ACC 403 - Ch 4

Which of the following outcomes is a likely benefit of information technology used for internal control? A. Enhanced timeliness of information. B. Processing of unusual or nonrecurring transactions. C. Potential loss of data. D. Recording of unauthorized transactions.

A. Enhanced timeliness of information.

Which of the following refers to measurements, agreed to beforehand, that can be quantified and reflect the success factors of an organization? A. Key Performance Indicators B. Price-earnings ratio C. Current ratio D. Acid-test ratio

A. Key Performance Indicators

Which of the following auditing procedures would be most likely to assist an auditor in identifying related party transactions? A. Reviewing confirmations of loans receivable and payable for indications of guarantees. B. Performing analytical procedures to seek indications of possible financial difficulties. C. Vouching accounting records for recurring transactions recorded just after the balance sheet date. D. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.

A. Reviewing confirmations of loans receivable and payable for indications of guarantees.

An auditor has determined that a client's 'days in receivables' ratio has slowly increased over the last three years. Which of the following could be a possible reason for this? A. The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures. B. The receivables have been secured as collateral for a recent capital asset purchase. C. The client has hired a collection agency which is extremely efficient at collecting. D. The accounts receivable department has implemented a new IT system, making collections much quicker and more efficient.

A. The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures.

Of the following scenarios, which would most likely result in an audit firm not accepting an engagement? A. The client has advised that the auditor will be unable to confirm certain inventories with no valid reason given. B. IT systems and architecture are antiquated and not capable of current processing and recording requirements. C. Some internal controls related to credit granting procedures are not operating effectively. D. Significant related party transactions, of which the auditor has been advised, are a routine part of business.

A. The client has advised that the auditor will be unable to confirm certain inventories with no valid reason given.

When gaining an understanding of the client at the industry level, the auditor will: A. consider the level of demand for the goods provided by companies in the industry. B. determine if the client has centralized or decentralized operations. C. determine if the client has a simple or complex capital structure. D. assess the amount of faulty goods the client returns to suppliers.

A. consider the level of demand for the goods provided by companies in the industry.

When the auditor is considering the risk of material misstatement, they will attempt to identify major risks, determine how these risks could relate to fraud or error, consider the importance of the risks, and ______. A. determine the probability that the identified risks might result in material misstatements B. attempt to immediately resolve any identified risks C. determine who is responsible for each identified risk D. notify management of these risks

A. determine the probability that the identified risks might result in material misstatements

Risks of material misstatement that are associated with a client's IT system include all of the following except: A. failure to accrue for a contingent liability. B. a terminated employee who is still able to log on to the client's IT system. C. the installation of new software that still needs modifications to operate as needed. D. no schedule for backing up data.

A. failure to accrue for a contingent liability.

Inherent risk related to closing procedures would generally be increased when _______. A. staff assigned to deal with closing procedures are relatively inexperienced B. no errors and omissions are located when auditing the closing process C. a client is found to have strong closing procedures, and sound D. internal control practices relating to closing the closing process is relatively straightforward

A. staff assigned to deal with closing procedures are relatively inexperienced

Corporate governance may be best thought of as _________. A. the people, systems, and processes within companies used to ensure that companies are well-managed B. the level of control exerted by senior management C. Corporate donations to political parties and non-profit entities D. a subsidiary entity that is controlled by a parent company

A. the people, systems, and processes within companies used to ensure that companies are well-managed

Auditors of private companies that do not have an audit committee or even a board of directors should communicate with _________. A. those charged with governance B. executive directors C. non-executive directors D. none of these answer choices are correct

A. those charged with governance

A comparison of account balances over time constitutes _______ analysis. A. trend B. time series C. ratio D. common-size

A. trend

Analytical procedures used in planning an audit should focus on identifying A. The predictability of financial data from individual transactions. B. Areas that may represent specific risks relevant to the audit. C. The various assertions that are embodied in the financial statements. D. Material weaknesses in the internal control structure.

