Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 6 Audit Responsibilities and Objectives

6.1 Learning Objective 6-1

1) The objective of an audit of the financial statements is an expression of an opinion on

A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement.

Terms: Objective of ordinary audit of financial statements

Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a
conclusion because of insufficient evidence, the auditor
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 auditor's report.
D) should notify regulators of the circumstances.

Terms: Auditor believes that financial statements are nor fairly presented
Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

3) Auditors accumulate evidence to

A) defend themselves in the event of a lawsuit.
B) determine if the financial statements are correct.
C) satisfy the requirements of the Securities Acts of 1933 and 1934.
D) reach a conclusion about the fairness of the financial statements.

Terms: Auditors accumulate evidence

Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

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4) Which of the following is not one of the steps used to develop audit objectives?
A) know the proper type of audit opinion to issue
B) divide the financial statements into cycles
C) know the management assertions about the financial statements
D) know the specific audit objectives for classes of transactions

Terms: Steps the AICPA and accounting profession taking to reduce practitioner's exposure to
lawsuits
Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

5) For publicly listed companies, the auditor also issues which of the following reports in
addition to a report containing the auditor's opinion?
A) a report on internal control over financial reporting
B) a report on compliance with the Foreign Corrupt Practices Act (FCPA)
C) a report on compliance with generally accepted accounting principles only
D) a report on compliance with the Federal Securities Act

Terms: Objective of ordinary audit of publicly listed companies

Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

6) When developing the audit objectives, the first step is to divide the financial statements into
cycles. False, the 1st step is understand objectives and responsibilities for the audit

Terms: Steps to develop audit objectives

Difficulty: Easy
Objective: LO 6-1
AACSB: Reflective thinking

6.2 Learning Objective 6-2

1) The responsibility for adopting sound accounting policies and maintaining adequate internal
control rests with the
A) board of directors.
B) company management.
C) financial statement auditor.
D) company's internal audit department.

Terms: Responsibility for adopting sound accounting policies and maintaining adequate internal
controls
Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

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2) If management insists on financial statement disclosures that the auditor finds unacceptable,
the auditor can withdraw from the engagement or
A)
Issue an adverse opinion Issue a qualified opinion
Yes Yes

B)
Issue an adverse opinion Issue a qualified opinion
No No

C)
Issue an adverse opinion Issue a qualified opinion
Yes No

D)
Issue an adverse opinion Issue a qualified opinion
No Yes

Terms: Auditor insists on financial statement disclosures that management finds unacceptable
Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

3) In certifying their annual financial statements, the CEO and CFO of a public company certify
that the financial statements comply with the requirements of
A) GAAP.
B) the Sarbanes-Oxley Act.
C) the Securities Exchange Act of 1934.
D) GAAS.

Terms: Certifying annual financial statements by CEO and CFO

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

4) Which of the following statements is true of a public company's financial statements?

A) Sarbanes-Oxley requires only the CEO to certify the financial statements.
B) Sarbanes-Oxley requires only the CFO to certify the financial statements.
C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.
D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.

Terms: Public company's financial statements

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

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5) The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to
A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.

Terms: Responsibility for preparation of the financial statements and the accompanying
footnotes
Difficulty: Moderate
Objective: LO 6-2
AACSB: Reflective thinking

6) Management is not responsible for which of the following?

A) adopting sound accounting policies
B) issuing their own opinion on the fairness of the financial statements
C) maintaining an effective system of internal controls
D) making fair representations in the financial statements

Terms: Management's responsibilities

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

7) Because they operate the business on a daily basis, a company's management knows more
about the company's transactions and related assets, liabilities, and equity than the auditors.
TRUE

Terms: Responsibility for fair presentation of financial statements

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

8) The annual reports of many public companies include a statement about management's
responsibilities and relationship with the CPA firm.
TRUE

Terms: Management's responsibility and relationship with CPA firm

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

9) The auditors determine which disclosures must be presented in the financial statements.
FALSE, the auditors not determine ..
Terms: Responsibility for fair presentation of financial statements
Difficulty: Easy
Objective: LO 6-2
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AACSB: Reflective thinking

10) The Sarbanes-Oxley Act provides for criminal penalties.

TRUE
Terms: Sarbanes-Oxley Act
Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

11) The auditor knows more about an audit client's transactions than management does.
FALSE. the management operate the business daily, they know more about transactions than
auditors
Terms: Management's Responsibilities
Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

12) Annual reports of many public companies contain a statement about management's
responsibilities for the financial statements and their relationship with the CPA firm.
TRUE
Terms: Management's responsibilities
Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

13) The Sarbanes-Oxley Act requires the auditor to certify the quarterly and the annual financial
statements required to be filed by publicly listed firms with the Securities and Exchange
Commission.
False. it's CEO & CFO responsibility

Terms: Management's responsibilities

Difficulty: Easy
Objective: LO 6-2
AACSB: Reflective thinking

14) In signing the quarterly and the annual financial statements filed with the Securities and
Exchange Commission, management certifies the financial statements comply with the Securities
Exchange Act of 1933.
True

Terms: Management's responsibilities

Difficulty: Moderate
Objective: LO 6-2
AACSB: Reflective thinking

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6.3 Learning Objective 6-3

1) The auditor's best defense when material misstatements are not uncovered is to have
conducted the audit
A) in accordance with generally accepted auditing standards.
B) as effectively as reasonably possible.
C) in a timely manner.
D) only after an adequate investigation of the management team.

Terms: Auditors' best defense when material misstatements are not uncovered
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

2) Which of the following is not one of the reasons that auditors provide only reasonable
assurance on the financial statements?
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.

Terms: Reasons auditors provide only reasonable assurance on financial statements

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

3) Which of the following statements is the most correct regarding errors and fraud?
A) An error is unintentional, whereas fraud is intentional.
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.

Terms: Errors and fraud

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

4) When an auditor believes that an illegal act may have occurred, the auditor should first
A) obtain an understanding of the nature and circumstances of the act.
B) consult with legal counsel or others knowledgeable about the illegal act.
C) discuss the matter with the audit committee.
D) withdraw from the engagement.

Terms: Auditor believes an illegal act may have occurred

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking
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5) The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements that are not ________ are detected.
A) important to the financial statements
B) statistically significant to the financial statements
C) material to the financial statements
D) identified by the client

Terms: Auditor has no responsibility to plan and perform audit to obtain reasonable assurance
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

6) Fraudulent financial reporting is most likely to be committed by whom?

A) line employees of the company
B) outside members of the company's board of directors
C) company management
D) the company's auditors

Terms: Fraudulent financial reporting

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

7) Which of the following would most likely be deemed a direct effect illegal act?
A) violation of federal employment laws
B) violation of federal environmental regulations
C) violation of federal income tax laws
D) violation of civil rights laws

Terms: Direct-effect illegal act

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

8) The concept of reasonable assurance indicates that the auditor is

A) not a guarantor of the correctness of the financial statements.
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.

