acct 411 chapter 4, part 1
Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.
False Reason: Numerous fraud cases have involved the deliberate manipulation of estimates to increase net income.
A company's failure to provide minutes is not considered a significant scope limitation.
False Reason: This is a significant scope limitation that could result in the audit firm disclaiming an opinion.
When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts.
before
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, the auditors must inform the ______.
board of directors
On every audit engagement, the risk assessment process includes required________sessions in which critical audit areas are discussed.
brainstorming
Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called
business risks
When thinking about each of the relevant financial statement assertions, the auditor should focus on what ______.
can go wrong
Fraud risk ______.
can never be ignored
General business sources ______
can relate to an industry or individual company
Existence is riskier than completeness for ______.
cash
Factors related to the susceptibility of accounts to misstatement or fraud include ______.
complexity liquidity
Question an auditor asks when assessing_____risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"
control
The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk.
control
In the audit risk model, the assessment of inherent risk and___risk lead to a determination of_____risk
control and detection
The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______.
decreases as the RMM increases
Another name for employee fraud, embezzlement, and larceny is
defalcation
Auditing standards use the term ______ to refer to misappropriation of assets.
defalcation
The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk.
detection
Using the audit risk model, the auditor must adjust ______risk for significant accounts and relevant disclosures.
detection
In the audit risk model ______.
detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk AR = IR × CR × DR
Auditors can and do influence the level of ______.
detection risk only
A violation of pension laws or government contract regulations is an example of _________ noncompliance.
direct effect
An auditor should consider the laws and regulations that are typically known by auditors to have a potentially material effect on the financial statements for
direct effect noncompliance
Regardless of when analytical procedures are performed, testing is concluded by ______.
documenting team findings
A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called
embezzlement
Employee fraud can be classified as either
embezzlement or defalcation
Misappropriating funds or other property from one's boss in the definition of
employer fraud
An unintentional misstatement or financial statement omission is referred to as a(n)
error
An unintentional misstatement or financial statement omission is referred to as a(n) ______.
error
A misstatement in the financial statements may be caused by a(n)
error or fraud
According to auditing standards, an "auditors responsibility to detect and report misstatements from illegal acts that have a direct and material effect on the determination of financial statement amounts is the same as that for misstatement caused by ______.
error or fraud
If the potential for fraud is high, auditors should ______.
examine more transactions use less predictable audit procedures perform extended procedures include more experienced team members
If the potential for fraud is high, auditors should perform_______________ , including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points.
extended procedures
Issues of particular importance in times of economic distress include ______.
fair value measurements goodwill impairment inventory revenue recognition
According to professional auditing standards, which of the following is NOT a type of audit risk?
fraud
By definition _______risks are significant risks.
fraud
The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe and act on it is the definition of
fraud
Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their
fraud risk assessment.
Auditors have a responsibility to detect ______.
fraudulent activity that results in materially misstated financial statements
Intentional misstatements in financial statements to deceive financial statement users is the definition of
fraudulent financial reporting
Management fraud is sometimes referred to as
fraudulent financial reporting
Calculating year-to-year changes in balance sheet and income statement accounts is called
horizontal analysis
A company's performance measures ______.
identify what managers deem as key indicators of company performance might indicate qualitative factors to consider when determining materiality
Knowing industry characteristics ______.
includes knowledge of the client's competition relates to differences in production and marketing activities
A violation of equal employment opportunities is an example of
indirect effect compliance
The basis for executing an appropriate response to identified risks is ______ risk assessment.
inherent
The probability that, in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements is ______ risk.
inherent
When performing risk assessment procedures, the first step auditors often take it to assess_____ risk for each relevant assertion related to each of the significant accounts and disclosures identified on an audit engagement.
inherent
The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is
inherent risk
The formula for the audit risk model is ______.
inherent risk × control risk × detection risk
The assessment of inherent risk ______.
needs to occur for each significant financial statement account and disclosure needs to be evaluated without regards to internal controls
Errors are ______ considered fraud.
never
Examples of business risks include ______.
new products and services industry developments business expansion
Audit teams are concerned ______.
only with fraudulent activity that results in materially misstated financial statements
Due to the importance of industry characteristics, most large public accounting firms ______.
organize their audit staff by industry
Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______.
overstating assets or understating liabilities omitting important information from disclosures Understating expenses and overstating revenues.
An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______.
permissible, but rarely done
At the preliminary stage, analytical procedures are
reasonableness test
Items that must be documented in the working papers during the risk assessment process include ______.
regarding management override specific risks identified and audit team responses procedures to identify and assess risk
General business sources include ______.
registration statements and 10-K filings specialized trade magazines and journals business newspapers
An auditor's primary objective in regard to_________ is to obtain the evidence needed to determine if transactions with them have been properly accounted for and disclosed in the financial statements.
related parties
Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called
related parties
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion.
relevant
A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______.
reported to management above the level of the people involved
The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the _____________process and ultimately the audit plan.
risk assessment
A company's failure to provide minutes of the meetings of directors and committees of the board of directors is a significant_______ that could result in the public accounting firm's disclaiming an opinion on the financial statements.
scope limitation
Frauds involving senior management or high-level employees ______.
