2. In class in discussing the audit risk model we considered

several cases as follows:

Case Audit Inherent Control Detection

Risk Risk Risk Risk

I .05 .60 .30 .278

II .05 .20 .30 ???

What would be the required level of detection risk for case II. Compared with Case I would the auditor expect to do more or less audit work (substantive testing)?

a. .167; more audit work. c. .833; more audit work.

b. .167; less audit work. d. .833; less audit work.

e. none of the above.

Answer _____

3. A type of fraud where company management understates expenses

and liabilities in hopes of leading to a higher price

for the companys common stock, is called

a. financial reporting fraud, or fraudulent financial

reporting.

b. defalcation.

c. error.

d. misuse of authority.

Answer ____

4. The magnitude of an omission or misstatement of accounting

information that, in view of surrounding circumstances, makes

it probable that the judgment of a reasonable person relying

on the information would have been changed or influenced by

the omission or misstatement refers to the concept of:

a. Audit risk

b. Engagement risk

c. Substantive importance

d. Materiality

Answer ____

5. In class, we discussed the notion of an audit philosophy of

tests of accounts for overstatement and understatement to

gain audit efficiencies. Consider the following statements:

1. Testing Sales for UNDERstatement, conceptually, also tests Accounts receivable for UNDERstatement.

II. The auditor would mostly be concerned about testing

liabilities for understatement.

a. I is true; II is true.

b. I is true; II is false.

c. I is false; II is true.

d. I is false; II is false.

Answer ____

6. Consider the following statements:

I. Materiality has both quantitative and qualitative

considerations.

II. Substantive procedures [audit work] involve test of

details, and analytical review.

a. I is true; II is true.

b. I is true; II is false.

c. I is false; II is true.

d. I is false; II is false.

Answer _____

7. Management claims that the accounts receivable amounts are

real, not fictitious. What management assertion is involved?

a. Completeness

b. Existence

c. Rights and Obligations

d. Valuation and Allocation

Answer ____

8. The following refers to which management assertion:

All sales that took place, were recorded

a. Completeness

b. Cutoff

c. Occurrence

d. Presentation

e. Rights and obligations

Answer ____

9. Auditors send a letter to the companys attorneys to obtain

evidence about possible contingent liabilities. What means of

gathering evidence is this?

a. Observation. d. Inquiry

b. Reperformance. e. Comparison

c. Analysis.

Answer ____

10. Auditors perform a reasonableness test comparing their

estimate to the amount shown in the trial balance. What type

of evidence is this?

a. Analytical review

b. Confirmation

c. Reperformance

d. Inspection of documents

e. None of the above

Answer ____

11. The accounting clerk steals a customers check meant to pay

their account balance. To remove the accounts receivable

from the accounting records, the clerk writes off

[debit allowance for doubtful accounts, credit accounts

receivable] the customers account. This scheme is likely to

be discovered because:

a. The customer will demand repayment.

b. The customer will be told that it will be necessary to

pay cash for purchases in the future since their account

had been written off in the past.

c. The clerk will forget which account was written off.

Answer ____

12. Testing sales for completeness (i.e. UNDERstatement),

an auditor selects 50 sales invoices and vouches them to

the respective shipping documents. This evidence is not

appropriate because of the violation of:

a. Auditor's direct knowledge.

b. Objectivity

c. Reliability

d. Relevance

Answer ___

13. Auditors sometimes use ratios as audit evidence. For example

an unexplained INCREASE in the ratio of gross profit

to sales may suggest which of the following possibilities?

a. Fictitious purchases. b. Unrecorded purchases.

c. Unrecorded sales. d. Selling expense recorded as general expense.

Answer ____

14. In discussing audit procedures for contingent liabilities, we

discussed the analysis of legal expense. Say the auditor

asks the controller for the file containing attorney invoices

[i.e. bills from lawyers]. In reviewing the invoices, the

auditor notes that they sum to [total] $1,000,000, while the

amount shown in the general ledger account for legal expense

totaled $1,500,000. In this context, what did we suggest as

the auditors chief concern?

a. Too much is being spent on attorney fees.

b. There is likely a misclassification of an expense.

c. The auditor did not receive all the attorney invoices.

d. Legal expense is overstated.

Answer ____