is weak.
b. Only where the auditor has assessed inherent risk and control risk as low, the
auditor believes that the recipient will review the request, and a large number of
small balances are involved.
c. Only where internal control over sales and accounts receivable is strong.
d. Only where the auditor has assessed inherent risk and control risk as low, the
auditor believes that the recipient will review the request, and a small number of
large balances are involved.
 
40. When counting cash on hand, the auditor must exercise control over all cash and
other negotiable assets to prevent *
a. Theft.
b. Irregular endorsement.
c. Substitution.
d. Deposits in transit.
 
41. For customers not responding to a first request for positive confirmation requests, the
auditor should next *
a. Contact the customer by telephone and attempt to confirm the balance orally.
b. Analyze subsequent remittances from the customer to see if the year end balance
has been paid.
c. Send a second request for confirmation.
d. Examine underlying documentation supporting the year end balance.
42. Which of the following audit procedures would provide the least reliable evidence
that the client has legal title to inventories? *
a. Confirmation of inventories at locations outside the client's facilities.
b. Analytical review of inventory balances compared to purchasing and sales
activities.
c. Observation of physical inventory counts.
d. Examination of paid vendors' invoices.