Auditing Flashcards, test questions and answers
Discover flashcards, test exam answers, and assignments to help you learn more about Auditing and other subjects. Don’t miss the chance to use them for more effective college education. Use our database of questions and answers on Auditing and get quick solutions for your test.
We've found 5 Auditing tests
Accounting
Auditing
Public Accounting Firm
Chapter 5 Auditing – Flashcards 28 terms
28 terms
Preview
Chapter 5 Auditing – Flashcards
question
5.33 The most important fundamental component of an entity's internal control is A. Effectiveness and efficiency of operations. B. People who operate the control system. C. Reliability of financial reporting. D. Compliance with applicable laws and regulations.
answer
question
5.34 The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to A. Provide a basis for making constructive suggestions in a management letter. B. Determine the nature, timing, and extent of further audit tests to be performed. C. Provide the rationale for the inherent risk assessment at the financial statement assertion level. D. Provide information for a communication of internal control-related matters to management.
answer
question
5.35 Effectiveness of audit procedures would be reduced by A. Selecting larger sample sizes for audit. B. Performing audit procedures at the fiscal year-end date as opposed to the interim period. C. Deciding to obtain external evidence instead of internal evidence. D. Performing procedures during the interim period as opposed to at the fiscal year-end date.
answer
question
5.36 According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to A. Determine whether the company's controls are processing company data effectively. B. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. C. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company. D. None of the above.
answer
question
5.37 To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: A. Inquiry of client personnel. B. Observation of company operations. C. Confirmation of balances. D. Inspection of documentation.
answer
question
5.38 Which of the following is a preventive control? A. Reconciliation of a bank account. B. Recalculation of a sample of payroll entries by internal auditors. C. Separation of duties between the payroll and personnel departments. D. Detailed fluctuation analysis completed by the CFO for revenue.
answer
question
5.39 In most audits of large entities, control risk assessment contributes to audit efficiency, which means that A. The cost of substantive procedures will exceed the cost of control evaluation work. B. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. C. The cost of control evaluation work will exceed the cost of substantive procedures. D. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls.
answer
question
5.40 Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? A. A narrative memorandum describing the control system. B. An internal control questionnaire. C. A flowchart of the documents and procedures used by the company. D. All of the above.
answer
question
5.41 Tests of controls in a GAAS audit are required for A. Obtaining evidence about the financial statement assertions. B. Accomplishing control over the occurrence of recorded transactions. C. Applying analytical procedures to financial statement balances. D. Obtaining evidence about the operating effectiveness of client control activities.
answer
question
5.42 A transaction-level internal control activity is best described as A. An action taken by auditors to obtain evidence. B. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. C. A method for recording, summarizing, and reporting financial information. D. The functioning of the board of directors in support of its audit committee.
answer
question
5.43 When planning the audit of internal controls for an issuer, the audit team should A. Identify significant accounts, locations, and assertions. B. Conduct a walkthrough of the internal control process. C. Make inquiries of employees regarding the existence of control activities. D. Reperform control activities performed by client employees to determine their effectiveness.
answer
question
5.44 A material weakness is a situation in which A. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. B. There is a remote likelihood that a material misstatement would be detected on a timely basis. C. It is reasonably possible that a material misstatement would not be detected on a timely basis. D. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.
answer
question
5.45 When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: A. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. B. Whether the account has a history of errors. C. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. D. Both a and c are correct. E. All of the above are correct.
answer
question
5.46 Which of the following does not accurately summarize auditors' requirements regarding internal control? A. Understanding: public entity? Yes; nonpublic entity? Yes B. Documenting: public entity? Yes; nonpublic entity? Yes C. Evaluating control risk: public entity? Yes; nonpublic entity? Yes D. Test Controls: public entity? Yes; nonpublic entity? Yes
answer
question
5.47 When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over A. Operations. B. Compliance with regulations. C. Financial reporting. D. All of the above.
answer
question
5.48 When completing the audit of internal controls for a public company, AS 5 requires auditors to report on A. Management's Report on Internal Control (MROIC): no An Audit of Internal Control (AAOIC): no B. MROIC: yes AAOIC: no C. MROIC: no AAOIC: yes D. MROIC: yes AAOIC: yes
answer
question
5.49 When completing the audit of internal controls for a public company, AS 5 requires auditors to test A. Operating effectiveness only. B. Design effectiveness only. C. Both operating and design effectiveness. D. Neither operating nor design effectiveness
answer
question
5.50 Which of the following would probably not be considered an indication of a material weakness? A. Evidence of a material misstatement. B. Ineffective oversight by the audit committee. C. Immaterial fraud committed by senior management. D. Overproduction by the manufacturing plant.
answer
question
5.51 Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? A. Unqualified—no material weaknesses found. B. Disclaimer of opinion—unable to perform all necessary procedures. C. Disclaimer of opinion—significant deficiencies exist. D. Adverse—material weaknesses exist.