Terms: Concept of reasonable assurance

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

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9) Which of the following is the auditor least likely to do when aware of an illegal act?
A) discuss the matter with the client's legal counsel
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 company's management

Terms: Illegal acts

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

10) An auditor discovers that the company's bookkeeper unintentionally made a mistake in
calculating the amount of the quarterly sales. This is an example of
A) employee fraud.
B) an error.
C) misappropriation of assets.
D) a defalcation.

Terms: Errors and fraud

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

11) An auditor has a duty to

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.

Terms: Auditor responsibility for notifying users as to whether statements are properly stated
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

12) If the auditor were responsible for making certain that all of management's assertions in the
financial statements were absolutely correct,
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 practical.

Terms: Auditor responsible for making certain that all of management's assertions were
absolutely correct
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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13) When dealing with laws and regulations that do not have a direct effect on the financial
statements, the auditor
A) should inquire of management about whether the entity is in compliance with such laws and
regulations.
B) has no responsibility to determine if any violations of these laws has occurred.
C) must report all violations, including inconsequential violations, to the audit committee.
D) should perform the same procedures as for violations having a direct effect on the financial
statements.

Terms: Indirect-effect illegal acts

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

14) Which of the following statements is usually true?

A) Materiality is easy to quantify.
B) Fraudulent financial statements are often easy for the auditor to detect, especially when there
is collusion among management.
C) Reasonable assurance is a low level of assurance that the financial statements are free from
material misstatement.
D) An item is considered material if it would likely have changed or influenced the decisions of
a reasonable person using the statements.

Terms: Materiality
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

15) Auditing standards make ________ distinction(s) between the auditor's responsibilities for
searching for errors and fraud.
A) little
B) a significant
C) no
D) various

Terms: Auditor responsibility for searching for errors and fraud

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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16) In comparing management fraud with employee fraud, the auditor's risk of failing to discover
the fraud is
A) greater for management fraud because managers are inherently more deceptive than
employees.
B) greater for management fraud because of management's 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.

Terms: Management fraud vs. employee fraud and auditor failure to detect both
Difficulty: Challenging
Objective: LO 6-3
AACSB: Reflective thinking

17) Misappropriation of assets

A) is generally committed by company management.
B) harms the users of the financial statements by providing them incorrect financial data for their
decision making.
C) causes harm to stockholders because the assets are no longer available to their rightful
owners.
D) causes the financial statements to be misstated since the misappropriation usually involves
material amounts.

Terms: Misappropriation of assets

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

18) When comparing the auditor's responsibility for detecting employee fraud and for detecting
errors, the profession has placed the responsibility
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering errors and employee fraud.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Terms: Fraud and errors

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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19) If there is collusion among management, the chance a normal audit would uncover such acts
is
A) very low.
B) very high.
C) zero.
D) none of the above.

Terms: Employees collude to falsify documents

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

20) When the auditor becomes aware of or suspects noncompliance with laws and regulations,
A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit.
B) the auditor should discuss the matter with management at a level above those suspected of the
noncompliance.
C) the auditor should obtain additional information to evaluate the possible effects on the
financial statements.
D) all of the above.

Terms: Audit procedures when noncompliance is identified or suspected

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

21) When the auditor identifies or suspects noncompliance with laws and regulations, the auditor
A) should discuss the matter with those whom they believe committed the illegal act.
B) should begin communication with the FASB in accordance with regulations.
C) may disclaim an opinion on the basis of scope limitations if he or she is precluded by
management from obtaining sufficient appropriate evidence.
D) should withdraw from the engagement.

Terms: Noncompliance with laws and regulations

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

22) When an auditor knows that an illegal act has occurred, he or she must
A) report it to the proper governmental authorities.
B) consider the effects on the financial statements, including the adequacy of disclosure.
C) withdraw from the engagement.
D) issue an adverse opinion.

Terms: Auditor knows illegal act occurred

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking
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23) Which of the following is an accurate statement concerning the auditor's responsibility to
consider laws and regulations?
A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations
impact the financial statements.
B) The auditor's responsibility will depend on whether the laws or regulations are expected to
have a direct impact on the financial statements.
C) It is the responsibility of the auditor to determine if an act constitutes noncompliance.
D) The auditor must inform an outside party if management has knowingly not complied with a
law or regulation.

Terms: Illegal acts, effect on financial statements

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

24) Which of the following statements best describes the auditor's responsibility with respect to
illegal acts that do not have a material effect on the client's financial statements?
A) Generally, the auditor is under no obligation to notify parties other than personnel within the
client's 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 auditor's report.
D) Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.

Terms: Auditor responsibility with respect to illegal acts

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

25) Which of the following statements best describes the auditor's responsibility regarding the
detection of fraud?
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 is required to provide reasonable assurance that the financial statements are free
of both material errors and fraud.
C) The auditor is responsible for detecting material financial statement fraud, but not a material
misappropriation of assets.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued.

Terms: Auditor responsibility regarding detection of fraud

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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26) When reporting identified or suspected noncompliance,
A) the auditor must report inconsequential noncompliance to the audit committee.
B) the auditor should communicate all material noncompliance matters to those charged with
governance.
C) any intentional noncompliance must be reported to local law enforcement.
D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

Terms: Reporting of identified or suspected noncompliance

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

27) Another term for misappropriation of assets is

A) management fraud.
B) collusion.
C) employee fraud.
D) illegal acts.

Terms: Misappropriation of assets

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

28) The provisions of many laws and regulations affect the financial statements
A) directly.
B) only indirectly.
C) both directly and indirectly.
D) materially if direct; immaterially if indirect.

Terms: Illegal acts, effect on financial statements

Difficulty: Challenging
Objective: LO 6-3
AACSB: Reflective thinking

29) If a client has violated federal tax laws,

A) the auditor must notify the IRS.
B) and the amount is significant, the auditor should communicate with those charged with
governance.
C) the noncompliance generally will not impact the financial statements.
D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the
audit.

Terms: Illegal acts, effect on financial statements

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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30) In which of the following situations were the financial statements not misstated?
A) Assets were taken, but the asset misappropriation was discovered and appropriately disclosed
in the financial statements.
B) Assets were taken, and the theft was covered by misstating the related assets.
C) Assets were taken, and the theft was covered by understating revenues.
D) Assets were taken, and the theft was covered by overstating expenses.

