If management and salespeople are compensated on the basis of achieving high salestargets, there is increased incentive to record sales before they have been earned. In such asituation, the auditor will increase the extent of testing for which of the following transactionrelated audit objectives forsales?

A. cutoff and classification

B. completeness and cutoff

C. occurrence and cutoff

D. classification and occurrence

Mario, the owner ofClayton's icecream, is givingSteve, the manager of theaudit, a private tour of the production facilities. By doing thetour, Steve will

A. understand theclient's business and operations better.

B. be better able to identify control risks.

C. be able to gather audit evidence on operational efficiencies.

D. Steve should not be taking a tour alone with the owner as this could compromise his independence.

Yourclient, MacilbinkLtd., manufacturescalendars, books, and magazines. The printing presses that they use are only three yearsold, yet new technology has been developed that would result in cuts in ink and electricity costs by over20%, while simplifying the setupprocess, making smaller production runs more feasible. Macilbink Ltd. is facing lowered demand for its products and will need to change direction or innovate to stay in business. The effect of the new printing technology has resulted in which of the following risk assessment changes by MacilbinkLtd.'s auditors?

A. decreased control risk

B. increased client business risk

C. decreased client business risk

D. increased control risk

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of calculating key ratios for theclient's business and comparing them with industryaverages?

A. to understand theclient's industry and business

B. to indicate possible misstatements

C. to assess going concern

D. to reduce detailed tests

Anna performed a trend analysis of accounts receivable(AR) balances and computed the days to collect AR ratio. When she compared the results of her analysis with industryaverages, she found the results were unusually low compared to the industry norm. Anna can conclude that

A. the accounts receivable has an increased risk of misstatement.

B. she will not be able to rely on internal controls for accounts receivable for audit purposes.

C. the accounts receivable balance is wrong.

D. the integrity of thecompany's management is questionable.

Analytical procedures are generally used to produce evidence from

A. physical observation of inventories.

B. relationships among current financial balances and priorbalances, forecasts, and nonfinancial data.

C. detailed examination of external and internal documents.

D. confirmations mailed directly to the auditors by auditee customers.

External auditor Mary Smith may not rely on the work of internal auditor Ray Jones unless

A. Jones is supervised by Smith.

B. Jones is certified(CPA, CA;CPA, CGA; orCPA, CMA).

C. Smith obtains evidence that supports thecompetence, integrity, and objectivity of Jones.

D. Jones is independent of the client.

The first step in applying materiality is

A. estimating the combined effects of errors.

B. estimating the misstatement in a segment for each functional cycle.

C. comparing the error estimate with the materiality levels.

D. setting a judgment about materiality for the financial statements as a whole.

Since materiality isrelative, it is necessary to have benchmarks for establishing whether misstatements are material.Normally, the most important base for deciding what ismaterial, because it is regarded as a critical item of current period information forusers, is

A. total assets.

B. net income.

C. net working capital.

D. net income before taxes.

If the auditor sets a low dollar amount asmateriality,

A. the same amount of evidence is required as for a high dollar amount.

B. it has no effect on the amount of evidence required.

C. more evidence is required than for a high amount.

D. less evidence is required than for a high amount.

Which of the following types of misstatements has the highest level ofcertainty?

A. identified misstatements

B. likely aggregate misstatements

C. further possible misstatements

D. likely misstatements

Risks associated with specific industries may affect theauditor's assessment of client business risk and acceptable auditrisk, and even influence client acceptance decisions. Which of the following businesses would be the most risky for the auditor to accept as a newclient?

A. a client who is developing a computer game that is expected to be ready in three years and has no other products

B. a retail company in the clothing industry that has midrange pricing and appeals to a large population sector

C. a firm consisting of a partnership of ten lawyers that operates out of three different cities in one province

D. a small manufacturer of metal and plastic parts that has steady profits and has been in business for 15 years

Vanovo Ltd. has purchased several companies in the retail sector.Recently, Vanovo purchased both a coffee and donut chain(that also ownedbakeries) and a submarine sandwich chain.Unfortunately, the planned synergies between these two retail chains did not arise. What effect would this have on the financial statements of VanovoLtd., the parentcompany?

A. The fixed assets and goodwill recorded at acquisition could be impaired.

B. Costs of goods sold will likely be overstated for both of the new chains.

C. The financial statements will be incorrectly calculated and should be checked.

D. Risk of material misstatement for payroll expenses will increase.