1

Chapter 6
Multiple-Choice Questions

1. The objective of the ordinary audit of financial statements is the expression of an opinion on:
easy a. the fairness of the financial statements.
a b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the balance sheet and income statement.

2. If the auditor believes that the financial statements are not fairly stated or is unable to reach an
easy conclusion because of insufficient evidence, the auditor:
c a. should withdraw from the engagement.
b. should request an increase in audit fees so that more resources can be used to conduct the
audit.
c. has the responsibility of notifying financial statement users through the auditors report.
d. should notify regulators of the circumstances.

3. Auditors accumulate evidence to:

easy a. defend themselves in the event of a lawsuit.
d b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Securities Acts of 1933 and 1934.
d. enable them to reach conclusions about the fairness of the financial statements.

4. The responsibility for adopting sound accounting policies and maintaining adequate internal
easy control rests with the:
b a. board of directors.
b. company management.
c. financial statement auditor.
d. companys internal audit department.

5. The auditors best defense when material misstatements are not uncovered is to have conducted
easy the audit:
a a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.

6. If management insists on financial statement disclosures that the auditor finds unacceptable, the
easy auditor can:
a Issue an adverse audit report Issue a qualified audit report
a. Yes Yes
b. No No
c. Yes No
d. No Yes

7. If management insists on financial statement disclosures that the auditor finds unacceptable, the
easy auditor can do all but which of the following?
b a. Issue an adverse audit report.
b. Issue a disclaimer of opinion.
c. Withdraw from the engagement.
d. Issue a qualified audit report.

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8. Which of the following is not one of the reasons that auditors provide only reasonable
easy assurance on the financial statements?
d a. The auditor commonly examines a sample, rather than the entire population of
transactions.
b. Accounting presentations contain complex estimates which involve uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

10. Which of the following statements is most correct regarding errors and fraud?
easy a. An error is unintentional, whereas fraud is intentional.
a b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.

11. (SOX) Which of the following statements is true of a public companys financial statements?
easy a. Sarbanes-Oxley requires the CEO only to certify the financial statements.
c b. Sarbanes-Oxley requires the CFO only to certify the financial statements.
c. Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
d. Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.

12. Which of the following is not one of the three categories of assertions?
easy a. Assertions about classes of transactions and events for the period under audit
b b. Assertions about financial statements and correspondence to GAAP
c. Assertions about account balances at period end
d. Assertions about presentation and disclosure

13. If a short-term note payable is included in the accounts payable balance on the financial
easy statement, there is a violation of the:
d a. completeness assertion.
b. existence assertion.
c. cutoff assertion.
d. classification and understandability assertion.

14. Professional skepticism requires auditors to possess a(n) ______ mind.

easy a. introspective
b b. questioning
c. intelligent
d. unbelieving

15. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
easy that misstatements, whether caused by errors or fraud, that are not ________ are detected.
c
a. important to the financial statements
b. statistically significant to the financial statements
c. material to the financial statements
d. identified by the client

16. Fraudulent financial reporting is most likely to be committed by whom?

easy a. Line employees of the company.
c b. Outside members of the companys board of directors.
c. Company management.
d. The companys auditors.

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17. Which of the following would most likely be deemed a direct-effect illegal act?
easy a. Violation of federal employment laws.
c b. Violation of federal environmental regulations.
c. Violation of federal income tax laws.
d. Violation of civil rights laws.

18. The concept of reasonable assurance indicates that the auditor is:
easy a. not an insurer of the correctness of the financial statements.
a b. not responsible for the fairness of the financial statements.
c. responsible only for issuing an opinion on the financial statements.
d. responsible for finding all misstatements.

19. Tests of details of balances are specific procedures intended to:

easy a. test for monetary errors in the financial statements.
a b. prove that the accounts with material balances are classified correctly.
c. prove that the trial balance is in balance.
d. identify the details of the internal control system.

20. Which of the following is the auditor least likely to do when aware of an illegal act?
easy a. Discuss the matter with the clients legal counsel.
c b. Obtain evidence about the potential effect of the illegal act on the financial statements.
c. Contact the local law enforcement officials regarding potential criminal wrongdoing.
d. Consider the impact of the illegal act on the relationship with the companys management.

21. The auditor gives an audit opinion on the fair presentation of the financial statements and
medium associates his or her name with it when, on the basis of adequate evidence, the auditor
c concludes that the financial statements are unlikely to mislead:
a. investors.
b. management.
c. a prudent user.
d. the reader.

22. The responsibility for the preparation of the financial statements and the accompanying
medium footnotes belongs to:
b a. the auditor.
b. management.
c. both management and the auditor equally.
d. management for the statements and the auditor for the notes.

23. When engaged to audit the financial statements, it is acceptable for the auditor to draft:
medium
a The clients financial statements The footnotes to the clients financial statements
a. Yes Yes
b. No No
c. Yes No
d. No Yes

24. The auditor has considerable responsibility for notifying users as to whether or not the
medium statements are properly stated. This imposes upon the auditor a duty to:
a a. provide reasonable assurance that material misstatements will be detected.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial statements.
d. be an insurer of the fairness in the statements.

25. The auditor should not assume that management is dishonest, but the possibility of dishonesty

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easy must be considered. This is an example of:

b a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the AICPAs Code of Professional Conduct.

26. If the auditor were responsible for making certain that all of managements assertions in the
medium financial statements were absolutely correct:
d a. bankruptcies could no longer occur.
b. bankruptcies would be reduced to a very small number.
c. audits would be much easier to complete.
d. audits would not be economically feasible.

27. The auditors best defense when existing material misstatements in the financial statements are
medium not uncovered in the audit is:
d a. the audit was conducted in accordance with generally accepted accounting principles.
b. the financial statements are the clients responsibility.
c. the client is guilty of contributory negligence.
d. the client is guilty of fraudulent misrepresentation.

28. Fraudulent financial reporting is often called:

medium a. management fraud.
a b. theft of assets.
c. defalcation.
d. embezzlement.

