Audit Midterm

T or F Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively

T

T or F Auditor's use tick marks, which are symbols adjacent to the detail on the body of the schedule

T

An ________ is the detailed instruction that explains the audit evidence to be obtained during the audit a. audit procedure b. audit program c. audit assertion d. audit objective

a.

Auditing standards ______ that the basis used to determine the preliminary judgment about materiality be documented in the audit files a. require b. permit c. do not allow d. strongly encourage

a.

Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence? a. sample size - yes / timing of audit procedures - yes b. sample size - yes / timing of audit procedures - no c. sample size - no / timing of audit procedures - no d. sample size - no / timing of audit procedures - yes

a.

Risk of material misstatement at the assertion level a. determines the nature, timing, and extent of further auditing procedures b. is only relevant to account balances c. refers to risks that are pervasive to the financial statements as a whole d. consists of business risk and inherent risk

a.

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit a. in accordance with generally accepted auditing standards b. only after an adequate investigation of the management team c. in a timely manner d. as effectively as reasonably possible

a.

The auditor's responsibilities section of the standard unmodified opinion audit report states that the audit is designed to a. obtain reasonable assurance whether the statements are free of material misstatement b. discover material errors and/or irregularities c. discover all errors and/or irregularities d. conform to generally accepted accounting principles

a.

The auditor's responsibility section in an audit report states that "... the standards require that we plan and perform the audit to obtain _______ assurance about whether the financial statements are free of material misstatement." What type of assurance is given? a. reasonable b. immediate c. absolute d. limited

a.

A ________ risk represents an identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration a. significant b. financial statement c. substantial d. material

a.

T or F Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective

F

T or F All evidence must have the same level of persuasiveness

F

T or F An auditor will issue a disclaimer when he or she concludes the financial statements are not fairly presented

F

T or F Auditors are not allowed to make inquiries of employees who are not considered management, such as marketing or sales personnel

F

T or F Changes in accounting estimates require the auditor to issue a modified audit report with a consistency paragraph inserted after the opinion paragraph

F

T or F For prospective clients that have been previously audited by another CPA firm, the predecessor auditor must initiate the communication with the successor auditor

F

T or F The auditor's first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities, including but not limited to, law enforcement and the Securities and Exchange Commission

F

T or F The auditors determine which disclosures must be prepared in the financial statements

F

T or F The risk of material misstatement exists only at the overall financial statement level

F

T or F The sample size generally does not depend on client circumstances such as the extent of automated controls in place in the client's accounting information system

F

T or F Audit reports contain the phrase "obtain reasonable assurance," which is intended to inform users that auditors do not guarantee or ensure the fair presentation of the financial statements which the audit reports over

T

T or F Inherent risk and control risk exist independent of the audit of the financial statements

T

T or F The auditor must perform substantive tests related to assertions deemed to have significant risks

T

T or F The auditor's risk assessment for fraud should be ongoing throughout the audit

T

T or F The basis of opinion section of the audit report issued for financial statements of a nonpublic company should refer to auditing standards generally accepted in the United States of America

T

T or F The performance of risk assessment procedures is designed to help the auditor obtain an understanding of the entity

T

T or F The relevance of audit evidence depends on the audit objective being tested

T

T or F Transactions with related parties must be disclosed in the financial statements if they are deemed to be material

T

T or F When an auditor sets a low acceptable audit risk, it means that he or she wants to be more certain that the financial statements are not materially misstated

T

The management's responsibilities section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are a. the responsibility of management b. the responsibility of the auditor c. the joint responsibility of management and the auditor d. none of the above

a.

The most important general ledger account included in and affecting several cycles is the a. cash account b. retained earnings account c. income tax expense and liability accounts d. inventory account

a.

The responsibility for adopting sound accounting policies and maintaining adequate internal controls rests with the a. company management b. board of directors c. company's internal audit department d. financial statement auditor

a.

Two determinants of the persuasiveness of evidence are a. appropriateness and sufficiency b. independence and effectiveness c. competency and sufficiency d. relevance and reliability

a.

Which of the following statements is true of a public company's financial statements? a. Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements b. Sarbanes-Oxley requires only the CEO to certify the financial statements c. Sarbanes-Oxley requires only the CFO to certify the financial statements d. Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements

a.

