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D. Materiality and audit risk

Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
A. Internal Control
B. Expected Misstatement
C. Control Risk
D. Materiality and Audit risk

A. Obtains reasonable assurance about whether the financial statements are free of material misstatement

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor
A. Obtains reasonable assurance about whether the financial statements are free of material misstatement
B. Assesses the accounting principles used and also evaluates the overall financial statement presentation
C. Realizes that some matters, either individually or in the aggregate, are important while other matters are not important.
D. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

C. Inherent risk and control risk

Risk of material misstatement refers to a combination of which two "client" components of the audit risk model?
A. Audit risk and inherent risk
B. Audit risk and control risk
C. Inherent risk and control risk
D. Control risk and detection risk

A. find smaller errors

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to
A. Find smaller errors
B. Find larger errors
C. Increase the tolerable misstatements in the accounts
D. decrease the risk of overreliance

C. In response to inquiries from a successor auditor

When is a duty to disclose fraud to parties other than the client's senior management and its audit committee most likely to exist?
A. When the amount is material
B. When the fraud results in the misappropriation of assets rather than fraudulent financial reporting
C. In response to inquiries from a successor auditor
D. When a line manager rather than a lower-level employee commits the fraudulent act

C. Management places substantial emphasis on meeting earnings projections

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low
B. Insiders recently purchased additional shares of the entity's stock
C. Management places substantial emphasis on meeting earnings projections
D. The rate of change in the entity's industry is slow

C. An employee of a consumer electronics store steals 12 CD players.

Which of the following is a misappropriation of assets?
A. Classifying inventory held for resale as supplies
B. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent
C. An employee of a consumer electronics store steals 12 CD players.
D. Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales.

B. Whether management has any knowledge of fraud that has been perpetrated on or within the entity

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?
A. Whether management has ever intentionally violated the securities laws
B. Whether management has any knowledge of fraud that has been perpetrated on or within the entity
C. Management's attitudes toward regulatory authorities
D. Management's attitude about hiring ethical employees.

A. Company management falsifies inventory count tags, thereby overstating ending inventory and understating cost of sales.

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 sales.
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 as a cost of goods sold.
D. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

Which of the following is correct concerning required auditor communications about fraud?
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
D. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

B. Comparing a sample of shipping documents to related sales invoices

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?
A. Reviewing standard bank confirmations for indications of cash manipulations
B. Comparing a sample of shipping documents to related sales invoices
C. Observing a client's distribution of payroll checks
D. Confirming a sample of recorded receivables by direct communication with the debtors

C. Accounting records to the supporting documents

In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements
C. Accounting records to the supporting documents
D. Supporting documents to the account records

B. The measure of the reliability of audit evidence lies in the auditor's judgment.

Which of the following statements concerning audit evidence is correct?
A. To be appropriate, audit evidence should be either persuasive or relevant, but need not be both.
B. The measure of the reliability of audit evidence lies in the auditor's judgment.
C. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
D. A client's general ledger may be sufficient audit evidence to support the financial statements.

D. Inspection of bank statements obtained directly from the client's financial institution.

Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client's internal accounting staff.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
C. Observation of procedures performed by the client's personnel on the entity's trial balance.
D. Inspection of bank statements obtained directly from the client's financial institution.

A. Prenumbered purchase order forms prepared by the client.

Which of the following types of audit evidence is the least reliable?
A. Prenumbered purchase order forms prepared by the client.
B. Bank statements obtained from the client.
C. Test counts of inventory performed by the auditor
D. Correspondence from the client's attorney about litigation.

B. Computations made by the auditor.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?
A. Bank statements obtained from the client.
B. Computations made by the auditor.
C. Prenumbered client sales invoices.
D. Vendors' invoices included in the client's files.

B. Refundable income taxes.

An auditor would be least likely to use confirmations in connection with the examination of
A. Inventory held in a third-party warehouse.
B. Refundable income taxes.
C. Long-term debt.
D. Stockholders' equity.

B. The audit report

The assurance bucket is filled with all of the following types of evidence except
A. Test of controls
B. The audit report
C. Substantive analytical procedures
D. Test of details

C. Assist the auditor in assessing the validity of the conclusions reached.

The primary objective of final analytical procedures is to
A. Obtain evidence from details tested to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client's ability to continue in existence.

