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Auditing ch 6
Terms in this set (69)
Which of the following situations would cause a CPA to not accept a new audit engagement?
The prospective client is unwilling to make financial records available to the CPA.
Which of the following situations would heighten an auditor's concern about the risk of fraudulent financial reporting
An overly complex organizational structure involving unusual lines of authority.
Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
Management's disregard for internal control.
Which of the following matters is generally included in an auditor's engagement letter?
The financial accounting framework that will be applied.
Which of the following situations would raise an auditor's concern about the risk of fraudulent financial reporting?
Inability to generate positive cash flows from operations, while reporting large increases in earnings.
To best test existence, an auditor would sample from the:
General ledger to source documents.
The auditors' understanding established with a client should be confirmed through a(an):
Written communication with the client.
Which of the following would be least likely to be considered an audit planning procedure?
Perform the risk assessment.
While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:
Consider the likelihood that the risks could result in material misstatements.
Which of the following is correct concerning requirements about auditor communications about fraud?
Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
A predecessor auditor will ordinarily initiate communication with the successor auditor:
Prior to the successor's acceptance of engagement: no Subsequent to the successor's acceptance of the engagement: no
Which measure(s) of materiality considers quantitative considerations?
Planning: yes Evaluation: yes
Which of the following situations would lead a CPA to conclude that a potential audit engagement should not be accepted?
it is unlikely that sufficient evidence is available to support an opinion on the financial statements.
In using the statement of cash flows to obtain an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?
Negative cash flows from investing.
Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to:
Errors: yes Misappropriation of assets: yes
Which of the following is not one of the assertions made by management about an account balance?
When a company has changed auditors, according to the Professional Standards:
-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.
Which of the following procedures is not performed as a part of planning an audit engagement?
Verifying cutoff procedures.
The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:
Which of the following is least likely to be considered a financial statement audit risk factor?
Management operating and financing decisions are dominated by top management.
Which of the following is an example of fraudulent financial reporting?
Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?
Extreme degree of competition within the industry.
Which of the following conditions identified during the audit increases the risk of employee fraud?
Inventory items of small size, but high value.
Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?
The factors often have been observed in circumstances where frauds have occurred.
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?
Increase the assessed level of detection risk.
Which of the following is least likely to be required on an audit?
Make a legal determination of whether fraud has occurred.
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 Substantive analytical procedures: yes
Which of the following situations would an auditor consider a potential risk factor for misstatements from fraudulent financial reporting?
Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.
A successor auditor is required to make an effort to communicate with the predecessor auditor prior to:
Accepting the engagement.
If the economy is experiencing a recession, an auditor should focus increased attention on which of the following accounts?
Allowance for doubtful accounts.
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:
Which of the following statements is correct regarding the auditor's determination of materiality for a public company audit?
The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
Which of the following topics is not normally included in an engagement letter?
The auditors' level of materiality in planning the audit.
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
Use less predictable audit procedures.
Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?
Tests for unrecorded assets typically involve tracing from:
Source documents to recorded journal entries.
Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?
Determining that receivables are presented at net realizable value is most directly related to which management assertion?
Which of the following is not a general objective for the audit of asset accounts?
Establishing proper liabilities relating to assets.
Which of the following is not used by auditors to establish the completeness of recorded assets?
To test for unsupported entries in the journals, the direction of audit testing should be to the:
Original source documents.
A form filed with the SEC when a company changes auditors is a:
Which of the following is least likely to render a quantitatively small misstatement material?
Arises from an item not capable of precise measurement.
Which of the following is not a required source of information for the auditors' assessment of fraud risk?
Results of tests of controls.
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?
Examining physical controls over assets.
Preliminary arrangements agreed to by the auditors and the client should be documented in writing by the auditors. This documentation is known as:
An engagement letter.
The auditors are planning an audit engagement for a new client. The business of the client is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors when they are trying to obtain a general understanding of audit problems that could be encountered?
Prior-year working papers of the predecessor auditors.
The auditors will typically not initiate discussion with the audit committee regarding the:
Details of the procedures which the auditors intend to apply.
What is a potential successor auditor's responsibility for communicating with the predecessor auditors when dealing with a prospective new client?
The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.
Which situation would most likely require special audit planning by the auditors?
The investment portfolio has several complex financial instruments, such as deriviatives.
When an auditor is planning an audit, the auditor should:
Make preliminary judgments about materiality levels for audit purposes.
When an auditor accepts an audit engagement but does not possess the industry expertise of the business entity involved, the auditor should:
Obtain a knowledge of matters that relate to the nature of the entity's business.
Which of the following statements is always true when an auditor is planning a year-end audit?
An audit plan should be developed that includes a time budget.
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:
Integrity of management.
To minimize the risk that the audit will not detect material misstatements in the financial statements, the auditor primarily relies on:
An abnormal fluctuation in gross profit suggests the need for extended audit procedures for sales and inventories. This would most likely be identified in the audit risk assessment phase by utilizing:
A successor auditor should always make inquiries of the predecessor auditor before accepting an audit engagement. The successor should specifically inquire about the predecessor's:
Understanding as to the reasons for the change of auditors.
Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
Are all financial reporting operations at one location?
An auditor who selects a sample from the shipping documents file to determine whether invoices were prepared is satisfying the audit objective of:
Individuals who commit fraud are ordinarily able to rationalize the act and also have an:
Incentive: yes Opportunity: yes
PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?
A material amount would significantly alter the "total mix" of information made available to an investor.
Which of the following is correct concerning the PCAOB's concept of a significant account?
In deciding whether an account is a significant account one does not consider the effect of internal control.
The process of working from financial statement figures back to detailed documents most directly addresses the financial statement assertion of
According to the professional standards, auditors may document the understanding established with an audit client through a(n)
-Written communication with the client: yes -Oral communication with the client: no
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?
Square footage of selling space.
Which of the following is least likely to be considered a risk assessment procedure?
Observation of the physical count of inventory.
Which of the following is least likely to be considered a "further audit procedure"?
An engagement letter.
In the United States, the hiring of a company's external auditors of a public company is most likely the responsibility of the
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