Audit 2

General business sources ______ only relate to an industry and exclude individual companies can relate to an industry or individual company only relate to an individual company and exclude industry publications

Can relate to an industry or individual company

Existence is riskier than completeness for:

Cash (C - cash C- completeness)

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. detection inherent control

Control

Question an auditor asks when assessing ________ risk is, "what is the audit client doing when misstatement occur?" Are proper system in place to prevent or detect misstatement

Control Risks

Another name for employee fraud, embezzlement, and larceny is

Defalcation

Auditing standards use the term ______ to refer to misappropriation of assets. larceny error embezzlement defalcation

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 control inherent

Detection

Using the audit risk model, the auditor must adjust _____ risk for significant accounts and relevant disclosures.

Detection

Auditors can and do influence the level of:

Detection Risk only

___________ is calculated and derived from other risks and is the amount of risk the auditor can allow

Detection risk

Auditors can and do influence the level of both detection and control risk control, detection and inherent risk both detection and inherent risk detection risk only

Detection risk only

__________ is the risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

Detection risk.

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 _____-_____ noncompliance.

Direct-effect

Regardless of when analytical procedures are performed, testing is concluded by ______. comparing expectations with recorded amounts investigating significant differences documenting team findings defining a significant difference developing an expectation

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 _____ or defalcation.

Embezzlement

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 or Defalcation

Employee fraud can be classified as either _____ or _____

Embezzlement or larceny

Misappropriating funds or other property from one's boss in the definition of

Employee Fraud

Misappropriating funds or other property from one's boss in the definition of _____ _____ (2 words)

Employee fraud

An unintentional misstatement or financial statement omission is referred to as a(n) ______. error embezzlement defalcation larceny

Error

A misstatement in the financial statements may be caused by a(n) _____ or _____

Error or fraud

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as___________

Risk of material misstatement.

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. (2 words)

Scope limitation

Analytical procedures used when planning an audit should concentrate on signs of accounts and relationships that may represent specific potential problems and risks in the __________

financial statements.

The audit team's first concern is the effect of the noncompliance on the _______________

financial statements.

Interviewing the entity's management, internal auditors, directors, audit committee and other employees

-provides information on personnel competence and integrity -is a required audit procedure -helps bring auditors up to date on business and industry changes

General business sources include:

-registration statements and 10-K filings -specialized trade magazines and journals -business newspapers

Finding out a client is planning to acquire another company

-results in additional risks for the auditor -is a component of understanding the nature of the company

Control risk slightly below the maximum is 0.60 -0.95 and the maximum control risk is ______

1.0

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 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 memorandum becomes the basis for preparing the ______. engagement plan audit risk model audit plan audit team

Audit plan

The audit strategy is a result of the ______. resources available engagement plan audit plan audit risk model

Audit risk model

____________ is is not created by the auditors and is the susceptibility of the account to misstatement

inherent risk

The formula for the audit risk model is ______.

inherent risk × control risk × detection risk

The formula for the audit risk model is ______. inherent risk × control risk × detection risk detection risk - (inherent risk + control risk) inherent risk + control risk + detection risk (inherent risk + control risk) - detection risk

inherent risk × control risk × detection risk

A _________ is never recorded, so this type of investigation is generally difficult.

"dangling credit"

The theory of the __________is an asset amount that is investigated and found to be false or questionable.

"dangling debit"

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include

-overstating assets and understating liabilities - omitting important information from disclosures

Which of the following statements regarding audit risks are correct

- audit risk should bet an appropriately low level - the focus on evaluating audit risk on the relevant assertions identified

Investigating significant differences at the preliminary stage

- can be used to plan additional audit work - may be considered attention directing - help auditors identify risks as an aid in preparing the audit plan

Factors related to the susceptibility of accounts to misstatement or fraud include:

- liquidity - complexity

Items that must be documented in the working papers during the risk assessment process include:

- other conditions causing auditors to plan additional procedures - discussion with engagement personnel - significant decisions during discussion

Items that must be documented in the working papers during the risk assessment process include:

- results of audit procedures, particularly regarding management override -specific risks identified and audit team responses -procedures to identify and assess risks

In establishing the overall audit strategy, the auditor should take into account the:

