ACCT 406 Exam 1 UPDATED
QUESTIONS AND CORRECT ANSWERS
Auditing is different from most other accounting courses because learning auditing largely involves
memorizing technical formulas and rules
A. True
B. False - correct answer b. False
Which of the following is the best definition for financial statement auditing:
A. Systematic process of reporting and communicating economic assertions in accordance with
established criteria
B. A systematic process of objectively obtaining and evaluating evidence to determine and
communicate whether economic assertions are reported in accordance with established criteria
C. Any independent professional service that improves the quality of information, or its context, for
decision makers
D. None of the above definitions even comes close to capturing the essential components - correct
answer b. A systematic process of objectively obtaining and evaluating evidence to determine
and communicate whether economic assertions are reported in accordance with established criteria
Following are five of the phases in the financial statement audit process. Select the answer (a-d) that
places the phases in the proper order.
I. Consider and audit internal control
Ii. Evaluate results and issue the audit report
Iii. Client acceptance/continuance
Iv. Audit business processes and related accounts
V. Plan the audit
A. Iii, iv, i, v, ii
B. Iv, iii, i, v, ii
C. I, v, iv, iii, ii
,D. Iii, v, i, iv, ii - correct answer d. Iii, v, i, iv, ii
The risk that a material misstatement occurs, goes undetected by the client's internal control structure,
and is not detected by the auditor, who unknowingly issues a "clean" audit report is known as:
A. Incremental risk
B. Environmental risk
C. Audit risk
D. Information risk - correct answer c. Audit risk
Which of the following statements is correct concerning the concept of materiality?
A. Materiality is determined by reference to formal guidelines established in professional standards
B. Materiality depends only on the dollar amounts listed on a client's financial statements
C. Materiality depends on the nature of the client, and not on the dollar amounts listed on a client's
financial statements
D. No formal requirements exist for determining materiality - it is a matter of professional judgement
- correct answer d. No formal requirements exist for determining materiality - it is a matter of
professional judgement
Tests of details of balances emphasize the ending balances in the general ledger
A. True
B. False - correct answer a. True
Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify
reducing control risk further from the planned level and increasing reliance on substantive tests
A. True
B. False - correct answer b. False
, Substantive tests of transactions emphasize the verification of dollar amounts of transactions recorded
in the journals and then posted in the general ledger
A. True
B. False - correct answer a. True
Tests of controls are required on any audit of a private company where the auditor believes the
controls are either inappropriately designed or the implementation of the control is ineffective
A. True
B. False - correct answer b. False
A dual-purpose test
A. Simultaneously tests debits and credits
B. Is a procedure completed by both the internal and external auditors
C. Is useful to both the entity and the auditor
D. Is both a substantive test of transactions and test of controls - correct answer d. Is both a
substantive test of transactions and test of controls
According to the first general standard in the ten generally accepted auditing standards (gaas), the
person or persons performing the audit should have adequate ____________, ____________ and
_____________.
A. Technical / training / proficiency
B. Independence / integrity / objectivity
C. Training / independence / professionalism
D. None of the above - correct answer a. Technical / training / proficiency
Collectively, the three general standards (not categories of standards) in the ten gaas establish broad
standards for
QUESTIONS AND CORRECT ANSWERS
Auditing is different from most other accounting courses because learning auditing largely involves
memorizing technical formulas and rules
A. True
B. False - correct answer b. False
Which of the following is the best definition for financial statement auditing:
A. Systematic process of reporting and communicating economic assertions in accordance with
established criteria
B. A systematic process of objectively obtaining and evaluating evidence to determine and
communicate whether economic assertions are reported in accordance with established criteria
C. Any independent professional service that improves the quality of information, or its context, for
decision makers
D. None of the above definitions even comes close to capturing the essential components - correct
answer b. A systematic process of objectively obtaining and evaluating evidence to determine
and communicate whether economic assertions are reported in accordance with established criteria
Following are five of the phases in the financial statement audit process. Select the answer (a-d) that
places the phases in the proper order.
I. Consider and audit internal control
Ii. Evaluate results and issue the audit report
Iii. Client acceptance/continuance
Iv. Audit business processes and related accounts
V. Plan the audit
A. Iii, iv, i, v, ii
B. Iv, iii, i, v, ii
C. I, v, iv, iii, ii
,D. Iii, v, i, iv, ii - correct answer d. Iii, v, i, iv, ii
The risk that a material misstatement occurs, goes undetected by the client's internal control structure,
and is not detected by the auditor, who unknowingly issues a "clean" audit report is known as:
A. Incremental risk
B. Environmental risk
C. Audit risk
D. Information risk - correct answer c. Audit risk
Which of the following statements is correct concerning the concept of materiality?
A. Materiality is determined by reference to formal guidelines established in professional standards
B. Materiality depends only on the dollar amounts listed on a client's financial statements
C. Materiality depends on the nature of the client, and not on the dollar amounts listed on a client's
financial statements
D. No formal requirements exist for determining materiality - it is a matter of professional judgement
- correct answer d. No formal requirements exist for determining materiality - it is a matter of
professional judgement
Tests of details of balances emphasize the ending balances in the general ledger
A. True
B. False - correct answer a. True
Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify
reducing control risk further from the planned level and increasing reliance on substantive tests
A. True
B. False - correct answer b. False
, Substantive tests of transactions emphasize the verification of dollar amounts of transactions recorded
in the journals and then posted in the general ledger
A. True
B. False - correct answer a. True
Tests of controls are required on any audit of a private company where the auditor believes the
controls are either inappropriately designed or the implementation of the control is ineffective
A. True
B. False - correct answer b. False
A dual-purpose test
A. Simultaneously tests debits and credits
B. Is a procedure completed by both the internal and external auditors
C. Is useful to both the entity and the auditor
D. Is both a substantive test of transactions and test of controls - correct answer d. Is both a
substantive test of transactions and test of controls
According to the first general standard in the ten generally accepted auditing standards (gaas), the
person or persons performing the audit should have adequate ____________, ____________ and
_____________.
A. Technical / training / proficiency
B. Independence / integrity / objectivity
C. Training / independence / professionalism
D. None of the above - correct answer a. Technical / training / proficiency
Collectively, the three general standards (not categories of standards) in the ten gaas establish broad
standards for