C. The examination of changes in an account over time.

The substantive analytical procedure known as trend analysis is best described by
A. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data.
B. Development of a model to forma n expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods.
C. The examination of changes in an account over time.
D. The comparison of common-size financial statements over time.

C. A copy of the financial statements

The current file of the auditor's working papers should generally include
A. A flowchart of the accounting system
B. Organization charts
C. A copy of the financial statements
D. Copies of bond and note indentures.

D. Narrative descriptions of the client's accounting system and control procedures.

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

A. Lead schedule

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)
A. Lead schedule
B. Supporting schedule
C. Audit control account
D. Working trial balance

D. Affect the financial statement assertions

An auditor's primary consideration regarding an entity's internal controls is whether they
A. Prevent management override
B. Relate to the control environment
C. Reflect management's philosophy and operating style
D. Affect the financial statement assertions

D. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

Which of the following statements about internal control is correct?
A. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur.
B. The establishment and maintenance of internal control is an important responsibility of the internal auditor.
C. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance.
D. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

D. All of the above.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?
A. Effectiveness and efficiency of operations.
B. Reliability of financial reporting.
C. Compliance with applicable laws and regulations.
D. All of the above.

D. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

Monitoring is a major component of the COSO Internal Control- Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component?
A. Monitoring can be an ongoing process.
B. Monitoring can be conducted as a separate evaluation.
C. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs.
D. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

A. Believes the internal controls are unlikely to be effective.

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at the maximum level for some assertions because he or she
A. Believes the internal controls are unlikely to be effective.
B. Determines that the pertinent internal control components are not well documented.
C. Performs tests of controls to restrict detection risk to an acceptable level.
D. Identifies internal controls that are likely to prevent material misstatements.

C. Substantive procedures to restrict detection risk for significant transaction classes.

Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal controls.
B. Analytical procedures to verify the design on internal controls.
C. Substantive procedures to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

B. Concluding that controls are ineffective

Assessing control risk below maximum involves all of the following except
A. Identifying specific controls to rely on
B. Concluding that controls are ineffective
C. Performing tests of controls
D. Analyzing the achieved level of control risk after performing tests of controls.

B. Reperformance of the control by the auditor.

Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of control?
A. Inquiry of client personnel.
B. Reperformance of the control by the auditor.
C. Observation of client personnel.
D. Walkthrough.

B. Observation by the auditor of the employees performing control activities.

The highest quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by
A. Inspection of documents prepared by a third party, but which contain the initials of those applying client controls.
B. Observation by the auditor of the employees performing control activities.
C. Inspection of a flowchart of duties performed and available personnel.
D. Making inquiries of employees who apply control activities.

D. Assess whether the service organization's controls are suitably designed and operating effectively.

Reports by the service organization's auditor typically
A. Provide reasonable assurance that their financial statements are free of material misstatements
B. Ensure that the client will not have any misstatements in areas related to the service organization's activities
C. Ensure that the client is billed correctly
D. Assess whether the service organization's controls are suitably designed and operating effectively.

C. Significant deficiencies in the design or operation of the internal control.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent
A. Disclosures of information that significantly contradict the auditor's going concern assumption.
B. Material fraud or illegal acts perpetrated by high-level management.
C. Significant deficiencies in the design or operation of the internal control.
D. Manipulation of falsification of accounting records or documents from which financial statements are prepared.

B. Understanding of the system

An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
A. Program for tests of controls
B. Understanding of the system
C. Understanding of the types of fraud that are probable, given the present system
D. Documentation of the study and evaluation of the system.

D. General controls

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus?
A. Data capture controls
B. Application controls
C. Output controls
D. General controls

C. Measures the sufficiency of the evidential matter obtained.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
A. Eliminate the risk of nonsampling errors
B. Reduce audit risk and materiality to a relatively low level.
C. Measures the sufficiency of the evidential matter obtained.
D. Minimize the failure to detect errors and fraud.

A. the controls are operating effectively

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether
A. the controls are operating effectively
B. The financial statements are materially misstated
C. The risk of incorrect acceptance is too high
D. Materiality for planning purposes is at a sufficiently low level.

A. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why
A. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.
B. Deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions.
C. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatement at a higher rate.
D. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement.