-auditor's evaluation of risk assessment -results of preliminary engagement activities -significant factors in directing engagement team activitie -reporting objectives of the engagement

In the audit risk model

-detection risk is based on the desired level of audit risk and assessed levels of inherent and control risks - AR = IR * CR * DR

Issues of particular importance in times of economic distress include:

-fair value measurements -inventory -revenue recognition -goodwill impairment

If the potential for fraud is high, auditors should:

-include more experience team members -examine more transactions -use less predictable audit procedures -perform extended procedures

Knowing industry characteristics

-includes knowledge of the client's competition -relates to differences in production and marketing activities

Inherent Risks

-is not created by the auditors -is the susceptibility of the account to misstatement

Fraud Risk:

-is not specifically mentioned in the audit risk model -must be considered on each audit engagement

Auditors are responsible for:

-looking for indications of systematic bias -monitoring differences between estimates and audit evidence

Noncompliance or suspected noncompliance

-may require discussion with the client's legal council -must always be responded to by the auditors

A company's performance measures

-might indicate qualitative factors to consider when determining materiality -identify what managers deem is key indicators of company performance

Audit risk is evaluated at both the overall financial statement level and for each significant _____ and _____

Account & Disclosure

Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of _____ _____ (2 words)

Accounting estimates

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?

Accounts receivable.

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 Procedures

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 _____ _____ (2 words)

Analytical procedure

___________ incorporate information from a variety of sources such as relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Analytical procedures

_____________ can be used when planning the audit, when performing substantive procedures during an audit, and as a method of overall review at the end of an audit.

Analytical procedures

Analytical procedures are required:

At the end and beginning 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 (2 words)

Audit Committee

Fraud risk ______. may or may not be ignored depending on the assessment of inherent and control risks can never be ignored can only be ignored with continuing audit clients

Can never be ignored

Which of the following statements regarding audit risk are correct? (Select all that apply) The auditing professional has an official standard regarding acceptable level of audit risk. Audit risk is generally only evaluated at the overall financial statement level. Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.

Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.

The audit plan includes a description of the _____ _____ memorandum. (2 words)

Audit strategy

the nature, timing and extent of resources needed to perform the engagement should be outlined in the audit

Audit strategy

__________ places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms. Most firms use low, moderate and high, but these all represent a range of numbers.

Audit theory

Which of the following statements are correct? (Select all that apply) If an auditor becomes aware of an illegal act procedures must be performed to determine if one occurred. 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.

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.

__________ that contain difficult estimates to audit are very challenging to auditors

Balances

Which of the following statements are true regarding assessing the risk of fraud? (Select all that apply) The easiest way to look for omission of liabilities is the "dangling credit". Balances that contain difficult estimates to audit are very challenging for auditors. Some fraudulent accounting entries only affect one account or place in the financial statements. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.

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.

White-collar crimes may ______ the organization. be perpetrated by or upon only be perpetrated by only be perpetrated upon

Be perpetrated by or upon

When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts. either before or after after before

Before

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

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 ______. CFO and CEO audit committee board of directors SEC

Board of directors

On every audit engagement, the risk assessment process includes required _____ sessions in which critical audit areas are discussed.

Brainstorming

sks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called _____ risks.

Business

When thinking about each of the relevant financial statement assertions, the auditor should focus on what ______. is being done right can go wrong dollar amount is considered significant

Can go wrong

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 indirect-effect noncompliance direct-effect noncompliance

Error or fraud

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. (2 words)

Extended procedures

_______ refers to the number of tests performed. Eg: the larger number of accounts receivable confirmations that are mailed to customers, the greater the chance of finding errors and fraud, and therefore, the lower the detection risk.

Extent

True or False: A well planned and carefully performed audit can virtually eliminate audit risk

False

True or false: A company's failure to provide minutes is not considered a significant scope limitation

False

True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.

