Deck 4: Audit Responsibilities and Objectives

Question 1

Which of the following is NOT one of the four phases in the audit process?

A) Plan and design an audit approach.
B) Test controls and transactions.
C) Complete the audit and issue the report.
D) Inform client of any adjustments or corrections to be made to the financial statements.

Answer 1

D

Question 2

Which one of the following statements is true?

A) It is usually easier for the auditor to uncover errors than fraud.
B) It is usually equally difficult for the auditor to uncover errors or fraud.
C) It is usually easier for the auditor to uncover fraud than errors.
D) None of the above

Answer 2

A

Question 3

When the auditor has assessed control risk of a particular area at a reduced level, he or she will then:

A) eliminate the need to gather evidence in that area.
B) test the effectiveness of the controls in that area.
C) proceed to expand the sample sizes in that area.
D) negotiate with management to determine which controls will be tested in that area.

Answer 3

B

Question 4

Only three management assertions are associated with transaction- related audit objectives. Which one of the following is NOT?

A) Valuation or allocation
B) Completeness
C) Existence or occurrence
D) Presentation and disclosure

Question 5

When the auditor believes an illegal act may have occurred, it is necessary to:

A) consider accumulating additional evidence to determine if there is actually an illegal act.
B) inquire of management, at a level above those likely to be involved with illegality.
C) consult with the client's legal counsel.
D) do all three of the above.

Question 6

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:

A) equally on discovering either one.
B) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
C) more on discovering errors than employee fraud.
D) more on discovering employee fraud than errors.

Question 7

When the auditor knows that an illegal act exists he should:

A) consider the adequacy of disclosures.
B) modify the audit report.
C) consider the effects on the financial statements.
D) all of the above

Question 8

Which one of the following statements is true?

A) The auditor's objectives follow and are closely related to management assertions.
B) Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts.
C) Management's assertions follow and are closely related to the auditor's objectives.
D) The auditor's primary responsibility is to find and disclose fraudulent management assertions.

Question 9

'The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.' This is an example of:

A) unprofessional behaviour.
B) a rule in the joint Code of Professional Conduct.
C) due diligence.
D) an attitude of professional skepticism.

Question 10

To which audit objective does the assertion 'recorded sales are for the amount of goods shipped and are correctly billed and recorded' relate?

A) Occurrence
B) Accuracy
C) Valuation
D) Completeness

Question 11

After the auditor has completed all the 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) the Code of Professional Conduct.
B) generally accepted auditing standards.
C) generally accepted accounting principles.
D) the auditor's professional judgement.

Question 12

Which of the following 'general transaction- related audit objectives' is NOT part of the valuation or allocation assertion?

A) Completeness
B) Timing
C) Accuracy
D) Classification

Question 13

The objective of the ordinary examination by the independent auditor is the expression of an opinion on:

A) the statement of financial position and the statement of financial performance.
B) the fairness of the financial statements.
C) the accuracy of the financial statements.
D) the accuracy of the annual report.

Question 14

Which of the following statements is true?

A) The circumstances may vary from audit to audit, but the evidence accumulated remains the same.
B) The general audit objectives may vary from audit to audit, but the circumstances remain the same.
C) The general audit objectives remain the same from audit to audit, but the evidence varies, depending on the circumstances.
D) The evidence that the auditor accumulates remains the same from audit to audit, but the general audit objectives vary, depending on the circumstances.

Question 15

The completeness assertion addresses:

A) matters that are the opposite of those addressed by the occurrence assertion.
B) whether all transactions that should be included in the financial statements are in fact included.
C) the possibility of omitting transactions that should have been recorded.
D) all of the above

Question 16

Which of the following is NOT an assertion relating to 'general transaction- related audit objectives'?

A) Accuracy
B) Occurrence
C) Rights and obligations
D) Completeness

Question 17

Management assertions are:

A) explicitly expressed representations about the financial statements.
B) provided to the auditor in the assertions letter, but are not disclosed on the financial statements.
C) stated in the footnotes to the financial statements.
D) implied or expressed representations about classes of transactions and the related accounts in the financial statements.

Question 18

ASA 300 requires an auditor to gain a reasonable understanding of the client's:

A) business and industry.
B) industry but not business.
C) business but not industry.
D) specific entity structure but not its business or industry.

Question 19

Which one of the following statements about the existence and completeness objectives is true?

A) Existence deals with overstatements and completeness deals with understatements.
B) The completeness objective deals with transactions being recorded in their entirety.
C) The existence and completeness objectives both emphasise the inclusion of all transactions.
D) Existence deals with understatements and completeness deals with overstatements.

Question 20

Which of the following is an example of the classification and understandability assertion?

