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Auditing ch 5
Terms in this set (80)
To be effective, analytical procedures performed near the end of the audit should be performed by
A manager or partner who has a comprehensive knowledge of the client's business and industry.
The components of the risk of misstatement are:
Inherent Risk (YES)
Control Risk (YES)
Detection Risk (NO)
Financial statement assertions are established for classes of transactions:
Balances: yes Disclosures: yes
Further audit procedures include:
Risk assessment procedures:no Tests of controls: yes
Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as:
Which of the following is not an assertion relating to classes of transactions?
Audit documentation is intended to allow ___________ to understand the audit work performed, the evidence obtained, and the significant conclusions.
An experienced auditor
Which of the following is not considered to be an analytical procedure?
Comparison of financial statements amount with source documents
Applying substantive tests to the details of asset and liability accounts as of an interim date, rather than as of the balance sheet date:
Potentially increases the risk that errors which exist at the balance sheet date will not be detected.
Comparing the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable during an audit would be a type of:
The inspection of a vendor's invoice by the auditors is:
Documentary evidence about occurrence of a transaction.
The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?
Analytical procedures are required at the risk assessment stage and as:
Procedures near the end of the audit.
During financial statement audits, auditors seek to restrict which type of risk?
Which of the following groups are not considered a specialist by AICPA Professional Standards?
A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:
Violates professional standards.
Which of the following best describes the problem with the use of published industry averages for analytical procedures?
Lack of comparability
In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?
A price for a similar asset obtained from an active market.
An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the:
Measurement date (ordinarily the date of the financial statements).
Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?
Material related party transactions must be disclosed in the notes to the financial statements.
Which of the following is not a basic procedure used in an audit?
Tests of direct evidence.
Which of the following is not a financial statement assertion relating to account balances?
Recorded value and discounts.
Which of the following is generally true about the sufficiency of audit evidence?
The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement.
Which of the following is true about analytical procedures?
Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.
Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?
Reviewing subsequent events or transactions.
An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as:
An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as:
An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as:
Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?
Observation of procedures
The internal control flowchart is an example of:
An administrative working paper.
A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a:
Which of the following is not a function of working papers?
Provide support for the accounting records.
A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a:
Working trial balance.
The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the:
Investigation of significant variations and unusual relationships.
Auditors must obtain written client representations that typically should be signed by
The chief executive officer and the chief financial officer.
What ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion?
The auditors' judgment.
Auditors can mitigate risk, like the failure to detect material dollar errors in the financial statements, by doing what?
Performing substantive procedures.
An independent auditor finds that the Simmer Corporation purchased land owned by an officer of the company for an amount in excess of its asking price. This finding indicates the existence of:
Related party transactions.
Which transaction would not necessarily be considered a related party transaction?
Payment of a bonus to the president
The management representation letter date should coincide with the:
Date of the auditor's report.
An analytical procedure example is the comparison of:
Financial ratios of the current year to previous years.
When using management's written representations as audit evidence about the completeness assertion, an auditor should consider that such representations:
Complement, but do not replace, substantive procedures designed to support the assertion.
Which of the following is least likely to be included in a client's representation letter?
Management acknowledges responsibility for illegal actions committed by employees
Which of the following statements regarding audit evidence is generally correct?
The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
Which of the following is the most accurate statement regarding audit evidence?
The auditor must obtain sufficient appropriate audit evidence.
Which procedure is not a typical analytical procedure?
Comparison of recorded amounts of major disbursements with appropriate invoices.
Which of the following is not a primary purpose of audit working papers?
To decrease the need for substantive procedures.
Concerning retention of working papers, the Sarbanes-Oxley Act:
Requires retention for at least 7 years.
During an audit, the working papers are primarily considered to be:
Support for the auditors' representations as to compliance with generally accepted auditing standards.
Even though the quantity, type, and content of working papers will vary, the working papers generally would include:
Auditing procedures followed and the testing performed in obtaining audit evidence.
The permanent file section of the working papers that is retained for each audit client most likely contains:
Narrative descriptions of the client's accounting procedures and controls.
Working papers used by the auditor that record the procedures used to gather evidence should be:
Designed to meet the circumstances of the particular engagement.
In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?
The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
Confirmation would be most effective in addressing the existence assertion for the:
Inventory held on consignment.
In preparing for an audit of the retail footwear division of a major retail organization, the auditor gathered the following information about the organization's stores:
An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be:
An overstatement of year-end inventory.
Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region?
-Sales employees are not as productive in generating sales as those in other regions.
-The Mid-Central Region has a lower gross margin.
Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations?
Sales per store are directly related to the size of the store
Which of the following statements is not correct regarding the auditor's further analysis?
The other regions all generate higher sales per square foot than the Mid-Central Region.
Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place (e.g., the trend to more casual shoes). A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion?
Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.
What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances?
Assertions with high inherent risk are least likely to involve:
The date on which no information may be deleted from audit documentation is the
Documentation completion date.
n evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are
Reasonable in the circumstances
In obtaining sufficient appropriate audit evidence, the work of which type or types of specialists may be relied upon?
Client Engaged: yes
Auditor Engaged: yes
Which of the following is most likely to be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
An unexpected economic downturn is likely to have which effect on inventory turnover.
Which of the following is most consistent with an increase in the ratio of debt to equity?
Repurchase of a portion of the company's outstanding common stock.
Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will:
Increase days of sales in accounts receivable.
Examination of large data sets to uncover hidden patterns is often referred to as:
Which of the following is not accurate as it applies to using data analytics in financial statement auditing:
It ordinarily requires that all audit staff members maintain a high level of data analytics skills.
Which of the following approaches to an audit is most likely to result in a detailed analysis of one or more characteristics of an entire population?
A data analytical approach.
An advantage of data analytical approaches applied to auditing is that
Auditing of entire populations of transactions may, in particular situations, become cost justified.
Which of the following is not generally considered a difficulty in using data analytical approaches in auditing and other areas?
The requirement for networks of linked "super-computers" to perform any such calculations.
Type of audit: During the physical inventory count, the auditor requested that certain containers of inventory items be opened to ensure they were not empty
inspection of tangible assets
Type of audit: During a site visit to a branch Warehouse, the auditor noted unauthorized Personnel have access to the inventory
Type of audit: The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation
inspection of records or documents
Type of audit: The auditor sent a letter to the company's outside attorney accompanied by Management's request for information concerning pending or threatened litigation, claims, and assessments
Type of audit procedure: The auditing firms computer-assisted audit specialist obtained an electronic billing file from the company and checked the accuracy of the summarized Billings file
Type of audit: the Auditor selected a sample of invoices and agreed the vendor to the approved vendor list, as had been required by the client's internal control procedures
Type of audit procedure: the Auditors scanned the repairs and maintenance account for unusually large amounts
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