COMPLETING THE AUDIT

1. Which of the following is not among the characteristics of the procedures being performed in
completing the audit?
A. They are optional since they have only an indirect impact on the opinion to be expressed.
B. They involve a lot of subjective judgment by the auditor.
C. They do not pertain to specific transaction cycles or accounts.
D. They are usually performed by the audit managers or other senior members of the audit team
who have extensive audit experience with the client.

2. Before reaching a final decision on the opinion to be issued, a conference generally is held
with the client. At this meeting, all of the following may be expected, except:
A. an oral report of the auditor’s major findings.
B. the auditor’s rationale for proposed adjustments or additional disclosures.
C. an agreement between the auditor and the client on the changes to be made in the financial
statements.
D. the delivery of the management letter.

3. Which of the following activities is ordinarily performed prior to year-end?

A. Audit documentation review
B. Interim testing
C. "Roll-forward" work
D. Subsequent event review

4. Which of the following statements is true?

A. It is more difficult to discover unrecorded transactions or events than to verify recorded
information.
B. It is more difficult to verify recorded information than to discover unrecorded transactions
or events.
C. It is equally difficult to verify recorded information and to discover unrecorded
transactions or events.
D. None of the given choices is true.
5. Upon completion of the audit, the auditor needs to consider uncorrected misstatements because:
A. The aggregate of uncorrected misstatements, when considered, makes the financial statements
materially misstated.
B. There is a need to revise the financial statements after their issuance.
C. They are basis of whether the auditor needs to redocument internal control.
D. The aggregate of uncorrected misstatements is the basis of the auditor to reassess
materiality level.

6. What should a prudent auditor do when the aggregate of uncorrected misstatements approaches the
materiality level?
A B C D
Perform additional
YES NO NO YES
procedures.
Request management to
adjust financial statements
for identified YES YES NO YES
misstatements
Request management to
adjust financial statements
for projected YES NO YES NO
misstatements.

7. If based on the aggregate of uncorrected misstatements the auditor believes there may be material
misstatements, the auditor should perform additional procedures. If the client refuses to adjust
the financial statements and the auditor is not able to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should:
A. issue a standard opinion.
B. consider resigning from the engagement.
C. appropriately modify the audit report.
D. obtain additional representation letter covering uncorrected misstatements.

8. Which of the following communications is ordinarily signed by the auditor?

A. Attorney’s letter
B. Management representation letter
C. Internal control deficiency letter
D. All of these are signed by the auditor
9. They involve analysis of significant ratios and trends including the resultant investigation of
fluctuations and relationships that are inconsistent with other relevant information or
expectation:
A. inquiry.
B. analytical procedures.
C. account analysis.
D. inspection.

10. Analytical procedures performed in the overall review stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely indicate
that
A. unaccounted effects of irregularities exist.
B. internal control activities are not operating effectively.
C. additional tests of details are required.
D. the communication with the audit committee should be revised.
11. When substantive tests are performed before the balance sheet date, at a minimum the auditors
should, at or after the balance sheet date:
A. changes occurred in the account balances between the two dates.
B. perform analytical procedures, including comparison of the account balances at the two dates.
C. reconfirm all balances that were confirmed at interim date.
D. confirm all balances that were not confirmed at interim date.

12. An assumption underlying analytical procedures is that

A. these procedures cannot replace tests of balances and transactions.
B. statistical tests of financial information may lead to the discovery of material errors in
the financial statements.
C. the study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
D. relationships among data may reasonably be expected to exist and continue in the absence of
known conditions to the contrary.

13. An auditor suspects that fictitious sales may have been recorded during the year. Which of the
following analytical review results would most likely indicate that fictitious sales were
recorded?
A. Uncollectible account write-offs increased by 10 percent, sales increased by 10 percent, and
accounts receivable increased by 10 percent.
B. Gross margin decreased from 40 to 35 percent.
C. The number of days’ sales in accounts receivable decreased from 64 to 38.
D. Accounts receivable turnover decreased from 7.1 to 4.3.

