Audit Chapter 4

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

my definition _______ risks are significant risks

Fraud

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

A

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? A. High liquidity. B. Unfavorable industry conditions. C. Lack of working capital. D. Slow customer collections.

A

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on: A. management fraud. B. client fraud on customers. C. employee misappropriation of assets. D. employee embezzlement.

A

under the private securities litigation reform act of 1995 when auditors believe an illegal act that is more than "clearly inconsiquental" has or may have accured, the auditors must inform the A. board of directors B. sec C. audit committee D. CFO and CEO

A

using the audit risk model, the auditor must adjust ________ risk for significant accounts and relevant disclosures

detection risks

A violation of pension laws or government contract regulations is an example of ________ noncompliance

direct effect

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

intentional misstatements in financial statements to deceive financial statement users is the definition of

fraudulent financial reporting

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

strategy

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

white - collar

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

A

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 A. significant B. material C. relevant D. risky

A

issues of particular importance in times of economic distress include: Check all that apply A. inventory B. revenue recognition C. fair value measurements D. goodwill impairment E. allowance for uncollectible accounts

A,B,C,D

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

B

Items that must be documented in the working papers during the risk assessment process includes Check all that apply A. explanation of why improper revenue recognition is a risk B. other conditions causing auditors to plan additional procedures C. discussion with engagement personnel D. significant decisions during discussion

B,C,D

investigating significant differences at the preliminary stage Check all that apply A. provides direct evidence about the number in the financial statements B. may be considered attention directing C. can be used to plan additional audit work D. help auditors identify risks as an aid in preparing the audit plan

B,C,D

on every audit engagement, the risk assessment process includes required __________ sessions in which critical audit areas discussed

Brainstorming

A higher assessed risk of material misstatement for a relevant assertion being audited __________ detection risk A. has not impact on B. increases C. reduces

C

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

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

D

Auditors can and do influence the level of: A. both detection and inherent risk B. Control, detection and inherent risk C. both detection and control risk D. detection risk only

D

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

False

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

accounting estimates

All companies trading on the stock exchanges are required to have a ____________ 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 plan includes a description of the __________ memorandum

audit strategy

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

horizontal analysis

the exposure or susceptibility of an assertion within an entity financial statement to a material misstatement without regard to the system of internal control is ________ risk

inherent

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

larceny

Employee fraud can be classified as either ________ or _______

larceny, embezzlement

an auditors 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

Another name for employee fraud, embezzlement, and larceny is

Defalcation

True or False: audit team brainstorming sessions are a required audit engagement component

True

True or False: fraud affecting financial information often arises from the perceived need to get through a difficult period

True

Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called

Vertical analysis

An unintentional misstatement or financial statement omission is referred to as an A. error B. defalcation C. larceny D. embezzlement

A

Fraud risk A. can never be ignored B. may or may not be ignored depending on t he assessment of inherent and control risks C. can only be ignored with continuing audit clients

A

If preliminary findings indicate the possibility of fraud, auditors should A. involve fraud examination professionals B. enlist the cooperation of the board of directors C. issue a disclaimer of opinion

A

The best indicator of the risk of a material misstatement is: A. misstatements in previous audits that required adjusting entries B. a new senior management team C. a client who changes audit firms every two years

A

The probability that the auditors own procedures will fail to detect material misstatements provided that any have entered the accounting system is _______ risk A. detection B. inherent C. control

A

The probability that the clients internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is _________ risk A. control B. inherent C. detection

A

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 A. inherent B. detection C. control

A

When detection risk is high, the auditor requires __________ effective testing than when detection risk is low A. less B. more

A

if preliminary findings indicate the possibility of fraud, auditors should A. involve fraud examination professionals B. enlist the cooperation of the board of directors C. issue a disclaimer of opinion

A

under which of the following circumstance are auditors permitted to disclose information regarding fraud and clients noncompliance Check all that apply A. if the audit firm resigns or is fired B. when the auditor is a successor auditor C. when answering a subpoena

A, C

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

A,B

In the audit risk model Check all that apply A. detection risk is based on the desired level of audit risk and assessed levels of inherent risk and control risk B. AR= IR X CR X DR C. the desired level of audit risk is based on the assessed level of inherent, control, and detection risk D. detection risk is considered to be independent of inherent and control risks which are interrelated

A,B

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

A,B

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

A,B

Which of the following statements are correct Check all that apply A. most business risks are eventually reflected in the financial statements B. auditors devote significant time to understanding clients business risks C. gaining an understanding of strategies and procedures involves gathering evidence in areas historically addressed by auditors

A,B

If the potential for fraud is high, auditors should Check all that apply A. perform extended procedures B. include more experienced team members C. use less predictable audit procedures D. examine more transactions E. perform more tests of transactions at interim points instead of year end

A,B,C,D

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

A,C

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

A,C

Items that must be documented in the working papers during the risk assessment process include: Check all that apply A. results of audit procedures, particularly procedures regarding management override B. communications to the audit team and audit firm partners C. procedures to identify and assess risk D. specific risks identified and audit team responses

A,C,D

inherent risk Check all that apply A. is not created by the auditors B. can be controlled by the auditors C. is not related to the nature of the clients business D. is the susceptibility of the account to misstatement

A,D

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 A. significant B. relevant C. risky D. material

B

Analytical procedures used in planning an audit should focus on: A. reducing the scope of tests of controls and substantive tests. B. enhancing the auditor's understanding of the client's business. C. assessing the adequacy of the available evidential matter. D. providing assurance that potential material misstatements will be identified.