30. Auditing standards make _____ distinction(s) between the auditors responsibilities for
medium searching for errors and fraud.
c a. little
b. a significant
c. no
d. various

31. In comparing management fraud with employee fraud, the auditors risk of failing to discover
medium the fraud is:
b a. greater for management fraud because managers are inherently more deceptive than
employees.
b. greater for management fraud because of managements ability to override existing
internal controls.
c. greater for employee fraud because of the higher crime rate among blue collar workers.
d. greater for employee fraud because of the larger number of employees in the organization.

32. Which of the following statements is correct with respect to the auditors responsibilities
medium relative to the detection of indirect-effect illegal acts?
a a. The auditor has no responsibility for searching for indirect-effect illegal acts.
b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any
other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether direct-effect or
indirect-effect.
d. Discovery of indirect-effect illegal acts is usually easier than discovery of fraud.

33. When comparing the auditors responsibility for detecting employee fraud and for detecting
medium errors, the profession has placed the responsibility:
c a. more on discovering errors than employee fraud.
b. more on discovering employee fraud than errors.

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c. equally on discovering either one.

d. on the senior auditor for detecting errors and on the manager for detecting employee fraud.

34. If several employees collude to falsify documents, the chance a normal audit would uncover
medium such acts is:
a a. very low.
b. very high.
c. zero.
d. none of the above.

35. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the
medium auditor should:
d a. include audit procedures which have a strong probability of detecting illegal acts.
b. still include some audit procedures designed specifically to uncover illegalities.
c. ignore the issue.
d. make inquiries of management regarding their policies for detecting and preventing illegal
acts and regarding their knowledge of violations, and then rely on normal audit procedures
to detect errors, irregularities, and illegalities.

36. When the auditor has reason to believe an illegal act has occurred, the auditor should:
medium a. inquire of management only at one level below those likely to be involved with the
illegality.
c b. begin communication with the FASB in accordance with PCAOB regulations.
c. consider accumulating additional evidence to determine if there is actually an illegal act.
d. withdraw from the engagement.

37. When the auditor knows that an illegal act has occurred, the auditor must:
medium a. report it to the proper governmental authorities.
b b. consider the effects on the financial statements, including the adequacy of disclosure.
c. withdraw from the engagement.
d. issue an adverse opinion.

38. (Public) If an auditor uncovers an illegal act at a public company, the auditor must notify:
medium a. local law enforcement officials.
c b. the Public Company Accounting Oversight Board.
c. the Securities and Exchange Commission.
d. all of the above.

39. Why does the auditor divide the financial statements into smaller segments?
medium a. Using the cycle approach makes the audit more manageable.
a b. Most accounts have few relationships with others and so it is more efficient to break the
financial statements into smaller pieces.
c. The cycle approach is used because auditing standards require it.
d. All of the above are correct.

40. Why does the auditor divide the financial statements into segments around the financial
medium statement cycles?
b a. Most auditors are trained to audit cycles as opposed to entire financial statements.
b. The approach aids in the assignment of tasks to different members of the audit team.
c. The cycle approach is required by auditing standards.
d. The cycle approach allows the auditor to detect indirect-effect illegal acts.

41. The most important general ledger account included in and affecting several cycles is the:
medium a. cash account.
a b. inventory account.
c. income tax expense and liability accounts.

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d. retained earnings account.

42. Management assertions are:

medium a. implied or expressed representations about accounts, transactions, and disclosures in the
a financial statements.
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the assertions letter, but are not disclosed on the financial
statements.

43. Which of the following statements is true?

medium a. Audit objectives follow and are closely related to management assertions.
a b. Managements assertions follow and are closely related to the audit objectives.
c. The auditors primary responsibility is to find and disclose fraudulent management
assertions.
d. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.

44. Which of the following statements is true regarding the distinction between general audit
medium objectives and specific audit objectives for each account balance?
b a. The specific audit objectives are applicable to every account balance on the financial
statements.
b. The general audit objectives are applicable to every account balance on the financial
statements.
c. The general audit objectives are stated in terms tailored to the engagement.
d. For any given class of transactions, usually only one audit objective must be met to
conclude the transactions are properly recorded..

45. Which of the following statements about the existence and completeness assertions is not true?
medium a. The existence and completeness assertions emphasize different audit concerns.
c b. Existence deals with overstatements and completeness deals with understatements.
c. Existence deals with understatements and completeness deals with overstatements.
d. The completeness assertion deals with unrecorded transactions.

46. The occurrence assertion applies to _______.

medium a. presentation and disclosure matters
b b. classes of transactions and events during the period
c. account balances
d. proper classification of income statement accounts

47. Which of the following management assertions is not associated with transaction-related audit
medium objectives?
b a. Occurrence
b. Classification and understandability
c. Accuracy
d. Completeness

48. Which of the following statements is not true?

medium a. Balance-related audit objectives are applied to account balances.
d b. Transaction-related audit objectives are applied to classes of transactions.
c. Balance-related audit objectives are applied to the ending balance in balance sheet
accounts.
d. Balance-related audit objectives are applied to both beginning and ending balances in
balance sheet accounts.

49. In testing for cutoff, the objective is to determine:

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medium a. whether all of the current periods transactions are recorded.

b b. whether transactions are recorded in the correct accounting period.
c. the proper cutoff between capitalizing and expensing expenditures.
d. the proper cutoff between disclosing items in footnotes or in account balances.

50. The detail tie-in objective is not concerned that the details in the account balance:
medium a. agree with related subsidiary ledger amounts.
b b. are properly disclosed in accordance with GAAP.
c. foot to the total in the account balance.
d. agree with the total in the general ledger.

51. The detail tie-in is part of the_______ assertion for account balances.
medium a. classification
b b. valuation and allocation
c. rights and obligations
d. completeness

52. Which of the following is not a proper match of a transaction-related audit objective and
medium management assertion?
a a. Accuracy and cutoff.
b. Classification and classification.
c. Posting and summarization with accuracy.
d. Occurrence and occurrence.

