Ch 6b

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1. Although auditors need to consider the A) 7. Auditors generally use a financial Transactions-sales,
interrelationships between cycles, they typically True statement cycle approach when cash receipts,
treat cycles independently to the extent practical performing a financial statement acquisition of
to manage complex audits effectively. audit. Describe the transaction flow, goods/services, cash
A) True using specific examples, from disbursements,
B) False journals to financial statements that payroll services and
produce financial statements. disbursements, and
2. Asking the right questions and probing further until A)
allocation and
the auditor is satisfied with the responses can help True
adjustments
the auditor to detect a material misstatement in the
financial statements.
Journals-sales, cash
A) True
receipts, acquisitions,
B) False
cash disbursements,
3. As the impact from noncompliance is further A) payroll, and general
removed from affecting the financial statements, the True
less likely the auditor is to become aware of or General ledger and
recognize noncompliance when auditing the subsidiary ledgers to
financial statements. General ledger trial
A) True balance to financial
B) False statements
4. An audit generally provides no assurance that illegal A) 8. Auditors have a higher degree of A) True
acts that do not have a direct effect on the financial True responsibility for detecting illegal
statements will be detected. acts that have a direct effect on the
A) True financial statements than illegal
B) False acts that do not have a direct effect
5. Auditing standards indicate that reasonable B) on the financial statements.
assurance is a moderate, but not absolute, level of False A) True
assurance that the financial statements are free of B) False
material misstatement. 9. Auditors have found that generally B) obtain some
A) True the most efficient and effective combination of
B) False way to conduct audits is to: assurance for each
6. The auditor's first course of action when an illegal B) A) obtain complete assurance about class of transactions
act is uncovered should be to immediately notify the False the correctness of each class of and for the ending
appropriate authorities, including but not limited to, transactions affecting the account. balance in the related
law enforcement and the Securities and Exchange B) obtain some combination of accounts.
Commission. assurance for each class of
A) True transactions and for the ending
B) False balance in the related accounts.
C) obtain assurance about the
ending balance of the account only.
D) verify each entry that was made
into an account.
10. Audits are expected to provide a B) False
higher degree of assurance for the
detection of material frauds than is
provided for an equally material
error.
A) True
B) False
11. The concept of professional skepticism The six 12. The cycle approach to A) ties to the way
has been a foundational element of characteristics auditing: transactions are recorded in
auditing standards for year and continues of skepticism A) ties to the way journals and then
to be difficult to implement in practice. are: transactions are recorded in summarized in the general
Recent academic research on the topic of 1. Questioning journals and then summarized ledger and financial
professional skepticism suggests that mindset - a in the general ledger and statements.
there are six characteristics to skepticism. disposition to financial statements.
List and briefly describe each of these inquiry with B) cannot combine
characteristics. some sense of transactions recorded in
doubt different journals with the
2. Suspension of general ledger balances that
judgment - result from those
withholding transactions.
judgment until C) is the only way of
appropriate segmenting an audit.
evidence is D) assumes that each account
obtained has two or more cycles
3. Search for associated with it.
knowledge - a
13. Errors are usually more B) False
desire to
difficult for an auditor to
investigate
detect than frauds.
beyond the
A) True
obvious, with a
B) False
desire to
corroborate 14. In describing the cycle D) The "inventory and
4. Interpersonal approach to segmenting an warehousing" cycle may be
understanding - audit, which of the following audited at any time during
recognition that statements is not true? the engagement since it is
people's A) All general ledger unrelated to the other
motivations and accounts and journals are cycles.
perceptions can included at least once.
lead them to B) Some journals and general
provide biased ledger accounts are included
or misleading in more than one cycle.
information C) The "capital acquisition and
5. Autonomy - repayment" cycle is closely
the self- related to the "acquisition of
direction, moral goods and services and
independence, payment" cycle.
and conviction D) The "inventory and
to decide for warehousing" cycle may be
oneself, rather audited at any time during
than accepting the engagement since it is
the claims of unrelated to the other cycles.
others
6. Self-esteem -
the self-
confidence to
resist
persuasion and
to challenge
assumptions or
conclusions.
15. Listed below are several accounts listed from a 1. S, 2. 21. When an auditor believes that an illegal A) True
company's trial balance. Next to each account C, 3. A, act may have occurred, the first step he or
put the letter corresponding to the transaction 4. C, 5. she should take is to gather additional
cycle used to audit the account: P, 6. I, 7. evidence to determine the extent of the
S = Sales and collection cycle I = Inventory and S, 8. A illegality and if there is a direct impact on
warehousing cycle the financial statements.
A = Acquisition and payment cycle C = Capital A) True
acquisition and repayment cycle B) False
P = Payroll and personnel cycle
22. When examining the relationships of the A) True
five cycles and general cash, the cycles
1. ________ Sales returns and allowances 5. ________
have no beginning or end except at the
Salaries and commissions
origin or final disposition of the company.
2. ________ Capital stock 6. ________ Cost of goods
A) True
sold
B) False
3. ________ Buildings 7. ________ Trade accounts
receivable 23. When using the cycle approach to C) both A and
4. ________ Notes payable 8. ________ Rent segmenting the audit, the reason for B are correct.
treating capital acquisition and repayment
16. The most important general ledger account A) cash
separately from the acquisition of goods
included in and affecting several cycles is the: account.
and services is that:
A) cash account.
A) the transactions are related to
B) inventory account.
financing a company rather than to its
C) income tax expense and liability accounts.
operations.
D) retained earnings account.
B) most capital acquisition and repayment
17. The objective of the audit of financial statements B) False cycle accounts involve few transactions,
by an independent auditor is to verify that the but each is often highly material and
financial statements are free of misstatements therefore should be audited extensively.
and accurately represent the company's C) both A and B are correct.
financial position and results of operations. D) neither A nor B is correct.
A) True
24. Why does the auditor divide the financial B) The
B) False
statements into segments around the approach aids
18. Other than inquiring of management about A) True financial statement cycles? in the
policies they have established to prevent illegal A) Most auditors are trained to audit assignment of
acts and whether management knows of any cycles as opposed to entire financial tasks to
laws or regulations that the company has statements. different
violated, the auditor should not search for illegal B) The approach aids in the assignment of members of
acts that do not have a direct effect on the tasks to different members of the audit the audit
financial statements unless there is reason to team. team.
believe they may exist. C) The cycle approach is required by
A) True auditing standards.
B) False D) The cycle approach allows the auditor
to detect illegal acts.
19. Under the cycle approach, the only accounts B) False
that have two or more cycles associated with 25. Why does the auditor divide the financial A) Using the
them are cash and accounts receivable. statements into smaller segments? cycle
A) True A) Using the cycle approach makes the approach
B) False audit more manageable. makes the
B) Most accounts have few relationships audit more
20. Under the cycle approach to segmenting an B) False
with others and so it is more efficient to manageable.
audit, transactions recorded in different journals
break the financial statements into smaller
should never be combined with the general
pieces.
ledger balances that result from those
C) The cycle approach is used because
transactions.
auditing standards require it.
A) True
D) All of the above are correct.
B) False