Chapter 6 Auditing

What are the 6 stages of an audit?

1. Plan the audit 2. Obtain an understanding of the client and its environment, including internal control 3. Assess the risks of misstatement and design further audit procedures 4. Perform further audit procedures 5. Complete the audit 6. Form an opinion and issue the audit report

Which assertions would be affected by the misstatement of the client failing to describe in the financial statements significant debt restrictions?

Classification and understanding

Tracing of a transaction from source documents to the accounting records is generally an audit procedure that is designed to establish:

Completeness

Which assertion would be affected by the misstatement of a client failing to include in their financial statements inventory that was consigned to others?

Completeness

What is the best example of a substantive procedure?

Confirming balances of accounts receivable

The primary objective of tests of details of transactions performed as substantive procedures is to:

Detect material misstatements in the financial statements

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

Which of the assertions would be affected by the misstatement occurring when the client records receivables that are fictitious?

Existence and occurrence

Analytical procedures are optional procedures that may be useful to the auditors during the risk assessment stage of the audit.

False

Auditors should never spend more time on an audit than is called for in a conscientiously developed time budget.

False

CPAs cannot ethically refuse to provide auditing services to any prospective client which the CPAs are competent to audit, if the prospective client is willing to pay the CPAs' standard audit fees.

False

Completeness of an asset account can best be established by vouching recorded entries in the asset account.

False

One basic reason that audit plans usually focus on balance sheet accounts is because users of financial statements are likely to rely more heavily upon the balance sheet than the other financial statements.

False

Substantive procedures are generally completed before the auditors assess control risk.

False

The substantive procedures portion of the audit plan generally is organized around income statement accounts.

False

What are the 3 conditions present when fraud occurs?

Incentive or pressure, opportunity, and attitude

_______risk is the risk of material misstatement of an assertion without considering internal control.

Inherent

The audit committee of a company must be made up of:

Members of the board of directors who are not officers or employees

Audit _______ begins with determining the requirements for the engagement.

Planning

A successor auditor should attempt communication with a predecessor auditor:

Prior to accepting the engagement

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

________assessment procedures are performed when obtaining an understanding of the client.

Risk

Which portion of an audit is least likely to be completed before the balance sheet date?

Substantive procedures

A declining industry with increasing business failures is an industry condition that is indicative of increased risk of fraudulent financial reporting.

True

A systems approach to an audit emphasizes tests of controls.

True

An audit plan should indicate which auditing procedures have been completed and which remain to be done.

True

An engagement letter represents a written contract between the auditors and the client.

True

Audit risk is the risk of issuing an inappropriate opinion because the auditors' procedures fail to detect a material misstatement in the financial statements.

True

Auditors are required to specifically assess the risk of material misstatement of the financial statements due to fraud on every audit.

True

Successor auditors are required by professional standards to attempt certain inquiries of the predecessors before accepting a new audit client.

True

Tests of controls are designed to determine whether the client's controls are operating effectively.

True

Which assertion would be affected by the misstatement of the client having a significant amount of damaged goods that were presented at cost?

Valuation or allocation

Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud? a) Are financial reporting operations controlled by and limited to one location? b) Does it have knowledge of fraud or suspect fraud? c) Has the possibility of management override been assessed? d) Does the company have insurance against all forms of fraud?

b) Does it have knowledge of fraud or suspect fraud?

Which of the following best describes what is meant by the term "fraud risk factor"? a) Factors that, when present, indicate that risk exists. b) Factors often observed in circumstances where frauds have occurred. c) Factors that, when present, require modification of planned audit procedures. d) Weaknesses in internal control identified during an audit.

b) Factors often observed in circumstances where frauds have occurred.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) Supervise members of the audit team less closely and rely more upon judgment. b) Use less predictable audit procedures. c) Use only certified public accountants on the engagement. d) Place increased emphasis on the audit of objective transactions rather than subjective transactions.

b) Use less predictable audit procedures.

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? a) Generous performance-based compensation systems. b) Management preoccupation with increased financial performance. c) An unreliable accounting system. d) Strained relationships between management and the auditors.

c) An unreliable accounting system.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) Decrease the use of professional skepticism and increase the use of internally generated evidence. b) Use predictable, well established audit procedures. c) Consider further management's selection and application of significant accounting principles. d) Supervise members of the audit team less closely and rely more upon judgment.

c) Consider further management's selection and application of significant accounting principles.

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a) Adequate disclosure. b) Quality control. c) Materiality and audit risk. d) Client acceptance.

c) Materiality and audit risk.

Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement? a) Prepare a rough draft of the financial statements and of the auditors' report. b) Consider internal control. c) Tour the client's facilities and review the general records. d) Consult with and review the work of the predecessor auditors prior to discussing the engagement with the client management.

c) Tour the client's facilities and review the general records.

Which of the following should not normally be included in the engagement letter for an audit? a) A description of the responsibilities of client personnel to provide assistance. b) An indication of the amount of the audit fee. c) A description of the limitations of an audit.. d) A listing of the client's branch offices selected for testing.

d) A listing of the client's branch offices selected for testing.

Which of the following topics is not normally included in an engagement letter? a) The auditors' responsibilities with respect to the audit. b) A request that the client sign a copy of the letter. c) Client responsibilities regarding the audit. d) A schedule of individual audit team member billing rates.

d) A schedule of individual audit team member billing rates.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? a) Analysis of balance sheet accounts. b) Analysis of income statement accounts. c) All matters of continuing accounting significance. d) Facts that might bear on the integrity of management.

d) Facts that might bear on the integrity of management.

An audit committee's responsibilities normally would not include:

discussing all details of the audit plans of the independent auditors

Fair values can be evaluated by comparing to prices on _______ markets.

existing

Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

integrity of management

The portions of the auditors' audit plans relating to internal control are generally organized around the:

major transaction cycles

Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.

numbered

The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.

smaller

Auditors may use audit ______ to test clerical accuracy.

software

A cutoff test that relates to plant assets typically affects __________.

the balance sheet