B. Areas that may represent specific risks relevant to the audit.

Which of the following choices would indicate an appropriate change in the auditor's approach to the audit, when an increased level of risk is present in a certain area? A. Assigning less audit staff to the engagement B. Assignment of personnel with specialized skills for the area of increased risk C. Withdraw from the audit D. Obtain management assurances in writing pertaining to the increased area of risK

B. Assignment of personnel with specialized skills for the area of increased risk

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations? A. Prior-year payroll expense to budgeted current-year payroll expense. B. Current-year revenue to budgeted current-year revenue. C. Prior-year accounts payable to current-year accounts payable. D. Current-year warranty expense to current-year contingent liabilities.

B. Current-year revenue to budgeted current-year revenue.

What is the typical means by which an auditor outlines the details of the engagement, and communicates this to the client's management? A. An audit plan B. Engagement letter C. Audit working papers D. Risk assessment

B. Engagement letter

When scrutinizing a statement of cash flows in an attempt to gain a better understanding of the client, which would be most surprising to an auditor? A. An increase in accounts receivable B. Negative operating cash flows C. Negative investing cash flows D. A decrease in payables

B. Negative operating cash flows

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? A. The firm should address all independence impairment issues on the date of the audit opinion. B. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. C. Communications related to independence may occur in any form prior to issuance for the financial statements. D. Prior to accepting the engagement, the firm should orally affirm its independence to the audit committee with all members present.

B. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Which of the following is/are among the procedures used by auditors to identify related parties? A. Gain an understanding of the industry. B. Review correspondence from the client's advisors, such as attorneys or consultants. C. Trace inventory quantities from the floor to the ledger. D. Review financial statements of competitors.

B. Review correspondence from the client's advisors, such as attorneys or consultants.

Which of the following acts directs that the audit committee members should be independent members of the board of directors, not executive directors or otherwise affiliated with the issuer? A. Securities Exchange Act of 1934 B. Sarbanes Oxley Act of 2002 C. Securities Act of 1933 D. Foreign Corrupt Practices Act of 1977

B. Sarbanes Oxley Act of 2002

In auditing related party transactions, an auditor ordinarily places primary emphasis on A. The probability that related party transactions will recur. B. The adequacy of the disclosure of the related party transactions. C. Verifying the valuation of the related party transactions. D. Confirming the existence of the related parties.

B. The adequacy of the disclosure of the related party transactions.

Which of these scenarios would cause the auditor to initiate special planning procedures? A. The client recently repurchased outstanding stock. B. The client's inventory contains very specialized, hard to value items. C. Management are forthright in their dealings with the auditors. D. Not all assets belonging to the company have been properly asset tagged.

B. The client's inventory contains very specialized, hard to value items.

Which of the following information that comes to an auditor's attention would be most likely to raise a question about the occurrence of illegal acts? A. The presence of several difficult-to-audit transactions affecting expense accounts. B. The discovery of unexplained payments made to government employees. C. The failure to develop adequate procedures that detect unauthorized purchases. D. The exchange of property for similar property in a nonmonetary transaction.

B. The discovery of unexplained payments made to government employees.

Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements? A. Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters. B. The results of an analytical procedure disclose unexpected differences. C. Audit trails of computer-generated transactions exist only for a short time. D. The chief financial officer will not sign the management representation letter until the last day of the auditor's fieldwork.

B. The results of an analytical procedure disclose unexpected differences.

Client closing procedures: A. are routine transactions that do not impact audit risk. B. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period. C. affect balance sheet accounts only. D. affect expense accounts only.

B. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period.

With respect to Key Performance Indicators, auditors should ________. A. disregard them as they would be unrelated to the audit B. ask management to provide a detailed explanation of which KPIs are of the most importance to them so that related audit procedures can be planned C. assign the task of investigation to the internal audit function D. assign new KPIs to the client as a result of the audit process

B. ask management to provide a detailed explanation of which KPIs are of the most importance to them so that related audit procedures can be planned

Companies use profitability measures to assess performance and to: A. maintain consistency in operations each month. B. assess their ability to compete. C. measure their ability to pay long term debts on time. D. measure their ability to pay short term debts on time.

