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Questions
Q:
Discuss the various factors that influence currency movement, including individual and business transactions, inflation, interest rates, and trade and investment activity. Explain why international marketers need to monitor these developments.
Q:
List and describe the various properties of money that are presented in the text. Use an example of a currency to illustrate the various properties of money and how that currency satisfies each property.
Q:
An international marketers profit is only weakly impacted by international finance issues.
a. True
b. False
Q:
Administered prices can be used for sensitive, high-demand, or essential products.
a. True
b. False
Q:
Administered prices are set by a government, often in an attempt to weaken foreign competitors.
a. True
b. False
Q:
Price escalations are realized as the price of a product increases as it moves from one country to another because of transportation, middlemen, tariffs, and other expenses.
a. True
b. False
Q:
Buy-back countertrades are trade deals in which products are exchanged for cash.
a. True
b. False
Q:
Terms of trade refers to an agreed-upon payment in return for goods and services.
a. True
b. False
Q:
Hedging refers to any financial process that lessens financial risk.
a. True
b. False
Q:
Forward rates are the exchange rates for a previous transaction that is projected into the future.
a. True
b. False
Q:
Forward rates are the exchange rates for the delivery of a currency at a specific time in the future.
a. True
b. False
Q:
The Bretton Woods agreement established a global currency system.
a. True
b. False
Q:
The primary responsibility of the International Monetary Fund is currency stabilization.
a. True
b. False
Q:
Revaluation refers to a government increase in the par value of a currency under a fixed-rate regime.
a. True
b. False
Q:
A fixed or pegged regime sets a predetermined band or par value for a currency.
a. True
b. False
Q:
A floating exchange rate occurs when the value of a currency is allowed to respond freely to market forces.
a. True
b. False
Q:
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
A. Compare a sample of shipping documents to related sales invoices.
B. Observe the entity's distribution of payroll checks.
C. Confirm a sample of recorded receivables by direct communication with the debtors.
D. Review standard bank confirmations for indications of kiting.
Q:
You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Accuracy.
Q:
You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.
Q:
All of the following are typically in the current file except:
A. Adjusting journal entries.
B. Copies of the audit report.
C. Chart of accounts.
D. Lead schedules.
Q:
Audit documentation prepared on audits of public entities is the property of the
A. Shareholders.
B. Auditor.
C. Management of the entity being audited.
D. SEC.
Q:
An example of audit evidence with a medium level of reliability is
A. Scanning.
B. Recalculation.
C. Observation.
D. All of these.
Q:
The permanent (continuing) file of an auditor's working papers most likely would include copies of the
A. Bank statements.
B. Debt agreements.
C. Lead schedules.
D. Attorney's letters.
Q:
Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
A. Account analyses.
B. Supporting schedules.
C. Control accounts.
D. Lead schedules.
Q:
The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents'
A. Format be neat and orderly and include both a permanent file and a general file.
B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards.
C. Ownership is determined by the legal statutes of the state where the auditor practices.
D. Preparation is the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
Q:
Of the following, which is the least persuasive type of audit evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and third party vendors.
C. Copies of company sales invoices inspected by the auditor.
D. Computations made by the auditor.
Q:
Which of the following presumptions does not relate to the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
Q:
To test for unsupported entries in the ledger, the direction of audit testing should start from the
A. Ledger entries.
B. Journal entries.
C. Externally generated documents.
D. Original source documents.
Q:
In determining whether transactions have been recorded, the direction of the audit testing should start from the
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
Q:
Footing is an example of
A. Recalculation.
B. Confirmation.
C. Inquiries.
D. Analytical procedures.
Q:
In designing written audit programs, an auditor should plan specific audit procedures to test
A. Timing of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit techniques.
D. Management assertions.
Q:
Vouching is used primarily to test which of the following assertions about classes of transaction?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Classification.
Q:
Tracing is used primarily to test which of the following assertions about classes of transactions?
A. Occurrence.
B. Completeness.
C. Cutoff.
D. Classification.
Q:
Which assertions may be tested for the "presentation and disclosure" category of management assertions?
A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation.
B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification.
