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Auditing ch 5 & 6
Terms in this set (149)
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
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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