Ch6 Audit
A documented audit plan is required on all audits.
T
a. The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective?
(1) Trace from source documents to journals.
Which of the following topics is not normally included in an engagement letter?
A schedule of individual audit team member billing rates.
The accounting department has experienced a high rate of turnover of key personnel
Increase
The client had a significant amount of damaged goods that were presented at cost.
Valuation or allocation
d. Tracing from source documents to journals most directly tests:
Completeness (understatements).
Which of the following is the best example of a substantive procedure?
Confirming balances of accounts receivable.
In directional testing, vouching from ledgers to source documents most directly addresses this assertion.
Existence and occurrence
The client recorded receivables that were fictitious
Existence and occurrence
j. Which of the following best describes what is meant by the term "fraud risk factor"?
Factors often observed in circumstances where frauds have occurred.
During 20X1, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
Increase
TWD's Board of Directors is controlled by Janice Mead, the majority stockholder, who also acts as the chief executive officer.
Increase
b. The audit committee of a company must be made up of:
Members of the board of directors who are not officers or employees.
d. Which portion of an audit is least likely to be completed before the balance sheet date?
Substantive procedures
In directional testing, tracing from source documents to journals most directly addresses this assertion
completeness
Audit procedures that are focused on the effectiveness of internal control are called __________.
tests of controls
i. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
Materiality and auditing risk
k. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.
Supervisory position.
c. Which of the following should not normally be included in the engagement letter for an audit?
A listing of the client's branch offices selected for testing.
Because municipalities have received increased federal and state funding for environmental purposes, TWD returned to profitability for the first year following three years with losses.
Decrease
During 20X1, litigation filed against TWD from an action 10 years ago that alleged that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years' financial statements are being removed from the 20X1 financial statements.
Decrease
h. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
Detection risk.
An engagement letter represents a written contract between the auditors and the client.
T
Auditors are required to specifically assess the risk of material misstatement of the financial statements due to fraud on every audit.
T
The authenticity and accuracy of an account receivable may be tested by __________ with the debtor, or by vouching entries in the account to supporting documents.
confirmation
The term __________ refers to the process of determining that transactions are reflected in the proper accounting period.
cutoff
A successor auditor should attempt communication with a predecessor auditor:
prior to accepting the engagement.
Analytical procedures are optional procedures that may be useful to the auditors during the risk assessment stage of the audit.
F
During 20X1, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant influence over UEL.
Increase
Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 20X1 disclosed a new operating policy. TWD guaranteed to several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails a federal or state site clean-up inspection in 20X2.
Increase
The internal auditor reports to the controller and the controller reports to Janice Mead.
Increase
The client failed to describe in the financial statements significant debt restrictions.
Presentation and disclosure
f. As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:
Recorded sales have been properly posted to customer accounts.
The assertion most directly related to the question of ownership of an asset.
Rights and obligations
Audit risk at the account balance level consists of three components: (1) __________, (2) control risk and (3) detection risk.
inherent risk
The auditors must assess the risk of material misstatement of financial statements due to the two types of fraud, fraudulent financial reporting and __________.
misappropriation of assets
Assertions are __________ that are set forth in the financial statements.
representations of management
Performing certain audit procedures at an interim date, rather than at the balance sheet date, results in additional __________ that must be controlled by the auditors.
risk
Tests of balances and transactions designed to detect material misstatements are called __________.
substantive procedures (tests)
a. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets?
An unreliable accounting system.
The assertions most directly related to the "did it all get included"
Compelteness
g. The primary objective of tests of details of transactions performed as substantive procedures is to:
Detect material misstatements in the financial statements.
e. Vouching from journals (or ledgers) to source documents most directly tests:
Existence (overstatements).
l. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
Use less predictable audit procedures.
The client recorded year-end sales in the subsequent year.
cutoff
e. Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
Facts that might bear on the integrity of management.