B. assess their ability to compete.

A company's ability to meet its needs for cash in the short terms is called ________. A. profitability B. liquidity C. materiality D. due professional care

B. liquidity

When the economy is poor, a fall in profits can easily be explained to shareholders when most companies in the industry are also experiencing a decline in earnings; therefore, therefore when the economy is poor there is a tendency within an entity to _______. A. minimize profits B. maximize write-offs C. maximize profits D. minimize revenues

B. maximize write-offs

Non-executive directors should ideally be _________. A. expected to have the same level of knowledge about the company as executive directors B. objective and knowledgeable about the industry C. employed by the client firm D. from an unrelated industry, to ensure maximum objectiveness

B. objective and knowledgeable about the industry

The term _______ refers to an affiliate, principal owner, manager, or other party that is not independent of the entity. A. other beneficiary B. related party C. primary beneficiary D. third party

B. related party

The concept of inherent risk is most closely tied to the idea of _________. A. audit risk B. underlying business risks C. currency risk D. global risk

B. underlying business risks

Which factors would likely increase an auditor's concern pertaining to risk of fraudulent financial reporting? A. Excessive amount of liquid assets that could easily be converted to cash. B. Low profitability/growth with respect to competitors in the same industry. C. An extremely confusing and overly complex institutional structure, with blurred lines of authority. D. Management participation in selection of accounting methods and principles.

C. An extremely confusing and overly complex institutional structure, with blurred lines of authority.

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for A. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements. B. Ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements. C. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. D. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations.

C. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

Which of the following would not be considered an analytical procedure? A. Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget. B. Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. C. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. D. Developing the current year's expected net sales based on the sales trend of similar entities within the same industry.

C. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

Which of the following statements is false regarding related parties? A. The presence of related parties is considered a fraud risk factor. B. Management should have controls in place for identifying related parties. C. Related party transactions do not have to be disclosed if they are conducted at "arm's length." D. A subsidiary company is considered a related party.

C. Related party transactions do not have to be disclosed if they are conducted at "arm's length."

Which of the following describes the board of directors of a company? A. Are all full-time employees of the company. B. Ensure the company is run to benefit the employees. C. Represent the shareholders of the company. D. Do not include the chief executive officer.

C. Represent the shareholders of the company.

Which of the following is true of the influence of significant accounts and classes of transactions on inherent risk? A. When the determination of an account balance is subjective, the inherent risk is low. B. When the transactions are routine and relatively homogenous, the inherent risk is high. C. When determination of account balance is objective, the inherent risk is low. D. When the account has high volume of transactions, the inherent risk is low.

C. When determination of account balance is objective, the inherent risk is low.

Should the client have internal controls in place to ensure related parties are being identified? A. Yes, but the client in under no obligation to disclose them. B. No, not necessarily. C. Yes, and the client is required to disclose them. D. None of these answer choices are correct.

C. Yes, and the client is required to disclose them.

An indicator that the auditor might need to adopt extended audit procedures would be best evidenced by __________. A. the client's current ratio has decreased slightly B. a new competitor has entered the client's industry C. an unusual fluctuation in gross profit margin last year D. net sales is increasing approximately 3% per year

C. an unusual fluctuation in gross profit margin last year

If an auditor is considering accepting a client in an industry that is unfamiliar to the auditor, the auditor should _________. A. not accept the engagement B. issue a disclaimer of opinion C. attempt to learn all matters that would materially pertain to the entity's business D. opinion of specialists the auditor hires

C. attempt to learn all matters that would materially pertain to the entity's business

If the management of an entity is close to breaching a debt covenant that requires maintaining a certain current ratio, management may have an incentive to ________. A. overstate either current assets or current liabilities B. either understate current assets or overstate current liabilities C. either overstate current assets or understate current liabilities D. understate either current assets or current liabilities

C. either overstate current assets or understate current liabilities

The ultimate responsibility for the financial reporting process rests with the _______, but the efficiency of achieving this goal is improved by the _______. A. non-executive directors; audit committee B. audit committee; executive directors C. full board; audit committee D. executive directors; full board

C. full board; audit committee

Analytical procedures are conducted during the risk assessment phase of the audit to ________. A. aid in the elimination of risk B. complete the audit work C. identify accounts at risk of material misstatement D. highlight normal fluctuations in accounts

C. identify accounts at risk of material misstatement

An audit committee of a publicly traded company should be composed of: A. the CFO and two other board members who are also shareholders. B. the audit partner, the CFO, and a shareholder. C. members of the board of directors who are independent directors. D. executive and non-executive members of the board of directors.

