chapter 4- smartbook auditing

1. Which of the following statements are true regarding assessing the risk of fraud?

-Balances that contain difficult estimates to audit are very challenging for auditors. -The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.

1. Intentional misstatements in financial statements to deceive financial statement users is the definition of__________ ___________ __________.

-Blank 1: fraudulent -Blank 2: financial -Blank 3: reporting

1. True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.

-False Reason: Numerous fraud cases have involved the deliberate manipulation of estimates to increase net income.

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

-False Reason: This is a significant scope limitation that could result in the audit firm disclaiming an opinion.

1. Which of the following statements are true?

-If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. -Auditors are normally required to keep client information confidential.

1. The components of the risk of material misstatement (RMM) are ________ risk and ________ risk.

-Inherent -control

1. Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of ________ ________.

-accounting estimates

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 procedure

1. When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts.

-before

1. Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, the auditors must inform the _______.

-board of directors

1. General business sources include _________.

-business newspapers -registration statements and 10-K filings -specialized trade magazines and journals

When thinking about each of the relevant financial statement assertions, the auditor should focus on what

-can go wrong

Fraud risk ______.

-can never be ignored

1. General business sources _________.

-can relate to an industry or individual company

1. Auditors ______.

-cannot place complete reliance on internal controls to the exclusion of other audit procedures -would not seem to exhibit due professional care if the level of audit risk was too high

1. Existence is riskier than completeness for _________.

-cash

1. Factors related to the susceptibility of accounts to misstatement or fraud include ______.

-complexity -liquidity

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?" (Enter only one word per blank.)

-control

1. In the audit risk model, the assessment of inherent risk and _________ risk lead to a determination of _________ risk. (Enter only one word per blank.)

-control -detection

1. The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable:

-decreases as the RMM decreases.

1. Another name for employee fraud, embezzlement, and larceny is _______.

-defalcation

1. The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is _____ risk.

-detection

1. Using the audit risk model, the auditor must adjust ________ risk for significant accounts and relevant disclosures. (Enter only one word per blank.)

-detection

1. In the audit risk model ______.

-detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk -AR = IR × CR × DR

1. Auditors can and do influence the level of _________.

-detection risk only

1. The two types of noncompliance discussed in auditing standards are _______ - effect noncompliance and ________ - effect noncompliance. (Enter only one word per blank.)

-direct -indirect

1. An auditor should consider the laws and regulations that are typically known by auditors to have a potentially material effect on the financial statements for _______ -_______ noncompliance.

-direct -effect

1. A violation of pension laws or government contract regulations is an example of ______-______ noncompliance. (Enter only one word per blank.)

-direct-effect

1. Regardless of when analytical procedures are performed, testing is concluded by ______.

-documenting team findings

1. Auditing standards use the term Blank______ to refer to misappropriation of assets.

-employee fraud

1. An unintentional misstatement or financial statement omission is referred to as a(n)_______.

-error

1. 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 _______

-error or fraud

1. A misstatement in the financial statements may be caused by a(n) ______ or ________.

-error or mistake -fraud

1. 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__________ . (Enter only one word per blank.)

-fraud

Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their _____ ______ assessment.

-fraud risk

1. Auditors have a responsibility to detect ________.

-fraudulent activity that results in materially misstated financial statements

1. Investigating significant differences at the preliminary stage ________.

-help auditors identify risks as an aid in preparing the audit plan -may be considered attention directing -can be used to plan additional audit work

Knowing industry characteristics:

-includes knowledge of the client's competition. -relates to differences in production and marketing activities.

1. The basis for executing an appropriate response to identified risks is ______ risk assessment.

-inherent

1. The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is________ risk.

-inherent

1. The probability that, in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements is Blank______ risk.

-inherent

1. The formula for the audit risk model is _____.

-inherent risk × control risk × detection risk

1. The key difference between error and fraud is:

-intent

There is a(n) ______ relationship between RMM and detection risk.

