Chapter 6 smartbook

Materiality depends on the ______ and the nature of the item. Multiple choice question. number of errors dollar amount intent

dollar amount

The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk. Multiple choice question. audit business engagement inherent

engagement

Substantive procedures should be performed for all significant financial statement accounts ______ controls are considered extremely strong.

even if

Many inherent risks arise because of_____risks faced by management, such as the possibility of material misstatement due to fraud.

business

To obtain the understanding of the entity and its environment, auditors perform ___ ___ procedures.

risk assessment

A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by the_____ _______

time budget

During the second stage of the audit process, auditors use ____ _____procedures to gather information to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures.

risk assessment

An increase in the level of planning materiality results a decrease in ______. Multiple choice question. scope of audit procedures relevant assertions interim period

scope of audit procedures

A $500 error would most likely be considered material for ______. Multiple choice question. no organizations all organizations a school fund raising organization large U.S. manufacturers global corporations

a school fund raising organization

A description of the nature, timing, and extent of the audit procedures to be performed is found in the audit ______.

plan

(1) Incentive or pressure, (2) opportunity, and (3) attitude to rationalize the act are the three fundamental conditions of the fraud _____ ______

risk triangle

The time interval from the beginning of audit work to the balance sheet date is called the ______ period. Multiple choice question. engagement subsequent interim

interim

Many inherent risks arise because of ______ risks faced by management, such as the possibility of material misstatement due to fraud. Multiple choice question. audit. control business

business

Examples of risk assessment procedures include all of the following except ______. Multiple choice question. analytical procedures observation and inspection vouch sales transactions inquiries of management

vouch sales transactions

Auditors test completeness of receivables in order to determine that all ______.

receivables have been recorded

The auditors' understanding of the nature of the client includes ______. Multiple select question. organizational structure product lines competitive position accounting policies general economic environment

organizational structure product lines competitive position accounting policies

To gain an understanding of the client, the auditors will identify methods used by the client to measure and review ______. Multiple choice question. performance risks analytical procedures

performance

When materiality is allocated to a particular account, it is referred to as____materiality

performance

The application of performance materiality to a particular audit procedures is

tolerable misstatement

True or false: Asset valuation is relatively straight-forward for all assets because they are recorded at cost and recorded values are not changed due to the historical cost principle.

False

True or false: Performing audit work during the interim period reduces the total amount of substantive procedures that must be completed.

False

Which of the following is NOT a component of the fraud risk triangle? Multiple choice question. Opportunity Incentive or pressure Fear Rationalization

Fear

Identify which of the following would not be covered in the engagement letter of an audit. Multiple choice question. Applicable financial reporting framework Audit scope Auditor and management responsibilities Internal controls to be tested

Internal controls to be tested

Which of the following is not a facet of the overall audit strategy? Multiple choice question. Consideration of industry reporting requirements Setting the basis of reporting Setting the deadlines for reporting Setting a date when the final audit fees will be paid

Setting a date when the final audit fees will be paid

Select the following items that are identified by the text as conditions indicative of fraud. Multiple select question. Unwillingness to allow auditor access to files or testing Missing documents Unsupported transactions Related party transactions

Unwillingness to allow auditor access to files or testing Missing documents Unsupported transactions

The best source of information about the nature of the client is likely to be obtained by ______. Multiple choice question. inquiries of management and other personnel reading trade publications reading AICPA Audit and Accounting Guides reviewing prior year tax returns

inquiries of management and other personnel

Planning materiality is commonly based on % of ______. Multiple select question. net income total assets total liabilities total revenues

net income total assets total revenues

At the planning stage of an audit, auditors consider materiality to determine their ______. Multiple choice question. scope of the audit opinion business risk

scope of the audit

Assume auditors find a $5,000 misstatement in a sample. As a result, they estimate the entire population is misstated by about $20,000. The sample size must have been____ % of the population

25

True or false: In performing risk assessment, auditors only focus on material misstatement at the financial statement level.