answer
question
5.52 The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the A. Authorization of transactions from the custody of related assets. B. Operational responsibility from the record-keeping responsibility. C. Human resources function from the controllership function. D. Administrative controls from the internal accounting controls.
answer
question
5.53 Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? A. The report will be dated as of the date of the financial statements. B. The report will express an opinion on the effectiveness of internal control over financial reporting. C. The auditor will issue an adverse opinion if one or more material weaknesses exist. D. The report may be presented with the report on the entity's financial statements as a combined report.
answer
question
5.54 If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? A. Unqualified opinion or adverse opinion. B. Qualified opinion or adverse opinion. C. Unqualified opinion or disclaimer of opinion. D. Disclaimer of opinion.
answer
question
5.55 Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? A. The fact that the auditors conducted an audit of the entity's financial statements. B. The definition of a material weakness in internal control over financial reporting. C. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. D. A reference to the auditors' report and opinion on the entity's financial statements.
answer
question
5.56 If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must A. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. B. Assess control risk at less than the maximum for all relevant assertions. C. Perform only substantive procedures. D. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.
answer
question
5.57 When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include A. Inquiry of appropriate personnel. B. Reading over the company's code of conduct. C. Reperformance of the control activity. D. Both a and c are correct.
answer
question
5.58 Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: A. The frequency of the performance of the control by the company during the period being audited. B. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. C. The expected rate of deviation for a control activity. D. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.
answer
question
5.59 The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including A. The auditor's testing of controls for the audit of internal control on a public company. B. Misstatements detected during the financial statement audit. C. Any control deficiencies identified during the audit. D. All of the above.
answer
question
5.60 Once the auditor detects a control deficiency, which of the following steps must he or she take first? A. Perform tests of other controls related to the same assertion as the control deemed ineffective. B. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. C. Modify the planned substantive procedures as a result of the deficiency. D. Test the deficient control, assuming a maximum level of risk.
answer
Accounting
Auditing
Balance
Fraudulent Financial Reporting
Income Before Taxes
Management
Supreme Court
Managerial Accounting Exam 1 Test Answers – Flashcards 123 terms
123 terms
Preview
Managerial Accounting Exam 1 Test Answers – Flashcards
question
Audit Committee
answer
a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process
question
Board of Directors
answer
The body selected by shareholders to oversee the company
question
Budget
answer
Quantitative expression of a plan that helps managers coordinate and implement the plan
question
Certified Management Accountant (CMA)
answer
a professional certification issued by the IMA to designate expertise in the areas of managerial accounting, economics, and business finance.
question
Chief Executive Officer (CEO)
answer
hired by the board of directors to oversee the company on a daily basis
question
Chief Financial Officer (CFO)
answer
responsible for all the company's financial concerns
question
Chief Operating Officer (COO)
answer
responsible for overseeing the company's operations
question
Controller
answer
responsible for general financial accounting, managerial accounting, and tax reporting
question
Controlling
answer
evaluating the results of business operations against the plan and making adjustments to keep the company pressing towards its goals
question
Cost-Benefit Analysis
answer
Weighing costs against benefits to help make decisions
question
Cross-Functional Teams
answer
corporate teams whose members represent various functions of the organization, such as R&D, design, production, marketing, distribution, and customer service.
question
Decision Making
answer
identifying possible courses of action and choosing among them
question
Directing
answer
running the company on a day to day basis
question
Enterprise Resource Planning (ERP)
answer
software integrates the departments and functions across an organization.
question
Extensible Business Reporting Language (XBRL)
answer
data tagging system that enables companies to release financial and business information in a format that can be quickly, efficiently, and cost-effectively accessed, sorted, and analyzed over the internet
question
International Financial Reporting Standards (IFRS)
answer
SEC has recently moved to adopt IFRS for all publicly traded companies within the next few years. In many instances, IFRS vary from GAAP.
question
Institute of Management Accountants (IMA)
answer
professional organization that promotes the advancement of the management accounting profession.
question
Internal Audit Function
answer
corporate function charged with assessing the effectiveness of the company's internal controls and risk management policies.
question
ISO 9001:2008
answer
quality related certification issued by the International Organization for Standardization (ISO) Firms may become ISO 9001:2008 certified by complying with the quality management standards set forth by the ISO and undergoing extensive audits of their quality management processes.
question
Just-in-time (JIT)
answer
A process that redefines and simplifies manufacturing by reducing inventory levels and delivering raw materials at the precise time they are needed on the production line
question
Lean Production
answer
An approach to production that emphasizes the elimination of waste in all aspects of production processes
question
Planning
answer
setting goals and objectives for the company and deciding how to achieve them
question
Sarbanes-Oxley Act of 2002 (SOX)
answer
law that requires companies to maintain adequate systems of internal control
question
Supply-Chain Management
answer
Involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability
question
Sustainability
answer
the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs
question
Throughput Time
answer
the time between buying raw materials and selling finished products
question
Treasurer
answer
responsible for raising the firm's capital and investing funds
question
Total Quality Management (TQM)
answer
Managing the entire organization so that it excels on all dimensions of products and services that are important to the customer.