C. Occurrence, completeness, classification and understandability, cutoff and classification.
D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
Q:
Which assertions may be tested for the "transactions and events" category of management assertions?
A. Existence, completeness, rights and obligations, accuracy, cutoff and classification.
B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification.
C. Occurrence, completeness, authorization, accuracy, cutoff and classification.
D. Existence, rights and obligations, accuracy, authorization, and completeness.
Q:
Which assertions may be tested for the "account balances" category of management assertions?
A. Existence, accuracy, rights and obligations, completeness.
B. Existence, rights and obligations, completeness, valuation and allocation.
C. Occurrence, rights and obligations, completeness, valuation and allocation.
D. Occurrence, accuracy, rights and obligations, completeness.
Q:
In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?
A. Occurrence.
B. Cutoff.
C. Authorization.
D. Classification.
Q:
Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet?
A. Assertions about classes of transactions and events.
B. Assertions about account balances at the period end.
C. Assertions about presentation and disclosure.
D. None of these.
Q:
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
A. Be well documented and cross-referenced in the audit documents.
B. Be based on sources that are considered reliable.
C. Bear a direct relationship to the audit assertion.
D. Be persuasive enough to enable the auditor to form an opinion.
Q:
Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?
A. Auditor judgment.
B. Materiality.
C. Relative risk.
D. Reasonable assurance.
Q:
A confirmation is used to
A. Verify the inventory count is correct.
B. Verify that a control is being observed.
C. Verify a representation from a third party.
D. Verify that a specific trend is correct.
Q:
The sufficiency of evidence refers to the quality of audit evidence.
Q:
The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.
Q:
The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
Q:
Audit procedures are designed to test management assertions.
Q:
The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.
Q:
The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.
Q:
The classification assertion refers to transactions and events being recorded in the correct accounting period.
Q:
Management assertions fall into four main categories.
Q:
The auditor gathers audit evidence to test management's assertions.
Q:
Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
Q:
Using the audit risk model, identify the relationship between the following elements. For each of the items below, highlight whether the two elements have an inverse relationship, a direct relationship, or no relationship. When considering each item, assume that the other components of the risk model remain constant.
a. Engagement Risk and Acceptable Audit Risk Inverse Direct No Relationship
b. Assessed Inherent Risk and Planned Detection Risk Inverse Direct No Relationship
c. Materiality and Amount of substantive evidence needed Inverse Direct No Relationship
d. Assessed Inherent Risk and Assessed Control Risk Inverse Direct No Relationship
e. Acceptable Audit Risk and Assessed Control Risk Inverse Direct No Relationship
f. Amount of substantive evidence collected and Achieved
Q:
Which of the following is correct concerning required auditor communications about fraud?
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
Q:
A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
A. Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.
B. An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud.
C. The factors considered in assessing control risk indicated an increased risk of error but only a low risk of fraud in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
Q:
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A. Inability to generate cash flows from operations while reporting substantial earnings growth.
B. Management's lack of interest in increasing the entity's earnings trend.
C. Large amounts of liquid assets that are easily converted into cash.
D. Inability to borrow necessary capital without granting debt covenants.
Q:
The auditor is most likely to presume that a high risk of a fraud exists if
A. The entity is a multinational company that does business in numerous foreign countries.
B. The entity does business with several related parties.
C. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.
D. Inadequate employee training results in lengthy EDP exception reports each month.
Q:
The objectives of the engagement partner's communication with the audit team include
A. Maintaining an adversarial atmosphere between the auditor and management.
B. Complying with SEC rules.
C. Complying with FASB rules.
D. Emphasizing the importance of professional skepticism.
Q:
Increased fraud risk could result in all of the following except:
A. Lower detection risk.
B. Higher inherent risk.
C. Lower control risk.
D. Higher client risk.
Q:
As the acceptable level of detection risk decreases, the assurance directly provided from
A. Substantive procedures should increase.
B. Substantive procedures should decrease.
C. Tests of controls should increase.
D. Tests of controls should decrease.
Q:
As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of tests of controls by performing them at an interim date rather than at year-end.
