ACCT 561 Week 2

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions? 1. Completeness 2. Rights & obligations 3. Valuation or allocation 4. Classification & understand-ability

1. Completeness

The primary difference between an audit of the income statement is that the audit of the income statement addresses the verification of 1. Transactions 2. Authorizations 3. Costs 4. Cutoff

1. Transactions

When an auditor reviews additions to the equipment (fixed asset) account to make sure that repair and maintenance expenses are not understated, she wants to obtain evidence as to management's assertion regarding 1. Completeness 2. Existence 3. Valuation and allocation 4. Rights and obligations 5. Occurrence

2. Existence

Tests designed to detect credit sales made before the end of the year have been recorded in the subsequent year provide assurance about management's assertion of 1. Classification and Understandability 2. Rights and Obligations 3. Cutoff 4. Existence

3. Cutoff

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of Classification and Understandability // Existence or Occurrence 1. Yes // Yes 2. Yes // No 3. No // Yes 4. No // No

3. No // Yes

Auditing standards define a confirmation as "the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions." Two assertions for which confirmation of accounts receivable balances provides primary evidence are 1. Completeness and valuation 2. Valuation and rights and oblications 3. Rights and obligations and existence 4. Existence and completeness

3. Rights and obligations and existence

The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about 1. Completeness 2. Existence 3. Valuation and allocation 4. Rights & obligations 5. Occurrence

3. Valuation and allocation

When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion? 1. Completeness 2. Existence 3. Valuation and allocation 4. Rights and obligations 5. Occurrence

4. Rights and obligations

In specific information that implies the existence of possible illegal acts that could have a material but indirect effect on the financial statements comes to an auditor's attention, the auditor should next A. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred. B. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities. C. Report the matter to an appropriate level of management at least one level above those involved. D. Discuss the evidence with the client's audit committee, or others with equivalent authority and responsibility.

A. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

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? A. Are financial reporting operations controlled by and limited to one location? B. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks? D. Has it reported to the audit committee the nature of the company's internal control?

A. Are financial reporting operations controlled by and limited to one location?

Jones, CPA is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct-effect illegal acts that are material to XYZ's financial statements and illegal acts that have a material but indirect effect on the financial statements will be detected? Direct Effect-Illegal Acts // Indirect Effect-Illegal Acts A. Reasonable // None B. Reasonable // Reasonable C. Limited // None D. Limited // Reasonable

A. Reasonable // None

What is an auditor's responsibility who discovers senior management is involved in what is financially immaterial fraud? A. Report the fraud to the audit committee. B. Report the fraud to the Public Company Accounting Oversight Board. C. Report the fraud to a level of management at least one below those involved in the fraud. D. Determine that the amounts involved are immaterial, and if so, there is no reporting responsibility.

A. Report the fraud to the audit committee.

Individuals who commit fraud are ordinarily able to rationalize the act and also have an Incentive // Opportunity A. Yes//Yes B. Yes//No C. No//Yes D. No//No

A. Yes//Yes

Which of the following is least likely to be required on an audit? A. Evaluate the business rationale for significant, unusual transactions. B. Make a legal determination of whether fraud has occurred. C. Review accounting estimates for biases. D. Test appropriateness of journal entries and adjustment.

B. Make a legal determination of whether fraud has occurred.

Which of the following is not required in SAS No. 99, "Consideration of Fraud in a Financial Statement Audit"? A. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. B. Conduct a discussion by the audit team of the risks of material misstatement due to fraud. C. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. D. Inquiries of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

C. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor.

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should A. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified opinion, require disclosure. B. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes. C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client. D. Issue an "expert for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? A. Domination of management by top executives. B. Large amounts of cash processed. C. Negative cash flows from operations. D. Small high dollar inventory items.

C. Negative cash flows from operations.

When the risk of material misstatement due to fraud is considered high in a particular area, which of the following is a likely response? A. Perform tests on an interim basis throughout the period. B. Obtain more reliable evidence by expanding tests to include all transactions. C. Obtain additional corroborative information. D. Design tests of controls to substantiate weaknesses.

C. Obtain additional corroborative information.

Which of the following is most likely to be presumed to represent a fraud risk on an audit? A. Capitalization of repairs and maintenance expense into the property, plant and equipment asset account. B. Improper interest expense accrual. C. Introduction of significant new products. D. Improper revenue recognition.

D. Improper revenue recognition.

Which of the following procedures would least likely result in the discovery of possible illegal acts? A. Reading the minutes of the board of directors' meetings. B. Making inquiries of the client's management. C. Performing tests of details of transactions. D. Reviewing an internal control questionnaire.

D. Reviewing an internal control questionnaire.

Which of the following need not be documented in relation to the auditor's consideration of fraud? A. Nature of communications about fraud made to management. B. Procedures performed to obtained information to identify and assess risks of material misstatement due to fraud. C. Specific risks of material misstatement due to fraud that were identified. D. The assessed level of the risk of management override of controls.

D. The assessed level of the risk of management override of controls.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? A. Only use certified public accountants on the engagement. B. Place increased emphasis on the audit of objective transactions rather than subjective transactions. C. Supervise members of the audit team less closely and reply more upon judgment. D. Use less predictable audit procedures.

D. Use less predictable audit procedures.