question
Allocate
answer
to assign an indirect cost to a cost object
question
Assign
answer
to attach a cost to a cost object
question
Average cost
answer
total cost divided by the number of units
question
controllable costs
answer
costs that can be influenced or changed my management
question
conversion costs
answer
the combination of direct labor and manufacturing overhead costs
question
cost object
answer
anything for which managers want a separate measurement of costs
question
cost of goods manufactured
answer
the cost of manufacturing the goods that were finished during the period
question
customer service
answer
support provided for customers after the sale
question
design
answer
detailed engineering of products and services and the processes for producing them
question
differential cost
answer
the difference in cost between two alternative courses of action
question
direct cost
answer
a cost that can be traced to a cost object
question
direct labor
answer
the cost of compensating employees who physically convert raw materials into the company's products; directly traceable to the finished product
question
direct materials
answer
primary raw materials that become a physical part of a finished product and whose costs are traceable to the finished product
question
distribution
answer
delivery of products or services to customers
question
finished goods inventory
answer
completed goods that have not yet been sold
question
fixed costs
answer
costs that stay constant in total despite wide changes in volume
question
indirect costs
answer
a cost that relates to the cost object but cannot be traced to it
question
indirect labor
answer
labor costs that are difficult to trace to specific products
question
indirect materials
answer
materials whose costs are difficult to trace to specific products
question
inventoriable product costs
answer
all costs of a product that GAAP requires companies to treat as an asset for external financial reporting. these costs re not expensed until the product is sold
question
manufacturing company
answer
a company that uses labor, plant, and equipment to convert raw materials into new finished products
question
manufacturing overhead
answer
all manufacturing costs other than direct materials and direct labor; also called factory overhead and indirect manufacturing cost
question
marginal cost
answer
the cost of producing one more unit
question
marketing
answer
promotion and advertising of products or services
question
merchandising company
answer
a company that resells tangible products previously bought from suppliers
question
other indirect manufacturing costs
answer
all manufacturing overhead costs aside from indirect materials and indirect labor
question
period costs
answer
costs that are expensed in the period in which they are incurred
question
prime costs
answer
the combination of direct material and direct labor costs
question
production or purchases
answer
resources used to produce a product or service, or to purchase finished merchandise intended for sale
question
raw materials inventory
answer
all raw materials not yet used in manufacturing
question
research and development
answer
researching and developing new or improved products or service or the processes for producing them
question
retailer
answer
merchandising company that sells to consumers
question
service company
answer
a company that sells intangible services rather than tangible products
question
sunk cost
answer
a cost that has already been incurred
question
total costs
answer
the cost of all resources used throughout the value chain
question
trace
answer
to assign direct cost to a cost object
question
uncontrollable costs
answer
costs that cannot be changed or influenced in the short run by management
question
value chain
answer
the activities that add value to a firm's products and services; includes R&D, design, production or purchases, marketing, distribution, and customer service
question
variable costs
answer
costs that change in total in direct proportion to changes in volume
question
wholesaler
answer
merchandising companies that buy in bulk from manufacturers, mark up the prices, and then sell those products to retailers
question
work in process inventory
answer
goods that are partway through the manufacturing process but not yet complete
question
bill of materials
answer
a list of all the raw materials needed to manufacture a job
question
billing rate
answer
the labor rate charged to the customer, which includes both cost and profit components
question
cost driver
answer
the primary factor that causes a cost
question
cost-plus pricing
answer
a pricing approach in which the company adds a desired level of profit to the products cost
question
job cost record
answer
a written or electronic document the lists the direct materials, direct labor, and manufacturing overhead costs assigned to each individual job
question
job costing
answer
a system for assigning costs to products or services that differ in the amount of materials, labor, and overhead required. Typically used by manufacturers that produce unique, or custom-ordered products in small batches; also used by professional service firms
question
invoice
answer
bill from a supplier
question
labor time record
answer
a written or electronic document that identifies the employee, the amount of time spent on a particular job, and the labor cost charged to a job
question
materials requisition
answer
a written or electronic document that requests specific materials be transferred from the raw materials inventory storeroom to the production floor
question
overallocated manufacturing overhead
answer
the amount of manufacturing overhead allocated to jobs is more than the amount of manufacturing overhead costs actually incurred; results in jobs being overcosted
question
pick
answer
storeroom workers remove items from raw materials inventory that are needed by production
question
predetermined manufacturing overhead rate
answer
the rate used to allocate manufacturing overhead to individual jobs; calculated as total manufacturing overhead costs divided by total estimated amount of allocation base
question
process costing
answer
a system for assigning costs to a large numbers of identical units that typically pass through a series of uniform production steps. Costs are averaged over the units produced such that each unit bears the same unit cost