53. Which of the following statements is not correct?

medium a. There are many ways an auditor can accumulate evidence to meet overall audit objectives.
d b. Sufficient appropriate evidence must be accumulated to meet the auditors professional
responsibility.
c. It is appropriate to minimize the cost of accumulating evidence.
d. Gathering evidence and minimizing costs are equally important considerations that affect
the approach the auditor selects.

54. Two overriding considerations affect the many ways an auditor can accumulate evidence:
medium 1. Sufficient appropriate evidence must be accumulated to meet the auditors professional
a responsibility.
2. Cost of accumulating evidence should be minimized.
In evaluating these considerations:
a. the first is more important than the second.
b. the second is more important than the first.
c. they are equally important.
d. it is impossible to prioritize them.

55. If the auditor has obtained a reasonable level of assurance about the fair presentation of the
medium financial statements through understanding internal control, assessing control risk, testing
b controls, and analytical procedures, then the auditor:
a. can issue an unqualified opinion.
b. can significantly reduce other substantive tests.
c. can write the engagement letter.
d. needs to perform additional tests of controls so that the assurance level can be increased.

56. After the auditor has completed all audit procedures, it is necessary to combine the information
medium obtained to reach an overall conclusion as to whether the financial statements are fairly
d presented. This is a highly subjective process that relies heavily on:
a. generally accepted auditing standards.
b. the AICPAs Code of Professional Conduct.
c. generally accepted accounting principles.

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d. the auditors professional judgment.

57. Which of the following combinations is correct?

medium a. Existence relates to whether the amounts in accounts are understated.
c b. Occurrence relates to whether balances exist.
c. Existence relates to whether amounts included exist.
d. Occurrence relates to whether the amounts in accounts occurred in the proper year.

58. If an auditor conducted an audit in accordance with auditing standards, which of the following
medium would the auditor likely detect?
b a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.

59. Which of the following statements best describes the auditors responsibility with respect to
medium illegal acts that do not have a material effect on the clients financial statements?
a a. Generally, the auditor is under no obligation to notify parties other than personnel within
the clients organization.
b. Generally, the auditor is under an obligation to inform the PCAOB.
c. Generally, the auditor is obligated to disclose the relevant facts in the auditors report.
d. Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.

60. Which of the following statements best describes the auditors responsibility regarding the
medium detection of fraud?
c a. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from nonperformance of audit procedures specifically described in the engagement
letter.
b. The auditor must extend auditing procedures to actively search for evidence of fraud in all
situations.
c. The auditor must extend auditing procedures to actively search for evidence of fraud
where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion
is issued.

61. The essence of the attest function is to:

medium a. assure the consistent application of correct accounting procedures.
b b. determine whether the clients financial statements are fairly stated.
c. examine individual transactions so that the auditor may certify as to their validity.
d. detect collusion and fraud.

62. The primary difference between an audit of the balance sheet and an audit of the income
medium statement is that the audit of the income statement deals with the verification of:
a a. transactions.
b. authorizations.
c. costs.
d. cutoffs.

c. There will be many specific objectives developed for each relevant general objective.
d. There must be one specific objective for each general objective.

89. Responsibility for the fair presentation of financial statements rests equally with management and
easy the auditor.
b a. True
b. False

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90. Errors are usually more difficult for an auditor to detect than frauds.
easy a. True
b b. False

91. Auditors have found that the most efficient way to conduct audits is to focus primarily on testing
easy classes of transactions and performing minimal or no tests of ending account balances.
b a. True
b. False

92. When an auditor has reduced assessed control risk based on tests of controls, he or she may then
easy reduce the extent to which the accuracy of the financial statement information directly related to
a those controls must be supported through the accumulation of evidence using substantive tests.
a. True
b. False

93. Tests of details of balances typically involve the use of comparisons and relationships to assess the
easy overall reasonableness of account balances.
b a. True
b. False

94. Other than inquiring of management about policies they have established to prevent illegal acts and
easy whether management knows of any laws or regulations that the company has violated, the auditor
a should not search for indirect-effect illegal acts unless there is reason to believe they may exist.
a. True
b. False

95. When an auditor believes that an illegal act may have occurred, the first step he or she should take
easy is to inquire of management at a level above those likely to be involved in the potential illegal act.
a a. True
b. False

96. Audits are expected to provide a higher degree of assurance for the detection of material frauds than
medium is provided for an equally material error.
b a. True
b. False

97. Auditors have a higher degree of responsibility for detecting direct-effect illegal acts than indirect-
medium effect illegal acts.
a a. True
b. False

98. The auditors first course of action when an illegal act is uncovered should be to immediately notify
medium the appropriate authorities, including but not limited to the police, and for publicly held companies,
b the Securities and Exchange Commission.
a. True
b. False

99. Under the cycle approach to segmenting an audit, transactions recorded in different journals should
medium never be combined with the general ledger balances that result from those transactions.
b a. True
b. False

100. General transaction-related audit objectives vary from audit to audit, depending on the nature and
medium characteristics of the clients business and industry.

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b a. True
b. False

101. The audit objective of posting and summarization is associated with the management assertion of
medium accuracy.
a a. True
b. False

102. Balance-related audit objectives are usually applied to the ending balance in income statement
medium accounts; transaction-related audit objectives are usually applied to transactions reflected in balance
b sheet accounts.
a. True
b. False

103. The transaction-related audit objective of timing is related to the assertion of cutoff.
medium a. True
a b. False

104. The effect of a violation of the existence transaction-related audit objective for the sales account
medium would be an overstatement of that account.
a a. True
b. False

105. The effect of a violation of the completeness transaction-related audit objective for cash
medium disbursements transactions would be an overstatement of cash disbursements.
b a. True
b. False

106. The transaction-related audit objective that deals with whether recorded transactions have actually
medium occurred is the completeness objective.
b a. True
b. False

107. The general balance-related audit objective that deals with determining that details in the account
medium balance agree with related master file amounts, foot to the total in the account balance, and agree
a with the total in the general ledger is the detail tie-in objective.
a. True
b. False