-inverse

1. If preliminary findings indicate the possibility of fraud, auditors should

-involve fraud examination professionals

1. Interviewing the entity's management, internal auditors, directors, audit committee, and other employees:

-is a required audit procedure. -helps bring auditors up to date on business and industry changes. -provides information on personnel competence and integrity

1. Fraud risk ______.

-is not specifically mentioned in the audit risk model -must be considered on each audit engagement

1. Detection risk:

-is the amount of risk the auditor can allow. -is calculated and derived from other risks.

Inherent risk _____.

-is the susceptibility of the account to misstatement -is not created by the auditors

1. When an employee misappropriates funds or property not entrusted to his or her custody, an act of __________ or simple theft has occurred. (Enter only one word per blank.)

-larceny

1. With respect to accounting estimates, auditors are responsible for:

-looking for indications of systematic bias. -monitoring differences between estimates and audit evidence.

1. Business risk assessment _______.

-makes auditors more knowledgeable about the client's business and environment -is an important component of an audit -may involve asking production personnel about labor problems

1. Company discussion boards:

-may be used by anonymous whistle-blowers. Reason: Correct. Company discussion boards may be used by anonymous whistle-blowers.

1. When developing an expectation of an account balance, auditors ________.

-may consider third party information -may use vertical and horizontal analysis -may consider relevant nonfinancial information

1. A company's performance measures _________.

-might indicate qualitative factors to consider when determining materiality -identify what managers deem as key indicators of company performance

1. Noncompliance or suspected noncompliance ________.

-must always be responded to by the auditor

1. Noncompliance or suspected noncompliance ________.

-must always be responded to by the auditors -may require discussions with the client's legal council

1. When doing fraud risk assessment, auditors _________.

-must presume improper revenue recognition is a risk

1. Based on the allowable or planned level of detection risk, auditors modify the ________ , the _________, and the _________ of further audit procedures. (Enter only one word per blank.)

-nature -timing -extent

1. The assessment of inherent risk ______.

-needs to occur for each significant financial statement account and disclosure -needs to be evaluated without regards to internal controls

1. Examples of business risks include:

-new products and services. -industry developments. -business expansion

1. Audit teams are concerned _________.

-only with fraudulent activity that results in materially misstated financial statements

1. Due to the importance of industry characteristics, most large public accounting firms:

-organize their audit staff by industry.

1. Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include

-overstating assets or understating liabilities -omitting important information from disclosures

1. If the potential for fraud is high, auditors should ________.

-perform extended procedures -use less predictable audit procedures -examine more transactions -include more experienced team members

1. An audit team making a choice to rely exclusively on evidence produced by substantive procedures is _______.

-permissible, but rarely done

1. At the preliminary stage, analytical procedures are _______ tests.

-reasonableness

1. Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called ______.

-related parties

An auditor's primary objective in regard to ______ _______ is to obtain the evidence needed to determine if transactions with them have been properly accounted for and disclosed in the financial statements. (Enter only one word per blank.)

-related parties

1. A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be _______.

-reported to management above the level of the people involved

1. Finding out a client is planning to acquire another company _________.

-results in additional risks for the auditor -is a component of understanding the nature of the company

1. In establishing the overall audit strategy, the auditor should take into account the ______.

-results of preliminary engagement activities -auditor's evaluation of risk assessment -reporting objectives of the engagement -significant factors in directing engagement team activities

1. Issues of particular importance in times of economic distress include:

-revenue recognition. -fair value measurements. -inventory. -goodwill impairment.

1. The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the ______ ______ process and ultimately the audit plan. (Enter only one word per blank.)

-risk assessment

1. A company's failure to provide minutes of the meetings of directors and committees of the board of directors is a significant ________ _________ that could result in the public accounting firm's disclaiming an opinion on the financial statements. (Enter only one word per blank.)

-scope limitation

1. Frauds involving senior management or high-level employees ________.

-should be reported to the audit committee or Board of Directors

1. 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.

-significant

1. Items that must be documented in the working papers during the risk assessment process include _________.

-significant decisions during discussion -other conditions causing auditors to plan additional procedures -discussions with engagement personnel

1. Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, they must ______ inform the SEC.