should be reported to the audit committee or Board of Directors
An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a ______ account or disclosure.
significant
Items that must be documented in the working papers during the risk assessment process include ______.
significant decisions during discussion discussions with engagement personnel other conditions causing auditors to plan additional procedures
Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called
significant risk
Factors related to the susceptibility of accounts to misstatement or fraud include ______.
size of account balance the volume of transactions
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, they must ______ inform the SEC.
sometimes
A well planned and carefully performed audit ______ audit risk.
still has some
The nature, timing, and extent of resources needed to perform the engagement should be outlined in the audit
strategy
Tests of details and analytical procedures which study plausible relationships are the two categories of
substantive procedures
Auditors are able to reduce detection risk by completing more and stronger ______.
substantive tests
Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements.
two; two
Knowing if a client is centralized or decentralized is a component of ______.
understanding the nature of the company
Most firms express their audit risk ______.
using qualitative measures
Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called
vertical analysis
The misdeeds of people who steal with a pencil or computer terminal are known as
white collar crimes
Auditors ______.
would not seem to exhibit due professional care if the level of audit risk was too high cannot place complete reliance on internal controls to the exclusion of other audit procedures
Which of the following statements are true?
-If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. -Auditors are normally required to keep client information confidential.
Audit team brainstorming sessions are a required audit engagement component.
True Reason: Critical audit team issues must be discussed.
Which of the following statements regarding audit risk are correct?
Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.
Which of the following statements are correct?
Auditors are not expected to know all relevant laws and regulations affecting their clients. Auditors are not required to provide assurance about indirect-effect noncompliance.
Which of the following statements are correct?
Auditors devote significant time to understanding client's business risks. Most business risks are eventually reflected in the financial statements. Evidence must be gathered in areas not historically addressed by auditors.
Which of the following statements are true regarding assessing the risk of fraud?
Balances that contain difficult estimates to audit are very challenging for auditors. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.
Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance?
If the audit firm resigns or is fired When answering a subpoena
Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when managements' estimates all exhibit conservatism.
True Reason: Even when estimates are within the range of reasonableness, if they all lean to the conservative side they must be evaluated for overall reasonableness.
Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.
True Reason: Most firms use low, moderate and high, but these all represent a range of numbers.
The professional statements make clear that risk assessment underlies the entire audit process.
True Reason: This is why it is essential that auditors take great care to appropriately assess RMM.
The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement.
True Reason: This may occur when auditors understand measures to which management or financial statement users may be sensitive.
Audit risk is evaluated at both the overall financial statement level and for each significant
account and disclosure
Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of
accounting estimates
When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary
analytical procedure
Analytical procedures are required ______.
at the beginning of the audit at the end of the audit
All companies trading on the stock exchanges are required to have a(n) __________which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management,
audit committee
The audit strategy memorandum becomes the basis for preparing the ______.
audit plan
The probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated is the definition of
audit risk
The audit strategy is a result of the ______.
audit risk model
The audit plan includes a description of the
audit strategy memorandum
In establishing the overall audit strategy, the auditor should take into account the ______.
auditor's evaluation of risk assessment reporting objectives of the engagement results of preliminary engagement activities significant factors in directing engagement team activities
White-collar crimes may ______ the organization.
be perpetrated by or upon
The professional standards break down overall audit risk into
inherent, control, detection risk
The key difference between error and fraud is ______.
intent
There is a(n) ______ relationship between RMM and detection risk.
inverse
If preliminary findings indicate the possibility of fraud, auditors should ______.
involve fraud examination professionals
Finding out a client is planning to acquire another company ______.
is a component of understanding the nature of the company results in additional risks for the auditor
Interviewing the entity's management, internal auditors, directors, audit committee and other employees ______.
is a required audit procedure helps bring auditors up to date on business and industry changes provides information on personnel competence and integrity
Inherent risk ______.
is not created by the auditors is the susceptibility of the account to misstatement
Detection risk ______.
is the amount of risk the auditor can allow is calculated and derived from other risks
When an employee misappropriates funds or property not entrusted to his or her custody, an act of ________or simple theft has occurred.
larceny
The auditor's responsibility for detecting indirect-effect noncompliance is ______.
limited
An account or disclosure ______.
may be significant even though the balance is below materiality
Company discussion boards ______.
may be used by anonymous whistle-blowers
When developing an expectation of an account balance, auditors ______.
may consider relevant nonfinancial information may consider third party information may use vertical and horizontal analysis
Business risk assessment ______.
may involve asking production personnel about labor problems is an important component of an audit makes auditors more knowledgeable about the client's business and environment
Noncompliance or suspected noncompliance ______.
may require discussions with the client's legal council must always be responded to by the auditors
With respect to accounting estimates, auditors are responsible for ______.
monitoring differences between estimates and audit evidence looking for indications of systematic bias
Fraud risk ______.
must be considered on each audit engagement is not specifically mentioned in the audit risk model
When doing fraud risk assessment, auditors ______.
must presume improper revenue recognition is a risk
The type and purpose is referred to as the_______of an audit procedures
nature
Based on the allowable or planned level of detection risk, auditors modify the___, the_______, and the______of further audit procedures.
nature, timing, extent