Why does the auditor divide the financial statements into smaller segments? a. using the cycle approach makes the audit more manageable b. the cycle approach is used because auditing standards require it c. most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces d. all of the above are correct

a.

_______ risk represents the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of the client's internal controls a. inherent b. control c. account balance d. material

a.

Risk assessment procedures include a. determination of the type of audit opinion to issue b. observation of the entity's operations c. assessing acceptable audit risk d. a required discussion among the staff members of the audit and the client regarding material misstatements in the financial statement

b.

A CPA may wish to emphasis specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is a. included in the opinion paragraph b. included in a separate paragraph in the report c. included in the introductory paragraph d. included in the scope paragraph

b.

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the a. inherent risk. b. acceptable audit risk. c. statistical risk. d. financial risk.

b.

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the a. management letter requested by the auditor b. engagement letter c. audit plan d. audit strategy for the client

b.

An audit of historical financial statement most commonly includes the a. income statement, the statement of cash flows, and the statement of net working capital b. balance sheet, income statement, statement of cash flows, and the statement of changes in stockholder's equity c. balance sheet, statement of retained earnings, and statement of cash flows d. statement of cash flows, balance sheet, and the statement of retained earnings

b.

An auditor should examine minutes of the board of directors' meetings a. through the date of the financial statements b. through the date of the audit report c. only at the beginning of the audit d. on a test basis

b.

Appropriateness of evidence is a measure of the a. sufficiency of evidence b. quality of evidence c. meaning of evidence d. quantity of evidence

b.

Auditing standards make _______ distinction(s) between the auditor's responsibilities for searching for errors and fraud a. little b. no c. various d. a significant

b.

Auditing standards require that the audit report must be titled and that the title must a. indicate if the auditor is a CPA b. include the word "independent" c. indicate if the auditor is a proprietorship, partnership, or corporation d. indicate the type of audit opinion issued

b.

Fraudulent financial reporting is most likely to be committed by whom? a. line employees of the company b. company management c. the company's auditors d. outside members of the company's board of directors

b.

If an auditor establishes a relatively high level for materiality, then the auditor will a. accumulate more evidence than if a lower level had been set b. accumulate less evidence than if a lower level had been set c. accumulate approximately the same evidence as would be the case were materiality lower d. accumulate an undetermined amount of evidence

b.

If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or a. issue an adverse opinion - yes / issue a qualified opinion - no b. issue an adverse opinion - yes / issue a qualified opinion - yes c. issue an adverse opinion - no / issue a qualified opinion - yes d. issue an adverse opinion - no / issue a qualified opinion - no

b.

In what order should the following steps occur? A. set preliminary judgment of materiality and performance materiality B. understand the client's business and industry C. perform preliminary analytical procedures D. accept the client and perform initial audit planning a. B, D, A, C b. D, B, C, A c. D, C, B, A d. B, A, C, D

b.

Initial audit planning involves four matters. Which of the following is not one of these? a. develop an overall audit strategy b. request that bank balances be confirmed c. schedule engagement staff and audit specialists d. identify the client's reason for the audit

b.

The audit report date on a standard unmodified opinion audit report indicates a. the date on which the financial statements were filed with the Securities and Exchange Commission b. the last day of the auditor's responsibility for the review of significant events that occurred after the last date of the financial statements c. the last day of the fiscal period d. the last date on which users may institute a lawsuit against either the client or the auditor

b.

The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must a. be based on sources that are external to company b. be persuasive enough to enable the auditor to issue an audit report c. be well documented and cross-referenced in the audit documents d. provide evidence that prove or disprove an audit objective/assertion

b.

What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented? a. standard unmodified opinion b. adverse c. qualified d. disclaimer

b.

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? a. the auditor commonly examines a sample, rather than the entire population of transactions b. auditors believe that reasonable assurance is sufficient in the vast majority of cases c. accounting presentations contain complex estimates which involve uncertainty d. fraudulently prepared financial statements are often difficult to detect

b.

Which of the following will generally be considered a significant risk? a. a sale to a customer b. the determination of the amount of bad debt expense c. the purchase of inventory d. obtaining a loan from the bank

b.

