Auditing- Test 2 Prep - Ch 4,5,6,8,7 MC Structured
for Success in Every Examination Questions from
Top-Tier Universities With Comprehensive
Explanations and Solutions
Which of the following is an example of fraudulent financial reporting?
a. An employee diverts customer payments to his personal use, concealing his actions by
debiting an expense account, thus overstating expenses.
b. Company management falsifies the inventory count, thereby overstating ending
inventory and understating cost of sales.
c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
d. An employee borrows small tools from the company and neglects to return them; the
cost is reported as a miscellaneous operating expense. - CORRECT ANSWER- -b. Company
management falsifies the inventory count, thereby overstating ending inventory and
understating cost of sales.
Which of the following concepts are pervasive in the application of generally accepted
auditing standards, particularly the standards of fieldwork and reporting?
A. Internal Control
B. Expected Misstatement
C. Control Risk
D. Materiality and Audit risk - CORRECT ANSWER- -D. Materiality and audit risk
The existence of audit risk is recognized by the statement in the auditor's standard report
that the auditor
A. Obtains reasonable assurance about whether the financial statements are free of
material misstatement
B. Assesses the accounting principles used and also evaluates the overall financial
statement presentation
,C. Realizes that some matters, either individually or in the aggregate, are important while
other matters are not important.
D. Is responsible for expressing an opinion on the financial statements, which are the
responsibility of management. - CORRECT ANSWER- -A. Obtains reasonable assurance
about whether the financial statements are free of material misstatement
Risk of material misstatement refers to a combination of which two "client" components of
the audit risk model?
A. Audit risk and inherent risk
B. Audit risk and control risk
C. Inherent risk and control risk
D. Control risk and detection risk - CORRECT ANSWER- -C. Inherent risk and control risk
As lower acceptable levels of both audit risk and materiality are established, the auditor
should plan more work on individual accounts to
A. Find smaller errors
B. Find larger errors
C. Increase the tolerable misstatements in the accounts
D. decrease the risk of overreliance - CORRECT ANSWER- -A. find smaller errors
When is a duty to disclose fraud to parties other than the client's senior management and
its audit committee most likely to exist?
A. When the amount is material
B. When the fraud results in the misappropriation of assets rather than fraudulent financial
reporting
C. In response to inquiries from a successor auditor
D. When a line manager rather than a lower-level employee commits the fraudulent act -
CORRECT ANSWER- -C. In response to inquiries from a successor auditor
, Which of the following characteristics most likely would heighten an auditor's concern
about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low
B. Insiders recently purchased additional shares of the entity's stock
C. Management places substantial emphasis on meeting earnings projections
D. The rate of change in the entity's industry is slow - CORRECT ANSWER- -C. Management
places substantial emphasis on meeting earnings projections
Which of the following is a misappropriation of assets?
A. Classifying inventory held for resale as supplies
B. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with
an interest rate of 7 percent
C. An employee of a consumer electronics store steals 12 CD players.
D. Management estimates bad debt expense as 2 percent of sales when it actually expects
bad debts equal to 10 percent of sales. - CORRECT ANSWER- -C. An employee of a
consumer electronics store steals 12 CD players.
Auditing standards require auditors to make certain inquiries of management regarding
fraud. Which of the following inquiries is required?
A. Whether management has ever intentionally violated the securities laws
B. Whether management has any knowledge of fraud that has been perpetrated on or
within the entity
C. Management's attitudes toward regulatory authorities
D. Management's attitude about hiring ethical employees. - CORRECT ANSWER- -B.
Whether management has any knowledge of fraud that has been perpetrated on or within
the entity
Which of the following is an example of fraudulent financial reporting?
for Success in Every Examination Questions from
Top-Tier Universities With Comprehensive
Explanations and Solutions
Which of the following is an example of fraudulent financial reporting?
a. An employee diverts customer payments to his personal use, concealing his actions by
debiting an expense account, thus overstating expenses.
b. Company management falsifies the inventory count, thereby overstating ending
inventory and understating cost of sales.
c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
d. An employee borrows small tools from the company and neglects to return them; the
cost is reported as a miscellaneous operating expense. - CORRECT ANSWER- -b. Company
management falsifies the inventory count, thereby overstating ending inventory and
understating cost of sales.
Which of the following concepts are pervasive in the application of generally accepted
auditing standards, particularly the standards of fieldwork and reporting?
A. Internal Control
B. Expected Misstatement
C. Control Risk
D. Materiality and Audit risk - CORRECT ANSWER- -D. Materiality and audit risk
The existence of audit risk is recognized by the statement in the auditor's standard report
that the auditor
A. Obtains reasonable assurance about whether the financial statements are free of
material misstatement
B. Assesses the accounting principles used and also evaluates the overall financial
statement presentation
,C. Realizes that some matters, either individually or in the aggregate, are important while
other matters are not important.
D. Is responsible for expressing an opinion on the financial statements, which are the
responsibility of management. - CORRECT ANSWER- -A. Obtains reasonable assurance
about whether the financial statements are free of material misstatement
Risk of material misstatement refers to a combination of which two "client" components of
the audit risk model?
A. Audit risk and inherent risk
B. Audit risk and control risk
C. Inherent risk and control risk
D. Control risk and detection risk - CORRECT ANSWER- -C. Inherent risk and control risk
As lower acceptable levels of both audit risk and materiality are established, the auditor
should plan more work on individual accounts to
A. Find smaller errors
B. Find larger errors
C. Increase the tolerable misstatements in the accounts
D. decrease the risk of overreliance - CORRECT ANSWER- -A. find smaller errors
When is a duty to disclose fraud to parties other than the client's senior management and
its audit committee most likely to exist?
A. When the amount is material
B. When the fraud results in the misappropriation of assets rather than fraudulent financial
reporting
C. In response to inquiries from a successor auditor
D. When a line manager rather than a lower-level employee commits the fraudulent act -
CORRECT ANSWER- -C. In response to inquiries from a successor auditor
, Which of the following characteristics most likely would heighten an auditor's concern
about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low
B. Insiders recently purchased additional shares of the entity's stock
C. Management places substantial emphasis on meeting earnings projections
D. The rate of change in the entity's industry is slow - CORRECT ANSWER- -C. Management
places substantial emphasis on meeting earnings projections
Which of the following is a misappropriation of assets?
A. Classifying inventory held for resale as supplies
B. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with
an interest rate of 7 percent
C. An employee of a consumer electronics store steals 12 CD players.
D. Management estimates bad debt expense as 2 percent of sales when it actually expects
bad debts equal to 10 percent of sales. - CORRECT ANSWER- -C. An employee of a
consumer electronics store steals 12 CD players.
Auditing standards require auditors to make certain inquiries of management regarding
fraud. Which of the following inquiries is required?
A. Whether management has ever intentionally violated the securities laws
B. Whether management has any knowledge of fraud that has been perpetrated on or
within the entity
C. Management's attitudes toward regulatory authorities
D. Management's attitude about hiring ethical employees. - CORRECT ANSWER- -B.
Whether management has any knowledge of fraud that has been perpetrated on or within
the entity
Which of the following is an example of fraudulent financial reporting?