False

According to professional auditing standards, which of the following is NOT a type of audit risk? inherent fraud detection control

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

the act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe an 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 _____ _____ assessment. (2 words)

Fraud Risk

Management fraud is something referred to as

Fraudulent Financial Reporting

Auditors have a responsibility to detect ______. only fraud that involves management all fraudulent activity regardless of if it affects the financial statements fraudulent activity that results in materially misstated financial statements

Fraudulent activity that results in materially misstated financial statements

Intentional misstatements in financial statements to deceive financial statement users is the definition of _____ _____ _____ (3 words)

Fraudulent financial reporting

Management fraud is sometimes referred to as _____ _____ _____ (3 words)

Fraudulent financial reporting

Credit risk must be assessed and _____ if material misstatement is NOT likely to be detected by client's internal controls

High

IF the calculated acceptable level of detection risk is _______, that means auditors could use less effective testing, and ________ means auditors need more effective testing

High; low

For Timing, _________ detection risk allowed means that testing can be performed at interim and _________ detection risk allowed means testing is performed at the end of the year.

Higher; lower

A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______. noted in the working papers but not reported to anyone outside the audit team reported in notes to the financial statements ignored reported to management above the level of the people involved

Reported to management above the level of the people involved

Which of the following statements are true? (Select all that apply) When a court issues a subpoena, an auditor can refuse to respond on the basis of audit-client privilege. If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. Under SEC rules, limited disclosures to outside agencies of frauds and clients' noncompliance are permitted. Auditors are normally required to keep client information confidential.

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.

Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance? (Select all that apply) If the audit firm resigns or is fired When the auditor is a successor auditor When answering a subpoena

If the audit firm resigns or is fired When answering a subpoena

A violation of equal employment opportunities is an example of ________ ________ non compliance

Indirect - Effect

A violation of equal employment opportunities is an example of _____-_____ noncompliance.

Indirect-effect

The basis for executing an appropriate response to identified risks is ______ risk assessment. inherent detection control fraud

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 _____ 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 components of the risk of material misstatement (RMM) are ______ risk and _____ risk.

Inherent & Control Risk

The basis for executing an appropriate response to identified risk is ____________ risk assessment

Inherent Risks

The risk of material misstatement is composed of which audit risk components?

Inherent risk and control risk.

The key difference between error and fraud is ______. the magnitude of the misstatement who is responsible intent

Intent

There is a(n) ______ relationship between RMM and detection risk. inverse direct

Inverse

If preliminary findings indicate the possibility of fraud, auditors should ______. enlist the cooperation of the Board of Directors involve fraud examination professionals issue a disclaimer of opinion

Involve fraud examination professionals

The auditor's responsibility for detecting indirect-effect noncompliance is ______. limited higher than his or her responsibility for direct-effect noncompliance nonexistent as there is no responsibility the same as the responsibility for direct-effect noncompliance

L

When an employee misappropriates funds or property not entrusted to his or her custody, an act of _____ or simple theft has occurred.

Larceny

When detection risk is high, the auditor requires __________ effective testing than when detection risk is low

Less effective testing

Factors related to the susceptibility of accounts to misstatement or fraud include ______. liquidity organizational structure complexity

Liquidity & complexity

An account or disclosure ______. is only significant if it exceeds the materiality level may be significant even though the balance is below materiality

May be significant even though the balance is below materiality

Company discussion boards ______. can be used as a replacement for discussions with client personnel should not be considered a reliable source of company information may be used by anonymous whistle-blowers

May be used by anonymous whistle-blowers

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. (2 words)

Risk assessment

Which of the following statements are correct? (Select all that apply) Gaining an understanding of strategies and procedures involves gathering evidence in areas historically addressed by auditors. Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.

Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.

Noncompliance or suspected noncompliance ______. does not have to be responded to if it is "clearly inconsequential" must always be responded to by the auditor

Must always be responded to by the auditor

Fraud risk ______. (Select all that apply) must be considered on each audit engagement is the risk of material error by management when issuing financial statements is not specifically mentioned in the audit risk model

Must be considered on each audit engagement Is not specifically mentioned in the audit risk model

When doing fraud risk assessment, auditors ______. should not presume improper revenue recognition is a risk without cause plan to test for improper revenue recognition without making any assumptions must presume improper revenue recognition is a risk base the assessment of improper revenue recognition of prior audit reports

Must presume improper revenue recognition is a risk

The type and purpose is referred to as the _____ of an audit procedures.

