Question

Which overview defines audit strategy?

A. The determination of the amount of time to spend testing the client’s internal controls and conducting detailed testing of transactions and account balances.

B. Gaining an understanding of the client, including identifying risk factors.

C. Performing tests of controls and detailed substantive testing of transactions and accounts.

D. Evaluation of results of the detailed testing in light of the auditor’s understanding of the client and forming an opinion on the fair presentation of the client’s financial statements.

A comparison of account balances to a single line item, such as total assets, is termed ________.

A. common-size analysis

B. trend analysis

C. substantive procedures

An auditor is always particularly concerned with a metric that measures how long it takes the client firm to purchase inventory, sell the inventory, and collect the associated receivable. This metric is commonly referred to as _________.

A. the gross operating cycle

B. the financing cycle

C. the investing cycle

D. the inventory cycle

Which of the following indicates the ability of a company to generate income from its average investment in total assets?

A. Return on assets

B. Return of stockholders’ equity

C. Gross profit margin

D. Profit margin

Inherent risk related to closing procedures would generally be increased when _______.

A. a client is found to have strong closing procedures, and sound internal control practices relating to closing

B. no errors and omissions are located when auditing the closing process

C. staff assigned to deal with closing procedures are relatively inexperienced

D. the closing process is relatively straightforward

An indicator that the auditor might need to adopt extended audit procedures would be best evidenced by __________.

A. an unusual fluctuation in gross profit margin last year

B. net sales is increasing approximately 3% per year

C. a new competitor has entered the client’s industry

D. the client’s current ratio has decreased slightly

Answer 1

1.Audit Strategy is the determination of the amount of time to spend testing the client’s internal controls and conducting detailed testing of transactions and account balances. Hence Option A is incorrect.

2. A comparison of account balances to a single line item, such as total assets, is termed as Common sized statement. hence option A is correct.

3. Gross operating cycle is the period between acquisition of inventory to its final disposal and realsiation of money. Hence option A is correct.

4. Return on Assets is the ability of a company to generate income from its average investment in total assets. Hence Option A is correct.

5. Inherent risk related to closing procedures would generally be increased when staff assigned to deal with closing procedures are relatively inexperienced. Hence Option C is correct.

6. Extended audit procedures are useful when the actual risk is greater than the anticipated risk. So in the given problem Unusual variation in the gross profit seems to be something to worry about. Hence option A is correct.