Ch 4 MC

Enterprise risk management is the responsibility of? a. Company Management b. The external auditors c. The Company's insurance providers d. All of the Above

A. Company Management

The risk of material misstatements is composed of which audit risk components? a. Inherent risk & control risk b. Control risk & detection risk c. Inherent risk & detection risk d. Inherent risk, control risk, & detection risk

A. Inherent risk & control risk

Auditors are not responsible for accounting estimates with respect to a. making the estimates b. determining the reasonableness of estimates c. determining that estimates are presented in conformity with GAAP d. Determining that estimates are adequately disclosed in the financial statements

A. Making the estimates

When a company that sells its products for a (gross) profit increases its sales by 15% and its cost of goods sold by 7%, the cost of goods ratio will a. Increase b. Decrease c. Remin unchanged d. Not be able to be determined with the information provided

B. Decrease the numerator (COGS) increases relatively less than the denominator (Sales) increases.

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: A. Recommend remedial actions to the audit committee B. Evaluate the effect of noncompliance on the financial statements C. Determine whether to contact law enforcement officials D. Determine whether other similar acts have occurred

B. Evaluate the effect of noncompliance on the financial statements

One of the typical characteristics of management fraud is? a. Falsification of documents in order to misappropriate funds from an employer b. Victimization of investors through the use of materially misleading financial statements c. Illegal acts omitted by management to evade laws and regulations d. Conversion of stolen inventory to cash deposited in a falsified bank account

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

Which of the following circumstances would cause auditors to perform extended procedures? a. supporting documents are produced when requested b. the company made several large adjustment at or near YE c. the company has recently hired a new chief financial officer after the previous one retired d. the company maintains several different petty cash fund

B. the company made several large adjustment at or near YE

Which of the following statements best describes auditor's responsibility for detecting a clients noncompliance with a law or regulation A. The responsibility for detecting noncompliance exactly parallels the responsibilities for errors and fraud B. Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements C. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statements effects is detected. D. Auditors must design tests to detect all noncompliance that directly affects the financial statements.

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

Failure to meet company objectives is a result of? a. Information risk b. Audit Risk c. Business risk d. Inherent Risk

C. Business risk

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and the audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to a. Change from 0.1 to 0.04 b. Change from 0.2 to 0.3 c. Change from 0.25 to 0.1 d. Be Unchanged

C. change from 0.25 to 0.1 may have similar Q on test, but it will be more clear

If sales were overstated by recording a false credit sale at year end, where could you find the false "dangling debt"? a. Inventory b. Cost of Goods Sold c. Bad Debt Expense d. Accounts Receivable

D. Accounts Receivable

Analytical procedures used when planning an audit should concentrate on a. Weaknesses in the company's internal control activities b. Predictability of account balances based on individual significant transactions c. Management assertions in financial statements d. Accounts and relationships that can represent specific potential problems and risks in the financial statements

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

analytical procedures can be used in which of the following ways? a. As a means of overall review at the end of an audit b. As "attention-directing" methods when planning an audit at the beginning c. As substantive audit procedures to obtain evidence during the audit d. All of the Above

D. All of the Above

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatement do exist if? a. Audit risk b. Inherent risk c. Control risk d. Detection risk

D. Detection risk

Auditing standards do not require auditors of financial statements to? a. Understand the nature of errors and frauds b. Assess the risk of occurrence of errors and frauds c. Design audits to provide reasonable assurance of detecting errors and frauds d. Report all errors and frauds found to police authorities

D. Report all errors and frauds found to police authorities

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? a. Inherent risk b. control risk c. detection risk d. Risk of Material misstatement

D. Risk of material misstatement

It is acceptable under GAAS for an audit team to a. Assess risk of material misstatement at high and achieve an acceptably low audit risk by preforming extensive detection work b. assess control risk at zero and perform a minimum of detection work c. asses inherent risk at zero and perform a minimum of detection work d. Decide that audit risk can be 40 percent

a. Assess risk of material misstatement at high and achieve an acceptably low audit risk by preforming extensive detection work

Auditors assessed risk of material misstatement is 0.50 and they want to achieve a 0.05 risk of failing to express a correct opinion. What detection risk do the auditors plan to use for planning the remainder of the audit work? a. 0.20 b. 0.10 c. 0.75 d. 0.00

b. 0.10 DR = AR/(IR*CR) DR=0.05/.50=0.10

Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. Deciding the matters to cover in an engagement letter. b. Identifying unusual conditions that deserve more auditing effort. c. Determining which of the financial statement assertions are the most important for the client's financial statements. d. Determining the nature, timing, and extent of further audit procedures for auditing the inventory

b. Identifying unusual conditions that deserve more auditing effort.

Under the Private Securities Litigation Reform Act, independent auditors are required to first a. Report in writing all instances of noncompliance with the act to the client's board of directors b. Report to the SEC all instances of noncompliance thy believe have a material effect on financial statements if the board of directors does not first report to the SEC c. Report clearly inconsequential noncompliance with the act to the audit committee of the client's board of directors d. Resign from the audit engagement and report the instances of noncompliance with the act to the SEC

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

An audit strategy memorandum contains a. Specifications of auditing standards relevant to the financial statements being audited b. Specifications of procedures the auditors believe appropriate or the financial statements under audit c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached d. Reconciliation of the account balances in the financial statements with the account balances in the client's general leder

b. Specifications of procedures the auditors believe appropriate or the financial statements under audit

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? a. The entity's fiscal year ends on June 30. b. The entity enters into significant derivative transactions as hedges. c. The entity's financial statements are generated at an outside service center. d. The entity's financial data is available only in computer-readable form

b. The entity enters into significant derivative transactions as hedges.

What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Identify whether analytical procedures should be applied to the revenue accounts. c. Assess the potential for material misstatement due to fraud. d. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives

c. Assess the potential for material misstatement due to fraud.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling

c. Detection.

What is a specific procedural response to a particular fraud risk in an account balance or class of transactions? a. Exercising more professional skepticism b. Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud c. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis d. Studying management's selection and application of accounting principles more carefully

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

Analytical procedures are generally used to produce evidence from a. Confirmations mailed directly to the auditors by client customers b. Physical observation of inventories c. Relationships among current financial balances and prior balances, forecasts, and non financial data d. Detailed examination of external, external-internal, and internal documents

c. Relationships among current financial balances and prior balances, forecasts, and non financial data

an audit committee is a. composed of internal auditors b. composed of members of the audit team c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company d. A committee composed of persons not associating in any way with the client or the board of directors

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

A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement assertions. c. Detect fraud that may cause the financial statements to be misstated. d. Assist the auditor in evaluating the overall financial statement presentation

d. Assist the auditor in evaluating the overall financial statement presentation

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in what? a. Key factors that are consistent with prior periods b. Assumptions that are similar to industry guidelines c. Measurements that are objective and non-susceptible to bias d. Evidence of a conservative systematic bias

d. Evidence of a conservative systematic bias