14. Auditors apply analytical procedures on client's operations in order to identify

A. improper separation of accounting and other financial duties.
B. weaknesses of a material nature in the client's internal control.
C. unusual transactions.
D. noncompliance with prescribed control procedures.

15. Of the following procedures, which one does not produce analytical evidence?
A. Compare revenue, cost of sales, and gross profit with the prior year and investigate
significant variations.
B. Examine monthly performance reports and investigate significant revenue and expense
variances.
C. Confirm customers' accounts receivable and clear all material exceptions.
D. Compare sales trends and profit margins with industry averages and investigate significant
differences.

16. The extent to which analytical procedures provide useful substantive evidence depends on
A. the effectiveness of client’s internal control system.
B. the integrity and training of client’s personnel.
C. their reliability in the circumstances.
D. the experience of the auditor using them.

17. Analytical procedures:

A. are required to be performed in the planning phase of the audit.
B. are often done during examination’s testing stage.
C. are required to be done during the completion phase of the audit.
D. All of them

18. An important benefit from industry comparisons is:

A. an aid to understanding the client’s business.
B. an indicator of errors.
C. an indicator of irregularities.
D. a least-cost indicator for audit procedures.

19. A benefit obtained from comparing client’s data with industry average is that it provides
A. an indication of the likelihood of financial failure.
B. an indication where errors exist in the statements.
C. a benchmark to be used in evaluating client’s budget.
D. a comparison of “what is” with “what should be.”

20. When the current year’s unaudited trial balance is compared to the prior year’s audited trial
balance,
A. errors are identified.
B. discrepancies are discovered.
C. irregularities become apparent.
D. changes are highlighted.

21. When a higher than normal ratio of long-term debt to net worth is coupled with a lower than
average ratio of profits to total assets, the company
A. is highly successful.
B. is comparable with industry standards.
C. has a high risk of financial failure.
D. has a liquidity problem.

22. Which of the following discoveries through the use of analytical procedures would indicate a
relatively high risk of financial failure?
A. A decline in gross margin percentages.
B. An increase in the balance of fixed assets.
C. A higher than normal ratio of long-term debt to net worth as well as a lower than average
ratio of profits to total assets.
 D. An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable,
while at the same time accounts receivable turnover also decreased.

23. “Unusual fluctuations” occur when

A. significant differences are not expected but do exist.
B. significant differences are expected but do not exist.
C. there is a material accounting error or irregularity.
D. Any one of the given three situations may occur

24. Which method of analytical procedure is most useful because many expenses, such as cost of goods
sold, might be expected to bear a predictable relationship to net sales?
A. Horizontal analysis
B. Trend analysis
C. Vertical analysis
D. Reasonable analysis

25. One type of analytical procedure is trend analysis. Which of the following is the best example
of trend analysis?
A. Comparison of company financial ratios to that of its competitors.
B. Comparison of accounting records to budgeted amounts.
C. Comparison of inventory levels over the past 3 years.
D. Comparison of interest expenses to outstanding loan balances.

26. Analytical procedures are those that

A. evaluate the accuracy of the account balances.
B. assess the overall reasonableness of transactions and balances.
C. review the effectiveness of internal control procedures.
D. analyze the effect of management procedures on the accounting system.

27. Analytical procedures enable the auditor to predict the balance or quantity of an item under
audit. Information to develop this estimate can be obtained from all of the following except
A. tracing transactions through the system to determine whether procedures are being applied
as prescribed.
B. comparison of financial data with data for comparable prior periods, anticipated results
(e.g., budgets and forecasts), and similar data for the industry in which the entity operates.
C. study of the relationships of elements of financial data that would be expected to conform
to a predictable pattern based upon the entity’s experience.
D. study of the relationships of financial data with relevant nonfinancial data.

28. Which of the following statements is true concerning analytical procedures?

A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts
with assertions developed by the management.
B. Analytical procedures used in planning an audit ordinarily use data aggregated at a high
level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed level of control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions.

