Multiple Choice Question
1. The auditor wishes to gather evidence to test the assertion that the client's capitalization of leased equipment assets is properly valued.
Which of the following sources of evidence will the auditor find to be the most persuasive (most reliable and relevant)?
a. Direct observation of the leased equipment.
b. Examination of the lease contract and re-computation of capitalized amount and current amortization.
c. Confirmation of the current purchase price for similar equipment with vendors.
d. Confirmation of the original cost of the equipment with the lessor
2. Which of the following is the least persuasive documentation in support of an auditor's opinion?
a. Schedules of details of physical inventory counts conducted by the client.
b. Notation of inferences drawn from ratios and trends.
c. Notation of appraisers€™ conclusions in the auditor€™s documentation.
d. Lists of confirmations and the nature of responses received from the client€™s customers.
3. An auditor determines that management integrity is high, the risk of account misstatements is low, and the client's internal controls are effective. Which of the following conclusions can be reached regarding the need to perform direct tests of account balances?
a. Direct tests should be limited to material account balances, and the extent of testing should be sufficient to corroborate the auditor's assessment of low risk.
b. Direct tests of account balances are not needed.
c. Direct tests of account balances are necessary if audit risk was set at a low level, but are not necessary if audit risk was set at a high level.
d. Direct tests should be performed on all account balances to independently verify the correctness of the financial statements.
4. A test of inventory for overstatement provides corresponding evidence on:

5. Observation is considered a reliable audit procedure but one that is limited in its usefulness. Which of the following does not represent a limitation of the use of observation as an audit technique?
a. Individuals may act differently when being observed than they do otherwise.
b. It is rarely sufficient to satisfy any assertion other than existence.
c. It can provide an overview of the client€™s processing, but that processing may be different than the client€™s procedures specify.
d. It is difficult to generalize from one observation as to the correctness of processing throughout the period under audit.
6. Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concern about the receivables€™
a. Valuation
b. Classification
c. Existence
d. Completeness
7. An auditor would most likely verify the interest earned on short-term bond investments by:
a. Examining the receipt and deposit of interest checks.
b. Confirming the bond interest rate with the issuer of the bonds.
c. Re-computing the interest earned on the basis of face amount, interest rate, and period held.
d. Re-computing interest according to the face of the bond and adjusting by a bond discount or premium amortization.

8. An auditor observes inventory held by the client and notes that some of the inventory appears to be old, but in good condition. Which of the following conclusions is justified by the audit procedure?
I. The older inventory is obsolete.
II. The inventory is owned by the company.
III. Inventory needs to be reduced to current market value.
a. I only
b. II only
c. I and III only
d. III only
9. Which of the following statements is not true concerning the auditor's documentation?
a. The auditor should document the reasoning process and conclusions reached for significant account balances even if audit tests show no exceptions.
b. Documentation review is facilitated if a standard documentation format is utilized.
c. Audit documents should cross-reference other documents if the other documents contain work that affects the auditor's overall assessment of an account balance contained in the documentation.
d. The client should not prepare documentation schedules for the auditor even if the auditor independently teststhem.

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