Terms: Misappropriation of assets

Difficulty: Easy
Objective: LO 6-3
AACSB: Analytic thinking

31) Errors are usually more difficult for an auditor to detect than frauds.
False. Frauds are usually more difficult for an auditor to detect than errors

Terms: Auditor detection of errors and frauds

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

32) Other than inquiring of management about policies they have established to prevent illegal
acts and whether management knows of any laws or regulations that the company has violated,
the auditor should not search for illegal acts that do not have a direct effect on the financial
statements unless there is reason to believe they may exist.
TRUE
Terms: Auditor responsibility for searching for illegal acts that do not have a direct effect on the
financial statements
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

33) When an auditor believes that an illegal act may have occurred, the first step he or she should
take is to gather additional evidence to determine the extent of the illegality and if there is a
direct impact on the financial statements.
TRUE
Terms: Auditor believes an illegal act may have occurred
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

34) Audits are expected to provide a higher degree of assurance for the detection of material
frauds than is provided for an equally material error.
FALSE
Terms: Degree of assurance for detection of material frauds and errors
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking
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35) Auditors have a higher degree of responsibility for detecting illegal acts that have a direct
effect on the financial statements than illegal acts that do not have a direct effect on the financial
statements.
TRUE

Terms: Auditor degree of responsibility for detecting illegal acts

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

36) The auditor's first course of action when an illegal act is uncovered should be to immediately
notify the appropriate authorities, including but not limited to, law enforcement and the
Securities and Exchange Commission.
FALSE
Terms: Illegal act uncovered
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

37) An audit generally provides no assurance that illegal acts that do not have a direct effect on
the financial statements will be detected.

TRUE
Terms: Indirect-effect illegal acts; No assurance
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

38) Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of
assurance that the financial statements are free of material misstatement.
FALSE
Terms: Moderate or high risk of management fraud
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

39) In obtaining reasonable assurance that the financial statements are free of material
misstatement, the auditor does not need to consider the applicable legal and regulatory
framework relevant to the client.
FALSE

Terms: Auditor's responsibility for year-end inventory procedures

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

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40) The objective of the audit of financial statements by an independent auditor is to verify that
the financial statements are free of misstatements and accurately represent the company's
financial position and results of operations.
FALSE

Terms: Objective of audit of financial statements

Difficulty: Challenging
Objective: LO 6-3
AACSB: Reflective thinking

41) As the impact from noncompliance is further removed from affecting the financial
statements, the less likely the auditor is to become aware of or recognize noncompliance when
auditing the financial statements.
TRUE
Terms: Auditor responsibility for searching for illegal acts that do not have a direct effect on the
financial statements
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

42) The overall objectives of the auditor including reporting on the financial statements and
communicating, as required by accounting standards, must be in accordance with the auditor's
findings.
TRUE

Terms: Auditor's overall objectives

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

43) One of the paragraphs of the auditor's report includes a paragraph addressing the auditor's
responsibility for not detecting material misstatements in the financial statements, as this is
management's responsibility, not the auditors. TRUE

Terms: Auditor responsibility for detecting material misstatements

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

44) It is not difficult for the auditor to quantify a measure of materiality while performing the
audit.
FALSE
Terms: Auditor responsibility for defining materiality in an audit
Difficulty: Easy
Objective: LO 6-3
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AACSB: Reflective thinking

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45) It is possible that an audit performed in accordance with generally accepted auditing
standards may fail to detect a material misstatement in the financial statements.
TRUE

Terms: Concept of reasonable assurance in auditing

Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

46) Statistical sampling is an example of a specially designed auditing approach taken by the
auditor designed to provide absolute assurance that the financial statements are free of material
misstatements. FALSE

Terms: Auditor responsibility for providing reasonable assurance

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

47) The preparation of the financial statements by management contain complex estimates;
therefore, the auditor has to rely upon evidence which is convincing, not just persuasive.
FALSE
Terms: Auditor responsibility for providing reasonable assurance
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

48) Auditing standards make a distinction between the auditor's responsibility for searching for
errors and searching for fraud.
FALSE
Terms: Auditor responsibility for detecting fraud
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

49) Misappropriation of assets are, generally, in dollar amounts which are never material to the
financial statements.

Terms: Misappropriation of assets

Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking
TRUE

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50) An audit client is notified that the client is not in compliance with a number of pension laws
and regulations. In this situation, the auditor is not required to obtain sufficient appropriate
evidence of the impact of this noncompliance on the financial statements.
FALSE
Terms: Violations of laws and regulations
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

51) Discuss the differences between errors, frauds, and illegal acts. Give an example of each.
Terms: Errors, frauds, and illegal acts
Difficulty: Easy
Objective: LO 6-3
AACSB: Reflective thinking

The primary difference between errors and frauds is that errors are unintentional
misstatements of the financial statements, whereas frauds are intentional misstatements. Illegal
acts are violations of laws or government regulations, other than frauds. An example of an error
is a mathematical mistake when footing the columns in the sales journal. An example of a fraud
is the creation of fictitious accounts receivable. An example of an illegal act is the dumping of
toxic waste in violation of the federal environmental protection laws.

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52) Discuss the actions an auditor should take when an illegal act is identified or suspected.

2. Communicate with those charged with governance matters involving noncompliance with
laws and regulations that came to the auditor's attention during the course of the audit. If the
matter is believed to be intentional and material, it should be communicated to those charged
with governance, such as the board of directors, as soon as practicable.

3. Identify whether a responsibility exists to report the identified or suspected noncompliance to

parties outside the entity, such as regulatory authorities.

4. If the noncompliance has a material effect and has not been adequately reflected in the
financial statements, the auditor should express a qualified or adverse opinion. If the auditor has
been precluded by management from obtaining sufficient appropriate evidence to determine if
the noncompliance is material, the auditor should express a qualified opinion or disclaim an
opinion.
Terms: Actions auditor should take when auditor discovers illegal act
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking

53) Discuss three reasons why auditors are responsible for "reasonable" but not "absolute"
assurance.
Terms: Reasons auditors are responsible for reasonable but not absolute assurance
Difficulty: Moderate
Objective: LO 6-3
AACSB: Reflective thinking
1. Most audit evidence results from testing a sample of a population. Sampling inevitably
includes some risk of not uncovering a material misstatement.
2. Accounting presentations contain complex estimates, which inherently involve
uncertainty and can be affected by future events.
3.Fraudulently preparing financial statements are often extremely difficult for the auditor
to detect.