C. Dec, Inc, Dec

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls
: Desired confidence level, tolerable deviation rate, expected population deviation rate

A. Dec, Dec, Inc
B. Inc, Inc, Dec
C. Dec, Inc, Dec
D. Dec, Inc, Inc

Tolerable - Expected

Allowance for sampling risk =

D. There is an inverse relationship between the sample size and the tolerable deviation rate

Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Deviations from controls at a given rate usually result in misstatements at a higher rate
B. As the population size doubles, the sample size should also double.
C. The qualitative aspects of deviations are not considered by the auditor.
D. There is an inverse relationship between the sample size and the tolerable deviation rate

D. The auditor should provide recommendations for improving internal control in the audit report.

The SOX Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false?
A. The auditor should evaluate whether internal controls are effective in accurately and fairly reflecting the firm's transactions.
B. Management's report should state its responsibility for establishing and maintaining an adequate internal control system.
C. Management should identify material weaknesses in its report.
D. The auditor should provide recommendations for improving internal control in the audit report.

B. Deficiency in operation

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a
A. deficiency in design
B. Deficiency in operation
C. SIgnificant deficiency
D. material weakness

C. The financial statement amounts exposed to the deficiency

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?
A. the susceptibility of the related assets or liability to loss or fraud.
B. The interaction or relationship of the control with other controls.
C. The financial statement amounts exposed to the deficiency
D. The nature of the financial statement accounts, disclosures, and assertions involved.

C. Controls to monitor the inventory taking process

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control?
A. Controls to monitor results of the operations
B. Management's risk assessment process
C. Controls to monitor the inventory taking process
D. The period-end financial reporting process.

C. Controls that operate on a continuous basis.

Which of the following controls would most likely be tested during an interim period?
A. Controls over nonroutine transactions.
B. Controls over the period-end financial reporting process.
C. Controls that operate on a continuous basis.
D. Controls over transactions that involve a high degree of subjectivity.

B. Self-assessment processes in conjunction with entity-level controls.

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for their assessment.
A. Documentation and test controls over specific risks
B. Self-assessment processes in conjunction with entity-level controls.
C. Documentation and test entity-level controls over the entire entity.
D. Selective control test at that location.

B. Trace a transaction from each major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to
A. Tour the organization's facilities and locations before beginning any audit work
B. Trace a transaction from each major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.
C. Trace a transaction from each major class of transactions from origination through the company's information system.
D. Trace a transaction from every class of transactions from origination through the company's information system.

D. The walkthrough of the control system conducted at interim.

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?
A. Any significant changes that occurred in internal control subsequent to the interim date.
B. The length of the remaining period.
C. The specific controls tested prior to the "as of" date and the results of those tests.
D. The walkthrough of the control system conducted at interim.

C. A disclaimer of opinion.

AnnaLisa, an auditor for Neal, is prevented by the management of Lileah Co. from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the company hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the client's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control?
A. An unqualified report.
B. An adverse report.
C. A disclaimer of opinion.
D. An exculpatory opinion.

A. An unqualified report.

In auditing a public company client, Natalie, an auditor for N.M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?
A. An unqualified report.
B. An adverse report.
C. A disclaimer of opinion.
D. An exculpatory opinion.

C. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion.

In auditing ICFR for a public company client, Emily finds that he company has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the company has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do?
A. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary.
B. Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion.
C. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion.
D. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.

A. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

Which of the following statements concerning control deficiencies is true?
A. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.
B. All significant deficiencies are material weaknesses.
C. All control deficiencies are significant deficiencies
D. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

C. Significant deficiencies in the design or operation of internal control.

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent
A. Material fraud or illegal acts perpetrated by high-level management.
B. Disclosures of information that significantly contradict the auditor's going concern assumption.
C. Significant deficiencies in the design or operation of internal control.
D. Potential manipulation or falsification of accounting records.

A. The systems analyst reviews output and controls the distribution of output from the IT department.

Which of the following most likely represents a weakness in internal control of an IT system?
A. The systems analyst reviews output and controls the distribution of output from the IT department.
B. The accounts payable clerk prepares data for computer processing and enters the data into the computer.
C. The systems programmer designs the operating and control functions of programs and participates in testing operating systems.
D. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

D. Access information stored on computer files while having a limited understanding of the client's hardware and software features.

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an IT system is that the auditor may
A. Consider increasing the use of substantive tests of transactions in place of analytical procedures.
B. Substantiate the accuracy of data through self-checking digits and hash totals.
C. Reduce the level of required tests of controls to a relatively small amount.
D. Access information stored on computer files while having a limited understanding of the client's hardware and software features.

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