B. Nature of substantive procedures from less effective to more effective procedures.
C. Timing of tests of controls by performing them at several dates rather than at one time.
D. Assessed level of risk of material misstatement to a higher amount.
Q:
The acceptable level of detection risk is inversely related to the
A. Extent of the substantive procedures.
B. Risk of misapplying auditing procedures.
C. Overall materiality.
D. Risk of failing to discover material misstatements.
Q:
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably
A. Disclose the fraud to the appropriate level of the client's management.
B. Disclose the fraud to appropriate authorities external to the client.
C. Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud.
D. Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements.
Q:
The auditor can respond to an increased risk of fraud by doing all of the following except:
A. Evaluating whether the accounting policies selected may be indicative of fraudulent financial reporting through earnings management.
B. Assigning more experienced personnel to the audit.
C. Increasing detection risk.
D. Taking steps to obtain more reliable evidence.
Q:
All of the following represent an increased opportunity for management to commit fraud except:
A. Significant related party transactions.
B. The auditor's relationship with management is strained.
C. Management is dominated by a single person.
D. The financial statements include highly subjective estimates.
Q:
Which of the following is not a misstatement of the financial statements?
A. The entity uses different inventory accounting methods for internal and external reporting.
B. A departure from GAAP.
C. The footnote for pensions is omitted.
D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.
Q:
The primary responsibility for preventing fraud in an organization lies with
A. The audit committee of the board of directors.
B. The internal audit function.
C. The external auditor.
D. The organization's management.
Q:
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
A. Accounts receivable confirmation requests yield significantly fewer responses than expected.
B. Audit trails of computer-generated transactions exist only for a short time.
C. The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork.
D. Management consults with other accountants about significant accounting matters.
Q:
In general, material frauds perpetrated by which of the following are most difficult to detect?
A. Internal audit function.
B. Keypunch operator.
C. Cashier.
D. Controller.
Q:
Which of the following is a source of detection risk?
A. Unstable business environment.
B. Poor client controls.
C. A nonrepresentative sample.
D. Inherent risk assessed too high.
Q:
Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?
A. The specific business risks an entity faces that may result in financial statement errors and fraud.
B. Business risk factors that impact the ability of the entity to be profitable and survive.
C. Audit standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements.
D. Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.
Q:
Which of the following procedures would not be used to obtain an understanding of the entity and its environment?
A. Observe entity operations.
B. Reperform entity processes.
C. Verify proper valuation of inventory subject to technological obsolescence.
D. Review prior year's audit documentation.
Q:
When an entity moves into a significant new line of business, all of the following increase except:
A. Client risk.
B. Acceptable audit risk.
C. Risk of material misstatement.
D. Entity business risk.
Q:
Which of the following audit risk components may be assessed in qualitative terms?
A. Risk of material misstatement.
B. Detection risk.
C. Neither risk of material misstatement nor detection risk.
D. Both risk of material misstatement and detection risk.
Q:
An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except:
A. Fraud risk increases.
B. The risk of misappropriation of assets increases.
C. Risk of material misstatement increases.
D. Detection risk increases.
Q:
The risk of material misstatement includes which of the following?
A. Detection risk.
B. Audit risk.
C. Inherent risk.
D. Nonsampling risk.
Q:
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would
A. Decrease amount of substantive testing.
B. Decrease detection risk.
C. Increase detection risk.
D. Increase materiality levels.
Q:
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of controls.
B. Level of detection risk.
C. Extent of substantive tests.
D. Level of inherent risk.
Q:
All of the following are inherent risk factors that are pervasive to the financial statements except:
A. Highly complex significant transactions.
B. Non-routine transactions.
C. Classes of transactions are not processed systematically.
D. Supplies inventory is difficult to count.
Q:
The risk of material misstatement differs from detection risk in that it
A. Arises from the misapplication of auditing procedures.
B. May be assessed in either quantitative or qualitative terms.
C. Exists independently of the actions of the auditor.
D. Can be changed at the auditor's discretion.
Q:
The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as
A. Sampling risk.
B. Detection risk.
C. Nonsampling risk.
D. Inherent risk.