54) Discuss the differences in the auditor's responsibilities for discovering (1) material errors,
(2) material fraud, (3) illegal acts having a direct effect on the financial statements, and (4)
illegal acts that do not have a direct effect on the financial statements.
uditing standards make no distinction between the auditor's responsibilities for searching for
errors and fraud. In either case, the auditor must obtain reasonable assurance about whether the
statements are free of material misstatements. The standards also recognize that fraud is often
more difficult to detect because management or the employees perpetrating the fraud attempt to
conceal the fraud. Still, the difficulty of detection does not change the auditor's responsibility to
properly plan and perform the audit to detect material misstatements, whether caused by error or
fraud.
20
The auditor's responsibility for uncovering illegal acts that have a direct effect on the financial
statements is the same as for errors and fraud. However, the auditor is not required to search for
illegal acts that do not have a direct effect on the financial statements unless there is reason to
believe they exist.
Terms: Auditor responsibilities for discovering material errors, material fraud, direct-effect
illegal acts, and indirect-effect illegal acts
Difficulty: Challenging
Objective: LO 6-3
AACSB: Reflective thinking
Auditing standards make no distinction between the auditor's responsibilities for searching for
errors and fraud. In either case, the auditor must obtain reasonable assurance about whether the
statements are free of material misstatements. The standards also recognize that fraud is often
more difficult to detect because management or the employees perpetrating the fraud attempt to
conceal the fraud. Still, the difficulty of detection does not change the auditor's responsibility to
properly plan and perform the audit to detect material misstatements, whether caused by error or
fraud.
The auditor's responsibility for uncovering illegal acts that have a direct effect on the
financial statements is the same as for errors and fraud. However, the auditor is not required to
search for illegal acts that do not have a direct effect on the financial statements unless there is
reason to believe they exist.

6.4 Learning Objective 6-4

1) An audit must be performed with an attitude of professional skepticism. Professional

skepticism consists of two primary components: a questioning mind and
A) the assumption that upper-level management is dishonest.
B) a critical assessment of the audit evidence.
C) the assumption that all employees are motivated by greed.
D) verification of all critical information by independent third parties.

Terms: Attitude of professional skepticism

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

2) Which of the following is an accurate statement about professional skepticism?

A) Professional skepticism involves a critical assessment of the evidence.
B) Professional skepticism is easy to implement in practice.
C) It is easy for auditors to understand that their clients may try to deceive them throughout the
audit process.
D) Professional skepticism is only necessary for the audits of public companies.

Terms: Professional skepticism

Difficulty: Easy
Objective: LO 6-4
21
AACSB: Reflective thinking

3) One of the characteristics of professional skepticism is ________, which is the conviction to

decide for oneself, rather than accepting the claims of others.
A) interpersonal understanding
B) autonomy
C) suspension of judgment
D) self-esteem

Terms: Characteristics of professional skepticism

Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking

4) A questioning mindset
A) means the auditor must prove every statement that management makes to them.
B) means the auditor should approach the audit with a "do not trust anyone" mental outlook.
C) assures that the auditor will only accept honest clients.
D) means the auditor should approach the audit with a "trust but verify" mental outlook.

Terms: Professional skepticism

Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking

5) One of the characteristics of professional skepticism is ________, which is a desire to

investigate beyond the obvious.
A) self-esteem
B) an interpersonal understanding
C) a search for knowledge
D) a questioning mindset

Terms: Professional skepticism

Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking

6) ________ is the self-confidence to resist persuasion and to challenge assumptions or

conclusions.
A) Self-esteem
B) Interpersonal understanding
C) Suspension of judgment
D) Autonomy

Terms: Professional skepticism

Difficulty: Moderate
Objective: LO 6-4
22
AACSB: Reflective thinking

7) An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors of fraud and therefore should
A) plan and perform the engagement with an attitude of professional skepticism.
B) not rely on internal controls that are designed to prevent or detect errors or fraud.
C) design audit tests to detect unrecorded transactions.
D) extend the work to audit the majority of the recorded transactions and records of an entity.

Terms: Professional skepticism when auditing a client

Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking

8) Which of the following is not a characteristic of skepticism found in academic research on

this subject?
A) depending upon others to decide for oneself
B) searching for knowledge
C) suspending judgement until evidence is obtained
D) inquiring with a sense of doubt

Terms: Professional skepticism when auditing a client

Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking

9) Auditors often convince themselves that they only accept clients they can trust and who have
high integrity.
TRUE

Terms: Professional skepticism

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

10) A suspension of judgment is the recognition that people's motivations and perceptions can
lead them to provide biased or misleading information.
FALSE

Terms: Professional skepticism; interpersonal understanding; suspension of judgment

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

23
11) An exception is permissible with regards to displaying professional skepticism in audit is
understandable if the auditor has experienced integrity and honesty of client management in the
past.
FALSE

Terms: Professional skepticism

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

12) A suspension of judgment is the recognition that people's motivations and perceptions can
lead them to provide biased or misleading information.
TRUE

Terms: Professional skepticism; interpersonal understanding; suspension of judgment

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

13) An auditor embracing the responsibility during the audit of maintaining a questioning mind
and critically evaluating evidence significantly reduces the likelihood of audit failure throughout
the audit.
TRUE

Terms: Professional skepticism

Difficulty: Easy
Objective: LO 6-4
AACSB: Reflective thinking

14) Recent academic research on the topic of professional skepticism suggests that there are six
characteristics to skepticism. List and briefly describe each of these characteristics.
Terms: Professional skepticism
Difficulty: Moderate
Objective: LO 6-4
AACSB: Reflective thinking
1. Questioning mindset — a disposition to inquiry with some sense of doubt
2. Suspension of judgment — withholding judgment until appropriate evidence is obtained
3. Search for knowledge — a desire to investigate beyond the obvious, with a desire to
corroborate
4. Interpersonal understanding — recognition that people's motivations and perceptions can lead
them to provide biased or misleading information
5. Autonomy — the self-direction, moral independence, and conviction to decide for oneself,
rather than accepting the claims of others
6. Self-esteem — the self-confidence to resist persuasion and to challenge assumptions or
conclusions.

24
6.5 Learning Objective 6-5

1) The starting point to effective professional judgment begins with

A) gathering the facts.
B) identifying alternatives.
C) identifying relevant literature.
D) identifying and defining the issue.

Terms: Professional judgment process

Difficulty: Easy
Objective: LO 6-5
AACSB: Reflective thinking

2) Which of the following is not a step in the professional judgment process?

A) make the decision
B) perform the analysis
C) determine the type of audit opinion
D) review and document the rationale for the conclusion

Terms: Professional judgment process

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

3) ________ is the tendency to make assessments by starting from an initial value and then
adjusting insufficiently away from that initial value.
A) Anchoring
B) Availability
C) Overconfidence
D) Confirmation

Terms: Common judgment tendencies

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

25
4) When the auditor considers whether he or she understands the form and substance of the
transaction or event, and whether the relevant authoritative literature has been applied
consistently by the client, he or she is performing which step in the professional judgment
process?
A) identifying and defining the issue
B) performing the analysis and identifying potential alternatives
C) making the decision
D) gathering the facts

Terms: Professional judgment process

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

5) When performing the review and completing the documentation and rationale for the
conclusion step of the professional judgment process, auditors will
A) consider the accounting and auditing standards relevant to the issues.
B) articulate in written form the rationale of their judgment.
C) identify the issue.
D) gather the facts.