108. The cutoff objective, transactions near the balance sheet date are recorded in the proper period, is
medium a balance-related audit objective.
a a. True
b. False

109. For a private company audit, tests of controls are normally performed only on those internal
medium controls the auditor believes have not been operating effectively during the period under audit.
b a. True
b. False

110. An audit generally provides no assurance that indirect-effect illegal acts will be detected.
medium a. True
a b. False

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111. When an auditor believes there is a moderate or high risk of management fraud, the auditor will
medium normally do less audit work at interim dates instead of at year-end.
a a. True
b. False

112. An auditor must inform a clients audit committee of an illegal act discovered during an audit in
challenging writing.
b a. True
b. False

113. The objective of the audit of financial statements by an independent auditor is to verify that the
challenging financial statements are free of misstatements and accurately represent the companys financial
b position and results of operations.
a. True
b. False

114. The auditors responsibility for uncovering direct-effect illegal acts is the same as for fraud.
challenging a. True
a b. False

Chapter 7
Multiple-Choice Questions
Auditors must make decisions regarding what evidence to gather and how much
1. to accumulate.
Which of the following is a decision that must be made by auditors related to
Easy evidence?
c
Sample size Timing of audit procedures
a. Yes Yes
b. No No
c. Yes No
d. No Yes
Audit procedures may be
2. performed:
Easy
Prior to the fiscal year-end of the Subsequent to the fiscal year-end of the
a client client
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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3. Which of the following forms of evidence is most reliable?

easy a. General ledger account balances.
b b. Confirmation of accounts receivable balance received from a customer.
c. Internal memo explaining the issuance of a credit memo.
Copy of month-end adjusting
d. entries.
4. Which of the following is not a characteristic of the reliability of evidence?
Effectiveness of client internal
easy a. controls.
b b. Education of auditor.
Independence of information
c. provider.
d. Timeliness.
5. Which of the following is not a characteristic of the reliability of evidence?
easy a. Qualification of individual providing information.
Auditors direct
c b. knowledge.
c. Degree of subjectivity.
d. Degree of objectivity.
Calculating the gross margin as a percent of sales and comparing it with previous
6. periods is
easy what type of evidence?
b a. Physical examination.
b. Analytical procedures.
c. Observation.
d. Inquiry
7. Audit evidence obtained directly by the auditor will not be reliable if:
easy a. the auditor lacks the qualifications to evaluate the evidence.
it is provided by the clients
a b. attorney.
the client denies its
c. veracity.
d. it is impossible for the auditor to obtain additional corroboratory evidence.
8. Appropriateness of evidence is a measure of the:
easy a. quantity of evidence.
Chapter 8
Multiple-Choice Questions

1. Which of the following is not one of the three main reasons why the auditor should properly
easy plan engagements?
a a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.

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d. To help keep audit costs reasonable.

2. Avoiding misunderstandings with the client is important for:

easy
a Good client relations Facilitating high-quality work at a reasonable cost
a. Yes Yes
b. No No
c. Yes No
d. No Yes

3. A measure of how willing the auditor is to accept that the financial statements may be materially
easy misstated after the audit is completed and an unqualified opinion has been issued is the:
b a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

4. A measure of the auditors assessment of the likelihood that there are material misstatements in
easy an account before considering the effectiveness of the clients internal control is called:
d a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

5. When inherent risk is high, there will need to be:

Easy
d A lower assessment of audit risk More evidence accumulated by the auditor
a. Yes Yes
b. No No
c. Yes No
d. No Yes

6. The auditor is likely to accumulate more evidence when the audit is for a company:
easy
a Which has large amounts of debt Which is to be sold in the near future
a. Yes Yes
b. No No
c. Yes No
d. No Yes

7. Which of the following is not typically included in initial audit planning?

easy a. Client acceptance/continuation decisions.
d b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
d. Perform analytical procedures as substantive tests.

8. Initial audit planning involves four matters. Which of the following is not one of these?
easy a. Develop an overall audit strategy.
b b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the clients reason for the audit.

9. Most auditors assess inherent risk as high for related parties and related-party transactions
easy because:
b a. of the unique classification of related-party transactions required on the balance sheet.

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b. of the lack of independence between the parties.

c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.

10. Which of the following is not correct regarding the communications between successor and
easy predecessor auditors?
a a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the successor auditor.
c. The predecessor auditor must receive their former clients permission prior to divulging
information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a successor auditor.

11. A successor auditor may perform which of the following for a new audit client?
easy
a Speak to local attorneys, banks
and other businesses regarding Speak to the predecessor auditors about
the companys reputation disagreements they had with management
a. Yes Yes
b. No No
c. Yes No
d. No Yes

12. Which of the following is not a potential effect of an auditors decision that a lower acceptable
medium audit risk is appropriate?
b a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to the engagement.

13. It is easier and more common to implement increased evidence accumulation for inherent risk
medium than for acceptable audit risk because:
a a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.

14. (SOX) If an auditor is requested to perform nonaudit services for a public company audit client, who is
medium responsible for agreeing to those services with the audit firm?
d a. The clients management.
b. The clients chief executive officer.
c. The clients chief financial officer.
d. The clients audit committee.

15. Which of the following statements is true regarding communications between predecessor and
medium successor auditors?
b a. The burden of initiating the communication rests with the predecessor.
b. The predecessors response can be limited to stating that no information will be provided.
c. The predecessor should communicate with the successor only if the client is public.
d. There must be communication between the predecessor and successor if the successor is to
accept the engagement.

16. Investigating new clients with a focus on assessing the auditors potential relationship with that
medium new client is a critical element in determining:
b a. inherent risk.

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b. acceptable audit risk.

c. statistical risk.
d. financial risk.

17. The purpose of an engagement letter is to:

medium a. document the CPA firms responsibility to external users of the audited financial
b statements.
b. document the terms of the engagement in writing to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. emphasize managements responsibility for approving the audit program.

18. One means of informing the client that the auditor is not responsible for the discovery of all acts
medium of fraud is the:
a a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.

19. Which of the following normally signs the engagement letter for an audit of a public company?
medium a. Corporate treasurer.
d b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.