Nature

Errors are ______ considered fraud. always sometimes never

Never

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______. (Select all that apply) understating expenses and revenues omitting important information from disclosures overstating assets or understating liabilities

Omitting important information from disclosures Overstating assets or understating liabilities

Audit teams are concerned ______. only with fraudulent activity that results in materially misstated financial statements with all material and immaterial frauds with all material fraudulent activities whether or not they affect the financial statements with all fraudulent activities that have any connection to the financial statements

Only with fraudulent activity that results in materially misstated financial statements

Internal control is a set of policies and procedures designed to achieve management objectives in three different categories. Maintaining a good business reputation and increasing market share are objectives of the _____ category.

Operations

Due to the importance of industry characteristics, mos large public accounting firms

Organize their audit staff by industry

An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______. permissible, but rarely done not permissible permissible and often done

Permissible, but rarely done

At the preliminary stage, analytical procedures are _____ tests.

Reasonableness

A higher assessed risk of material misstatement for a relevant assertion being audited _______ detection risks

Reduces

Determining if transactions with them have been properly accounted for and disclosed in the financial statements is the auditor's primary objective in regards to _____ _____ (2 words)

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 _____ _____ (2 words)

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. risky significant relevant material

Relevant

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

Frauds involving senior management or high-level employees ______. should be reported to the audit committee or Board of Directors may be inconsequential, depending on the threshold level always require the auditor to disclaim an opinion

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. material risky relevant significant

Significant

Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called _____ risks.

Significant

Risks that require special audit consideration because of the nature of or likelihood of potential magnitude of misstatement related to the risks are called

Significant Risk

Factors related to the susceptibility of accounts to misstatement or fraud include ______. (Select all that apply) size of account balance the volume of transactions if the account records payables

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. always sometimes never

Sometimes

A well planned and carefully performed audit ______ audit risk. can virtually eliminate still has some

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 tests of details

Substantive tests

Which of the following statements regarding audit risk are correct? (Select all that apply) Audit risk is generally only evaluated at the overall financial statement level. The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level. The auditing professional has an official standard regarding acceptable level of audit risk.

The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level.

True or false: Audit team brainstorming sessions are a required audit engagement component.

True

True or false: 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

True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when managements' estimates all exhibit conservatism.

True

True or false: The professional statements make clear that risk assessment underlies the entire audit process.

True

True or false: 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

Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements. one; one two; two one; two two; one

Two; two

Knowing if a client is centralized or decentralized is a component of

Understanding the nature of the company

Knowing if a client is centralized or decentralized is a component of ______. identifying related parties recognizing industry concerns understanding the nature of the company assessing detection risk

Understanding the nature of the company

Most firms express their audit risk ______. using qualitative measures quantitatively (as numbers)

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 _____ analysis.

Vertical

The misdeeds of people who steal with a pencil or computer terminal are known as _____-_____ crimes.

White-collar

audit risk is evaluated at both the overall financial statement level and for each significant

account and disclosure

Audit risk is evaluated at both the overall financial statement level and for each significant___________ and __________

account; disclosure

Valuation of investment securities, depreciation, and net realizable value of accounts receivable are all examples of

accounting estimates

At the final review stage, ___________ procedures are designed to provide an overall test of reasonableness about the financial statements being reviewed, in light of all available evidence.

analytical review

Analytical procedures are required ______. Multiple select question. at the end of the audit as substantive testing procedures at the beginning of the audit

at the end of the audit at the beginning of the audit

The ___________ needs to be set low or very low

audit risk

__________ should be at an appropriately low level and focus on evaluation of _________ is on the relevant assertions identified

audit risk

The audit strategy is a result of the:

audit risk model

The audit plan includes a description of the _______ memorandum

audit strategy

An _______ contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

audit strategy memorandum

An audit committee is composed of members of a company's _____________ who are not involved in the day-to-day operations of the company.

board of directors

Auditors ______. (Select all that apply) cannot place complete reliance on internal controls to the exclusion of other audit procedures are not permitted to rely exclusively on evidence produced by substantive procedures, even when control risk is high can estimate inherent risk to be zero and omit other evidence-gathering procedures 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 would not seem to exhibit due professional care if the level of audit risk was too high

Existence is riskier than completeness for ______.

cash

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

Question an auditor asks when assessing ___________"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

