MULTIPLE-CHOICE QUESTIONS
1. The auditor discovers various errors in the client's financial statements during the audit. At the end of the audit, these misstatements are analyzed to determine if they need to be recorded and corrected. In which situation could management and the auditor decide not to correct the misstatement?
a. If, by correcting the misstatement, net income would increase rather than decrease.
b. If, by correcting the misstatement, net income would decrease rather than increase.
c. If the misstatement is material.
d. If the misstatement is immaterial.

2. The PCAOB's AS 14 provides insight that auditors must consider as they decide whether management's refusal to correct a detected misstatement is indicative of intentional bias. Which of the following is a form of management bias in this setting?
a. Refusal on the part of management to allow the auditor to communicate with the audit committee about the misstatement.
b. The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor.
c. Refusal on the part of management to allow the auditor to collect additional evidence to evaluate the materiality of the misstatement.
d. The identification by management of procedures that the auditor omitted during the audit, which yield information about the misstatement.

3. In obtaining evidence about loss contingencies, which of the following are sources of evidence that the auditor should obtain from management?
a. A description and evaluation of contingencies that existed at the balance sheet date.
b. Assurance that the accounting and disclosure requirements concerning contingent liabilities have been met.
c. Documentation of communication with internal and external legal counsel of the client.
d. All of the above.

4. In completing the audit, the auditor must obtain a letter of audit inquiry. Which of the following is an accurate description of a letter of audit inquiry?
a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel.
b. A letter that is the primary source of corroborative evidence concerning cash valuation, which is received from the client's bank.
c. A letter that is the primary source of corroborative evidence concerning accounts receivable valuation, which is received from the client's customer.
d. A letter that is the primary source of corroborative evidence concerning inventory valuation, which is received from the client's supplier.

5. In completing the audit, the auditor should review management's significant accounting estimates. In this setting, the auditor is responsible for providing reasonable assurance about which of the following?
a. The estimates are reasonable.
b. The estimates are presented in conformity with GAAP.
c. The disclosure about the estimates is adequate.
d. All of the above.

6. In evaluating the reasonableness of significant accounting estimates, the auditor should consider which of the following?
a. The significance of the estimate.
b. The sensitivity of the estimate to variations.
c. The sensitivity of the estimate to misstatement and bias.
d. All of the above.

7. In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have reasonable assurance that which of the following are characteristic of the disclosures?
a. The disclosed events and transactions have occurred and pertain to the entity.
b. All the disclosures that should have been included are included.
c. The disclosures are understandable to users.
d. All of the above.

8. The auditor's report does not provide assurance about which of the following elements of the client's financial reporting?
a. The 10-K.
b. The MD&A.
c. The financial statements.
d. The disclosures in the footnotes to the financial statements.

9. The auditor has responsibility regarding clients' noncompliance with laws and regulations. Obviously, management may try to hide acts involving noncompliance, which limits the auditor's ability to detect such acts. Which of the following are inherent limitations in the audit that limit the auditor's ability to detect acts involving noncompliance?
a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relating to financial reporting may not capture noncompliance.
b. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor.
c. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and are not a matter about which the auditor can resolve.
d. All of the above.

10. Which of the following is an important provision of the Foreign Corrupt Practices Act?
a. Auditors of clients operating in foreign countries must hire a joint auditor in the foreign country to provide assurance that laws and regulations have been followed by the client.
b. Auditors of clients operating in foreign countries must ensure that any inventory observations that occur in the foreign country are observed by at least some audit personnel from the U.S.; this requirement is in place because fraud often occurs in inventory accounts.
c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls.
d. Companies that have securities listed on U.S. markets must adhere to the internal control requirements of both the U.S. and the applicable foreign country.