20. Which of the following normally signs the engagement letter for an audit of a private company?
medium a. Management.
a b. Board of directors representative.
c. Audit committee representative.
d. Corporate treasurer.

21. An understanding of a clients business and industry and knowledge about operations are
medium essential for performing an adequate audit. For a new client, most of this information is
d obtained:
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the clients premises.

22. The least effective method of identifying related parties for a public company would be a(n):
medium a. inquiry of management.
c b. review of SEC filings.
c. distribution of the engagement letter to all stockholders.
d. examination of stockholders listings to identify principal stockholders.

23. An official record of meetings of the board of directors and stockholders is included in the
medium corporate:
c a. bylaws.
b. charter.
c. minutes.
d. license.

24. Which of the following is not likely to be a related party?

medium a. Affiliated companies.
c b. A major stockholder of the company.
c. A warehouse employee.

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d. The chief executive officer.

25. Which of the following is most likely to occur at the beginning of an initial audit engagement?
medium a. Prepare a rough draft of the financial statements and of the auditors report.
c b. Study and evaluate the system of internal administrative control.
c. Determine the clients reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

26. An auditor should examine minutes of the board of directors meetings:

medium a. through the date of the financial statements.
b b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test basis.

27. The first standard of field work, which states that the work is to be adequately planned and that
medium assistants, if any, are to be properly supervised, recognizes that:
a a. early appointment of the auditor is advantageous to the auditor and the client.
b. acceptance of an audit engagement after the close of the clients fiscal year is generally not
permissible.
c. appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim dates.

28. The corporate minutes are the official record of the meetings of the board of directors and
medium stockholders. The minutes typically include authorizations related to:
d
The CPAs use of outside specialists Management compensation
a. Yes Yes
b. No No
c. Yes No
d. No Yes

29. An engagement letter sent to an audit client usually would not include a(n):
medium a. reference to the auditors responsibility for the detection of errors or irregularities.
c b. estimation of the time to be spent on the audit work by audit staff and management.
c. statement that management advisory services would be made available upon request.
d. reference to managements responsibility for the financial statements.

30. Which of the following is correct with respect to a companys corporate charter?
medium a. The corporate charter is granted by the federal government and is required to recognize the
c corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a corporation.
c. The corporate charter includes the exact name of the corporation, the date of
incorporation, and the types of business the corporation is authorized to conduct.
d. The corporate charter must be annually reviewed by the PCAOB.

31. Corporate bylaws include:

Medium
d The types and amounts of capital stock The rules and procedures used to
the corporation is authorized to issue operate the corporation
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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32. In what order should the following steps occur?

medium A. Assess client business risk
b B. Understand the clients business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.

33. Which of the following statements is not correct with respect to analytical procedures?
medium a. Auditing standards emphasize the need for auditors to develop and use expectations.
b b. Analytical procedures must be performed throughout the audit.
c. Analytical procedures may be performed at any time during the audit.
d. Analytical procedures use comparisons and relationships to assess whether account
balances appear reasonable.

34. The most widely used profitability ratio is the:

medium a. quick ratio.
d b. profit margin.
c. return on assets.
d. earnings per share.

40. Which of the following would not likely be classified as a related-party transaction?
medium a. An advance of one weeks salary to an employee.
a b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of the client company.
d. Exchanges of equipment between two companies owned by the same person.
48. Whenever an auditor compares client data to client-prepared budgets, there are two special
medium concerns. Indicate if the two items below are concerns.
a
Assessing whether the budgets were Client data may have been altered to conform
realistic plans to the budget
a. A concern A concern
b. Not a concern Not a concern
c. A concern Not a concern
d. Not a concern A concern

50. Which is a liquidity activity ratio?

medium a. Profit margin
b b. Inventory turnover
c. Return on assets
d. Times interest earned

51. Which is usually included in an engagement letter?

Estimate of hours required to Dollar estimate of fees to be billed to

medium complete audit the client
d a. Yes Yes
b. No No
c. Yes No
d. No Yes

52. Which is usually included in an engagement letter?

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medium
a A reference to GAAP A reference to GAAS
a. Yes Yes
b. No No
c. Yes No
d. No Yes

53. Which is usually included in an engagement letter?

medium
c The financial statements are
the responsibility of the Ratios to be used by the auditor in the planning
companys management phase
a. Yes Yes
b. No No
c. Yes No
d No Yes

54. When may the auditor refer to a specialist in the audit report?
medium
c
Only if the specialists report results
in a modification of the audit Only if the specialist assisted in the audit of an
opinion account material to the financial statements
a. Yes Yes
b. No No
c. Yes No
d No Yes

55. Which is usually included in the engagement letter?

medium
b The projected type of opinion on
the financials statement to be Name(s) of the client personnel responsible for
audited supplying the auditor with information
a. Yes Yes
b. No No
c. Yes No
d No Yes

56. Which is usually included in the engagement letter?

medium
b List of audit procedures to be used
in inventory observation The auditors assessment of Audit Risk
a. Yes Yes
b. No No
c. Yes No
d No Yes

72. When an auditor decides there is higher inherent risk for an account, one potential effect is that
easy more audit evidence will be required for that account.
a a. True
b. False

73. As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
easy a. True

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a b. False

74. Before accepting a new client, most CPA firms investigate the company to determine its
easy acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting
b certain partiesnamely the companys attorneys and bankersduring this investigation.
a. True
b. False

75. For prospective clients that have previously been audited by another CPA firm, the predecessor
easy auditor is required to communicate with the successor auditor.
b a. True
b. False

76. When a successor auditor contacts a companys previous auditor, the predecessor auditor is
easy required to respond fully and without limit to the request for information.
b a. True
b. False

77. A predecessor auditor who has been contacted by a successor auditor for information about the
easy client does not have to obtain permission from the former client before providing any
b confidential information to the successor auditor because the confidentiality requirement does
not extend to former clients.
a. True
b. False

