Multiple Choice Questions
Select the best answer for each of the following questions. Explain the reasons for your selection.
a. Which of the following is not a financial statement assertion made by management?
(1) Existence of recorded assets and liabilities.
(2) Completeness of recorded assets and liabilities.
(3) Valuation of assets and liabilities.
(4) Effectiveness of internal control.

b. Which of the following business characteristics is not indicative of high inherent risk?
(1) Operating results that are highly sensitive to economic factors.
(2) Large likely misstatements detected in prior audits.
(3) Substantial turnover of management.
(4) A large amount of assets.

c. As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?
(1) To increase the efficiency of the audit by eliminating the need for other audit procedures.
(2) To remind the client’s management of its primary responsibility for the financial statements.
(3) To document in the audit working papers the client’s responses to certain verbal inquiries made by the auditors during the engagement.
(4) To provide evidence in those areas dependent upon management’s future intentions.

d. Which of the following statements best describes why auditors investigate related party transactions?
(1) Related party transactions generally are illegal acts.
(2) The substance of related party transactions may differ from their form.
(3) All related party transactions must be eliminated as a step in preparing consolidated financial statements.
(4) Related party transactions are a form of management fraud.

e. Of the following, which is the least reliable type of audit evidence?
(1) Confirmations mailed by outsiders to the auditors.
(2) Correspondence between the auditors and suppliers.
(3) Copies of sales invoices inspected by the auditors.
(4) Canceled checks returned in the year-end bank statement directly to the client.

f. Analytical procedures are most likely to detect:
(1) Weaknesses of a material nature in internal control.
(2) Unusual transactions.
(3) Noncompliance with prescribed control activities.
(4) Improper separation of accounting and other financial duties.

g. Which of the following is not a primary approach to auditing an accounting estimate?
(1) Review and test management’s process for developing the estimate.
(2) Review subsequent transactions.
(3) Confirm the amounts.
(4) Develop an independent estimate.

h. A primary purpose of the audit working papers is to:
(1) Aid the auditors by providing a list of required procedures.
(2) Provide a point of reference for future audit engagements.
(3) Support the underlying concepts included in the preparation of the basic financial statements.
(4) Support the auditors’ opinion.

i. In what section of the audit working papers would a long-term lease agreement be filed?
(1) Current working paper file.
(2) Permanent working paper file.
(3) Lead schedule file.
(4) Corroborating documents file.

j. Which of the following is not a function of audit working papers?
(1) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.
(2) Assist audit team members responsible for supervision in reviewing the work.
(3) Assist auditors in planning future engagements.
(4) Assist peer reviewers and inspectors in performing their roles.

k. In using the work of a specialist, the auditors referred to the specialist’s findings in their report. This would be an appropriate reporting practice if the:
(1) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.
(2) Auditors, as a result of the specialist’s findings, give a qualified opinion on the financial statements.
(3) Client understands the auditors’ corroborative use of the specialist’s findings in relation to the representations in the financial statements.
(4) Auditors, as a result of the specialist’s findings, decide to indicate a division of responsibility with the specialist.

l. A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably:
(1) Remain silent on the matter since it is an internal matter of the auditing firm.
(2) Note that the assistant auditor is completely dissociated from responsibility for the auditors’ opinion.
(3) Document the additional work required, since all disagreements of this type will require expanded substantive procedures.
(4) Document the assistant auditor’s position and how the difference of opinion was resolved.