A) All disclosures that should have been included in the financial statements have been included.
B) Financial and other information is appropriately presented and described, and disclosures are clearly expressed.
C) Disclosed events and transactions have occurred and pertain to the entity.
D) Transactions and events have been recorded in the correct accounting period.

Question 21

The essence of the attest function is to:

A) examine individual transactions so that the auditor may certify as to their validity.
B) determine whether the client's financial statements are fairly stated.
C) detect collusion and fraud.
D) assure the consistent application of correct accounting procedures.

Question 22

To adequately plan the appropriate audit evidence, generally accepted auditing standards require the auditor to gain an understanding of the internal control structure. This understanding is obtained by:

A) discussions with client personnel.
B) observing client activities.
C) reviewing organisational charts and procedural manuals.
D) all of the above

Question 23

An example of a fraudulent financial reporting is:

A) overlooking the revaluation of obsolete inventory.
B) cashier misappropriating funds from a cash sale and not recording the transaction.
C) intentional overstatement of sales.
D) all of the above

Question 24

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) needs to do additional tests of controls so that the assurance level can be increased.
C) can significantly reduce the test of details.
D) can write the engagement letter.

Question 25

The auditor's BEST defence when existing material misstatements in the financial statements are NOT uncovered in the audit is that:

A) the financial statements are client's responsibility.
B) the audit was conducted in accordance with generally accepted accounting principles.
C) the client is guilty of contributory negligence.
D) the audit was conducted in accordance with Australian auditing standards.

Question 26

When preparing the financial statements, it is acceptable for the auditor to prepare:

A) the statements for a client.
B) the footnotes for a client.
C) a draft of the statements for a client.
D) a draft of the statements and footnotes for a client.

Question 27

Which of the following journals would be included in all of the various audit cycles?

A) Sales journal
B) General journal
C) Cash disbursements journal
D) Cash receipts journal

Question 28

The cycle approach to segmenting an audit:

A) divides an audit into segments by keeping closely related types of transactions and account balances in the same segment.
B) divides the different operation areas of the client's business operations.
C) requires different audit teams that cycle between assignments to ensure the objectivity objective is met.
D) all of the above

Question 29

Which of the following statements is NOT correct?

A) The existence/occurrence assertion is concerned with inclusion of amounts that should not have been.
B) The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included.
C) The completeness assertion deals with matters opposite from those of the existence/occurrence assertion.
D) It would be a violation of the completeness assertion if management recorded a sale that did not take place.

Question 30

An audit process is a well- defined methodology for organising an audit to ensure that:

A) the evidence gathered is both sufficient and appropriate.
B) all appropriate audit objectives are met.
C) all appropriate audit objectives are specified.
D) all of the above

Question 31

Analytical procedures are those that:

A) assess the overall reasonableness of transactions and balances.
B) analyse the effect of management procedures on the accounting system.
C) review the effectiveness of internal control procedures.
D) evaluate the accuracy of the account balances.

Question 32

In comparing management fraud with employee fraud, the auditor's responsibility to discover the fraud is:

A) greater for management fraud because of management's ability to override existing internal controls.
B) greater for management fraud because managers are inherently smarter than employees.
C) the same for both management and employee fraud.
D) greater for employee fraud because of the larger number of employees in the organisation.

Question 33

To adequately plan the appropriate audit evidence to gather, Australian auditing standards require the auditor to gain an understanding of:

A) the client's procedural manuals.
B) the client's internal controls.
C) the client's organisation charts.
D) all of the above

Question 34

The audit can be divided into transaction cycles. Which of the following is NOT one of the transaction cycles?

A) Acquisition and payment cycle
B) Sales and collection cycle
C) Sales and payment cycle
D) Payroll and personnel cycle

Question 35

If the auditor was responsible for making certain that all the assertions of management in the statements were correct:

A) bankruptcies could no longer occur.
B) audits would not be economically feasible.
C) audits would be much easier to complete.
D) bankruptcies would be reduced to a very small number.

Question 36

The accuracy of information included in footnotes that accompany the audited financial statements of a company whose shares are traded on a stock exchange is the primary responsibility of:

A) the Australian Securities and Investment Commission.
B) the independent auditor.
C) the stock exchange officials.
D) the company's management.

Question 37

A Directors Declaration in accordance with the Corporations Act, must state the directors are satisfied the financial statements:

A) comply with applicable accounting standards.
B) are in accordance with the Act.
C) give a true and fair view.
D) all of the above

Question 38

Which one of the following is NOT an example of misclassification for sales?

A) Recording the sale of a subsidiary as a reduction in investments
B) Recording a sale of operating fixed assets as revenue
C) Including retail sales as wholesale sales
D) Including cash sales as credit sales

Question 39

The reason auditors accumulate evidence is to:

A) satisfy the requirements of the Corporations Act.
B) enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.
C) defend themselves in the event of a lawsuit.
D) justify the conclusions they have otherwise reached.

