MULTIPLE-CHOICE QUESTIONS

1. Which of the following statements is false regarding preliminary analytical procedures in the revenue cycle?

a. Since revenue is typically regarded as a high-risk account, preliminary analytical procedures related to revenue are not required.

b. Auditors completing preliminary analytical procedures do not need to use the four-step process that would be required for substantive analytical procedures.

c. Trend analysis would not be appropriate as a preliminary analytical procedure in the revenue cycle.

d. All of the above statements are false.

2. Assume that an auditor expected that the client's activities related to sales and accounts receivable would be similar to industry averages. Which of the following relationships detected as part of preliminary analytical procedures would suggest a heighted risk of misstatement in the revenue cycle?

a. The number of days' sales in accounts receivable increased from 44 days in the prior year to 65 days in the year being audited. The industry average increased from 45 to 47 days.

b. The gross margin increased from 16.7% to 18.3%, while the industry average changed from 16.7% to 16.3%.

c. Accounts receivable increased 35% over the prior year, while sales stayed relatively stable.

d. All of the above.

3. After identifying the risks of material misstatement, the auditor develops an audit plan in response to those risks. Which of the following plans for testing revenue would be most likely when the auditor believes that control risk is high?

a. The only evidence the auditor plans to obtain is from tests of details.

b. The auditor plans to obtain 40% of the necessary audit evidence from tests of controls, and the remaining 60% from substantive analytical procedures.

c. The auditor plans to obtain the majority of the necessary audit evidence from tests of controls.

d. Any of the above would be an appropriate audit plan if the auditor believes that control risk is high.

4. Responding to identified risks involves developing an audit approach that addresses those risks. Which of the following statements about the planned audit approach is true?

a. The audit approach needs to include tests of controls, substantive analytical procedures, and tests of details.

b. The audit approach will typically require more evidence for higher-risk areas than lower-risk areas.

c. The audit approach should follow the audit firm's standardized audit program.

d. The sufficiency and appropriateness of selected procedures will not vary across assertions.

5. When auditing a nonpublic company, the auditor would generally make a decision not to test the operating effectiveness of controls in which of the following situations?

a. The preliminary assessment of control risk is at the maximum.

b. It is more cost efficient to directly test ending account balances than to test controls.

c. The auditor believes that controls are designed effectively, but are not operating as described.

d. All of the above are situations when the auditor would likely not test the operating effectiveness of controls.

6. An auditor performs tests of controls in the sales cycle. First, the auditor makes inquiries of company personnel about credit granting policies. The auditor then selects a sample of sales transactions and examines documentary evidence of credit approval. This test of controls most likely supports which of the financial statement assertion(s)?

Completeness Valuation or Allocation

a. Yes Yes

b. No Yes

c. Yes No

d. No No

7. To test the completeness of sales, the auditor would select a sample of transactions from which of the following populations?

a. Customer order file.

b. Open invoice file.

c. Bill of lading file.

d. Sales invoice file.

8. The auditor is concerned that fictitious sales have been recorded. The best audit procedure to identify the existence of the fictitious sales would be to perform which of the following?

a. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods.

b. Select a random sample of shipping documents (bills of lading) and trace to the sales invoice to determine whether the invoice was properly recorded.

c. Select a sample of customer purchase orders and trace through to the generation of a sales invoice.

d. Select a sample of customer purchase orders to determine whether a valid customer actually exists.