Auditing Chapter 5 & 6 – Flashcards

To be effective, analytical procedures performed near the end of the audit should be performed by: A. The partner performing the quality review of the audit. B. A beginning staff accountant who has had no other work related to the engagement. C. A manager or partner who has a comprehensive knowledge of the client's business and industry. D. The CPA firm's quality control manager.

The components of the risk of misstatement are: A. Inherent Risk, Control Risk, Detection Risk B. Inherent Risk, Control Risk C. Inherent Risk D. Control Risk, Detection Risk

Financial statement assertions are established for classes of transactions: A. Account Balances, Disclosures B. Account Balances C. Disclosures D. Neither

Further audit procedures include: A. Risk Assessment Procedures, Test of Controls B. Risk Assessment Procedures C. Test of Controls D. Neither

Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as: A. Appropriate assertions. B. Sufficient assertions. C. Relevant assertions. D. Reliable assertions.

Which of the following is not an assertion relating to classes of transactions? A. Accuracy. B. Sufficiency. C. Cutoff. D. Classification.

Audit documentation should be sufficient to allow which individual to understand the audit work performed, the evidence obtained, and the significant conclusions? A. A certified public accountant. B. A partner in a CPA firm. C. An experienced auditor. D. The controller at the company being audited.

Which of the following is not considered to be an analytical procedure? A. Comparisons of financial statement amounts with source documents. B. Comparisons of financial statement amounts with nonfinancial data. C. Comparisons of financial statement amounts with budgeted amounts. D. Comparisons of financial statement amounts with comparable prior year amounts.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice A. Eliminates the use of certain statistical sampling methods that would otherwise be available. B. Presumes that the auditor will reperform the tests as of the balance sheet date. C. Should be especially considered when there are rapidly changing economic conditions. D. Potentially increases the risk that errors which exist at the balance sheet date will not be detected.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? A. Test of transactions. B. Analytical procedures. C. Test of controls. D. Test of details.

The inspection of a vendor's invoice by the auditors is: A. Direct evidence about occurrence of a transaction. B. Physical evidence about occurrence of a transaction. C. Documentary evidence about occurrence of a transaction. D. Part of the client's accounting system.

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A. 5%. B. 12.5%. C. 42.7%. D. 60%.

Analytical procedures are required at the risk assessment stage and as: A. Tests of internal control. B. Substantive procedures. C. Procedures near the end of the audit. D. Computer generated procedures.

During financial statement audits, auditors seek to restrict which type of risk? A. Control risk. B. Detection risk. C. Inherent risk. D. Account risk.

A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable, but should only be done when cost justified. C. Is acceptable, but only for non-public clients. D. Is acceptable and desirable under all conditions.

Which of the following best describes the problem with the use of published industry averages for analytical procedures? A. Lack of comparability. B. Lack of sufficiency. C. Lack of accuracy. D. Lack of availability.

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence? A. A price for a similar asset obtained from an active market. B. An appraisal obtained discounting future cash flows. C. Management's judgment of the cost to purchase an equivalent asset. D. The historical cost of the asset.

An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: A. Acquisition date of the asset. B. Audit report date. C. Expected replacement date of the asset. D. Measurement date (ordinarily the date of the financial statements).

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? A. The financial statements must often be adjusted for the effects of material related party transactions. B. Material related party transactions must be disclosed in the notes to the financial statements. C. The substance of related party transactions will differ from their form. D. In a related party transaction one party has the ability to exercise significant influence over the other party.

Which of the following is not a basic procedure used in an audit? A. Risk assessment procedures. B. Substantive procedures. C. Tests of controls. D. Tests of direct evidence.

Which of the following is not a financial statement assertion relating to account balances? A. Completeness. B. Existence. C. Rights and obligations. D. Recorded value and discounts.

Which of the following is generally true about the sufficiency of audit evidence? A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement. B. The amount of evidence concerning a particular account varies inversely with the materiality of the account. C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account. D. When evidence is appropriate with respect to an account it is also sufficient.

Which of the following is true about analytical procedures? A. Performing analytical procedures results in the most reliable form of evidence. B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control. C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation. B. Observation. C. Reviewing subsequent events or transactions. D. Analyzing corporate organizational structure.

An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as: Vertical analysis. Horizontal analysis. Cross-sectional analysis. Comparison analysis.

An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as: Vertical analysis. Horizontal analysis. Cross-sectional analysis. Comparison analysis.

An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as: Vertical analysis. Horizontal analysis. Cross-sectional analysis. Comparison analysis.

Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? Confirmation of amounts. Review of management's process of development. Independent development of an estimate. Review of subsequent events.

The audit time budget is an example of: A supporting schedule. An administrative working paper. A lead schedule. A corroborative working paper.

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: Supporting schedule. Lead schedule. Corroborating schedule. Reconciling schedule.

Which of the following is not a function of working papers? Provide support for the auditors' report. Provide support for the accounting records. Aid partners in planning and conducting future audits. Document staff compliance with generally accepted auditing standards.

A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a: Working trial balance. Lead schedule. Summarizing schedule. Supporting schedule.

The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the: Vouching of all data supporting various ratios. Investigation of significant variations and unusual relationships. Comparison of client-computed statistics with industry data on a quarterly and full-year basis. Recalculation of industry date.

The auditors must obtain written client representations that normally should be signed by: The president and the chairperson of the board. The treasurer and the internal auditor. The chief executive officer and the chief financial officer. The corporate counsel and the audit committee chairperson.

Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? The audit time budget. The auditors' judgment. Generally accepted accounting quality standards. The auditors' working papers.

Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by: Performing substantive procedures. Performing tests of controls. Assessing control risk. Obtaining a client representation letter.

An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of: Management fraud. Related party transactions. Window dressing. Weak internal control.

Which of the following would not necessarily be considered a related party transaction? Payment of a bonus to the president. Purchases from another corporation that is controlled by the corporation's chief stockholder. Loan from the corporation to a major stockholder. Sale of land to the corporation by the spouse of a director.

The date of the management representation letter should coincide with the: Date of the auditor's report. Balance sheet date. Date of the latest subsequent event referred to in the notes to the financial statements. Date of the engagement agreement.

An example of an analytical procedure is the comparison of: Financial information with similar information regarding the industry in which the entity operates. Recorded amounts of major disbursements with appropriate invoices. Results of a statistical sample with the expected characteristics of the actual population. EDP generated data with similar data generated by a manual accounting system.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations: A. Complement, but do not replace, substantive procedures designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with a moderate assessed level of control risk. C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control risk. D. Replace the assessed level of control risk as evidence to support the assertions.

Which of the following expressions is least likely to be included in a client's representation letter? No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. Management acknowledges responsibility for illegal actions committed by employees. Management has made available all financial statements, including notes.

Which of the following statements is generally correct about audit evidence? The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. To be appropriate, audit evidence must be sufficient. Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on financial statements. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

Which of the following statements relating to audit evidence is the most accurate statement? Audit evidence gathered by an auditor from outside an enterprise is reliable. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. Oral representations made by management are not valid evidence. The auditor must obtain sufficient appropriate audit evidence.

Which of the following is not a typical analytical procedure? Study of relationships of the financial information with relevant nonfinancial information. Comparison of the financial information with similar information regarding the industry in which the entity operates. Comparison of recorded amounts of major disbursements with appropriate invoices. Comparison of the financial information with budgeted amounts.

Which of the following is not a primary purpose of audit working papers? To coordinate the examination. To assist in preparation of the audit report. To support the financial statements. To provide evidence of the audit work performed.

Concerning retention of working papers, the Sarbanes-Oxley Act: Has no provisions. Requires permanent retention. Requires retention for at least 7 years. Requires retention for a period of 4 or less years.

During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be: A client-owned record of conclusions reached by the auditors who performed the engagement. Evidence supporting financial statements. Support for the auditors' representations as to compliance with generally accepted auditing standards. A record to be used as a basis for the following year's engagement.

Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the: Copies of those client records examined by the auditor during the course of the engagement. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. Auditor's comments concerning the efficiency and competence of client management personnel. Auditing procedures followed and the testing performed in obtaining audit evidence.

The permanent file section of the working papers that is kept for each audit client most likely contains: Review notes pertaining to questions and comments regarding the audit work performed. A schedule of time spent on the engagement by each individual auditor. Correspondence with the client's legal counsel concerning pending litigation. Narrative descriptions of the client's accounting procedures and controls.

Working papers that record the procedures used by the auditor to gather evidence should be: Considered the primary support for the financial statements being examined. Viewed as the connecting link between the books of account and the financial statements. Designed to meet the circumstances of the particular engagement. Destroyed when the audited entity ceases to be a client.

In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit? The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers. The working papers are the property of the client after the client pays the fee. The working papers must be retained by the CPA firm for a period of ten years.

Confirmation would be most effective in addressing the existence assertion for the: Addition of a milling machine to a machine shop. Payment of payroll during regular course of business. Inventory held on consignment. Granting of a patent for a special process developed by the organization.

Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin. A. I only. B. II only. C. II and III only. D. I, II and III.

Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations? A. Sales per store are directly related to the size of the store. B. Sale clerks are less productive in larger size stores. C. Gross margin is directly related to the size of the store. D. Average square feet of store correlates with the number of stores in the district.

Which of the following statements is not correct regarding the auditor's further analysis? A. The Mid-Central Region has fewer average full-time equivalent employees per store than the other regions per store. B. The other regions all generate higher sales per square foot than the Mid-Central Region. C. The Mid-Central Region has the highest average wages per full-time equivalent employee. D. The largest contributor to total corporate profits is the Southwest Region.

Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place (e.g., the trend to more casual shoes). A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion? A. Take a sample of receiving documents at stores and trace to purchase orders to determine the length of time between the purchase and delivery of the goods. B. Interview store managers in the Mid-Central Region to determine their attitude toward centralized purchasing. C. Perform an inventory count at selected stores in the Mid-Central Region and determine if adjustments are needed to the perpetual records. D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.

What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances? A. Estimation. B. Nonroutine. C. Qualified. D. Routine.

Assertions with high inherent risk are least likely to involve: A. Complex calculations. B. Difficult accounting issues. C. Routine transactions. D. Significant judgment by management.

The date on which no information may be deleted from audit documentation is the A. Client's year-end. B. Documentation completion date. C. Last date of significant fieldwork. D. All of these are incorrect in that no information may ever be deleted from audit documentation.

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are A. Prepared in a satisfactory control environment. B. Consistent with industry guidelines. C. Based on verifiable objective assumptions. D. Reasonable in the circumstances.

In obtaining sufficient appropriate audit evidence, the work of which type or types of specialists may be relied upon? A. Client Engaged, Auditor Engaged B. Client Engaged C. Auditor Engaged D. Neither

Which of the following is most likely to be considered an analytical procedure? A. Testing purchases at year-end to determine they were recorded in the proper period. B. Comparing inventory balances to recent sales activities. C. Selecting a sample of year-end receivables for confirmation. D. Reconciling physical counts of inventory to perpetual records.

An unexpected economic downturn is likely to have which effect on inventory turnover. A. Increase. B. Decrease. C. No effect. D. Each of these replies is equally likely.

Which of the following is most consistent with an increase in the ratio of debt to equity? A. Payment of a required principal payment on long-term debt. B. Repurchase of a portion of the company's outstanding common stock. C. Higher than expected profits due to a decrease in cost of goods sold. D. Payment of most accounts receivable immediately prior to year-end using a portion of the company's cash.

Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will: A. Decrease recorded net income. B. Decrease the current ratio. C. Increase days of sales in accounts receivable. D. Increase year-end recorded inventory.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? A. The prospective client has fired its prior auditor. B. The CPA lacks a thorough understanding of the prospective client's operations and industry. C. The CPA is unable to review the predecessor auditor's working papers due to a major fire that destroyed both hard and soft copy documentation. D. The prospective client is unwilling to make financial records available to the CPA.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Large amounts of liquid assets that are easily convertible into cash. B. Low growth and profitability as compared to other entity's in the same industry. C. Financial management's participation in the initial selection of accounting principles. D. An overly complex organizational structure involving unusual lines of authority.

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A. Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. B. Management's disregard for internal control. C. The existence of related party transactions. D. Management's attempt to meet earnings per share growth rate goals.

Which of the following matters is generally included in an auditor's engagement letter? A. Limitations of the engagement. B. Factors to be considered in establishing preliminary judgments about materiality. C. Management's liability for all illegal acts committed by its employees. D. The auditor's responsibility to obtain negative assurance relating to non-compliance with laws and regulations.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Inability to generate positive cash flows from operations, while reporting large increases in earnings. B. Management's lack of interest in increasing the dividend paid on common stock. C. Large amounts of liquid assets that are easily convertible into cash. D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

To best test existence, an auditor would sample from the: A. General ledger to source documents. B. General ledger to the financial statements. C. Source documents to the general ledger. D. Source documents to journals.

The auditors' understanding established with a client should be established through a(an): A. Oral communication with the client. B. Written communication with the client. C. Written or oral communication with the client. D. Completely detailed audit plan.

Which of the following would be least likely to be considered an audit planning procedure? A. Use an engagement letter. B. Develop the overall audit strategy. C. Perform the risk assessment. D. Develop the audit plan.