Question 40

Which one of the following is NOT a proper match of auditor's objective with management's assertion?

A) Timing matches with valuation or allocation.
B) Existence matches with existence/occurrence.
C) Classification matches with presentation/disclosure.
D) Completeness matches with completeness.

Question 41

Auditors cannot provide assurance that indirect- effect illegal acts will be detected because:

A) they do not accept responsibility for discovering illegal acts.
B) they lack legal expertise.
C) both A and B
D) none of the above

Question 42

An auditor should recognise that the application of auditing procedures may produce evidential matter indicating the possibility of errors or fraud and therefore should:

A) plan and perform the engagement with an attitude of professional scepticism.
B) extend the work to audit most recorded transactions and records of an entity.
C) design audit tests to detect unrecorded transactions.
D) not depend on internal accounting control features that are designed to prevent or detect errors or irregularities.

Question 43

Most illegal acts affect the financial statements:

A) only indirectly.
B) both directly and indirectly.
C) materially if direct; immaterially if indirect.
D) directly.

Question 44

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) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.
B) the transactions are related to financing a company rather than to its operations.
C) both A and B above
D) neither A nor B above

Question 45

Which of the following statements BEST describes the auditor's responsibility regarding the detection of fraud?

A) The auditor has greater responsibility for detecting material errors than fraud and direct- effect illegal acts.
B) The auditor has equal responsibility for detecting errors, fraud and direct- effect illegal acts.
C) The auditor has greater responsibility for detecting material errors than fraud.
D) The auditor has equal responsibility for detecting errors, fraud and indirect- effect illegal acts.

Question 46

The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes on the auditor a duty to:

A) be an insurer of the fairness of the statements.
B) provide reasonable assurance that material misstatements will be detected.
C) be a guarantor of the fairness of the statements.
D) be equally responsible with management for the preparation of the financial statements.

Question 47

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:

A) management.
B) management for the statements and the auditor for the notes.
C) both management and the auditor equally.
D) the auditor.

Question 48

Which of the following is NOT an assertion relating to 'general presentation and disclosure- related audit objectives'?

A) Completeness
B) Accuracy
C) Cut off
D) Occurrence

Question 49

Tests of details of balances are specific procedures intended to:

A) identify the details of the internal control system.
B) prove that the accounts with material balances are classified correctly.
C) prove that the trial balance is in balance.
D) test for monetary errors in the financial statements.

Question 50

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) The 'inventory and warehousing' cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
C) Some journals and general ledger accounts are included in more than one cycle.
D) The 'capital acquisition and repayment' cycle is closely related to the 'acquisition of goods and services and payment' cycle.

Question 51

'Illegal acts,' as opposed to fraud, are defined as:

A) violations of laws or government regulations, other than errors.
B) violations of laws or government regulations, other than irregularities.
C) violations of laws or government regulations, other than fraud.
D) violations of law which would result in the arrest of the perpetrator.

Question 52

The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead:

A) management.
B) investors.
C) the reader.
D) a prudent user.

Question 53

Which of the following statements is NOT true?

A) An example of a valuation/allocation assertion would be that property, plant and equipment are listed in the noncurrent section of the Balance Sheet.
B) An example of an existence/occurrence assertion would be that sales in the income statement represent exchanges of goods or services that actually took place.
C) An example of a completeness assertion would be that the notes payable account in the balance sheet includes all such obligations of the entity.
D) An example of a rights/obligations assertion would be that amounts capitalised for leases in the balance sheet represent the cost of the entity's rights to leased property.

Question 54

When planning an audit, which of the following should be an overriding consideration?

A) The minimisation of costs incurred to accumulate evidence
B) The accumulation of sufficient audit evidence
C) The accumulation of appropriate audit evidence
D) All of the above

Question 55

Fraudulent financial reporting is often called:

A) employee fraud.
B) management fraud.
C) theft of assets.
D) defalcation.

Question 56

The factor that distinguishes an error from fraud is:

A) whether it is caused by the auditor or the client.
B) whether it is a dollar amount or a process.
C) intent.
D) materiality.

Question 57

The objective of an audit is to:

A) provide assurance that the financial report is free from error.
B) express an opinion on whether the financial reports are prepared in accordance with an applicable financial reporting framework.
C) express an opinion on the financial statements.
D) provide assurance that the financial reports are free from error and fraud.

Question 58

Which of the following is NOT one of the five broad categories of assertions, as adapted from ASA 315?

A) Presentation and disclosure
B) Existence or occurrence
C) Valuation or allocation
D) General or specific transaction objectives

Question 59

If a long- term note receivable is included on an accounts receivable listing, there is a violation of the:

A) timing objective.
B) completeness objective.
C) existence objective.
D) classification objective.