The professional standards break down overall audit risk into

control risk, inherent risk, and detection risk

In the audit risk model, the assessment of inherent risk and _____ risk lead to a determination of _____

control, 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

The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______. is not dependent on RMM decreases as the RMM increases decreases as the RMM decreases

decreases as the RMM increases

Anther name for employee fraud, embezzlement and larceny

defalcation

In the audit risk model, the assessment of inherent risk and control risk lead to a determination of __________ risk.

detection

In the audit risk model, the assessment of inherent risk and control risk lead to a determination of_________ risk.

detection

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

In the audit risk model ______. (select all that apply) detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk the desired level of audit risk is based on the assessed level of inherent, control and detection risk AR = IR × CR × DR detection risk is considered to be independent of inherent and control risks which are interrelated

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

Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) explanation of why improper revenue recognition is a risk discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion

discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion

Regardless of when analytical procedures are performed, testing is concluded by:

documenting team findings

auditors would not seem to exhibit ___________ if the level of audit risk was too high

due professional case

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 __________ or defalcation

embezzlement

Employee fraud can be classified as either ______ or ______

embezzlement; larceny

According to auditing standards, an "auditors responsibility o 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

The level of detection risk is always based on the assessment of ________

inherent and control risk

_________ is due to intent, not error

fraud

The ___________ is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements.

fraud brainstorming session`

___________ must be considered on each audit engagement and is not specifically mentioned in the audit risk model

fraud risk

Management fraud is sometimes referred to as _________ and is done by intentional misstatements in financial statements to deceive financial statement users

fraudulent financial reporting

an auditor most likely consider an inherent risk factor in planning an audit is if the entity enters into significant derivative transactions as ___________.

hedges

Investigating significant differences at the preliminary stage ______. (Select all that apply) help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work provides direct evidence about the number in the financial statements may be considered attention directing

help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work may be considered attention directing

Even if they think control risk is _______, auditors often perform some tests of controls.

high

Inherent risk assessed and must be ____ if material misstatement is likely to enter the accounting information system

high

Assess risk of material misstatement at ___________ audit risk by performing extensive substantive tests. The objective is to perform a quality audit and keep audit risk low.

high and achieve an acceptably low

Calculating year-to-year changes in balance sheet and income statement accounts is called

horizontal

Calculating year-to-year changes in balance sheet and income statement accounts is called

horizontal analysis

A company's performance measures ______. (Select all that apply) identify what managers deem as key indicators of company performance related to management compensation help auditors gain a better understanding of their clients might indicate qualitative factors to consider when determining materiality

identify what managers deem as key indicators of company performance might indicate qualitative factors to consider when determining materiality

Auditors perform analytical procedures in the planning stage of an audit for the purpose of ___________ that deserve more auditing effort. This is the "attention‑directing" purpose.

identifying unusual conditions

An audit team's assessment of control risk as low ______. (Select all that apply) implies controls are effective allows auditors to use smaller sample sizes implies controls can definitely be relied on may limit the use of substantive tests of details

implies controls are effective allows auditors to use smaller sample sizes may limit the use of substantive tests of details

Examples of business risks include ______. (Select all that apply) industry developments new products and services inaccurate accounting estimates business expansion

industry developments new products and services business expansion

Auditors cannot place complete reliance on __________ to the exclusion of other audit procedures

internal controls

There is an ____ relationship between risk of material misstatement and detection risk

inverse

Inherent risk ______. (Select all that apply) is not created by the auditors is the susceptibility of the account to misstatement is not related to the nature of the client's business can be controlled by the auditors

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 determines the overall level of audit risk is calculated and derived from other risks

is the amount of risk the auditor can allow is calculated and derived from other risks

When an employee misappropriates funds or property not trusted to his or her custody, an act of _________ or simple theft has occurred

larceny

With respect to accounting estimates, auditors are responsible for ______. (Select all that apply) looking for indications of systematic bias monitoring differences between estimates and audit evidence making accounting estimates ensuring that all accounting estimates are conservative

looking for indications of systematic bias monitoring differences between estimates and audit evidence

0.10-0.45 is considered _________ control risk which is Quantitative

low

For Nature, the _________ detection risk allowed, the more effective tests; the ________ detection risk allowed, less effective tests.