question
production schedule
answer
a written or electronic document indicting the quantity and types of inventory that will be manufactured during a specific time frame
question
purchase order
answer
a written or electronic document authorizing the purchase of specific raw materials from a specific supplier
question
raw materials record
answer
a written or electronic document listing the number and cost of all units used and received, and the balance currently in stock; a separate record is maintained for each type of raw material kept in stock
question
receiving report
answer
a written or electronic document listing the quantity and type of raw materials received in an incoming shipment; the report is typically a duplicate of the purchase order without the quantity prelisted on the form
question
stock inventory
answer
products normally kept on hand in order to quickly fill customer orders
question
subsidiary ledger
answer
supporting detail for a general ledger account
question
underallocated manufacturing overhead
answer
the amount of manufacturing overhead allocated to jobs is less than the amount of manufacturing overhead costs actually incurred; this results in jobs being undercosted
question
activity-based costing (ABC)
answer
focuses on activities as the fundamental cost objects. the costs of those activities become building blocks for compiling the indirect costs or products, services, and customers
question
activity-based management (ABM)
answer
using activity-based cost information to make decision that increase profits while satisfying customers' needs
question
appraisal costs
answer
costs incurred to detect poor-quality goods or services
question
batch-level activities
answer
activities and costs incurred for every batch, regardless of the number of units in the batch
question
cost distortion
answer
overcosting some products while undercosting others
question
cost of quality report
answer
a report that lists the costs incurred by the company related to quality
question
departmental overhead rates
answer
separate manufacturing overhead rates established for each department
question
external failure costs
answer
costs incurred after defective product is delivered
question
facility-level activities
answer
Activities and costs incurred no matter how many units, batches, or products are produced in the plant
question
internal failure costs
answer
costs incurred to avoid poor quality goods or services before delivery to customers
question
lean production
answer
a philosophy and business strategy of manufacturing without waste
question
non-value-added activities
answer
activities that neither enhance the customer's image of the product or service nor provide a competitive advantage; also known as waste activities
question
plantwide overhead rate
answer
when overhead is allocated to every product using the same manufacturing overhead rate
question
prevention costs
answer
costs incurred to avoid poor-quality goods or services
question
product-level activities
answer
activities and costs incurred for a particular product, regardless of the number of units or batches of the product produced
question
unit-level activities
answer
activities and costs incurred for every unit produced
question
value engineering
answer
eliminating waste in the system by making the company's processes as effective and efficient as possible
question
value-added activities
answer
activities for which the customer is willing to pay because these activities add value to the final product of service
question
Professional Ethics
answer
Competence, Confidentiality, Integrity, and Credibility
question
Competence
answer
Competent knowledge and skills, perform duties lawfully, provide support info that is clear, concise, accutate, convey professional limitations that would hinder activity or productivity.
question
Confidentiality
answer
Keep info confidential, Inform all relevant parties regarding use of confidential information, do not use confidential information for unethical or illegal advantages.
question
Credibility
answer
Commicate information fairly and objectively, disclose all relevant information that could influence decision making, disclose delays or inefficiencies in anything.
question
Integrity
answer
Mitigate actual conflicts of interest, refrain from supporting in activities that would discredit the company, refrain from engaging in conduct that would prejucice carrying out duties ethically
question
Shifting Economy
answer
The Economy is moving away from manufacuring to more service.
question
Globalization
answer
Creates more competition and opportunity
question
Cost
answer
Use of Company resources
question
Expense
answer
Used-up costs
question
Product Cost
answer
All costs related to making the product
question
Manufacturing Product Costs
answer
Direct Materials, Direct Labor, MO
question
Cost flow: Direct Materials Used
answer
Beg. DM + DM Purchased = Available - End DM = DM Used
question
Cost flow: Cost of goods manufactured
answer
Beg WIP + DM Used + DL + MO = Available - End WIP = Cost of goods manufactured
question
Cost flow: Cost of goods sold
answer
Beginning FG + Cost of goods manufactured = available - end. FG = Cost of goods sold
question
Cost flow: Net Income
answer
Sales - Cost of goods sold = Gross profit - period costs = net income
question
Cost Pools
answer
Grouping of similar overhead costs
Auditing
Balance
Communications
Compliance With Laws And Regulations
Current Replacement Cost
Fraudulent Financial Reporting
Introductory Auditing
Management
Auditing Ch 6 – Flashcards 20 terms
20 terms
Preview
Auditing Ch 6 – Flashcards
question
A successor auditor is required to attempt communication with the predecessor auditor prior to:
answer
Accepting the engagement
question
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:
answer
Analytical Procedures
question
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:
answer
An engagement letter
question
Tests for unrecorded assets typically involve tracing from:
answer
Source documents to recorded journal entries
question
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is
answer
The auditor's preliminary estimate of the smallest amount of misstatement that would be material to any of the one client's financial statements.
