AUDITING II UPDATED EXAM QUESTIONS AND
CORRECT ANSWERS
In the context of an audit of financial statements, substantive procedures are audit procedures
that:
A. may be eliminated under certain conditions.
B. are primarily designed to discover significant subsequent events.
C. may be either tests of details of transactions, tests of details of account balances, or
analytical procedures.
D. will increase proportionately with an increase in the auditor's reliance on internal control. -
CORRECT ANSWERS C. may be either tests of details of transactions, tests of details of
account balances, or analytical procedures.
Which of the following is not an audit procedure that is commonly used in performing tests of
controls?
A. Inquiring.
B. Observing.
C. Confirming.
D. Inspecting. - CORRECT ANSWERS C. Confirming
Which of the following relatively small misstatements most likely would have a material effect
on an entity's financial statements?
A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorized.
,D. An uncollectible account receivable that was not written-off. - CORRECT ANSWERS A.
An illegal payment to a foreign official that was not recorded.
Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important for fair presentation
of financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for the aggregate level of misstatements 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
ANSWERS B. An auditor considers materiality for the aggregate level of misstatements
that could be material to any one of the financial statements individually.
An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by:
A. scanning the general journal for unusual entries.
B. performing a revenue cutoff test at year-end.
C. tracing a sample of journal entries to the general ledger.
D. examining documentary evidence of sales returns and allowances recorded after year-end. -
CORRECT ANSWERS A. scanning the general journal for unusual entries.
Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising
in connection with financial statements audited.
, TRUE or FALSE - CORRECT ANSWERS FALSE
The risk that an auditor will conclude, based on substantive procedures, that a material error
does not exist in an account balance when, in fact, such an error does exist is referred to as:
A. sampling risk.
B. detection risk.
C. nonsampling risk.
D. inherent risk. - CORRECT ANSWERS B. detection risk.
All of the following are inherent risk factors that are pervasive to the financial statements
except:
A. highly complex significant transactions.
B. non-routine transactions.
C. classes of transactions are not processed systematically.
D. supplies inventory is difficult to count. - CORRECT ANSWERS D. supplies inventory is
difficult to count.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of risk of material misstatement from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the auditor
would:
A. decrease amount of substantive testing.
B. decrease detection risk.
C. increase detection risk.
D. increase materiality levels. - CORRECT ANSWERS B. decrease detection risk.
CORRECT ANSWERS
In the context of an audit of financial statements, substantive procedures are audit procedures
that:
A. may be eliminated under certain conditions.
B. are primarily designed to discover significant subsequent events.
C. may be either tests of details of transactions, tests of details of account balances, or
analytical procedures.
D. will increase proportionately with an increase in the auditor's reliance on internal control. -
CORRECT ANSWERS C. may be either tests of details of transactions, tests of details of
account balances, or analytical procedures.
Which of the following is not an audit procedure that is commonly used in performing tests of
controls?
A. Inquiring.
B. Observing.
C. Confirming.
D. Inspecting. - CORRECT ANSWERS C. Confirming
Which of the following relatively small misstatements most likely would have a material effect
on an entity's financial statements?
A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorized.
,D. An uncollectible account receivable that was not written-off. - CORRECT ANSWERS A.
An illegal payment to a foreign official that was not recorded.
Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important for fair presentation
of financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for the aggregate level of misstatements 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
ANSWERS B. An auditor considers materiality for the aggregate level of misstatements
that could be material to any one of the financial statements individually.
An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by:
A. scanning the general journal for unusual entries.
B. performing a revenue cutoff test at year-end.
C. tracing a sample of journal entries to the general ledger.
D. examining documentary evidence of sales returns and allowances recorded after year-end. -
CORRECT ANSWERS A. scanning the general journal for unusual entries.
Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising
in connection with financial statements audited.
, TRUE or FALSE - CORRECT ANSWERS FALSE
The risk that an auditor will conclude, based on substantive procedures, that a material error
does not exist in an account balance when, in fact, such an error does exist is referred to as:
A. sampling risk.
B. detection risk.
C. nonsampling risk.
D. inherent risk. - CORRECT ANSWERS B. detection risk.
All of the following are inherent risk factors that are pervasive to the financial statements
except:
A. highly complex significant transactions.
B. non-routine transactions.
C. classes of transactions are not processed systematically.
D. supplies inventory is difficult to count. - CORRECT ANSWERS D. supplies inventory is
difficult to count.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of risk of material misstatement from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the auditor
would:
A. decrease amount of substantive testing.
B. decrease detection risk.
C. increase detection risk.
D. increase materiality levels. - CORRECT ANSWERS B. decrease detection risk.
