BYU ACC 406 FINAL QUESTIONS AND ANSWERS
Why does demand for auditing exist in a free-market economy, even if it were not
required by regulation? - Answer -Due to the nature of the agency relationship, natural
conflict of interest, and information asymmetry between an absentee owner and
manager
T/F Auditing is different from most other accounting courses because learning auditing
largely involves memorizing technical formulas and rules. - Answer -False
Which of the following is the best definition for financial statement auditing? - Answer -
A systematic process of objectively obtaining and evaluating evidence to determine and
communicate whether economic assertions are reported in accordance with established
criteria.
Following are five of the phases in the financial statement audit process. Select the item
(a-d) that places the phases in the proper order.
I. Consider and audit internal control
II. Evaluate results and issue the audit report
III. Client acceptance/continuance
IV. Audit business processes and related accounts
V. Plan the audit - Answer -III, V, I, IV, II
The risk that a material misstatement occurs, goes undetected by the client's internal
control structure, and is not detected by the auditor, who unknowingly issues a "clean"
audit report is known as: - Answer -audit risk
Which of the following statements is correct concerning the concept of materiality? -
Answer -No formal requirements exist for determining materiality—it is a matter of
professional judgment.
T/F It is management's responsibility to ensure that the company's financial statements
are prepared in accordance with GAAP. It is the auditor's responsibility to provide
reasonable assurance that the financial statements are free of material misstatement. -
Answer -true
T/F Tests of details of balances emphasize testing the detail amounts that make up the
ending balances in the general ledger. - Answer -true
T/F Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk further from the planned level and increasing
reliance on substantive tests. - Answer -false
,T/F Substantive tests of transactions emphasize the verification of dollar amounts of
transactions recorded in the journals and then posted in the general ledger. - Answer -
true
T/F Tests of controls are required on any audit of a private company where the auditor
believes the controls are either inappropriately designed or the implementation of the
control is ineffective. - Answer -false
A dual-purpose test - Answer -Is both a substantive test of transactions and a test of
controls.
Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important to users for
fair presentation of the financial statements in conformity with GAAP, while other
matters are not important.
B. Materiality is defined as the total amount of each misstatement that could be material
to any one of the financial statements individually.
C. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments.
D. An auditor's consideration of materiality is influenced by the auditor's perception of
the needs of a reasonable person who will rely on the financial statements. - Answer -B
The three steps in applying materiality are listed below in random order.
Evaluate audit findings
Determine tolerable misstatement
Determine a materiality level for the overall financial statements
The correct sequence from start to finish is: - Answer -3, 2, 1
Which of the following provides the best definition of planning materiality?
A. The maximum amount by which management believes the financial statements could
be misstated and still not affect the decision of users.
B. The maximum amount by which the auditor believes the financial statements could
be misstated and still not affect the decision of users.
C. The amount determined by auditing standards that auditors must use when planning
an audit.
D. All of the above - Answer -B
, Determining tolerable misstatement is necessary because: - Answer -evidence is
accumulated by financial statement segments during the course of the audit.
T/F Assume you are planning an audit and you determine that materiality (i.e. the size
of misstatement that is expected to affect a financial statement user's decision) for a
client is lower than you originally anticipated. Thus, you must adjust the audit plan to
increase the quality and/or quantity of audit evidence. - Answer -true
If planned detection risk is reduced, the quality and/or quantity of evidence the auditor
accumulates should - Answer -increase
An auditor may compensate for a high level of control risk by increasing the - Answer -
quality or quantity of audit evidence
The audit risk model is used primarily for the purpose of - Answer -determining the
audit plan
The auditor set acceptable audit risk at 3%, assessed inherent risk at 100% and control
risk at 50%, and determined a planned detection risk of 6%. If control risk had been
assessed at 75%, planned detection risk would need to be ____ to keep acceptable
audit risk at 3%. - Answer -4%
In an audit area that has a higher level of inherent risk, it would be prudent to
A. increase the amount of evidence
B. Assign more experienced staff
C. Review collected evidence more thoroughly
D. Any/all of the above - Answer -D
T/F Audit Risk and Engagement Risk are two terms that refer to the exact same
concept. - Answer -false
Which of the following risks can be controlled by the auditor?
A. Engagement risk
B. Inherent risk
C. Control risk
D. Detection risk - Answer -D
Which of the following are qualitative factors that may affect the evaluation of audit
findings?
