ACCTMIS 3200 Auditing Principles & Procedures Q & A w/ Rationales, Exams of Accounting

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ACCTMIS 3 200

Auditing Principles &

Procedures

Q & A w/ Rationales

1. Which of the following is an example of a substantive audit procedure? a) Reviewing the client's accounting policies and procedures manual b) Obtaining a letter of representation from the client's management c) Performing analytical procedures on the client's financial statements d) Testing the accuracy and completeness of the client's sales transactions* Rationale: Substantive audit procedures are those that provide evidence about the validity of the assertions in the financial statements, such as testing transactions, balances, and disclosures. Option d is a substantive audit procedure that tests the occurrence, completeness, accuracy, and cut- off assertions for sales. Options a and b are examples of audit planning procedures, while option c is an example of a risk assessment procedure.
2. What is the main purpose of audit sampling? a) To reduce the cost and time of the audit b) To increase the reliability and validity of the audit evidence c) To enable the auditor to draw conclusions about a population based on a sample* d) To comply with the auditing standards and regulations Rationale: Audit sampling is the application of audit procedures to less than 100% of the items in a population, such that the auditor can make inferences about the

methods b) Statistical sampling allows the auditor to quantify sampling risk, while non-statistical sampling does not c) Statistical sampling requires a representative sample, while non-statistical sampling does not d) Both a and b* Rationale: Statistical sampling is a method of sampling that uses random selection methods and allows the auditor to quantify sampling risk, which is the risk that the sample is not representative of the population. Non-statistical sampling is a method of sampling that uses judgmental selection methods and does not allow the auditor to quantify sampling risk. Option d is correct as both a and b reflect these differences. Option c is incorrect because both statistical and non-statistical sampling require a representative sample to draw valid conclusions.

5. Which of the following statements is true about audit documentation? a) Audit documentation should be prepared in sufficient detail to enable an experienced auditor to understand the work performed and conclusions reached* b) Audit documentation should be finalized and signed by the auditor before issuing the audit report c) Audit documentation should include all information obtained by the auditor, regardless of its relevance or reliability d) Audit documentation should be retained by the auditor for at least five years after completing the audit Rationale: Audit documentation is the record of the audit

procedures performed, relevant audit evidence obtained, and conclusions reached by the auditor. Option a is true because audit documentation should provide sufficient and appropriate evidence to support the auditor's opinion and demonstrate compliance with auditing standards. Option b is false because audit documentation should be finalized and signed by the auditor within a reasonable time after issuing the audit report, not before. Option c is false because audit documentation should include only information that is relevant and reliable for supporting the auditor's opinion, not all information obtained by the auditor. Option d is false because audit documentation should be retained by the auditor for at least seven years after completing the audit, not five years. B:

1. Which of the following best describes the concept of materiality in auditing? a. The requirement to disclose all immaterial errors in financial statements. b. The threshold at which errors or omissions are judged to be of significance. c. The measure of the auditors' professional judgment and skepticism.

being audited.

3. A substantial increase in accounts receivable's provision for bad debts and a corresponding decrease in revenue recognized may indicate: a. A potential misstatement in accounts receivable. b. An overstatement of revenue and an understatement of expenses. c. An underestimation of revenue and an overstatement of expenses. d. A potential error in the income tax provision. Answer: a. A potential misstatement in accounts receivable. Rationale: A substantial increase in the provision for bad debts and a corresponding decrease in revenue likely suggest a higher risk of misstatement in accounts receivable due to potential overestimation of revenue or failure to adequately account for bad debt.
4. Which of the following is an example of inherent risk in an audit? a. The client's financial statements being unsupported by adequate evidence. b. The complexity of the client's operations and financial transactions. c. The client's management team having a history of unethical behavior. d. A lack of segregation of duties within the client's internal

control system. Answer: b. The complexity of the client's operations and financial transactions. Rationale: Inherent risk relates to the susceptibility of financial statements to material misstatement due to the nature of the client's operations, industry, or transactions. The complexity of operations and financial transactions increases the inherent risk and requires the auditor to exercise higher levels of professional skepticism.