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and: A. Assess the risk of misstatements due to illegal acts. B. Consider the complexity of the transactions involved. C. Consider the likelihood that the risks could result in material misstatements. D. Determine materiality levels.

Which of the following is correct concerning requirements about auditor communications about fraud? A. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. B. All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

A predecessor auditor will ordinarily initiate communication with the successor auditor: A. Prior to the Successor's Acceptance of the Engagement, Subsequent to the Successor's Acceptance of the Engagement B. Prior to the Successor's Acceptance of the Engagement C. Subsequent to the Successor's Acceptance of the Engagement D. Neither

Which measure of materiality (or both) considers quantitative considerations? A. Planning, Evaluation B. Planning C. Evaluation D. Neither

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted? A. There are significant related party transactions that management claims occurred in the ordinary course of business. B. Internal control activities requiring the segregation of duties are subject to management override. C. Management continues to employ an inefficient system of information technology to record financial transactions. D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor? A. Decreases in accounts payable. B. Decreases in accounts receivable. C. Negative cash flows from investing. D. Negative operating cash flows.

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: A. Errors, Misappropriation of Assets B. Errors C. Misappropriation of Assets D. Neither

Which of the following is not one of the assertions made by management about an account balance? A. Relevance. B. Existence. C. Valuation. D. Rights and obligations.

When a company has changed auditors, according to the Professional Standards: A. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. B. The predecessor must always respond fully to all inquiries made by the successor auditor. C. The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. D. The successor may choose not to attempt any communication with the predecessor auditor.

Which of the following procedures is not performed as a part of planning an audit engagement? A. Reviewing the working papers of the prior year. B. Developing an overall audit strategy. C. Confirmation of all major accounts. D. Designing an audit plan.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

Which of the following is least likely to be considered a financial statement audit risk factor? A. Management operating and financing decisions are dominated by top management. B. A new client with no prior audit history. C. Rate of change in the entity's industry is rapid. D. Profitability of the entity relative to its industry is inconsistent.

Which of the following is an example of fraudulent financial reporting? A. Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. B. An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. C. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. D. An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? A. Low turnover of senior management. B. Extreme degree of competition within the industry. C. Capital structure including various operating subsidiaries. D. Sales goals in excess of any of the preceding three years.

Which of the following conditions identified during the audit increases the risk of employee fraud? A. Large amounts of cash in the bank. B. Existence of a mandatory vacation policy for employees performing key functions. C. Inventory items of small size, but high value. D. Presence of reconciling items on a client prepared year-end proof of cash.

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit? A. Factors whose presence indicates that fraud exists. B. Factors whose presence often have been observed in circumstances where frauds have occurred. C. Factors whose presence will require modification to planned audit procedures. D. Factors obtained during the audit which lead to required communications with the audit committee.

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist? A. Apply increased professional skepticism about material transactions. B. Increase the assessed level of detection risk. C. Assign personnel with particular skill to areas of high risk. D. Obtain increased evidence about the appropriateness of management's selection of accounting principles.

Which of the following is least likely to be required on an audit? A. Evaluate the business rationale for significant, unusual transactions. B. Make a legal determination of whether fraud has occurred. C. Review accounting estimates for biases. D. Test appropriateness of journal entries and adjustments.

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? A. Substantive Test of Details, Substantive Analytical Procedures B. Substantive Test of Details C. Substantive Analytical Procedures D. Neither

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

A successor auditor is required to attempt communication with the predecessor auditor prior to: A. Performing test of controls. B. Testing beginning balances for the current year. C. Making a proposal for the audit engagement. D. Accepting the engagement.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts? A. Purchase returns and allowances. B. Allowance for doubtful accounts. C. Common stock. D. Noncontrolling interest of a subsidiary purchased during the year.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

Which of the following statements is correct regarding the auditor's determination of materiality? A. The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. C. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. D. The amount used for the planning should equal that used for evaluation.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is: A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements. B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements. C. The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet. D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

Which of the following topics is not normally included in an engagement letter? A. The auditors' preliminary assessment of internal control. B. The auditors' estimate of the fee for the engagement. C. Limitations on the scope of the engagement. D. A description of responsibility for the detection of fraud.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? A. Only use certified public accountants on the engagement. B. Place increased emphasis on the audit of objective transactions rather than subjective transactions. C. Supervise members of the audit team less closely and rely more upon judgment. D. Use less predictable audit procedures.

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance? A. Completeness. B. Rights and obligations. C. Legality. D. Valuation.