Question 60

The most important general ledger account included in and affecting several cycles is the:

A) income tax expense and liability accounts.
B) cash account.
C) retained earnings account.
D) inventory account.

Question 61

What are the responsibilities of management in regard to their declaration in the financial reports? Discuss.

Question 62

The responsibility of management includes:

A) making fair representations in the financial statements.
B) maintaining adequate internal controls.
C) adopting sound accounting policies.
D) all of the above

Question 63

Which of the following is NOT a responsibility of management?

A) Ensuring that the company can pay debts as and when they become due and payable
B) Ensuring that the accounts comply with accounting standards
C) Enhancing the confidence of financial report users
D) Adopting sound accounting policies and maintaining adequate internal controls

Question 64

Misstatements are usually considered material if:

A) the combined uncorrected errors in the financial statements are likely to have changed or influenced the decisions of a reasonable person using the financial statements.
B) the auditor has quantified a measure of materiality.
C) the combined uncorrected errors and fraud in the financial statements are likely to have changed or influenced the decisions of a reasonable person using the financial statements.
D) none of the above

Question 65

How does the auditor obtain sufficient appropriate audit evidence about management assertions in the financial statements?

Question 66

'All assets, liabilities and equity interests that should have been recorded have been recorded' relates to which management assertion?

A) Rights and obligations
B) Existence or occurrence
C) Valuation and allocation
D) Completeness

Question 67

Professional scepticism means that the auditor should:

A) only consider writtten representations from the audit client.
B) approach the audit with a questioning mind.
C) consider that management is mostly honest.
D) not accept the representations of management.

Question 68

Reasonable assurance is:

A) more than a low level of assurance, reasonable, but not absolute.
B) less than certainty.
C) a measure of the level of certainty that the auditor has obtained at the completion of the audit.
D) all of the above

Question 69

Discuss the differences between errors, fraud and illegal acts. Give an example of each.

Question 70

Which of the following is NOT a management assertion category?

A) Account balances
B) Classes of transactions and events
C) Presentation and disclosure
D) None of the above, i.e., all are management assertion categories.

Question 71

After the general balance- related objectives are understood, specific objectives for each account balance on the financial statements can be developed. Which of the following statements is true?

A) There must be two specific objectives for each general objective.
B) There should be at least one specific objective for each relevant general objective.
C) There will be only one specific objective for each relevant general objective.
D) There will be many specific objectives developed for each relevant general objective.

Question 72

What is the first step to developing audit objectives?

A) Know management assertions about accounts
B) Divide the financial statements into cycles
C) Understand objectives and responsibilities for the audit
D) Know general audit objectives for classes of transactions and accounts

Question 73

In testing for cutoff, the objective is to determine:

A) that no transactions of the current period have been delayed and recorded in a future period.
B) whether transactions are recorded in the proper period.
C) that no transactions from the prior period are included in the current period's balances.
D) whether all of the current period's transactions are recorded.

Question 74

There are several reasons why the auditor is responsible for reasonable but not absolute assurance. One of them is that:

A) most audit evidence results from testing a sample of a population and sampling involves minimal risk.
B) accounting presentations contain complex estimates that can be convincing.
C) audit testing and the evaluation of test results require significant auditor judgement, and auditors can make errors in judgement.
D) fraudulently prepared financial statements are often extremely difficult, but not impossible, for the auditor to detect.

Question 75

For the most part, auditors treat each transaction cycle:

A) separately as the audit is being performed.
B) as a separate business unit with different audit teams.
C) as a joint venture with other clients in the same industry.
D) as an interrelated unit with the other cycles throughout the entire audit.

Question 76

Discuss three reasons why auditors are responsible for 'reasonable' but not 'absolute' assurance.

Question 77

The auditor's BEST defence when material misstatements are NOT uncovered in the audit is that:

A) the audit was conducted in accordance with Australian accounting standards.
B) the audit was conducted in accordance with auditor judgement.
C) the audit was conducted in accordance with Australian auditing standards.
D) misstatements are the responsibility of management.

Question 78

The objective of issuing an audit opinion on the financial report, includes an opinion on:

A) the accompanying notes.
B) the financial statements.
C) the directors' declaration.
D) all of the above

Question 79

When the auditor knows that an illegal act has occurred, the first course of action by the auditor is to:

A) consider the effects on the financial statements, including the adequacy of disclosure.
B) not report it to the proper governmental authorities.
C) withdraw from the engagement.
D) issue an adverse opinion.

Question 80

Which of the following is an example of misappropriation of assets resulting in a misstatement in the balance sheet?

A) Cash from a cash sale was stolen and the transaction was not recorded.
B) Assets were stolen and the misappropriation was discovered.
C) Cash collected from a customer was stolen and the account receivable for the customer's account was not credited.
D) Both A and C