Auditing and Assurance Services Exam
Questions With Verified Answers
________ generally provide the most reliable evidence.
A) Confirmations
B) Recalculations
C) Reperformances
D) Observations - ANSWER-A
.________ inquiry is used to obtain information about facts and details that the auditor does
not have, usually about past or current events or processes.
A) Assessment
B) Declarative
C) Interrogative
D) Informational - ANSWER-D
.________ is fraud that involves theft of an entity's assets.
A) Fraudulent financial reporting
B) A "cookie jar" reserve
C) Misappropriation of assets
D) Income smoothing - ANSWER-C
.________ is the auditor's examination of the client's documents and records to substantiate
that the information is included in the financial statements.
A) Inspection
B) Recalculation
,C) Observation
D) Verification - ANSWER-A
.________ is the risk that the auditor or audit firm will suffer harm after the audit is finished,
even though the audit report was correct.
A) Inherent risk
B) Audit risk
C) Engagement risk
D) Control risk - ANSWER-C
.________ risk represents the auditor's assessment of the susceptibility of an assertion to
material misstatement, before considering the effectiveness of the client's internal control.
A) Material
B) Account balance
C) Control
D) Inherent - ANSWER-D
."Cookie jar reserves" are often created by companies whenever their earnings are low to
create reserves for future periods when earnings need to be "boosted" upward.
T/F - ANSWER-False
."Physical examination" is the inspection or count by the auditor of items such as
A) cash, inventory, and payroll timecards.
B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets - ANSWER-D
,.) Which of the following is an accurate statement regarding a company's ability to meet its
long-term debt obligations?
A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its
borrowing capacity.
B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used
to the owners' benefit.
C) The times interest earned ratio indicates if a company can make its principal and interest
payments.
D) The key ratios that are used to measure a long-term solvency are debt to equity, return on
assets, and times interest earned. - ANSWER-A
.A ________ risk represents an identified and assessed risk of material misstatement that, in
the auditor's professional judgment, requires special audit consideration.
A) material
B) substantial
C) financial statement
D) significant - ANSWER-D
.A benefit obtained from using industry averages is that it provides a(n)
A) benchmark to compare the company's results.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be." - ANSWER-A
.A canceled check written by the client, made payable to a local supplier and drawn on the
client's bank account is one type of internal document
T/F - ANSWER-False
.A common incentive for companies to manipulate financial statements is a decline in the
company's financial prospect
, T/F - ANSWER-True
.A company is concerned with the theft of cash after the sale has been recorded. One way in
which fraudsters conceal the theft is by a process called "lapping." Which of the following
best describes lapping?
A) reduce the customer's account by recording a sales return
B) write off the customer's account
C) apply the payment from another customer to the customer's account
D) reduce the customer's account by recording a sales allowance - ANSWER-C
.A company's long-term solvency
A) can be measured by the gross profit percentage.
B) depends on the success of its operations and on its ability to raise capital for expansion.
C) can be measured by the days to collect receivables ratio.
D) depends on its ability to generate cash for the payment of dividends - ANSWER-B
.A high detection risk equates to a low amount of audit evidence needed
T/F - ANSWER-False
.A lack of controls over payments to vendors can cause revenue fraud
T/F - ANSWER-False
.A(n) ________ is a supporting schedule that supports a specific amount and is normally
expected to tie the amount recorded in the client's records to another source of information.
A) reconciliation of amounts
B) analysis
C) summary of procedures
D) informational document - ANSWER-A
Questions With Verified Answers
________ generally provide the most reliable evidence.
A) Confirmations
B) Recalculations
C) Reperformances
D) Observations - ANSWER-A
.________ inquiry is used to obtain information about facts and details that the auditor does
not have, usually about past or current events or processes.
A) Assessment
B) Declarative
C) Interrogative
D) Informational - ANSWER-D
.________ is fraud that involves theft of an entity's assets.
A) Fraudulent financial reporting
B) A "cookie jar" reserve
C) Misappropriation of assets
D) Income smoothing - ANSWER-C
.________ is the auditor's examination of the client's documents and records to substantiate
that the information is included in the financial statements.
A) Inspection
B) Recalculation
,C) Observation
D) Verification - ANSWER-A
.________ is the risk that the auditor or audit firm will suffer harm after the audit is finished,
even though the audit report was correct.
A) Inherent risk
B) Audit risk
C) Engagement risk
D) Control risk - ANSWER-C
.________ risk represents the auditor's assessment of the susceptibility of an assertion to
material misstatement, before considering the effectiveness of the client's internal control.
A) Material
B) Account balance
C) Control
D) Inherent - ANSWER-D
."Cookie jar reserves" are often created by companies whenever their earnings are low to
create reserves for future periods when earnings need to be "boosted" upward.
T/F - ANSWER-False
."Physical examination" is the inspection or count by the auditor of items such as
A) cash, inventory, and payroll timecards.
B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets - ANSWER-D
,.) Which of the following is an accurate statement regarding a company's ability to meet its
long-term debt obligations?
A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its
borrowing capacity.
B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used
to the owners' benefit.
C) The times interest earned ratio indicates if a company can make its principal and interest
payments.
D) The key ratios that are used to measure a long-term solvency are debt to equity, return on
assets, and times interest earned. - ANSWER-A
.A ________ risk represents an identified and assessed risk of material misstatement that, in
the auditor's professional judgment, requires special audit consideration.
A) material
B) substantial
C) financial statement
D) significant - ANSWER-D
.A benefit obtained from using industry averages is that it provides a(n)
A) benchmark to compare the company's results.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be." - ANSWER-A
.A canceled check written by the client, made payable to a local supplier and drawn on the
client's bank account is one type of internal document
T/F - ANSWER-False
.A common incentive for companies to manipulate financial statements is a decline in the
company's financial prospect
, T/F - ANSWER-True
.A company is concerned with the theft of cash after the sale has been recorded. One way in
which fraudsters conceal the theft is by a process called "lapping." Which of the following
best describes lapping?
A) reduce the customer's account by recording a sales return
B) write off the customer's account
C) apply the payment from another customer to the customer's account
D) reduce the customer's account by recording a sales allowance - ANSWER-C
.A company's long-term solvency
A) can be measured by the gross profit percentage.
B) depends on the success of its operations and on its ability to raise capital for expansion.
C) can be measured by the days to collect receivables ratio.
D) depends on its ability to generate cash for the payment of dividends - ANSWER-B
.A high detection risk equates to a low amount of audit evidence needed
T/F - ANSWER-False
.A lack of controls over payments to vendors can cause revenue fraud
T/F - ANSWER-False
.A(n) ________ is a supporting schedule that supports a specific amount and is normally
expected to tie the amount recorded in the client's records to another source of information.
A) reconciliation of amounts
B) analysis
C) summary of procedures
D) informational document - ANSWER-A