Which of the following would not increase the risks of material misstatement at the overall financial statement level? a. deficiencies in management's integrity b. effective oversight by the board of directors c. inadequate accounting systems d. all of the above

b.

All of the following are causes for the addition of an emphasis of a matter paragraph under both AICPA and PCAOB standards except for a. emphasis of a matter b. lack of consistent application of generally accepted accounting principles c. reports involving other auditors d. auditor agrees with a departure from promulgated accounting principles

c.

Auditing standards for public companies are established by the a. FASB b. SEC c. PCAOB d. IRS

c.

For publicly listed companies, the auditor also issues which of the following reports in addition to a report containing the auditor's opinion? a. a report on compliance with the Federal Securities Act b. a report on the compliance with the Foreign Corrupt Practices Act (FCPA) c. a report on internal control over financial reporting d. a report on compliance with generally accepted accounting principles only

c.

The _____ always includes a list of the _______, and it usually includes sample sizes, items to select, and the timing of the tests a. audit assertion; audit objectives b. audit program; audit objectives c. audit program; audit procedures d. audit assertion; audit programs

c.

The first phase in planning an audit and designing an audit approach is to a. understand the client's business and industry b. perform preliminary audit procedures c. accept the client and perform initial audit planning d. set the preliminary judgment of materiality

c.

The permanent audit file would usually include the a. client's working trial balance b. summary of the auditor's test of controls for the current years audit c. organizational chart of the company's employees d. summary of the risk assessment procedures performed

c.

When considering the risk of misstatement due to fraud, a. auditing standards require the auditor to presume that risk of fraud exists in expense transactions b. the risk is only made at the financial statement level c. auditing standards outline procedures the auditor should perform to obtain information from management about their consideration of fraud d. the risk of not detecting a material misstatement due to fraud is lower than the risk of not detecting a misstatement due to error

c.

Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting II. Separate reports on financial statements and internal control over financial reporting a. I only b. II only c. either I or II d. neither I or II

c.

Which of the following is a correct statement regarding the standard unmodified opinion audit report? a. the auditor's responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles b. the audit report includes the name of the lead partner on the audit c. the auditor's responsibilities paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed d. the format of the audit report for public and nonpublic entities are identical

c.

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern? a. the entity has lost a major customer b. the entity has significant recurring operating losses c. the entity is suing a competitor for a minor patent infringement d. the entity has working capital deficiencies

c.

Which of the following statements is the most correct regarding errors and fraud? a. auditors have more responsibility for finding fraud than errors b. fraud occurs more often than errors in financial statements c. an error is unintentional, whereas fraud is intentional d. errors are always fraud and frauds are always errors

c.

Why do auditors establish a preliminary judgment about materiality? a. to finalize the control risk assessment b. so the client can know what records to make available to the auditor c. to help plan the appropriate evidence to accumulate d. to determine the appropriate level of staff to assign to the audit

c.

A tour of the client's facilities provides the auditor an opportunity to a. assess physical safeguards over assets b. meet key personnel c. observe operations d. all of the above

d.

Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence? a. a copy of month-end adjusting entries b. general ledger account balances c. internal memo explaining the issuance of a credit memo d. confirmation of accounts receivable balance received from a customer

d.

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users a. I only b. II only c. both I and II d. neither are true

d.

Auditors should understand client objectives related to a. effectiveness and efficiency of operations b. compliance with laws and regulations c. reliability on financial reporting d. all of the above

d.

The objective of an audit of the financial statements is an expression of an opinion on a. the accuracy of the financial statements b. the accuracy of the annual report c. the accuracy of the balance sheet and income statement d. the fairness of the financial statements in all material respects

d.

When preparing and organizing audit files, a. a working trial balance is considered part of the permanent file b. the audit program is not part of the audit files c. the rules established by the SEC and PCAOB must be followed d. a lead schedule contains the detailed accounts from the general ledger making up the line item total on the trial balance

d.

Which of the following is an accurate statement regarding audit evidence? a. all evidence must be highly persuasive b. responses to the auditor's questions by client employees are considered highly persuasive c. audit evidence should provide an absolute level of assurance d. the auditor uses evidence to determine whether the statements are fairly presented

d.