A. Whether the misstatement involves the concealment of an unlawful transaction.
B. Whether the misstatement masks a change in earnings or trends.
C. Whether intentional misstatements are part of actions to "manage" earnings
D. All of the above - Answer -D
Why does demand for auditing exist in a free-market economy, even if it were not
required by regulation? - Answer -Due to the nature of the agency relationship, natural
conflict of interest, and information asymmetry between an absentee owner and
manager
T/F Auditing is different from most other accounting courses because learning auditing
largely involves memorizing technical formulas and rules. - Answer -False
Which of the following is the best definition for financial statement auditing? - Answer -
A systematic process of objectively obtaining and evaluating evidence to determine and
communicate whether economic assertions are reported in accordance with established
criteria.
Following are five of the phases in the financial statement audit process. Select the item
(a-d) that places the phases in the proper order.
I. Consider and audit internal control
II. Evaluate results and issue the audit report
III. Client acceptance/continuance
IV. Audit business processes and related accounts
V. Plan the audit - Answer -III, V, I, IV, II
The risk that a material misstatement occurs, goes undetected by the client's internal
control structure, and is not detected by the auditor, who unknowingly issues a "clean"
audit report is known as: - Answer -audit risk
Which of the following statements is correct concerning the concept of materiality? -
Answer -No formal requirements exist for determining materiality—it is a matter of
professional judgment.
T/F It is management's responsibility to ensure that the company's financial statements
are prepared in accordance with GAAP. It is the auditor's responsibility to provide
reasonable assurance that the financial statements are free of material misstatement. -
Answer -true
T/F Tests of details of balances emphasize testing the detail amounts that make up the
ending balances in the general ledger. - Answer -true
T/F Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk further from the planned level and increasing
reliance on substantive tests. - Answer -false
,T/F Substantive tests of transactions emphasize the verification of dollar amounts of
transactions recorded in the journals and then posted in the general ledger. - Answer -
true
T/F Tests of controls are required on any audit of a private company where the auditor
believes the controls are either inappropriately designed or the implementation of the
control is ineffective. - Answer -false
A dual-purpose test - Answer -Is both a substantive test of transactions and a test of
controls.
Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important to users for
fair presentation of the financial statements in conformity with GAAP, while other
matters are not important.
B. Materiality is defined as the total amount of each misstatement that could be material
to any one of the financial statements individually.
C. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments.
D. An auditor's consideration of materiality is influenced by the auditor's perception of
the needs of a reasonable person who will rely on the financial statements. - Answer -B
The three steps in applying materiality are listed below in random order.
Evaluate audit findings
Determine tolerable misstatement
Determine a materiality level for the overall financial statements
The correct sequence from start to finish is: - Answer -3, 2, 1
Which of the following provides the best definition of planning materiality?
A. The maximum amount by which management believes the financial statements could
be misstated and still not affect the decision of users.
B. The maximum amount by which the auditor believes the financial statements could
be misstated and still not affect the decision of users.
C. The amount determined by auditing standards that auditors must use when planning
an audit.
D. All of the above - Answer -B
, Determining tolerable misstatement is necessary because: - Answer -evidence is
accumulated by financial statement segments during the course of the audit.
T/F Assume you are planning an audit and you determine that materiality (i.e. the size
of misstatement that is expected to affect a financial statement user's decision) for a
client is lower than you originally anticipated. Thus, you must adjust the audit plan to
increase the quality and/or quantity of audit evidence. - Answer -true
If planned detection risk is reduced, the quality and/or quantity of evidence the auditor
accumulates should - Answer -increase
An auditor may compensate for a high level of control risk by increasing the - Answer -
quality or quantity of audit evidence
The audit risk model is used primarily for the purpose of - Answer -determining the
audit plan
The auditor set acceptable audit risk at 3%, assessed inherent risk at 100% and control
risk at 50%, and determined a planned detection risk of 6%. If control risk had been
assessed at 75%, planned detection risk would need to be ____ to keep acceptable
audit risk at 3%. - Answer -4%
In an audit area that has a higher level of inherent risk, it would be prudent to
A. increase the amount of evidence
B. Assign more experienced staff
C. Review collected evidence more thoroughly
D. Any/all of the above - Answer -D
T/F Audit Risk and Engagement Risk are two terms that refer to the exact same
concept. - Answer -false
Which of the following risks can be controlled by the auditor?
A. Engagement risk
B. Inherent risk
C. Control risk
D. Detection risk - Answer -D
Which of the following are qualitative factors that may affect the evaluation of audit
findings?
A. Whether the misstatement involves the concealment of an unlawful transaction.
B. Whether the misstatement masks a change in earnings or trends.
C. Whether intentional misstatements are part of actions to "manage" earnings
D. All of the above - Answer -D