Tests for unrecorded assets typically involve tracing from: Source documents to recorded journal entries. Source documents to observations. Recorded journal entries to documents. Recorded journal entries to observations.

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries? Completeness. Existence. Rights. Valuation.

Determining that receivables are presented at net realizable value is most directly related to which management assertion? Existence. Rights. Valuation. Presentation and disclosure.

Which of the following is not a general objective for the audit of asset accounts? Establishing existence of assets. Establishing proper valuation of assets. Establishing proper liabilities relating to assets. Establishing the completeness of assets.

Which of the following is not used by auditors to establish the completeness of recorded assets? Assessing control risk. Tracing from source documents to entries in the accounting records. Performing analytical procedures. Vouching transactions.

To test for unsupported entries in the journals, the direction of audit testing should be to the: Ledger entries. Journal entries. Original source documents. Financial statements.

A form filed with the SEC when a company changes auditors is a: Form 8-K. Form 10-K. Form S-1. Form B-1.

Which of the following is least likely to render a quantitatively small misstatement material? Affects the registrant's compliance with regulatory requirements. Masks a change in earnings or other trends. Arises from an item not capable of precise measurement. The transaction involves a related party.

Which of the following is not a required source of information for the auditors' assessment of fraud risk? Discussion among audit team members. Fraud risk factors. Results of tests of controls. Inquiry of management and others.

Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control? Reviewing accounting estimates for biases. Examining physical controls over assets. Evaluating the business rationale for significant unusual transactions. Examining journal entries and other adjustments for evidence of fraud.

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in: A memorandum to be placed in the permanent section of the auditing working papers. An engagement letter. A client representation letter. A confirmation letter attached to the constructive services letter.

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered? Client manuals of accounts and charts of accounts. AICPA Industry Audit Guides. Prior-year working papers of the predecessor auditors. Latest annual and interim financial statements issued by the client.

The auditors will not ordinarily initiate discussion with the audit committee concerning the: Extent to which the work of internal auditors will influence the scope of the examination. Extent to which change in the company's organization will influence the scope of the examination. Details of potential problems which the auditors believe might cause a qualified opinion. Details of the procedures which the auditors intend to apply.

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client? The successor auditors have no responsibility to contact the predecessor auditors. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.

Which of the following situations would most likely require special audit planning by the auditors? Some items of factory and office equipment do not bear identification numbers. Depreciation methods used on the client's tax return differ from those used on the books. Assets costing less than $500 are expensed even though the expected life exceeds one year. Inventory is comprised of precious stones.

When planning an audit, an auditor should: Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. Make preliminary judgments about materiality levels for audit purposes. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. Prepare a preliminary draft of the management representation letter.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should: Engage financial experts familiar with the nature of the business entity. Obtain a knowledge of matters that relate to the nature of the entity's business. Refer a substantial portion of the audit to another CPA who will act as the principal auditor. First inform management that an unqualified opinion cannot be issued.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true? An engagement should not be accepted after the fiscal year-end. An inventory count must be observed at the balance sheet date. The client's audit committee should not be told of any specific audit procedures which will be performed. It is an acceptable practice to carry out parts of the examination at interim dates.

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: Adequacy of the preplanned audit plan. Ability to establish consistency in application of accounting principles between years. Apparent scope limitation. Integrity of management.

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: Substantive procedures. Tests of controls. Internal control. Statistical analysis.

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 risk assessment phase of the audit by the use of: Tests of transactions and balances. An assessment of internal control. An audit time budget. Analytical procedures.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: Awareness of the consistency in the application of generally accepted accounting principles between accounting periods. Evaluation of all matters of continuing accounting significance. Opinion of any subsequent events occurring since the predecessor's audit report was issued. Understanding as to the reasons for the change of auditors.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? Are all financial reporting operations at one location? Does it have knowledge of fraud or suspect fraud? Does it have programs to mitigate fraud risks? Has it reported to the audit committee the nature of the company's internal control?

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of: Accuracy. Completeness. Control. Existence.

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: A. Inventive, Opportunity B. Incentive C. Opportunity D. Neither

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality? A material amount would significantly alter the "total mix" of information made available to an investor. Materiality cannot be used as a basis for interpreting federal securities laws. A material amount is that at which an individual's decision would be changed. Materiality is composed of quantitative and not qualitative aspects.

Which of the following is correct concerning the PCAOB's concept of a significant account? It is the same as a relevant assertion. The auditor need only consider significant accounts when controls do not operate effectively. In deciding whether an account is a significant account one does not consider the effect of internal control. It is an account for which qualitative materiality considerations are particularly important.