78. Auditors should obtain copies of the clients articles of incorporation, bylaws, and minutes of
easy the meetings of the board of directors to aid in their understanding of the companys
a management and governance structure.
a. True
b. False

79. An auditor must evaluate a specialists professional qualifications and understand the objectives
easy of the specialists work.
a a. True
b. False

80. To evaluate a specialists work the auditor must himself/herself be considered a specialist.
medium a. True
b b. False

81. An engagement letter establishes a clear understanding of the terms of the engagement between
medium the client and the auditor, but it is optional for private companies.
a a. True
b. False

82. Because of the requirements of Rule 201 of the AICPAs Code of Professional Conduct which
easy state that auditors should undertake only those professional services that the member or the
b members firm can reasonably expect to be completed with professional competence, auditors
are not normally permitted to consult with, or rely on the work of, outside specialists during an
audit engagement.
a. True
b. False

83. Acceptable audit risk is a measure of the auditors willingness to accept that the financial
medium statements do not contain material misstatements after the audit is completed and a qualified

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b audit report has been issued.

a. True
b. False

84. If a prospective client has been audited in the past, the successor auditor will typically rely
medium solely on the representations about the client by the predecessor auditor.
b a. True
b. False

85. Two major factors that affect acceptable audit risk are the likely users of the financial statements
medium and the likelihood of issuing an unqualified audit opinion.
b a. True
b. False

86. A major consideration in assigning staff to an audit engagement is the experience levels
medium required for the work, while a less important consideration is maintaining staff continuity on the
b engagement.
a. True
b. False

87. Inherent risks typically vary across industries.

medium a. True
b b. False

88. Transactions with related parties must be disclosed in the financial statements if they are
medium deemed to be material.
a a. True
b. False

89. All known related parties must be identified and included in the auditors permanent files
medium related to the client.
a a. True
b. False

90. Generally, auditors assess inherent risk as moderate for related party transactions because they
medium expect clients to be aware of their scrutiny of such transactions.
b a. True
b. False

91. The corporate charter typically establishes the companys fiscal year and frequency of
medium stockholder meetings.
b a. True
b. False

92. Ordinarily, the auditor should review and abstract copies of contracts during the later stages of
medium an audit.
b a. True
b. False

93. When a successor auditor requests information from a companys previous auditor, and there
medium are legal problems or disputes between the client and the predecessor auditor, the predecessor
a auditors response to the new auditor may be limited to stating that no information will be
provided.
a. True
b. False

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94. One purpose of performing preliminary analytical procedures in the planning phase of an audit
medium is to help the auditor make a preliminary assessment of control risk.
b a. True
b. False

95. Material transactions between the client and the clients related parties must be disclosed in the
medium auditors report.
b a. True
b. False

96. An engagement letter can affect the CPA firms legal responsibilities to the client, but does not
challenging affect responsibility to external users of audited financial statements.
a a. True
b. False

97. Two categories of audit-relevant information found in corporate charters and bylaws are
challenging authorizations and discussions of matters affecting inherent risk.
b a. True
b. False

Chapter 9
Multiple-Choice Questions

1. If it is probable that the judgment of a reasonable person would have been changed or
easy influenced by the omission or misstatement of information, then that information is, by
a definition of FASB Statement No. 2:
a. material.
b. insignificant.
c. significant.
d. relevant.

2. The preliminary judgment about materiality is the amount by which the auditor
easy believes the statements could be misstated and still not affect the decisions of reasonable users.
b a. minimum
b. maximum
c. mean average
d. median average

3. Auditors are responsible for determining whether financial statements are materially misstated,
easy so upon discovering a material misstatement they must bring it to the attention of:
d a. regulators.
b. the audit firms managing partner.
c. no one in particular.
d. the clients management.

4. The FASB definition of materiality emphasizes what class of financial statement users?
easy a. Regulators.
c b. Informed investors.

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 22

c. Reasonable persons.
d. Potential investors.

5. When auditors allocate the preliminary judgment about materiality to account balances, the
easy materiality allocated to any given account balance is referred to as:
d a. the materiality range.
b. the error range.
c. tolerable materiality.
d. tolerable misstatement.

6. Why do auditors establish a preliminary judgment about materiality?

easy a. To determine the appropriate level of audit experience required for the work.
c b. So that the client can know what records to make available to the auditor.
c. To plan the appropriate audit evidence to accumulate and develop an overall audit
strategy.
d. To finalize the assessment of control risk.

7. Auditors are _____ to decide on the combined amount of misstatements in the financial
easy statements that they would consider material early in the audit.
b a. permitted
b. required
c. not allowed
d. strongly encouraged

8. If an auditor establishes a relatively high level for materiality, then the auditor will:
easy a. accumulate more evidence than if a lower level had been set.
b b. accumulate less evidence than if a lower level had been set.
c. accumulate approximately the same evidence as would be the case were materiality lower.
d. accumulate an undetermined amount of evidence.

9. The preliminary judgment about materiality and the amount of audit evidence accumulated are
easy _____ related.
d a. directly
b. indirectly
c. not
d. inversely

10. After the preliminary judgment about materiality has been established, auditors may:
easy a. not adjust it.
d b. adjust it downward only.
c. adjust it upward only.
d. adjust it either downward or upward.

11. In an audit area that has a lower inherent risk, it would be prudent to:
easy a. increase the amount of audit evidence gathered.
c b. assign more experienced staff to that area.
c. increase the tolerable misstatement for the area.
d. expand planning procedures.

12. Which of the following is least likely to be appropriate as the basis for determining the
easy preliminary judgment about materiality in the audit of financial statements?
d a. Net income before taxes.
b. Current assets.
c. Owners equity.
d. Inventory.