5. Which of the following assertions is not typically included in financial statement audit objectives? a. Existence or occurrence. b. Valuation or allocation. c. Rights and obligations. d. Management integrity. Answer: d. Management integrity. Rationale: Financial statement audit objectives generally focus on assertions related to the financial statement elements, such as existence or occurrence, valuation or allocation, completeness, rights and obligations, and presentation and disclosure. The concept of management integrity is typically considered during a risk assessment or evaluation of internal controls, rather than being an audit objective.

Rationale: Audit working papers are used to document the evidence collected, procedures performed, and conclusions reached by the auditor during the audit engagement. They serve as a record of the work performed and provide support for the auditor's opinion on the financial statements.

8. Which of the following is a key objective of a compliance audit? a. Assessing the organization's financial statements for material misstatements. b. Evaluating the effectiveness of internal control systems over financial reporting. c. Reviewing the organization's compliance with laws, regulations, and policies. d. Identifying opportunities for cost reduction and operational improvement. Answer: c. Reviewing the organization's compliance with laws, regulations, and policies. Rationale: Compliance audits focus on reviewing an organization's adherence to laws, regulations, and internal policies. These audits assess whether the organization's activities and operations are in compliance with applicable legal and regulatory requirements.
9. Which of the following is a test of controls used by auditors to gather evidence? a. Analytical procedures.

b. Ratio analysis. c. Confirmation of accounts. d. Walkthrough testing. Answer: d. Walkthrough testing. Rationale: Walkthrough testing involves tracing a sample of transactions through the client's internal control process, from initiation to recording, to determine the effectiveness of the controls. It allows auditors to assess whether controls are operating effectively and to gather evidence about their design and operation.

10. The expectation gap refers to: a. A difference between actual financial performance and budgeted results. b. A mismatch between the auditor's and client's perceptions of the auditor's responsibilities. c. An inconsistency between the auditor's judgment and the company's management views. d. A deviation from regulatory requirements in the audit process. Answer: b. A mismatch between the auditor's and client's perceptions of the auditor's responsibilities. Rationale: The expectation gap represents the difference between what the general public, including financial statement users, expects auditors to accomplish and what auditors' professional standards and responsibilities

Rationale: Auditors are required to communicate significant deficiencies in internal control to the audit committee or those charged with governance. This communication ensures that the appropriate individuals within the organization are aware of the control weaknesses and can take necessary actions to rectify them.

13. Which of the following statements is true regarding the concept of professional skepticism in auditing? a. It requires auditors to assume management's honesty unless evidence suggests otherwise. b. It implies a belief that management's representations are accurate and truthful. c. It necessitates a critical evaluation of audit evidence and a questioning mindset. d. It involves auditing procedures with the primary goal of detecting fraud. Answer: c. It necessitates a critical evaluation of audit evidence and a questioning mindset. Rationale: Professional skepticism in auditing requires auditors to maintain a questioning mindset and critically evaluate the evidence obtained during the audit. It includes appropriate professional doubt to objectively assess and challenge management's assertions.
14. When issuing an adverse opinion on internal controls, the auditor's report should include: a. A description of control deficiencies and suggestions for

improvement. b. Emphasis of matter paragraph highlighting risks. c. A clear disclaimer of responsibility for detecting fraud. d. A qualified opinion on the financial statements as well. Answer: b. Emphasis of matter paragraph highlighting risks. Rationale: When issuing an adverse opinion on internal controls, the auditor's report should include an emphasis of matter paragraph highlighting the risks and significance of the control deficiencies identified. An adverse opinion on internal controls does not automatically result in a qualified opinion on the financial statements themselves.

15. Which of the following is a limitation of an audit engagement? a. Auditors cannot perform analytical procedures on financial statements. b. Auditors have the sole responsibility for preventing fraud within the audited entity. c. Auditors rely on management's representations and documents provided by the client. d. Audit engagements do not provide any reasonable assurance to financial statement users. Answer: c. Auditors rely on management's representations and documents provided by the client. Rationale: Auditors rely on management's representations