29. Which of the following items tend to be the most predictable for purposes of analytical procedures
applied as substantive tests?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.

30. According to professional standards, analytical procedures are least likely to be applied to:
A. test disclosures about reportable operating segments.
B. review the financial statements or interim financial information.
C. compile the financial statements.
D. plan an audit and assist in the final review.

31. Which of the following is not a typical analytical procedure?

A. Study of relationships of financial information with relevant nonfinancial information.
B. Comparison of financial information with similar information regarding the industry in which
the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of recorded amounts of major disbursements with budgeted amounts.

32. Which of the following would be least likely to be comparable between similar corporations in
the same industry line of business?
A. Earnings per share
B. Return on total assets before interest and taxes
C. Accounts receivable turnover
D. Operating cycle

33. Sales commissions as a percentage of sales declined significantly during the year under audit.
Of the following possible causes, the most likely is
A. sales increased during the year.
B. the sales force was reduced at the end of the year.
C. sales commission rates were increased at the beginning of the year.
D. fictitious sales were recorded at year-end to inflate earnings. Commissions were not recorded
on these sales.
34. In evaluating the effectiveness of a company's credit and collection policies, the ratio most
likely to be used by an auditor is
A. quick ratio.
B. accounts receivable turnover.
C. working capital turnover.
D. return on sales.

35. During an audit of the accounts receivable function, you found that the accounts receivable
turnover rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely
cause of the decrease in the turnover rate?
A. An increase in the discount offered for early payment.
B. A more liberal credit policy.
C. A change from net 30 to net 25.
D. Greater cash sales.

36. Significant unexpected fluctuations identified by analytical procedures will usually necessitate
a(an)
A. consistency qualification.
B. review of internal control.
C. explanation in the representation letter.
D. auditor investigation.

37. An auditor compares 2010 revenues and expenses with those of the prior year and investigates all
changes exceeding 10%. By this procedure the auditor would be most likely to learn that
A. an increase in property tax rates has not been recognized in the client's accrual.
B. the 2010 provision for uncollectible accounts is inadequate, because of worsening economic
conditions.
C. fourth quarter payroll taxes were not paid.
D. the client changed its capitalization policy for small tools in 2010.

38. Of the following procedures, which is the most important that an auditor should use when
performing an analytical review of the income statement?
A. Select sales and expense items and trace their amounts to related supporting documents.
B. Compare actual revenues and expenses with the corresponding figures of the previous year and
investigate significant differences.
C. Obtain from the proper client representatives, inventory certificates for the beginning and
ending inventory amounts that were used to determine cost of sales.
D. Ascertain that the net income amount in the statement of changes in financial position
(statement of cash flows) agrees with the net income amount in the income statement.

39. The auditor's analytical procedures will be facilitated if the client

A. uses a standard cost system that produces variance reports.
B. segregates obsolete inventory before the physical inventory count.
C. corrects material weaknesses in internal control before the beginning of the audit.
D. reduces inventory balances to the lower of cost or market.

40. Which of the following is not a purpose served by the application of analytical procedures?
A. As part of audit planning to assist in locating significant changes in revenues and expenses.
B. To provide a basis for lowering materiality thresholds where significant earnings inflation
is indicated.
C. To determine the economic substance of related party transactions.
D. As part of audit review to determine that all significant abnormalities have been resolved
to the auditor's satisfaction.

41. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained
decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
A. Unrecorded purchases
B. Unrecorded sales
C. Merchandise purchases being charged to selling and general expense
D. Fictitious sales

42. In applying analytical procedures, the auditor discovered that gross profit as a percent of
sales declined sharply during the current year. A possible cause might be
A. the client has significant amounts of obsolete inventory carried at full cost.
B. a significant quantity of finished goods located in a distant warehouse was inadvertently
omitted from the ending inventory.
C. recorded sales included goods that were shipped the following year.
D. depreciation of office equipment was overstated.

43. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures
for sales and inventories would most likely be identified in the planning phase of the audit by
the use of
A. tests of transactions and balances.
B. a preliminary review of internal control.
C. specialized audit programs.
D. analytical procedures.

44. What form of analytical review might uncover the existence of obsolete merchandise?
A. Inventory turnover rates
B. Decrease in the ratio of gross profit to sales
C. Ratio of inventory to accounts payable
D. Comparison of inventory values to purchase invoices.

45. What is ordinarily the primary concern when auditing the income statement?
 A. Overstatement of Revenues, Expenses and Net Income
B. Overstatement of Revenues and Expenses, and understatement of Net Income
C. Overstatement of Net Income and understatement of Revenues and Expenses
D. Overstatement of Revenues and Net Income, and understatement of Expenses

46. Compared to balance sheet accounts, the audit of income statement accounts generally relies more
heavily on:
A. tests of details of transactions.
B. tests of details of balances.
C. analytical procedures.
D. tests of controls.

47. What audit procedure is not ordinarily used to examine selling, general and administrative
expenses?
A. Analytical procedures
B. Use of budgets to identify unexpected differences
C. Confirmations of amounts paid with advertising agencies
D. Detailed tests of balances

48. Which of the following income statement accounts is least likely to be subject to extensive
detailed tests of balances?
A. Legal and professional fees
B. Contributions
C. Cost of sales
D. Officers’ salaries

49. Which of the following procedures is normally not considered in the auditor's substantive
procedures for revenue and expense accounts?
A. Evaluate evidence gathered in the audit of balance sheet accounts and examination of
transaction cycles.
B. Individually confirm significant transactions with third parties.
C. Perform analytical procedures to verify the overall reasonableness of revenue and expense
accounts.
D. Examine "miscellaneous", "other", and "clearing" accounts that are classified as revenues
and expenses.

50. The auditors' best course of action with respect to "other financial information" included in a
client prepared annual report containing the auditors' report is to:
A. indicate in the auditors' report that the "other financial information" is unaudited.
B. consider whether the "other financial information is accurate by performing a review.
C. obtain written representations from the management as to the material accuracy of the "other
financial information."
D. read and consider the manner of presentation of the "other financial information."

51. Which of the following events in the subsequent period is an example of a Type 2 subsequent
event?
A. Realization of recorded year-end receivables at a different amount than what is recorded
B. Settlement of recorded year-end estimated product warranty liabilities at an amount different
from what is recorded
C. Purchase of a business
D. Purchase of a machine

52. Which of the following statements best expresses the auditor’s responsibility with respect to
events occurring in the subsequent period?
A. The auditor has no responsibility for events occurring in the subsequent period unless these
events affect transactions recorded on or before the balance sheet date.
B. The auditor’s responsibility is to determine that transactions recorded on or before the
balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the last day of the field work.
D. The auditor is responsible for determining that a proper cutoff has been made and for
performing a general review of events occurring in the subsequent period.

53. An auditor concludes that the omission of a substantive procedures considered necessary at the
time of the audit may impair the auditor’s current ability to support the opinion that had been
previously issued. The auditor need not apply the omitted procedure if the
A. risk of adverse publicity or litigation is low.
B. results of other procedures that were applied tend to compensate for the omitted procedure.
C. auditor’s opinion is qualified because of a departure from generally accepted accounting
principles.
D. results of the subsequent period’s tests of controls make the omitted procedure less
important.

54. Which of the following procedures can be performed only in the subsequent period?
A. Examination of data to determine that a proper cutoff has been made
B. Tests of the details of balances
C. Tests of the details of transactions
D. Reading of the minutes of the board of directors’ meetings

55. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork.
The audit client believes that this event could have a significant direct effect on the financial
statements. The auditor should:
A. Advise the management to disclose the event in notes to the financial statements.
B. Disclose the event in the auditor’s report.
C. Withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known.
D. Advise the management to adjust the financial statements.