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 23

13. Auditing standards _____ that the basis used to determine the preliminary judgment about
easy materiality be documented in the audit files.
c a. permit
b. do not allow
c. require
d. strongly encourage

14. Amounts involving fraud are usually considered _____ important than unintentional errors of
easy equal dollar amounts.
d a. less
b. no less
c. no more
d. more

15. Which of the following qualitative factors may significantly influence whether an item is
easy deemed to be material?
a
Misstatements that are otherwise
minor may be material if there are Misstatements that are otherwise immaterial
possible consequences arising from may be material if they affect a trend in
contractual obligations. earnings
a. Yes Yes
b. No No
c. Yes No
d. No Yes

16. Auditors generally allocate the preliminary judgment about materiality to the:
easy a. balance sheet only.
a b. income statement only.
c. income statement and balance sheet.
d. statement of cash flows.

17. Which of the following statements regarding inherent risk is correct?

easy a. The inherent risk assigned in the audit risk model is unaffected by the auditors experience
c with clients organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if
experience shows that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce it in
subsequent years as they gain experience, even when there is inherent risk.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in
clients internal control system.

18. Auditors begin their assessments of inherent risk during audit planning. Which of the following
easy would not help in assessing inherent risk during the planning phase?
a a. Obtaining clients agreement on the engagement letter.
b. Obtaining knowledge about the clients business and industry.
c. Touring the clients plant and offices.
d. Identifying related parties.

19. Auditors commonly allocate materiality to balance sheet accounts rather than income statement
medium accounts because most income statement misstatements have a(n) _____ effect on the balance
b sheet.
a. reduced
b. equal
c. undetermined
d. increased

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 24

20. Which of the following is not a correct statement regarding the allocation of the preliminary
medium judgment about materiality to balance sheet accounts?
b a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation has virtually no effect on audit costs because the auditor must collect
sufficient appropriate audit evidence.
c. Auditors expect to identify overstatements as well as understatements in the accounts.
d. Relative audit costs affect the allocation.

21. What is the primary means of dealing with risk in planning decisions related to audit evidence?
medium a. Selection of more effective tests of details of balances.
b b. Application of the audit risk model.
c. Establishing a lower preliminary judgment about materiality.
d. Allocating materiality judgment to segments.

22. The phrase in our opinion in the auditors report is intended to inform users that auditors:
medium a. guarantee fair presentation of the financial statements.
d b. act as insurers of the accuracy of the statements.
c. certify the material presented in the statements by management.
d. base their conclusions about the statements on professional judgment.

23. Inherent risk is _______ related to detection risk and _______ related to the amount of audit
medium evidence.
d a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly

24. The five steps in applying materiality are listed below in random order.
medium 1. Estimate the combined misstatement.
b 2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be:
a. 1 2 5 4 3.
b. 3 4 2 1 5.
c. 4 3 1 5 2.
d. 5 1 3 2 4.

25. Which of the following statements is not correct?

medium a. Materiality is a relative rather than an absolute concept.
b b. The most important base used as the criterion for deciding materiality is total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal dollar amounts, frauds are usually considered more important than errors.

26. Since materiality is relative, it is necessary to have bases for establishing whether misstatements
medium are material. Normally, the most common base for deciding materiality is:
a a. net income before taxes.
b. net working capital.
c. net income after taxes.
d. total assets.

27. Certain types of misstatements are likely to be more important than other types to users, even if
medium the dollar amounts are the same. Which of the following demonstrates this?
a

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Amounts involving frauds are Misstatements that are otherwise immaterial

considered more important than may be material if they affect a trend in
errors of equal amount earnings.
a. Yes Yes
b. No No
c. Yes No
d. No Yes

28. Allocating the preliminary judgment about materiality to financial statements segments is
medium necessary because:
b a. evidence is accumulated for the financial statements as a whole so materiality does not
apply to them.
b. evidence is accumulated by segments rather than for the financial statements as a whole.
c. it is required by the AICPAs Code of Professional Conduct.
d. it is required by the SEC.

29. Which of the following statements is not correct?

medium a. Either an overstatement of an asset account or an understatement of a liability account
c would have the same effect on the income statement.
b. A misclassification in the balance sheet will have no effect on operating income.
c. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.

30. Regardless of how the preliminary judgment about materiality is allocated, the auditor must be
medium confident that total combined misstatements in all accounts are:
d a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.

31. Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance
medium to refer to ________.
c a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk

32. _____ misstatements are those where the auditor can determine the amount of the misstatement
medium in the account.
c a. Potential
b. Likely
c. Known
d. Projected
33. When a different extent of evidence is needed for the various cycles, the difference is caused by:
medium a. errors in the clients accounting system.
d b. a clients need to achieve an unqualified opinion.
c. an auditors need to follow auditing standards.
d. an auditors expectations of errors and assessment of internal control.

34. If planned detection risk is reduced, the amount of evidence the auditor accumulates will:
medium a. increase.
a b. decrease.
c. remain unchanged.
d. be indeterminate.

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35. Likely misstatements can result from:

Medium
a Projections of
Differences between misstatements based on
Computation of the managements and an an auditors tests of a
sampling error for the auditors judgment about sample from a
cash account account balances population
a. No Yes Yes
b. Yes Yes No
c. No No Yes
d. Yes No No

36. When discussing control risk (CR) and the audit risk model, which of the following is false?
medium a. CR is a measure of the auditors assessment of the likelihood that misstatements will not
b be prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or detect
errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support account balances is
direct.

37. Which of the following is not a good indicator of the degree to which statements are relied on
medium by external users?
d a. Clients size, as measured by total assets or total revenue.
b. Distribution of ownership among the public.
c. Nature and amount of liabilities.
d. Amount of net income or loss after taxes.

38. If an auditor believes the chance of financial failure is high and there is a corresponding
medium increase in business risk for the auditor, acceptable audit risk would likely:
a a. be reduced.
b. be increased.
c. remain the same.
d. be calculated using a computerized statistical package.

39. When management has an adequate level of integrity for the auditor to accept the engagement
medium but cannot be regarded as completely honest in all dealings, auditors normally:
a a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.

40. One accounting issue that does not require management to use significant judgments is:
medium a. the allowance for doubtful accounts.
b b. the useful life of equipment for tax purposes.
c. obsolete inventory.
d. the liability for warranty payments.

41. Inherent risk is often low for an account such as:

medium a. inventory.
d b. marketable securities.
c. cash.
d. accounts receivable.