Terms: Professional judgment process

Difficulty: Easy
Objective: LO 6-5
AACSB: Reflective thinking

6) The profession has developed professional judgment frameworks that illustrate an effective
decision-making process.
TRUE
Terms: Professional judgment process
Difficulty: Easy
Objective: LO 6-5
AACSB: Reflective thinking

7) During the professional judgment process, the analysis may identify only one appropriate
response to the issue.
FALSE

Terms: Professional judgment process

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

26
8) During the professional judgment process, it is not important that the auditor consider other
financial reporting framework requirements outside of generally accepted accounting principles.
FALSE

Terms: Gathering the facts and identifying the relevant literature

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

9) In a situation where the auditor is evaluating a decision made with regards to the recording of
an unusual revenue transaction, the auditor should step back and determine if the recording of the
revenue is in accordance with accounting standards.
FALSE

Terms: Professional judgment process-making the decision

Difficulty: Easy
Objective: LO 6-5
AACSB: Reflective thinking

10) Overconfidence is the tendency to put more weight on information that is consistent with the
initial beliefs or preferences.
FALSE

Terms: Professional judgment process

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

11) In order to mitigate availability, the auditor should consult with others and make the
opposing case.
TRUE
Terms: Professional judgment; strategies to mitigate common judgment tendencies
Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

12) In order to mitigate confirmation, the auditor should make the opposing case and consider
alternative explanations, potentially disconfirming or conflicting information.
TRUE
Terms: Professional judgment; strategies to mitigate common judgment tendencies
Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

27
13) In order to mitigate overconfidence, the auditor should challenge the opinions of experts and
the underlying evidence.
FALSE

Terms: Professional judgment; strategies to mitigate common judgment tendencies

Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

14) In order to mitigate anchoring, the auditor should consult with others, but not consider
management bias.
TRUE
Terms: Professional judgment; strategies to mitigate common judgment tendencies
Difficulty: Moderate
Objective: LO 6-5
AACSB: Reflective thinking

15) Auditors should be alert for potential judgment tendencies, traps, and biases that may impact
their decision-making process. Identify and define four of these judgment tendencies. Then, for
each judgment tendency, suggest a way to avoid or mitigate the tendency. TRUE
Terms: Professional judgment; strategies to mitigate common judgment tendencies
Difficulty: Challenging
Objective: LO 6-5
AACSB: Reflective thinking

28
6.6 Learning Objective 6-6

1) Why does the auditor divide the financial statements into smaller segments?
A) Using the cycle approach makes the audit more manageable.
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.

Terms: Reason auditor divides financial statements into smaller segments

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

2) Why does the auditor divide the financial statements into segments around the financial
statement cycles?
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 illegal acts.

Terms: Reason auditor divides financial statements into smaller segments

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

3) The most important general ledger account included in and affecting several cycles is the
A) cash account.
B) inventory account.
C) income tax expense and liability accounts.
D) retained earnings account.

Terms: Account included in and affected several cycles

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

29
4) When using the cycle approach to segmenting the audit, the reason for treating capital
acquisition and repayment separately from the acquisition of goods and services is that
A) the transactions are related to financing a company rather than to its operations.
B) most capital acquisition and repayment cycle accounts involve few transactions, but each is
often highly material and therefore should be audited extensively.
C) Both A and B are correct.
D) Neither A nor B is correct.

Terms: Cycle approach to segmenting an audit

Difficulty: Challenging
Objective: LO 6-6
AACSB: Reflective thinking

5) In describing the cycle approach to segmenting an audit, which of the following statements is
not true?
A) All general ledger accounts and journals are included at least once.
B) Some journals and general ledger accounts are included in more than one cycle.
C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods
and services and payment" cycle.
D) The "inventory and warehousing" cycle may be audited at any time during the engagement
since it is unrelated to the other cycles.

Terms: Cycle approach to segmenting an audit

Difficulty: Challenging
Objective: LO 6-6
AACSB: Reflective thinking

6) The cycle approach to auditing

A) ties to the way transactions are recorded in journals and then summarized in the general
ledger and financial statements.
B) cannot combine transactions recorded in different journals with the general ledger balances
that result from those transactions.
C) is the only way of segmenting an audit.
D) assumes that each account has two or more cycles associated with it.

Terms: Cycle approach to segmenting an audit

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

30
7) Which balance sheet accounts are included in the payroll and personnel cycle?
A) cash in bank, accrued payroll, trade accounts receivable
B) accrued payroll, notes payable, and deferred tax
C) accrued payroll, cash in bank, and accrued payroll taxes
D) salaries and commissions, cash in bank, accrued payroll taxes

Terms: Cycle approach to segmenting an audit

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

8) Under the cycle approach to segmenting an audit, transactions recorded in different journals
should never be combined with the general ledger balances that result from those transactions.
FALSE

Terms: Cycle approach to segmenting an audit

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

9) Under the cycle approach, the only accounts that have two or more cycles associated with
them are cash and accounts receivable.
FALSE

Terms: Cycle approach to segmenting an audit

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

10) Although auditors need to consider the interrelationships between cycles, they typically treat
cycles independently to the extent practical to manage complex audits effectively.
TRUE
Terms: Cycle approach to segmenting an audit
Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

11) When examining the relationships of the five cycles and general cash, the cycles have no
beginning or end except at the origin or final disposition of the company.
TRUE
Terms: Cycle approach to segmenting an audit
Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

31
12) Under the cycle approach, the capital acquisition and repayment cycle is closely related to
the acquisition and payment cycle.
FALSE

Terms: Cycle approach to segmenting an audit

Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

13) Auditors generally use a financial statement cycle approach when performing a financial
statement audit. Describe the transaction flow, using specific examples, from journals to
financial statements that produce financial statements.

Transactions-sales, cash receipts, acquisition of goods/services, cash disbursements, payroll

services and disbursements, and allocation and adjustments. Examples: Journals-sales, cash
receipts, acquisitions, cash disbursements, payroll, and general

Terms: Financial statement cycle approach when performing a financial statement audit
Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

14) Listed below are several accounts listed from a company's trial balance. Next to each account
put the letter corresponding to the transaction cycle used to audit the account.
S = Sales and collection cycle I = Inventory and warehousing cycle
A = Acquisition and payment cycle C = Capital acquisition and repayment cycle
P = Payroll and personnel cycle

1. ___S_____ Sales returns and allowances 5. ___P_____ Salaries and

commissions
2. ___C_____ Capital stock 6. ___I_____ Cost of goods sold
3. ___A_____ Buildings 7. ___S_____ Trade accounts
receivable
4. ___C_____ Notes payable 8. ___A_____ Rent

Terms: Financial statement cycle approach when performing a financial statement audit
Difficulty: Moderate
Objective: LO 6-6
AACSB: Reflective thinking

32
6.7 Learning Objective 6-7

1) Auditors have found that generally the most efficient and effective way to conduct audits is to
A) obtain complete assurance about the correctness of each class of transactions affecting the
account.
B) obtain some combination of assurance for each class of transactions and for the ending
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.

