BYU ACC 406 Final Exam Questions With
Correct Answers
Why |does |demand |for |auditing |exist |in |a |free-market |economy, |even |if |it |were |not |required |by
|regulation? |- |CORRECT |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. |- |CORRECT |ANSWER✔✔-False
Which |of |the |following |is |the |best |definition |for |financial |statement |auditing? |- |CORRECT |
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 |- |CORRECT |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: |- |CORRECT |ANSWER✔✔-audit |risk
,Which |of |the |following |statements |is |correct |concerning |the |concept |of |materiality? |- |
CORRECT |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. |- |CORRECT |
ANSWER✔✔-true
T/F |Tests |of |details |of |balances |emphasize |testing |the |detail |amounts |that |make |up |the |ending
|balances |in |the |general |ledger. |- |CORRECT |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. |- |CORRECT |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. |- |CORRECT |
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. |- |CORRECT |ANSWER✔✔-false
A |dual-purpose |test |- |CORRECT |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. |- |CORRECT |
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: |- |CORRECT |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 |- |CORRECT |ANSWER✔✔-B
Determining |tolerable |misstatement |is |necessary |because: |- |CORRECT |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. |- |CORRECT |ANSWER✔✔-true
If |planned |detection |risk |is |reduced, |the |quality |and/or |quantity |of |evidence |the |auditor |
accumulates |should |- |CORRECT |ANSWER✔✔-increase
An |auditor |may |compensate |for |a |high |level |of |control |risk |by |increasing |the |- |CORRECT |
ANSWER✔✔-quality |or |quantity |of |audit |evidence
The |audit |risk |model |is |used |primarily |for |the |purpose |of |- |CORRECT |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%. |- |
CORRECT |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
Correct Answers
Why |does |demand |for |auditing |exist |in |a |free-market |economy, |even |if |it |were |not |required |by
|regulation? |- |CORRECT |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. |- |CORRECT |ANSWER✔✔-False
Which |of |the |following |is |the |best |definition |for |financial |statement |auditing? |- |CORRECT |
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 |- |CORRECT |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: |- |CORRECT |ANSWER✔✔-audit |risk
,Which |of |the |following |statements |is |correct |concerning |the |concept |of |materiality? |- |
CORRECT |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. |- |CORRECT |
ANSWER✔✔-true
T/F |Tests |of |details |of |balances |emphasize |testing |the |detail |amounts |that |make |up |the |ending
|balances |in |the |general |ledger. |- |CORRECT |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. |- |CORRECT |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. |- |CORRECT |
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. |- |CORRECT |ANSWER✔✔-false
A |dual-purpose |test |- |CORRECT |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. |- |CORRECT |
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: |- |CORRECT |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 |- |CORRECT |ANSWER✔✔-B
Determining |tolerable |misstatement |is |necessary |because: |- |CORRECT |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. |- |CORRECT |ANSWER✔✔-true
If |planned |detection |risk |is |reduced, |the |quality |and/or |quantity |of |evidence |the |auditor |
accumulates |should |- |CORRECT |ANSWER✔✔-increase
An |auditor |may |compensate |for |a |high |level |of |control |risk |by |increasing |the |- |CORRECT |
ANSWER✔✔-quality |or |quantity |of |audit |evidence
The |audit |risk |model |is |used |primarily |for |the |purpose |of |- |CORRECT |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%. |- |
CORRECT |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