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42. The auditor typically does not assess control risk and inherent risk for:
medium a. each audit objective.
d b. each cycle.
c. each account.
d. the overall audit.

43. (Public) To what extent do auditors typically rely on internal controls of their public company clients?
medium a. Extensively
a b. Only very little
c. Infrequently
d. Never

44. Auditors typically rely on internal controls of their private company clients:
medium a. Only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.
b b. Only if the controls are determined to be effective.
c. Only if the client asks an auditor to test controls.
d. Only if the controls are sufficient to increase Control Risk to an acceptable level.

45. Acceptable audit risk is ordinarily set by the auditor during planning and:
medium a. held constant for each major cycle and account.
a b. held constant for each major cycle but varies by account.
c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.

46. When the auditor is attempting to determine the extent to which external users rely on a clients
medium financial statements, they may consider several factors except for:
d a. client size.
b. concentration of ownership.
c. types and amounts of liabilities.
d. assessment of detection risk.

47. A major difficulty in the application of the audit risk model is:
medium a. defining the terms of the model.
b b. measuring the components of the model.
c. understanding the effect on other factors in the model when one factor is changed.
d. the failure of the Audit Standards Board to accept it and incorporate it into standards.

48. When setting a preliminary judgment about materiality:

medium a. more evidence is required for a low dollar amount than for a high dollar amount.
a b. less evidence is required for a low dollar amount than for a high dollar amount.
c. the same amount of evidence is required for either low or high dollar amounts.
d. there is no relationship between it and the dollar amount of evidence needed.

49. When allocating materiality, most practitioners choose to allocate to:

challenging a. the income statement accounts because they are more important.
b b. the balance sheet accounts because there are fewer.
c. both balance sheet and income statement accounts because there could be errors on either.
d. all of the financial statements because there could be errors on other statements besides the
income statement and balance sheet.

50. The risk of material misstatement refers to:

challenging a. control risk and acceptable audit risk.
c b. inherent risk.
c. the combination of inherent risk and control risk.
d. inherent risk and audit risk.

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 28

51. Auditors may assess inherent risk and control risk:

medium Jointly to determine the risk of Separately and combine their effects in the
a material misstatement audit risk model
a. Yes Yes
b. No No
c. Yes No
d. No Yes

71. The auditors preliminary judgment about materiality is the maximum amount by which the
easy auditor believes the financial statements could be misstated and still not affect the decisions of
a reasonable users.
a. True
b. False

72. There is no precise definition of materiality in the professional literature.

easy a. True
a b. False

73. The FASB definition of materiality focuses on potential users of financial statements.
easy a. True
b b. False

74. Net income before taxes is normally the most important base for deciding materiality.
easy a. True
a b. False

75. Most practitioners allocate the preliminary judgment about materiality to income statement
easy accounts.
b a. True
b. False

76. The primary purpose of allocating the preliminary judgment about materiality to financial
easy statement accounts is to help the auditor decide the appropriate evidence to accumulate.
a a. True
b. False

77. Auditors cannot use prior year financial statement balances to establish their preliminary
easy judgment about materiality in planning the current years audit.
b a. True
b. False

78. If acceptable audit risk is low, and inherent risk and control risk are both high, then planned
easy detection risk should be high.
b a. True
b. False

79. Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases,
easy planned detection risk should decrease, ceteris paribus.
a a. True
b. False

80. Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit
easy risk increases, planned detection risk should decrease, ceteris paribus.
b a. True

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 29

b. False

81. The most important element of the audit risk model is control risk.
easy a. True
b b. False

82. For a private company client, auditors are required to test any internal controls they believe
easy have not been operating effectively during the period under audit.
b a. True
b. False

83. If an auditor believes the client will have financial difficulties after the audit report is issued,
easy and external users will be relying heavily on the financial statements, the auditor will probably
a set acceptable audit risk as low.
a. True
b. False

84. Achieved detection risk can be reduced only by accumulating more audit evidence.
medium a. True
b b. False

85. Auditors have difficulty applying the concept of materiality in practice because they often do
medium not know who the users of the financial statements are or what decisions will be made.
a a. True
b. False

86. The audit risk model that must be used for planning audit procedures and evaluating audit
medium results is: AcAR = IR x CR x AcDR.
b a. True
b. False

87. Statements on Auditing Standards provide detailed, objective guidance on how auditors are to
medium establish a preliminary materiality level, thus eliminating the need for subjective auditor
b judgment in this task.
a. True
b. False

88. If the preliminary judgment of materiality increases, the amount of audit evidence required will
medium also increase.
b a. True
b. False

89. Insert risk and control risk are normally assessed for the overall audit.
medium a. True
b b. False

90. Tolerable misstatement is the maximum combined total of all misstatements in the financial
medium statements that the auditor is willing to allow, or tolerate, when issuing a standard unqualified
b opinion.
a. True
b. False

91. If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would
medium need to obtain more audit evidence for that account than if $100,000 had been assigned.
a a. True

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 30

b. False

92. To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts
medium that can be verified by using low-cost audit procedures, such as analytical procedures, than to
a accounts that are more costly to audit.
a. True
b. False

93. To maximize audit effectiveness, the auditor should establish a high preliminary judgment about
medium materiality and allocate most of the amount to balance sheet accounts.
b a. True
b. False

94. Acceptable audit risk and the amount of substantive evidence required are inversely related.
medium a. True
a b. False

95. As control risk increases, the amount of substantive evidence the auditor plans to accumulate
medium should increase.
a a. True
b. False

96. Inherent risk and control risk are directly related.

medium a. True
b b. False

97. An acceptable audit risk assessment of low indicates a risky client requiring more extensive
medium evidence, assignment of more experienced personnel, and/or a more extensive review of audit
a files.
a. True
b. False

98. Engagement risk is effectively the audit firms business risk.

medium a. True
a b. False

99. Audit assurance is the complement of planned detection risk, that is, one minus planned
medium detection risk.
b a. True
b. False

Arens/Elder/Beasley