Terms: Setting audit objectives

Difficulty: Moderate
Objective: LO 6-7
AACSB: Reflective thinking

2) The term audit objective refers to all of the following except for
A) transaction-related audit objectives.
B) presentation and disclosure-related audit objectives.
C) balance-related audit objectives.
D) cycle-related audit objectives.

Terms: Setting audit objectives

Difficulty: Easy
Objective: LO 6-7
AACSB: Reflective thinking

3) When an auditor is determining what information to include in the notes to the financial
statements relating to bonds payable, he or she is concerned with the transaction-related audit
objectives.
FALSE

Terms: Setting audit objectives

Difficulty: Moderate
Objective: LO 6-7
AACSB: Reflective thinking

4) It is generally impractical for the auditor to obtain complete assurance about the correctness of
each class of transactions.
TRUE

Terms: Setting audit objectives

Difficulty: Easy
Objective: LO 6-7
AACSB: Reflective thinking

33
5) An audit objective focused on the balance in accounts receivable or accounts payable is a
transaction-related audit objective.
FALSE

Terms: Transaction and balance-related audit objectives

Difficulty: Easy
Objective: LO 6-7
AACSB: Reflective thinking

6) An audit objective focused on transactions in the sales journal is a balance-related audit

objective.
TRUE

Terms: Transaction and balance-related audit objectives

Difficulty: Easy
Objective: LO 6-7
AACSB: Reflective thinking

6.8 Learning Objective 6-8

1) Which of the following is not one of the AICPA categories of assertions?

A) assertions about classes of transactions and events for the period under audit
B) assertions about financial statements and correspondence to GAAP
C) assertions about account balances at period end
D) assertions about presentation and disclosure

Terms: Categories of assertions

Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking

2) If a short-term note payable is included in the accounts payable balance on the financial
statement, there is a violation of the
A) completeness assertion.
B) existence assertion.
C) cutoff assertion.
D) classification assertion.

Terms: Violation of assertions

Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking

34
3) International auditing standards and U.S. GAAP classify assertions into three categories.
Which of the following is not a category of assertions that management makes about the
accounting information in financial statements?
A) assertions about classes of transactions for the period under audit
B) assertions about account balances at period end
C) assertions about the quality of source documents used to prepare the financial statements
D) assertions about presentation and disclosure

Terms: Management assertions

Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking

4) Management assertions are

A) directly related to the financial reporting framework used by the company, usually U.S.
GAAP or IFRS.
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.

Terms: Management assertions

Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

5) Management makes the following assertions about account balances:

A) existence, completeness, classification, and cutoff.
B) existence, accuracy, classification, and rights and obligations.
C) existence, completeness, valuation and allocation, and rights and obligations.
D) existence, completeness, rights and obligations, and cutoff.

Terms: Management assertions

Difficulty: Challenging
Objective: LO 6-8
AACSB: Reflective thinking

35
6) Management's disclosure of the amount of unfunded pension obligations and the assumptions
underlying these amounts is an example of the ________ assertion.
A) completeness
B) existence
C) accuracy and valuation
D) rights and obligations

Terms: Accuracy and valuation assertion

Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

7) Which of the following assertions is described as "this assertion addresses whether all
transactions that should be included in the financial statements are in fact included"?
A) occurrence
B) completeness
C) rights and obligations
D) existence

Terms: Assertion which addresses whether all transactions that should be included are included
Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

8) Which of the following management assertions is not associated with classes of transactions
and events?
A) occurrence
B) classification
C) accuracy
D) rights and obligations

Terms: Management assertion not associated with transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

9) With increases in the complexity of transactions and the need for expanded disclosures about
these transactions, assertions about the ________ have increased in importance.
A) existence
B) account balances
C) presentation and disclosure
D) classes of transactions

Terms: Management assertions

Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking
36
10) Determining that the footnote disclosures related to long-term debt are accurate is an
example of the ________ audit objective.
A) occurrence
B) completeness
C) presentation and disclosure
D) classification and understandability

Terms: Presentation and disclosure-related objectives

Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking

11) Relevant assertions have a meaningful bearing on whether the account is fairly stated and are
used to assess the risk of material misstatement and the design and performance of audit
procedures.
TRUE

Terms: Management assertions

Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

12) The auditor's audit objectives follow and are closely related to management assertions.
TRUE

Terms: Management assertions

Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

13) The presentation and disclosure-related audit objectives are identical to the management
assertions for presentation and disclosure.
FALSE
Terms: Presentation and disclosure-related objectives
Difficulty: Easy
Objective: LO 6-8
AACSB: Reflective thinking

37
14) Briefly explain each management assertion related to classes of transactions and events for
the period under audit.
Terms: Management assertions related to classes of transactions
Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking
- Occurrence — the transactions recorded have actually taken place.
- Completeness — all transactions that should have been recorded have been recorded.
- Accuracy — the transactions were recorded at the appropriate amounts.
- Cutoff — the transactions have been recorded in the correct accounting period.
- Classification — the transactions have been recorded in the appropriate caption.

15) Briefly explain each management assertion related to account balances at period end.
Terms: Management assertions related to account balances at period end
Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking
- Existence — assets, liabilities and equity balances exist.
- Rights and Obligations — the entity legally controls rights to its assets and its liabilities
faithfully represent its obligations.
- Completeness — all balances that should have been recorded have been recorded.
- Valuation and Allocation — balances that are included in the financial statements are
appropriately valued and allocation adjustments are appropriately recorded.

16) Briefly explain each management assertion related to presentation and disclosure.
Terms: Management assertions related to presentation and disclosure
Difficulty: Moderate
Objective: LO 6-8
AACSB: Reflective thinking

- Occurrence — the transactions and disclosures have actually occurred.

- Rights and Obligations — the transactions and disclosures pertain to the entity.
- Completeness — all disclosures have been included in the financial statements.
- Classification — financial statements are clear and appropriately presented.
- Accuracy and Valuation — information is disclosed at the appropriate amounts.

38
6.9 Learning Objective 6-9

1) Which of the following statements is true regarding the distinction between general audit
objectives and specific audit objectives for each class of transactions?
A) The specific audit objectives are applicable to every class of transactions.
B) The general audit objectives are applicable to every class of transactions.
C) Once the specific transaction-related audit objectives are established, they can be used to
develop the general transaction-related objectives.
D) For any given class of transactions, usually only one audit objective must be met to conclude
the transactions are properly recorded.

Terms: Difference between general and specific audit objectives

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

2) The auditor is determining that the correct selling price was used for billing and that the
quantity of goods shipped was the same as the quantity billed. She or he is gathering evidence
about which transaction-related audit objective?
A) existence
B) completeness
C) accuracy
D) cut-off

Terms: Evidence for transaction-related audit objective if recorded sales are for amount shipped
and correctly billed and recorded
Difficulty: Moderate
Objective: LO 6-9
AACSB: Analytic thinking

3) The posting and summarization audit objective are the auditor's counterpart to management's
assertion of
A) occurrence.
B) completeness.
C) accuracy.
D) classification.

