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Multi-choice audit concept questions

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1. The natural sign of an asset is a:
a. Debit
b. Credit
c. Both
d. None

2. Internal Auditors are referred to as independent auditors.
a. True
b. False
c. Neither

3. The three categories for standards for auditors as set forth by GAAS are general standards, standards of fieldwork, and standards of examination.
a. True
b. False
c. Maybe so

4. Auditing is a systematic process of obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
a. True
b. False
c. No way

5 Audit Risk can be composed of the following components shown in the following formula:
a. AR = Debit + Credit
b. AR = IR - CR - DR
c. AR = IR x CR x DR
d. AR = Credit Risk + Inherent Risk + Control Risk

5. Materiality can be defined as follows:
a. When the inverse relationship of rates fluctuates with risk.
b. The amount of error and/or omission that would affect the judgment of a reasonable person.
c. When Detection Risk can no longer be measured.
d. Fraud exists.

6. All of the following consists of Management's Assertions except for:
a. Existence or Occurrence
b. Completeness
c. Rights & Obligations
d. Fraud not yet committed

7. All of the following are auditing procedures for verifying the Management Assertion of Existence/Occurrence:
a. Confirmations
b. Observation, inspection and examination.
c. Preparation of Audit Engagement Letter.
d. Vouching, testing of transactions.

8. Performing Cut-Off procedures is where:
a. Writing up procedures for fraud.
b. Reviewing financial transactions to see they were posted in the proper accounting period.
c. Cutting off the audit ahead of audit schedule.

9. Basic concepts for competence of evidential matter are relevance and reliability.
a. True
b. False
c. Both

10. An Audit Engagement Letter is the same thing as a Management Representation Letter except for the Management Representation Letter is done at the beginning of the audit while the Audit Engagement Letter is done at the conclusion of the audit.
a. Neither
b. False
c. True
11. Audit tests consists of the following except:
a. Tests of controls.
b. Substantive tests
c. Preparation of financial statements.

12. There are two major audit sampling methods, statistical sampling and non-statistical sampling. Statistical sampling is where the auditors specify the sampling risk they are willing to accept and then calculate a sample size that provides the degree of reliability and results are analyzed quantitatively. In non-statistical sampling the sample size is not mathematically determined and auditors use judgment in determining samples selected with the selected samples analyzed on a judgment basis.
a. True
b. False
c. Neither

13. The following are all sampling methods except:
a. Random sampling
b. Systematic selection
c. Bolean nucleaic method
d. Haphazard selection

14. The following are all internal controls in an information technology environment except for:
a. Hardware and software
b. Organizational
c. Security and access
d. Relevance
e. Controls on system development and modification
f. Operations and data control

15. All of the following are internal controls that could be implemented in an information technology environment except for:
a. Physical access and controls
b. Segregation of duties
c. Compliance with material misstatements

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Solution Preview

Please see attached file.

1. The natural sign of an asset is a:
a. Debit meaning the normal balance
b. Credit
c. Both
d. None

2. Internal Auditors are referred to as independent auditors.
a. True
b. False, no internal means inside (employees of the company)
c. Neither

3. The three categories for standards for auditors as set forth by GAAS are general standards, standards of fieldwork, and standards of examination.
a. True
b. False
c. Maybe so

4. Auditing is a systematic process of obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
a. True - pretty fancy way of stating that the numbers have been checked
b. False
c. No way

5 Audit Risk can be composed of the following components shown in the following formula:
a. AR = Debit + Credit
b. AR = IR - CR - DR
c. AR = IR x CR x DR
d. AR = Credit Risk + Inherent Risk + Control Risk

5. Materiality can be defined as follows:
a. When the inverse relationship of rates ...

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Taxation topics: AMT, deductions, casualty, like kind exchange, depreciation

1. When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes. Answer: True or False

2. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income and $1,538 [$1,000/(1 - .35)] of taxable income yield the same after-tax income. Answer: True or False

3. If Wal-Mart stock decreases in value during the tax year by $4,500, the amount realized is a negative $4,500. Answer: True or False