question
Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A) Management's attempt to meet earnings per share growth rate goals B) The existence of related party transactions C) Managements disregard for internal control D) Lack of understanding of the potential client's internal auditor's computer-assisted audit techniques.
answer
C) Managements disregard for internal control
question
Which of the following is an example of fraudulent financial reporting
answer
Company management falsifies inventory count tags thereby overstating ending inventory and understanding cost of goods sold
question
Which of the following is not one of the assertions made by management about an account balance? A) Relevance B) Existence C) Rights and obligations D) Valuation
answer
A) Relevance
question
Which of the following is not a general objective for the audit of asset accounts? A) Establishing proper valuation of assets B) Establishing the completeness of assets C) Establishing existence of assets D) Establishing proper liabilities relating to assets
answer
D) Establishing proper liabilities relating to assets
question
Which of the following topics is not normally included in an engagement letter? A) The auditors estimate of the fee for the engagement B) Limitations on the scope of the engagement C) The auditors preliminary assessment of internal control D) A description of responsibility for the detection of fraud
answer
C) The auditors preliminary assessment of internal control
question
An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements.
answer
True
question
Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.
answer
False
question
At least a portion of the auditors consideration of internal control usually is performed at an interim date rather than at the balance sheet date.
answer
True
question
Audit committees should be made up of the most qualified directors regardless of whether they are a part of management of the company.
answer
False
question
Confirming a bank account establishes existence but not rights to the cash balance.
answer
False
question
Preliminary arrangements with clients should be set forth in the management letter.
answer
False
question
The auditors test of controls are designed to substantiate the fairness of specific statement accounts.
answer
False
question
The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.
answer
True
question
The substantive approach to an audit is appropriate for many small businesses.
answer
True
question
Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.
answer
True
Accounting
Auditing
Enterprise Risk Management
Management
Need For Control
Reduce The Impact
Auditing and Assurance Chapter 4 – Flashcards 41 terms
41 terms
Preview
Auditing and Assurance Chapter 4 – Flashcards
question
Enterprise Risk Management is the responsibility of:
answer
Company Management
question
Failure to meet company objectives is a result of
answer
Business Risk
question
Auditing Standards do not require auditors of financial statements to
answer
Repot all errors and frauds found to police authorities
question
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
answer
Accounts Receivable.......In (fictitious) credit sales and (fictitious) receivables.
question
One of the typical characteristics of management fraud is...
answer
Victimization of investors through the use of materially misleading financial statements.
question
Which of the following circumstances would most likely cause and audit team to perform extended procedures?
answer
If the client made several large adjustments at year-end (a red flag), extended procedures would be considered necessary to ensure that fraud was not taking place.
question
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as:
answer
Risk of Material Misstatement
question
The risk of material misstatements is composed of which audit risk components?
answer
The Risk of Material Misstatements (RMM) is composed of: Inherent Risk and Control Risk
question
The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:
answer
Detection Risk
question
The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?
answer
DR = AR/ (IR x CR) = 0.05 / 0.50 = 0.10
question
If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to:
answer
Change from 0.25 to 0.1
question
Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?
answer
Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis
question
Analytical procedures are generally used to produce evidence from:
answer
Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.....Analytical procedures incorporate information from a variety of sources.
question
Which of the following relationships between types of analytical procedures and sources of information are most logical?
answer
Type of Analytical Procedure - Comparison of current account balances with expected balances.... Source of Information - Company's Budgets and Forecasts
question
Analytical procedures can be used in which of the following ways?
answer
1. As a means of overall review at the end of an audit. 2. As "attention-directing" methods when planning an audit at the beginning 3. As substantive audit procedures to obtain evidence during an audit.
question
Analytical procedures used when planning an audit should concentrate on:
answer
With Preliminary Analytical Procedures--> the auditors are looking for signs of accounts and relationships that may represent specific potential problems and risks in the financial statements.
question
When a company that sells its products for a (gross) profit increases its sales by 15% and its COGS by 7%, the COGS ratio will:
answer
Decrease.....the numerator (COGS) increases relatively less than the denominator (Sales) increases.
question
Auditors are not responsible for accounting estimates with respect to:
answer
Management is responsible for making the estimates in the first place, just as management is primarily responsible for all the financial statement elements.
question
An Audit Strategy contains:
answer
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
question
It is acceptable under GAAS for an audit team to:
answer
Assess Risk of Material Misstatement at high and achieve an acceptably low audit risk by performing extensive detection work.
question
Under the Private Securities Litigation Reform Act, independent auditors are required to first:
answer
Once informed, the Board of Directors has the first responsibility to report to the SEC. If the board does not report these items to the SEC, the law then requires the auditors to do so.
question
When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?
answer
Evidence of a Systematic Bias....whether Agressive or Conservative, would be of most concern to the audit team.