Terms: Transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

39
4) ________ deals with potential overstatement and ________ deals with understatements
(unrecorded transactions).
A) Occurrence; completeness
B) Completeness; occurrence
C) Accuracy; classification
D) Classification; accuracy

Terms: General and specific audit objectives

Difficulty: Challenging
Objective: LO 6-9
AACSB: Reflective thinking

5) General transaction-related audit objectives vary from audit to audit, depending on the nature
and characteristics of the client's business and industry.
FALSE

Terms: General transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

6) The audit objective of posting and summarization is associated with the management assertion
of accuracy.
TRUE

Terms: Audit objective of posting and summarization; Accuracy management assertion

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

7) The transaction-related audit objective of timing is related to the assertion of cutoff.

TRUE

Terms: Transaction-related audit objective of timing; Cutoff assertion

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

8) If a sale was for a valid shipment, but the amount of the sales invoice was calculated
incorrectly, the accuracy objective was violated.
TRUE

Terms: General transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

40
9) The effect of a violation of the completeness transaction-related audit objective for cash
disbursements transactions would be an overstatement of cash disbursements.
FALSE

Terms: Completeness transaction-related audit objective

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

10) The transaction-related audit objective that deals with whether recorded transactions have
actually occurred is the completeness objective.
FALSE

Terms: Transaction-related audit objective; Completeness objective

Difficulty: Moderate
Objective: LO 6-9
AACSB: Reflective thinking

11) In the context of the audit of sales, distinguish between the occurrence and completeness
transaction-related audit objectives. State the effect on the sales account (overstatement or
understatement) of a violation of each objective.
Terms: General and specific audit objectives
Difficulty: Challenging
Objective: LO 6-9
AACSB: Reflective thinking

When testing the occurrence objective for sales, the auditor's focus is on whether the sales that
have been recorded in the sales journal actually occurred. In contrast, tests of the completeness
objective are concerned with determining whether all sales that actually occurred have been
recorded in the sales journal. Violations of the occurrence objective result in overstatements of
sales; violations of the completeness objective result in understatements of sales.

41
12) Below are five audit procedures, all of which are tests of transactions associated with the
audit of the sales and collection cycle. Also, below are the six general transaction-related audit
objectives and the five management assertions. For each audit procedure, indicate (1) its audit
objective, and (2) the management assertion being tested.

Audit Objectives Assertions

A. occurrence V. occurrence
B. completeness W. completeness
C. accuracy X. accuracy
D. posting and summarization Y. classification
E. classification Z. cutoff
F. timing

1. Vouch recorded sales from the sales journal to the file of bills of lading.
(1) __A______
(2) __V______

2. Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in
recording sales transactions.
(1) __F_____
(2) __Z______

3. Account for the sequence of prenumbered bills of lading and sales invoices.
(1) __B______
(2) __W______

4. Trace from a sample of prelisting of cash receipts to the cash receipts journal, testing for
names, amounts, and dates.
(1) __B, C______
(2) __W, X______

5. Examine customer order forms for credit approval by the credit manager.
(1) __A______
(2) __V______

Terms: Management assertions and transaction-related audit objectives

Difficulty: Challenging
Objective: LO 6-9
AACSB: Analytic thinking

42
13) Below are five audit procedures, all of which are tests of transactions associated with the
audit of the acquisition and payment cycle. Also, below are the six general transaction-related
audit objectives and the five management assertions. For each audit procedure, indicate (1) its
audit objective, and (2) the management assertion being tested.

Audit Objectives Assertions

A. occurrence V. occurrence
B. completeness W. completeness
C. accuracy X. accuracy
D. posting and summarization Y. classification
E. classification Z. cutoff
F. timing

1. Foot the purchases journal and trace the totals to the related general ledger accounts.
(1) ___D_____
(2) ___X_____

2. Recompute the cash discounts taken by the client.

(1) ___C_____
(2) ___X_____

3. Compare dates on cancelled checks with the bank cancellation date.

(1) ___F_____
(2) ___Z_____

4. Trace from a sample of cancelled checks to the cash disbursements journal.

(1) ___B_____
(2) ___W_____

5. Examine supporting documentation for a sample of transactions for authorized payee and
amount and to determine services or goods were received.
(1) ___A_____
(2) ___V_____
Terms: Management assertions and transaction-related audit objectives
Difficulty: Challenging
Objective: LO 6-9
AACSB: Analytic thinking

43
6.10 Learning Objective 6-10

1) In testing for cutoff, the objective is to determine

A) whether all of the current period's transactions are recorded.
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.

Terms: Objective in testing cutoff

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

2) The detail tie-in objective is not concerned that the details in the account balance
A) agree with related subsidiary ledger amounts.
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.

Terms: Detail tie-in objective

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

3) The detail tie-in is part of the ________ assertion for account balances.
A) classification
B) valuation and allocation
C) rights and obligations
D) completeness

Terms: Detail tie-in is and assertion for account balances

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

4) The classification balance-related audit objective

A) involves determining if items included on a client's listing are included in the correct general
ledger accounts.
B) is the counterpart to the management assertion of completeness.
C) involves determining if items included on a client's listing are disclosed properly in the
financial statements.
D) involves tying in the account balances to the general ledger.

Terms: Balance-related audit objectives

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking
44
5) Balance-related audit objectives
A) are never applied to income statement accounts.
B) are designed to detect fraud.
C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to
account balances.
D) can have only one specific-related audit objectives.

Terms: Balance-related audit objectives

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

6) Which of the following statements is not true?

A) Balance-related audit objectives are applied to ending account balances.
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.

Terms: Balance-related and transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

7) Balance-related audit objectives follow from management assertions.

TRUE

Terms: Balance-related audit objectives

Difficulty: Easy
Objective: LO 6-10
AACSB: Reflective thinking

8) Balance-related audit objectives are usually applied to the ending balance in income statement
accounts; transaction-related audit objectives are usually applied to transactions reflected in
balance sheet accounts.
FALSE

Terms: Balance-related audit objectives; Transaction-related audit objectives

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

45
9) Tests of details of balances typically involve the use of comparisons and relationships to
assess the overall reasonableness of account balances.
FALSE
Terms: Tests of details of balances
Difficulty: Easy
Objective: LO 6-10
AACSB: Reflective thinking

10) The general balance-related audit objective that deals with determining that details in the
account balance agree with related master file amounts, foot to the total in the account balance,
and agree with the total in the general ledger is the detail tie-in objective.