-sometimes Reason: Auditors inform the Board of Directors and only inform the SEC if the board fails to do so.

1. Items that must be documented in the working papers during the risk assessment process include ______.

-specific risks identified and audit team responses -procedures to identify and assess risk -results of audit procedures, particularly procedures regarding management override

1. A well planned and carefully performed audit ______ audit risk.

-still has some

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

-strategy

1. Tests of details and analytical procedures which study plausible relationships are the two categories of _______ ________.

-substantive -procedures

1. Auditors are able to reduce detection risk by completing more and stronger ________.

-substantive tests

1. Factors related to the susceptibility of accounts to misstatement or fraud include:

-the volume of transactions. -size of account balance.

1. True or false: Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.

-true Reason: Most firms use low, moderate and high, but these all represent a range of numbers.

1. True or false: The professional standards make clear that risk assessment underlies the entire audit process.

-true Reason: This is why it is essential that auditors take great care to appropriately assess RMM.

1. Fraudulent accounting entries always affect at least Blank______ account(s) and Blank______ place(s) in the financial statements.

-two; two

1. Knowing if a client is centralized or decentralized is a component of:

-understanding the nature of the company.

1. Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called _______ analysis. (Enter only one word per blank.)

-vertical

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

-white-collar

Management fraud is sometimes referred to as ________ __________ __________.

Blank 1: fraudulent Blank 2: financial Blank 3: reporting

1. Employee fraud can be classified as either _________ or ___________.

Blank 1: larceny, defalcation, or embezzlement Blank 2: embezzlement, defalcation, or larceny

1. On every audit engagement, the risk assessment process includes required _______ sessions in which critical audit areas are discussed. (Enter only one word per blank.)-brainstorming

brainstorming

1. Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called ________ risk.

business

The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk

control

1. 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. (Enter only one word per blank.)

embezzlement

The type of procedure is referred to as the ______ of an audit procedures. (Enter only one word per blank.)

nature

1. Most firms express their audit risk ______.

using qualitative measures

1. Which of the following statements regarding audit risk are correct?

-The focus on evaluating audit risk is on the relevant assertions identified. -Audit risk should be at an appropriately low level.

1. True or false: Audit team brainstorming sessions are a required audit engagement component.

-True Reason: Correct. Critical audit team issues must be discussed.

1. True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when management's estimates all exhibit conservatism.

-True Reason: Correct. Even when estimates are within the range of reasonableness, if they all lean to the conservative side, they must be evaluated for overall reasonableness.

1. True or false: The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement.

-True Reason: This may occur when auditors understand measures to which management or financial statement users may be sensitive.

1. Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance?

-When answering a subpoena -If the audit firm resigns or is fired

1. Analytical procedures are required ______.

-at the beginning of the audit -at the end of the audit

1. All companies trading on the stock exchanges are required to have a(n) _______ _______ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management, (Enter only one word per blank.)

-audit -committee

1. The audit strategy memorandum becomes the basis for preparing the ________.

-audit plan

1. 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

1. The audit strategy is a result of the ________.

-audit risk model

1. White-collar crimes may ______ the organization.

-be perpetrated by or upon

By definition ______ risks are significant risks. (Enter only one word per blank.)

fraud

The professional standards break down overall audit risk into _____ risk, risk and _______ risk. (Enter only one word per blank.)

- inherent - control -detection

Audit risk is evaluated at both the overall financial statement level and for each significant ______ and _______.

-Account and disclosure

1. Which of the following statements are correct?

-Auditors are not expected to know all relevant laws and regulations affecting their clients. -Auditors are not required to provide assurance about indirect-effect noncompliance.

1. Which of the following statements are correct?

-Auditors devote significant time to understanding client's business risks. -Most business risks are eventually reflected in the financial statements.

An account or disclosure _____.

1. -may be significant even though the balance is below materiality

1. 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

The use of fraudulent means to misappropriate funds or other property from one's employer in the definition of

employee fraud

1. The auditor's responsibility for detecting indirect-effect noncompliance is ________.

limited

1. A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a

relevant

According to professional standards ______ ______ underlies the entire audit process.

risk assessment