question
An Audit Committee is:
answer
Composed of members of a company's Board of Directors who are not involved in the Day-to-Day operations of the company.
question
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:
answer
Evaluate the effect of noncompliance on the financial statements
question
Which of the following statements best describes auditors'responsibility for detecting client's noncompliance with a law or regulation?
answer
Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected.
question
Auditors perform analytical procedures in the planning stage of an audit for the purpose of:
answer
Identifying unusual conditions that deserve more auditing effort.
question
Which of the following may cause management to intentionally UNDERSTATE profits:
answer
1. Management wants to creat "cookie jar" reserves for a rainy day 2. The company believes its income tax expense is too high 3. Company is suffering a large loss and wants to take a "big bath"
question
Auditors specifically consider fraud risk from management override of controls..... True or False
answer
True
question
Auditors would perform the following steps in which order?
answer
1. Set Audit Risk 2. Risk of Material Misstatement 3. Calculate Detection Risk
question
Which of the following is NOT required by AU 420, "Consideration of Fraud in a Financial Statement Audit?"
answer
Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.
question
AU 420, "Consideration of Fraud in a Financial Statement Audit" Requirements....
answer
1. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. 2. Conduct a discussion by the audit team of the risks of material misstatement due to fraud. 3. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor.
question
Analytical procedures are performed in the following order:
answer
1. Develope an Expectation 2. Define a significant difference 3. Calculate predictions and compare them to the Recorded Amount 4. Investigate Significant Difference
question
The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated is referred to as:
answer
Audit Risk
question
What is Detection Risk?
answer
The probability that the auditor's procedures would not catch a material error or fraud that has ocurred and not been previously detected byt the client's internal controls. It is an element of Audit Risk.
question
If results from the auditor's tests of controls induce the auditor to change the assessed level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk?
answer
Detection Risk would decrease from 0.4 to 0.2
question
The auditor has assessed the Risk of Material Misstatement (RMM) to determine the acceptable level of detection risk for financial statement assertions for inventory account balances. As the acceptable level of detection risk decreases, which of the following adjustsments to the A/R audit program would the audit team normally make?
answer
Increase the sample size of the confirmations (If detection risk decreases, the audit team must be more EFFECTIVE in its audit procedures.)
question
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
answer
Interest Expense
question
Which of the following would NOT cause auditors to increase their assessment of inherent risk?
answer
The client's controller is an expert in application of accounting standards.
question
With respect to management's accounting estimates, auditors are responsible for:
answer
1. Determining the reasonableness of Estimates 2. Determining that estimates are presented in comformity with GAAP. 3. Determining that estimates are adequately disclosed in the financial statements.
question
Auditors would be responsible for designing audit procedures to detect non-compliance with which of the following laws and regulations?
answer
Federal Income Tax Laws
question
What should the Audit Strategy take into account?
answer
1. Reporting objectives of the Engagement 2. Factors significant in directing the activities of the engagement team. 3. Results of preliminary engagement activities and the initial risk assessment.
Accounting
Auditing
Fraudulent Financial Reporting
Introductory Auditing
Management
Related Party Transactions
Chapter 06-QUIZ-Audit Planning, Understanding the Client, Assessing Risks, and Responding – Flashcards 76 terms
76 terms
Preview
Chapter 06-QUIZ-Audit Planning, Understanding the Client, Assessing Risks, and Responding – Flashcards
question
Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company. True False
answer
FALSE
question
Analytical procedures are seldom used for planning an audit engagement because they are substantive procedures. True False
answer
FALSE
question
Preliminary arrangements with clients should be set forth in the management letter. True False
answer
FALSE
question
An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements. True False
answer
FALSE
question
The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts. True False
answer
FALSE
question
At least a portion of the auditors' consideration of internal control usually is performed at an interim date rather than at the balance sheet date. True False
answer
TRUE
question
The substantive approach to an audit is appropriate for many small businesses. True False
answer
TRUE
question
Confirming a bank account establishes existence but not rights to the cash balance. True False
answer
FALSE
question
The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry. True False
answer
TRUE
question
Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets. True False
answer
TRUE
question
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. D. The prospective client is unwilling to make financial records available to the CPA.
answer
D. The prospective client is unwilling to make financial records available to the CPA.
question
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.
answer
D. An overly complex organizational structure involving unusual lines of authority.
question
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.
answer
B. Management's disregard for internal control.
question
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 illegal acts committed by its employees. D. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.
answer
A. Limitations of the engagement.
question
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.
answer
A. Inability to generate positive cash flows from operations, while reporting large increases in earnings.
question
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.
answer
A. General Ledger to source documents.
question
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.
answer
B. Written communication with the client.
question
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.
answer
C. Perform the risk assessment.
question
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.
answer
C. Consider the likelihood that the risks could result in material misstatements.
question
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.