Terms: Detail tie-in objective; General balance-related objective

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking
TRUE

11) The cutoff objective, "transactions near the balance sheet date are recorded in the proper
period," is a balance-related audit objective.
TRUE

Terms: Cutoff objective; Balance-related audit objective

Difficulty: Moderate
Objective: LO 6-10
AACSB: Reflective thinking

12) An important balance-related audit objective is realizable value. Describe the purpose of this
audit objective, what it is concerned with, and give an example.
Terms: Balance-related objective of realizable value
Difficulty: Challenging
Objective: LO 6-10
AACSB: Reflective thinking
The purpose of this audit objective is to make sure that assets are included on the balance sheet at
the amounts estimated to be realized.
It is concerned with whether an account balance has been reduced for declines from
historical cost or when accounting standards require a fair value accounting treatment for the
account. It is concerned with valuation and allocation. It generally applies only to asset accounts,
although some liabilities are recorded at fair value.

46
13) Below are five audit procedures, all of which are tests of balances associated with the audit
of accounts receivable. Also, below are the eight general balance-related audit objectives and the
four management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the
management assertion being tested.

Audit Objectives Assertions

A. existence V. existence
B. completeness W. completeness
C. accuracy X. valuation and allocation
D. classification Y. rights and obligations
E. cutoff
F. detail tie-in
G. realizable value
H. rights and obligations

1. Obtain an aged listing of accounts receivable. For a sample of individual customers on the
listing, agree the customer's name, amount, and other information with the corresponding
information in the accounts receivable master file.
(1) __F______
(2) __X______

2. Examine details of sales for five days before and five days after year-end to determine whether
sales have been recorded in the proper period.
(1) __E______
(2) __X______

3. Assess the reasonableness of the balance in the allowance for doubtful accounts.
(1) __G______
(2) __H______
4. Inquire as to whether any accounts receivable have been factored or sold during the period.
(1) __H______
(2) __Y______

5. Inquire as to whether there are any receivables from related parties.

(1) ___D_____
(2) ___X_____
Terms: Management assertions and balance-related audit objectives
Difficulty: Challenging
Objective: LO 6-10
AACSB: Analytic thinking

6.11 Learning Objective 6-11

1) The procedures used to test the effectiveness of the internal controls are known as
47
A) tests of transactions.
B) tests of controls.
C) substantive analytical procedures.
D) control risk.

Terms: Tests of controls

Difficulty: Easy
Objective: LO 6-11
AACSB: Reflective thinking

2) Which of the following statements is not correct?

A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.
B) Sufficient appropriate evidence must be accumulated to meet the auditor's 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.

Terms: Considerations for accumulating evidence

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

3) Two overriding considerations affect the many ways an auditor can accumulate evidence:
1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional
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.

Terms: Considerations for accumulating evidence

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

48
4) If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control, assessing control risk, testing
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.

Terms: Auditor obtained reasonable level of assurance about fair presentation

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

5) After the auditor has completed all audit procedures, it is necessary to combine the
information obtained to reach an overall conclusion as to whether the financial statements are
fairly presented. This is a highly subjective process that relies heavily on
A) generally accepted auditing standards.
B) the AICPA's Code of Professional Conduct.
C) generally accepted accounting principles.
D) the auditor's professional judgment.

Terms: After auditor completed all audit procedures

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

6) Direct, written communication with the client's customers to identify whether a receivable
exists is an example of a(n)
A) substantive test of transactions.
B) test of controls.
C) analytical procedure.
D) test of details of balances.

Terms: Tests of details of balances

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

49
7) ________ are used as evidence to provide assurance about an account balance.
A) Substantive analytical procedures
B) Tests of transactions
C) Audit risks
D) Tests of details of balances

Terms: Analytical procedures; Substantive tests

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

8) When an auditor has reduced assessed control risk based on tests of controls, he or she may
then reduce the extent to which the accuracy of the financial statement information directly
related to those controls must be supported through the accumulation of evidence using
substantive tests.
TRUE
Terms: Tests of controls; Assessed control risk
Difficulty: Easy
Objective: LO 6-11
AACSB: Reflective thinking

9) For a private company audit, tests of controls are normally performed only on those internal
controls the auditor believes have not been operating effectively during the period under audit.
FALSE
Terms: Tests of controls
Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

10) Rights and obligations are the only balance-related assertion without a similar transaction-
related assertion.
TRUE

Terms: Audit process

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

11) The audit objectives are the well-defined methodology for organizing an audit to ensure that
the evidence gathered is sufficient and appropriate.
FALSE

Terms: Audit process

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

50
12) Obtaining an understanding of the entity and its environment is part of the analytical
procedures phase of the audit.
FALSE

Terms: Audit process

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

13) An auditor assesses the risk of material misstatement to determine the impact on the audit
plan and to determine the nature, extent, and timing of the audit procedures.
TRUE

Terms: Audit process

Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

14) List the four phases of a financial statement audit.

Terms: Phases of financial statement audit
Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking
There are four phases of a Financial Statement Audit: planning/risk assessment, internal control
assessment, substantive testing and reporting.

15) Describe what analytical procedures and tests of details of balances are and give an example
of each.
Analytical procedures consist of evaluations of financial information through analysis of
plausible relationships among financial and nonfinancial data. Analytical procedures use
comparisons and relationships to assess whether account balances and other data appear
reasonable. An example of an analytical procedure is to examine sales transactions in the sales
journal for unusually large amounts and/or compare monthly sales with prior years.

Tests of details of balances are specific procedures intended to test for monetary misstatements
in balances in the financial statements. An example is direct written communication with the
client's customers to identify any incorrect amounts.
Terms: Analytical procedures and tests of balances
Difficulty: Challenging
Objective: LO 6-11
AACSB: Reflective thinking

51
16) Match seven of the terms (a-k) with the definitions provided below (1-7):

a. tests of details of balances

b. tests of controls
c. substantive tests of transactions
d. analytical procedures
e. transaction-related audit objectives
f. management assertions
g. balance-related audit objectives
h. fraud
i. illegal act
j. error
k. management fraud
KEY: 1H 2E 3F 4A 5G 6B 7D
________ 1. an intentional misstatement of the financial statements

________ 2. a set of six audit objectives the auditor must meet, including timing, posting and
summarization, and accuracy

________ 3. implied or expressed representations made by the client about classes of

transactions, account balances and disclosures in the financial statements

________ 4. audit procedures testing for monetary misstatements to determine whether the
balance-related audit objectives have been satisfied for each significant account balance

________ 5. a set of nine audit objectives the auditor must meet, including completeness, detail
tie-in, and rights and obligations

________ 6. audit procedures designed to test the effectiveness of control policies and
procedures

________ 7. use of comparisons and relationships to assess whether account balances or other
data appears reasonable
Terms: Tests of balances; Tests of controls; Substantive tests of transactions; Analytical
procedures; Management assertions; Balance-related audit objectives; Fraud
Difficulty: Moderate
Objective: LO 6-11
AACSB: Reflective thinking

52