C. members of the board of directors who are independent directors.

Analytical procedures: A. cannot be performed on interim data. B. are only useful if the client's variation from budget is low. C. must take into account seasonal variation in the client's business. D. are not affected by different accounting methods between the client and other members of the industry.

C. must take into account seasonal variation in the client's business.

When gaining an understanding of the client, the auditor will identify the geographic location of the client because: A. more decentralized clients are easier to control. B. more centralized clients are harder to control. C. the auditor may plan to use staff from affiliated offices to visit overseas locations. D. the auditor will only visit one location to assess processes and procedures.

C. the auditor may plan to use staff from affiliated offices to visit overseas locations.

An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable? A. A decrease in notes payable. B. A decrease in accounts payable. C. A decrease in costs of goods sold as a percentage of sales. D. A decrease in retained earnings.

D. A decrease in retained earnings.

When gaining an understanding of the client, the auditor will consider: A. related party identification. B. the appropriateness of the client's system of internal controls to mitigate identified business risks. C. controls over the technology used to process and store data electronically. D. All of these answer choices are correct.

D. All of these answer choices are correct.

In a period of recession in a particular industry, the auditor would typically spend more time on which of the following accounts? A. Purchase discounts B. Equity method investment account with a noncontrolling interest in a subsidiary C. Preferred stock D. Allowance for doubtful accounts

D. Allowance for doubtful accounts

Which of the following are an evaluation of financial information by studying plausible relationships among both financial and non-financial data? A. Common-size analyses B. Trend analyses C. Closing procedures D. Analytical procedures

D. Analytical procedures

In the context of fraudulent financial reporting, which would most likely represent a risk factor? A. Low employee turnover at senior management levels B. Revenue expectations from management have increased slightly from the prior year C. The structure of the company includes subsidiary companies D. High degree of competition in the particular industry

D. High degree of competition in the particular industry

Which of the following factors indicate higher inherent risks? A. Steady profitability B. Demand is not seasonal C. Industry has low chance of technological obsolescence D. Industry subject to changing trends

D. Industry subject to changing trends

Which of the following elements would normally be included in an auditor's engagement letter? A. Whether or not the auditor will attempt to obtain negative assurance with respect to management's compliance with laws and regulations. B. Initial judgments pertaining to materiality. C. Responsibility of management for any and all illegal acts perpetrated by its employees. D. Potential limitations of the audit engagement.

D. Potential limitations of the audit engagement.

Common factors that influence inherent risk are ________. A. importers and exporters B. major suppliers C. discounts D. all of the above

D. all of the above

The audit committee is responsible for the ________ of the auditors. A. oversight and appointment B. appointment and compensation C. oversight and compensation D. all of the above

D. all of the above

A comparison of account balances to a single line item, such as total assets, is termed ________. A. substantive procedures B. compliance audit C. trend analysis D. common-size analysis

D. common-size analysis

When gaining an understanding of the client's sources of financing, the auditor: A. determines if the client is writing off uncollectible accounts receivable. B. is not interested in debt covenants because most debt contracts are the same. C. ignores the relative reliance on debt versus equity funding because that is a management decision, not an audit issue. D. determines if the client is meeting principal and interest payments when they are due.

D. determines if the client is meeting principal and interest payments when they are due.

Generally speaking, client firms engaged in international trade would be considered to have ________. A. less complicated operations B. lower control risk C. lower inherent risk D. higher inherent risk

D. higher inherent risk

Common uses of analytical procedures include all of the following except: A. overall assessment of financial statements at the final review stage of the audit. B. risk identification during the risk assessment stage. C. testing account balances derived from estimates during the risk response stage. D. test of internal controls.

D. test of internal controls.