answer
A. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
question
A predecessor auditor is required to attempt to initiate communication with the successor auditor: Prior to the Successor's Acceptance of the Engagement: YES NO Subsequent to the Successor's Acceptance of the Engagement: YES NO
answer
NO NO
question
Which measure of materiality (or both) considers quantitative considerations? Planning: YES NO Evaluation: YES NO
answer
YES YES
question
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.
answer
D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.
question
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.
answer
C. Negative cash flows from investing.
question
Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors: YES NO Misappropriation of Assets: YES NO
answer
YES YES
question
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.
answer
A. Relevance.
question
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 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.
answer
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.
question
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. Performing analytical procedures. C. Confirmation of all major accounts. D. Designing an audit program.
answer
C. Confirmation of all major accounts.
question
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.
answer
D. Inherent risk.
question
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.
answer
A. Management operating and financing decisions are dominated by top management.
question
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 inventor 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.
answer
A. Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
question
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.
answer
B. Extreme degree of competition within the industry.
question
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.
answer
C. Inventory items of small size, but high value.
question
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.
answer
B. Factors whose presence often have been observed in circumstances where frauds have occurred.
question
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.
answer
B. Increase the assessed level of detection risk.
question
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.
answer
B. Make a legal determination of whether fraud has occurred.
question
Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Tests of Details: YES NO Substantive Analytical Procedures: YES NO
answer
YES YES
question
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.
answer
D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.
question
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.
answer
D. Accepting the engagement.
question
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.
answer
B. Allowance for doubtful accounts.
question
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.
answer
C. Detection risk.
question
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.
answer
B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
question
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.
answer
B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
question
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.
answer
A. The auditors' preliminary assessment of internal control.
question
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.
answer
D. Use less predictable audit procedures.
question
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.
answer
C. Legality.
question
Tests for unrecorded assets typically involve tracing from: A. Source documents to recorded journal entries. B. Source documents to observations. C. Recorded journal entries to documents. D. Recorded journal entries to observations.
answer
A. Source documents to recorded journal entries.
question
Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries: A. Completeness. B. Existence. C. Rights. D. Valuation.
answer
A. Completeness.
question
Determining that receivables are presented at net-realizable value is most directly related to which management assertion? A. Existence. B. Rights. C. Valuation. D. Presentation and disclosure.
answer
C. Valuation.
question
Which of the following is not a general objective for the audit of asset accounts? A. Establishing existence of assets. B. Establishing proper valuation of assets. C. Establishing proper liabilities relating to assets. D. Establishing the completeness of assets.
answer
C. Establishing proper liabilities relating to assets.
question
Which of the following is not used by auditors to establish the completeness of recorded assets? A. Assessing control risk. B. Tracing from source documents to entries in the accounting records. C. Performing analytical procedures. D. Vouching transactions.
answer
D. Vouching transactions.
question
To test for unsupported entries in the journals, the direction of audit testing should be to the: A. Ledger entries. B. Journal entries. C. Original source documents. D. Financial statements.
answer
C. Original source documents.
question
A form filed with the SEC when a company changes auditors is a: A. Form 8-K. B. Form 10-K. C. Form S-1. D. Form B-1.
answer
A. Form 8-K.
question
Which of the following is least likely to render material a quantitatively small misstatement material? A. Affects the registrant's compliance with regulatory requirements. B. Masks a change in earnings or other trends. C. Arises from an item not capable of precise measurement. D. The Transaction involves a related party.
answer
D. The Transaction involves a related party.
question
A successor auditor has accepted an engagement that was previously performed by a predecessor auditor and, prior to accepting the engagement, has communicated with the predecessor. When the successor believes that the predecessor has performed satisfactory previous audits, which of the following is correct? A. A second communication is required and must include details of previous audits. B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a minimum of verification work. C. Absent ongoing litigation, a predecessor must provide all working papers requested by the predecessor. D. The client should be informed of the need to perform a detailed audit of all opening balances.
answer
B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a minimum of verification work.
question
The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditors? A. The auditors will be able to plan the audit work so that it may be done expeditiously. B. The auditors will be able to complete substantive procedures prior to year-end. C. The auditors will be able to better plan for the observation of the physical inventories. D. The auditors will be able to perform the examination more efficiently and will be finished at an early date after the year-end.
answer
B. The auditors will be able to complete substantive procedures prior to year-end.
question
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. A memorandum to be placed in the permanent section of the auditing working papers. B. An engagement letter. C. A client representation letter. D. A confirmation letter attached to the constructive services letter.
answer
B. An engagement letter.
question
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? A. Client manuals of accounts and charts of accounts. B. AICPA Industry Audit Guides. C. Prior-year working papers of the predecessor auditors. D. Latest annual and interim financial statements issued by the client.
answer
C. Prior-year working papers of the predecessor auditors.
question
The auditors will not ordinarily initiate discussion with the audit committee concerning the: A. Extent to which the work of internal auditors will influence the scope of the examination. B. Extent to which change in the company's organization will influence the scope of the examination. C. Details of potential problems which the auditors believe might cause a qualified opinion. D. Details of the procedures which the auditors intend to apply.