False

Which of the following is not a relevant assertion? Multiple choice question. Cutoff Existence or occurrence Rights and obligations Materiality and appropriation

Materiality and appropriation

Examples of risks at the financial statement level include ______. Multiple select question. existence or occurrence a declining industry lack of sufficient capital to continue operations ineffective control environment

a declining industry lack of sufficient capital to continue operations ineffective control environment

Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditors'___procedures.

analytical

Comparing current year balances to prior year balances is an example of ______. Multiple choice question. tests of controls analytical procedures performance materiality

analytical procedures

Auditors indirectly verify revenue, cost of goods sold, and expenses by substantiating changes in the _and _accounts.

asset liability

Generally highly reliable evidence is available to substantiate ______. Multiple choice question. revenues and expenses assets and liabilities

assets and liabilities

The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called ______ risk. Multiple choice question. engagement audit inherent control

audit

Generally accepted auditing standards require that indications of management fraud should be communicated to the ______, to assist in its oversight of the financial reporting process of the company. Multiple choice question. management board of directors audit committee

audit committee

Competitive position, organizational structure, governance processes, and product lines are all components of the auditors' understanding the nature of the

client

Auditors vouch cash receipt transactions occurring near period end to verify ______. Multiple choice question. cutoff of transactions completeness of assets existence of assets

cutoff of transactions

Analytical procedures provide ______ evidence as to the reasonableness of various revenues and expenses. Multiple choice question. direct indirect no

direct

The nature and extent of the audit work to be performed on a particular engagement depend largely upon the ______. Multiple choice question. work of the predecessor auditor effectiveness of the client's internal control agreed upon fees for the engagement limitations imposed upon the auditor by management

effectiveness of the client's internal control

Successor auditors seek information from predecessor auditors on communication with the client and those charged with governance regarding ______. Multiple select question. the timing of the audit and issuance of opinion fees charged for the audit internal control deficiencies and material weaknesses fraud and noncompliance with laws and regulations

internal control deficiencies and material weaknesses fraud and noncompliance with laws and regulations

Assertions such as existence or occurrence, rights and obligations, completeness, and cutoff are considered ____ assertions

relevant

The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at ______. Multiple choice question. the financial statement and relevant assertion levels neither the financial statement nor relevant assertion level the financial statement level only the relevant assertion level only

the financial statement and relevant assertion levels

An estimate of the number of hours required to perform each step in the audit is called a(n) ______. Multiple choice question. time budget audit plan audit strategy

time budget

Planning materiality is commonly based on all of the following except % of ______. Multiple choice question. total equity total assets total expenses net income

total expenses

The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n

transaction cycle

If assets are subject to depreciation, an analysis of the reasonableness of the cost allocation and verification of the computation of the remaining unallocated cost are important in assessing the____of assets.

valuation

obtain a list of related parties and verify all related party transactions are displayed Reason: This tests disclosure. investigate credit rating for delinquent receivables to verify they are recorded at net realizable value Reason: This tests valuation. vouch sales transactions near the period end to verify sales are recorded in the proper period

vouch sales transactions near the period end to verify sales are recorded in the proper period

If auditors test 20% of a population and find a $4,000 misstatement, they would estimate the entire population is misstated by about ______.

$20,000

If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be ______ $50,000. Multiple choice question. equal to more than less than

less than

Material misstatement of financial statements by management with the intent to mislead financial statement users is called ______.

fraudulent financial reporting

Significant risks often relate to transactions that are ______. Multiple select question. nonroutine estimation recurring routine

nonroutine estimation

Risk assessment procedures include ______. Multiple select question. observation and inspection analytical procedures inquiry of external parties recalculation of balances

observation and inspection analytical procedures inquiry of external parties

Auditors test the client's rights to assets to verify that all ______. Multiple choice question. recorded receivables are valid receivables belong to the client receivables have been recorded

receivables belong to the client

All of the following are common indications of fraud except ______. Multiple choice question. related party transactions missing inventory complaints by management about the conduct of the audit tips to the auditors about fraud

related party transactions

The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at the financial statement and ____ ______ levels.

relevant assertion

If auditors obtain evidence of fraud they should evaluate the implications and ______. Multiple choice question. always report the matter directly to the Board of Directors or audit committee Reason: This is done if the fraud involves senior management or material misstatement of the financial statements. immediately withdraw from the engagement Reason: This may be the response in very serious situations. discuss the evidence with the manager they believe is involved in the fraud report the matter to a manager at least one level above the one involved

report the matter to a manager at least one level above the one involved

Further audit procedures include ______. Multiple select question. business risk substantive procedures tests of controls

substantive procedures tests of controls

The planning materiality amount that will require the auditors to gather the most audit evidence is ______. Multiple choice question. $10,000 $50,000 $250,000