4. During the current year, Vijay, a self-employed individual, paid the following amounts:
Real estate tax on Kansas residence $3,400
State income tax 1,900
Real estate taxes on land in Costa Rica (held as an investment) 1,100
Gift tax paid on gift to daughter 1,500
State sales taxes 1,950
State occupational license fee 250
Property tax on value of his automobile (used 100% for business) 450

What is the maximum amount Vijay can claim as taxes in itemizing deductions from AGI?
a. $6,450.
b. $6,700.
c. $6,900.
d. $7,150.
e. None of the above.
Answer:

5. Frank's automobile (adjusted basis of $8,000) is used exclusively for business and is damaged in an accident. The fair market value before the accident is $10,000, and the fair market value after is $500. If the insurance recovery is $9,500, what is Frank's adjusted basis in the automobile after the casualty?
a. $0.
b. $1,500.
c. $8,000.
d. ($1,500).
e. None of the above.
Answer:

6. Tony owned the following lots of Orange Corporation stock.

Purchase date No. of shares Basis
October 1, 2005 50 $ 4,500
February 8, 2006 50 5,500
September 5, 2006 100 11,000

On October 12, 2006, 100 shares of stock were sold for $14,000. Tony did not specifically identify the shares of stock sold. What is the recognized gain or loss?
a. $0.
b. $3,000.
c. $3,500.
d. $4,000.
e. None of the above.
Answer:

7. On August 10, 2006, Black, Inc. acquired an office building as a result of a like-kind exchange. Black had given up a factory building that it had owned for 18 months as part of the like-kind exchange. Which of the statements below is correct?
a. The holding period of the office building does not include the holding period of the factory building.
b. The holding period of the factory building starts on August 11, 2006.
c. The holding period of the factory building starts on August 10, 2006.
d. The holding period of the office building includes the holding period of the factory building.
e. None of the above.
Answer:

8. In 2006, Mark has $14,000 short-term capital loss, $6,000 28% gain, and $7,000 5%/15% gain. Which of the statements below is correct?
a. Mark has a $1,000 capital loss deduction.
b. Mark has a $3,000 capital loss deduction.
c. Mark has a $1,000 net capital gain.
d. Mark has a $6,000 net capital gain.
e. Mark has a $14,000 net capital loss.
Answer:

9. Which of the following statements is correct?
a. If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is $2,000.
b. If the tentative AMT is $12,000 and the regular income tax liability is $10,000, the AMT is $12,000.
c. If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is a negative $2,000.
d. If the tentative AMT is $12,000, and the regular income tax liability is $10,000, the AMT is $2,000.
e. None of the above.
Answer:

10. Tom, a calendar year taxpayer, filed his 2001 Federal income tax return on April 1, 2002. In 2006, the IRS audits this return and assesses an income tax deficiency against Tom. On the grounds that the statute of limitations has run, Tom disputes the assessment. Is Tom correct? Why?

11. Lucille, age 39 and single, furnishes more than 50% of the support of her parents, who do not live with her. Lucille practices as a self-employed dietician and has gross income in 2006 of $110,000. Her deductions are as follows: $25,000 business and $7,100 itemized.

a. What is Lucille's taxable income for 2006?

b. Can Lucille qualify for head of household filing status? Explain.

12. Janelle acquires a used seven-year class asset on November 3, 2006, for $40,000. She does not elect to expense any of the asset under § 179 or straight-line cost recovery. She sells the asset on December 4, 2007. This is the only asset she acquires in 2006. Determine Janelle's cost recovery in 2006 and 2007.

13. If a business retains someone to provide services, that person may either be an employee or be self-employed (i.e., independent contractor).

14.Ulma had the following transactions during 2006: a painting held for three years and sold at a gain of $45,000; 100 shares of Gray stock held six months and sold for a loss of $13,000; 50 shares of Yellow stock held 18 months and sold for a gain of $36,000. Ulma also had $344,000 of taxable income from other sources than these property transactions. What is Ulma's net capital gain or loss and what is her taxable income?

15.Arlene, who is single, has taxable income for 2006 of $108,000. Calculate her alternative minimum tax, if any, given the following additional information.

AMT adjustments
Positive $20,000
Negative (25,000)
Tax preferences 45,000

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