answer
D. Details of the procedures which the auditors intend to apply.
question
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? A. The successor auditors have no responsibility to contact the predecessor auditors. B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors. C. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact. D. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.
answer
B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.
question
Which of the following situations would most likely require special audit planning by the auditors? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones.
answer
D. Inventory is comprised of precious stones.
question
When planning an audit, an auditor should: A. Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. B. Make preliminary judgments about materiality levels for audit purposes. C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. D. Prepare a preliminary draft of the management representation letter.
answer
B. Make preliminary judgments about materiality levels for audit purposes.
question
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should: A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.
answer
B. Obtain a knowledge of matters that relate to the nature of the entity's business.
question
With respect to the auditor's planning of a year-end audit, which of the following statements is always true? A. An engagement should not be accepted after the fiscal year-end. B. An inventory count must be observed at the balance sheet date. C. The client's audit committee should not be told of any specific audit procedures which will be performed. D. It is an acceptable practice to carry out parts of the examination at interim dates.
answer
D. It is an acceptable practice to carry out parts of the examination at interim dates.
question
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: A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management.
answer
D. Integrity of management.
question
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: A. Substantive procedures. B. Tests of controls. C. Internal control. D. Statistical analysis.
answer
A. Substantive procedures.
question
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 planning phase of the audit by the use of: A. Tests of transactions and balances. B. An assessment of internal control. C. Specialized audit programs. D. Analytical procedures.
answer
D. Analytical procedures.
question
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: A. Awareness of the consistency in the application of generally accepted accounting principles between accounting periods. B. Evaluation of all matters of continuing accounting significance. C. Opinion of any subsequent events occurring since the predecessor's audit report was issued. D. Understanding as to the reasons for the change of auditors.
answer
D. Understanding as to the reasons for the change of auditors.
question
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? A. Are all financial reporting operations at one location? B. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks? D. Has it reported to the audit committee the nature of the company's internal control?
answer
A. Are all financial reporting operations at one location?
question
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: A. Accuracy. B. Completeness. C. Control. D. Existence.
answer
B. Completeness.
question
Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive: YES NO Opportunity: YES NO
answer
YES YES
question
Which of the following is not a required source of information for the auditors' assessment of fraud risk? A. Discussion among audit team members. B. Fraud risk factors. C. Results of tests of controls. D. Inquiry of management and others.
answer
C. Results of tests of controls.
question
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? A. Reviewing accounting estimates for biases. B. Examining physical controls over assets. C. Evaluating the business rationale for significant unusual transactions. D. Examining journal entries and other adjustments for evidence of fraud.
answer
B. Examining physical controls over assets.
question
Engagement letters are used by most auditors in performing professional services. a. Describe the purpose of an engagement letter. b. List four items that are normally included in an engagement letter.
answer
a. The purpose of an engagement letter is to establish a written contract between the auditors and the client. Thus, the letter tends to prevent misunderstandings between those two parties. b. Items that are normally included in an engagement letter include (only four required): • Name of the entity and statements to be examined. • Scope of services. • Description of responsibility for detecting fraud. • Obligations of the client's staff to prepare schedules. • Fee or method of determining fee. • Provision for client's acceptance signature. • Management's obligation to conclude about the materiality of misstatements not recorded.
question
As a part of the planning process, the auditors often prepare an audit plan, an audit program, and a time budget. a. Describe an audit plan and explain its purpose. b. Describe an audit program and explain its purpose. c. Describe a time budget and explain its purpose.
answer
a. The audit plan is an overview of the engagement, outlining the nature and characteristics of the client and its environment and the overall audit strategy. The audit plan documents the major considerations in planning the engagement. b. The audit program is a detailed listing of audit procedures to be performed in the engagement. It is a tool for scheduling and controlling the work. c. The time budget includes an estimate of the time required for each audit task. It serves as a basis for the fee estimate, controls the audit work, and may be used to evaluate performance by the audit staff.
question
Many auditors take an approach to assessing the risk of material misstatement by beginning with an assessment of business risks. a. Define business risks. b. Why have auditors found it effective to take the approach of assessing business risks? c. Identify a business risk and explain how it might affect the auditor's audit procedures.
answer
a. Business risks are those that threaten management's ability to achieve the organization's objectives. b. Auditors have found this approach effective because significant business risks often create related risks of material misstatement (inherent risks) that the auditors should address in designing their audit procedures. c. Students may provide a number of examples. The textbook provides the following: Assume that the auditors have identified as a significant business risk and audit risk that sales personnel, informally or through written side agreements, may be modifying the terms of contracts with customers which may affect the amount of revenue that should be recognized. The auditors must design tests that are focused on determining whether such modifications of terms have been made, perhaps by obtaining tailored confirmations from customers about the existence of such side agreements.
