Audit Final Chapter 4

Analytical procedures used when planning an audit should concentrate on:

Accounts and relationships that can represent specific potential problems and risks in the financial statements.

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.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

It is acceptable under generally accepted auditing standards for an audit team to:

Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.

What is the primary objective of the fraud brainstorming session?

Assess the potential for material misstatement due to fraud.

A primary objective of analytical procedures used in the final review stage of an audit is to:

Assist the auditor in evaluating the overall financial statement presentation.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?

Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

Comparing current-year to prior-year sales volumes.

An audit committee is:

Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"?

Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?

Detection

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.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:

Evaluate the effect of the noncompliance on the financial statements.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of:

Identifying unusual conditions that deserve more auditing effort.

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

Inherent risk and control risk.

Auditors are not responsible for accounting estimates with respect to:

Making the estimates.

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions?

Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Analytical procedures are generally used to produce evidence from:

Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Auditing standards do not require auditors of financial statements to:

Report all errors and frauds found to police authorities.

Under the Private Securities Litigation Reform Act, independent auditors are required to first:

Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

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.

Which of the following circumstances would most likely cause an audit team to perform extended procedures?

The client made several large adjustments at or near year-end.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

The discovery of unexplained payments made to government employees.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?

The entity enters into significant derivative transactions as hedges.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Use more experienced audit team members to perform year-end testing.

One of the typical characteristics of management fraud is:

Victimization of investors through the use of materially misleading financial statements.

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention.

An audit team uses the assessed risk of material misstatement to:

determine the acceptable level of detection risk for financial statement assertions.

Analytical procedures used in planning an audit should focus on:

enhancing the auditor's understanding of the client's business.

If an auditor encounters significant risks at the client, the auditor should do all of the following except:

inform the SEC.

Generally accepted auditing standards states that analytical procedures:

should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

the client does not take the remedial action that the auditor considers necessary.