lower; higher

Business risk assessment ______. (Select all that apply) makes auditors more knowledgeable about the client's business and environment should focus on gathering evidence in areas historically addressed by auditors is an important component of an audit may involve asking production personnel about labor problems

makes auditors more knowledgeable about the client's business and environment is an important component of an audit may involve asking production personnel about labor problems

The closer the procedures are performed to year-end (balance sheet date) the more effective they are because there is less change of a __________ occurring between the interim conformation date and year end.

material misstatement

An account or disclosure

may be significant even though the balance is below materiality

When developing an expectation of an account balance, auditors ______. (Select all that apply) may consider third party information should not consider budgets and forecasts may use vertical and horizontal analysis may consider relevant nonfinancial information

may consider third party information may use vertical and horizontal analysis may consider relevant nonfinancial information

___________ is often referred to as employee fraud. Another name for employee fraud, embezzlement, and larceny is _________

misappropriation of assets; defalcation

0.40-.70 is considered _________ control risk which is Quantitative

moderate

Extent allows __________ for lower detection risk allowed and _________ for higher detection risk allowed

more tests; fewer tests

Noncompliance or suspected noncompliance ______. (Select all that apply) must always be responded to by the auditors may require discussions with the client's legal council always requires financial statement disclosure should always be recorded to the audit committee

must always be responded to by the auditors may require discussions with the client's legal council

When doing fraud risk assessment, auditors

must presume improper revenue recognition is a risk

The __________ of an audit procedure refers to the type of procedure (Eg: observation, recalculation, inquiry), this is where the auditor is considering WHAT to do.

nature

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

Based on the allowable or planned level of detection risk, auditors modify the __________of further audit procedures.

nature, timing and extent

The assessment of inherent risk ______. (select all that apply) does not need to consider the overall materiality level needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure

needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure

Due to the importance of industry characteristics, most large public accounting firms ______. assign auditors to audits of many different industries to improve their knowledge organize their audit staff by industry limit their audit engagements to one or two specific industries

organize their audit staff by industry

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______, understating expenses and overstating revenues, and omitting important information from disclosures

overstating assets or understating liabilities

An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______.

permissible, but rarely done

Auditors are not required to report all finding of errors and frauds to _________

police authorities.

Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses communications to the audit team and audit firm partners

procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses

Interviewing the entity's management, internal auditors, directors, audit committee and other employees ______. (Select all that apply) should not be used to build personal working relationships provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes

provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes

IF the relevant assertion is risky, or the related controls are poor, auditors would want to ______________ by modifying the nature, time, and extent of further procedures to increase their effectiveness.

reduce detection risk

A higher assessed risk of material misstatement for a relevant assertion being audited ______ detection risk.

reduces

General business sources include ______. (Select all that apply) registration statements and 10-K filings business newspapers company charter and bylaws specialized trade magazines and journals

registration statements and 10-K filings business newspapers specialized trade magazines and journals

An auditor's primary objective in regards to _______________ is to determine if transactions with them have been properly accounted for and disclosed in the financial statements

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

Finding out a client is planning to acquire another company ______. (Select all that apply) results in additional risks for the auditor is a component of understanding the nature of the company is a component of recognizing industry concerns requires the auditor to issue a modified audit opinion

results in additional risks for the auditor is a component of understanding the nature of the company

In establishing the overall audit strategy, the auditor should take into account the ______. (Select all that apply) results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement nature of communication required by company management significant factors in directing engagement team activities

results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement significant factors in directing engagement team activities

Issues of particular importance in times of economic distress include ______. (Select all that apply) revenue recognition inventory goodwill impairment management compensation fair value measurements

revenue recognition inventory goodwill impairment fair value measurements

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

If the account is not risky and controls are strong, the auditor could employ less effective and less costly __________

substantive audit procedures

Tests of details and analytical procedures which study plausible relationships are the two categories of_______

substantive procedures

_________ refers to WHEN the audit procedures will be completed, this is done when the auditor considers whether to complete the procedures at an interim date or at the balance sheet date.

timing

Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements.

two

Most firms express their audit risk ______.

using qualitative measures

If the audit risk is at .05 that means that on average that five percent of audit opinions would be __________

wrong