B

Auditors are able to reduce detection risk by completing more and stronger A. tests of details B. substantive tests

B

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

B

Management fraud generally refers to: A. violations of GAAS B. intentional distortions of financial statements C. unintentional mistakes D. noncompliance

B

The probability that an audit team will give an inappropriate opinion on financial statements best describes: A. inherent risk B. audit risk. C. detection risk. D. control risk.

B

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

B

Which of the following statements concerning noncompliance by clients is correct? A. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. B. An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. C. An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements. D. An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions.

B

Which of the following statements is correct A. the auditors responsibility for detecting indirect effect noncompliance is the same as the responsibility for direct effect noncompliance B. the auditors responsibility for detecting indirect effect noncompliance is limited C. the auditors has no responsibility for detecting indirect effect noncompliance D. the auditors responsibility for detecting indirect effect noncompliance is higher than his or her responsibility for direct effect noncompliance

B

Analytical procedures are required: check all that apply A. as substantive testing procedures B. at the beginning of the audit C. at the end of the audit

B,C

Auditors are responsible for: Check all that apply A. ensuring that all accounting estimates are conservative B. looking for indications of systematic bias C. monitoring differences between estimates and audit evidence D. making accounting estimates

B,C

Factors related to the susceptibility of accounts to misstatement or fraud include Check all that apply A. if the account records payables B. size of account balances C. the volume or transactions

B,C

Noncompliance or suspected noncompliance Check all that apply A. should always be recorded to the audit committee B. may require discussions with the clients legal council C. must always be responded to by the auditors D. always requires financial statement disclosure

B,C

under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients noncompliance Check all that apply A. when the auditor is a successor auditor B. if the audit firm resigns or is fired C. when answering a subpoena

B,C

General business sources include Check all that apply A. company charter ad bylaws B. specialized trade magazines and journals C. registration statement and 10- k fillings D. business newspapers

B,C,D

in establishing the overall audit strategy, the auditor should take into account the Check all that apply A. nature of communication required by company management B. auditors evaluation of risk assessment C. significant factors in directing engagement team activities D. results of preliminary engagements activities E. reporting objectives of the engagement

B,C,D,E

An audit team uses the assessed risk of material misstatement to: A. evaluate the effectiveness of the entity's internal control policies and activities. B. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. C. determine the acceptable level of detection risk for financial statement assertions. D. identify transactions and account balances where inherent risk is at the maximum.

C

Frauds involving senior management or high level employees A. always require the auditor to disclaim an opinion B. may be inconsequential, depending on the threshold level C. should be reported to the audit committee or board of directors

C

Inherent risk and control risk differ from detection risk in which of the following ways? A. Inherent risk and control risk exist as a result of the auditor's judgment about materiality. B. Inherent risk and control risk are controlled by the auditor. C. Inherent risk and control risk exist independently of the audit. D. Inherent risk and control risk are calculated by the client.

C

The audit strategy memorandum becomes the basis for preparing A. audit risk model B. audit team C. audit plan D. engagement plan

C

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 A. indirect- effect noncompliance B. direct- effect noncompliance C. error or fraud

C

Horizontal analysis refers to: A. financial statement amounts expressed each year as a proportion of a base amount. B. the trend of income from year to year of persons suspected of fraud. C. the change in a suspect's net worth from the beginning to the end of a period. D. changes of financial statement numbers and ratios across several years.

D

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: A. elements of audit risk whereas detection risk is not. B. considered at the individual account-balance level whereas detection risk is not. C. changed at the auditor's discretion whereas detection risk is not. D. functions of the client and its environment whereas detection risk is not.

D

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

Employee fraud

True or false: a well planned and carefully performed audit can virtually eliminate audit risk

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

Auditors must examine journal entires and other adjustments, especially those made close to year end, as part of their ___________ assessment

Fraud risk

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

Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called __________

business risks

According to professional auditing standards which of the following is NOT a type of audit risk? A. detection B. inherent C. fraud D. control

c

A misstatement in the financial statements may be caused by a __________ or ___________

error, fraud

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 professional standards break down overall audit risk into _____________ risk, _____________ risk and _____________ risk

inherent, control, detection

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