$10,000

Auditors consider the overall attractiveness and other characteristics of the client's industry. Which of the following are other characteristics that are considered? Multiple select question. Economic conditions Changes in technology Financial trends Barriers to entry Strength of competitors Governmental regulations

Economic conditions Changes in technology Financial trends Governmental regulations

Responsibility for the appointment, compensation, and oversight of the auditors rests with the client's ______. Multiple choice question. audit committee management board of directors

audit committee

The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called

audit risk

Following specific transactions from their source documents forward to their inclusion in the financial statement summary figures is a test of the ______ assertion. Multiple choice question. completeness valuation occurrence

completeness

Relevant assertions include ______. Multiple select question. completeness valuation or allocation materiality and appropriation existence or occurrence

completeness valuation or allocation existence or occurrence

Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ______ assets. Multiple choice question. rights to completeness of valuation of

completeness of

If inherent risk is assessed as low and internal controls seem able to prevent or detect and correct misstatements, the auditors may decide to perform tests of support an assessment that _____ risk is low.

control

The auditor's consideration of ______ risk involves analyzing the design and implementation of internal control to decide if the system appears adequate to detect and correct material misstatements.

control

Inquiries of predecessor auditors are aimed at obtaining information on ______. Multiple select question. disagreements with management reason for change in auditors integrity of management profits obtained from the audit

disagreements with management reason for change in auditors integrity of management

The overall risk of association with a particular business is often referred to as

engagement risk

A lack of sufficient capital to continue operations is considered a(n) ______ level risk. Multiple choice question. inherent financial statement relevant assertion

financial statement

The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis for the auditors' selection of___ audit procedures.

further

Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement____of assets

presentation

A risk that has been identified and assessed that, in the auditor's opinion, requires special audit consideration is considered a(n)

significant risk

PCAOB standards explicitly require auditors to determine whether any of the identified risks of material misstatement are

significant risks

In making inquiries related to fraud, auditors must ask whether the company has entered into any ____ ______ transactions

significant unusual

Significant unusual transactions ______ involve related parties. Multiple choice question. always sometimes never

sometimes

When auditors obtain evidence of fraud, they should ______ withdraw from the engagement. Multiple choice question. never always sometimes

sometimes

Auditors should document several elements of risk assessment including ______. Multiple select question. auditor's opinion on the financial statements audit team discussion nature, timing, and extent of further audit procedures understanding of the entity and its environment

audit team discussion nature, timing, and extent of further audit procedures understanding of the entity and its environment

During the planning stage of an audit, the auditors establish an understanding with their client as to the nature of services to be provided and the responsibilities of the ______. auditor and firm client and employees auditor and client

auditor and client

Auditors should document several elements of risk assessment including all of the following except ______. Multiple choice question. nature, timing, and extent of further audit procedures audit team discussion auditor's opinion on the financial statements understanding of the entity and its environment

auditor's opinion on the financial statements

Most audit firms organize the substantive portion of their audit plans around the ______ accounts. Multiple choice question. income statement equity balance sheet

balance sheet

When evaluating the overall attractiveness of the industry a client operates in, auditors consider ______. Multiple select question. organizational structure bargaining power of customers barriers to entry bargaining power of suppliers strength of competitors

bargaining power of customers barriers to entry bargaining power of suppliers strength of competitors

According to auditing standards, successor auditors must attempt to communicate with predecessor auditors ______. Multiple choice question. immediately after presenting a formal proposal to a new client before accepting the engagement as soon as the engagement is accepted

before accepting the engagement

Achieving management's objectives is always subject to ___ risks.

business

Many inherent risks arise because of _______risks faced by management, such as the possibility of material misstatement due to fraud.

business

Potential significant business risks for a client include ______. Multiple select question. changes in government regulations competition material price volatility hiring a new production manager interest rate increases

changes in government regulations competition material price volatility interest rate increases

The overall audit strategy involves determining overall characteristics of the engagement that ______. Multiple select question. determine the timing of procedures determine the auditors' opinion determine the focus of the audit team define the audit scope

determine the timing of procedures determine the focus of the audit team define the audit scope

Inquiries of predecessor auditors are aimed at obtaining information on ______. Multiple select question. disagreements with management profits obtained from the audit integrity of management reason for change in auditors

disagreements with management integrity of management reason for change in auditors

The systems portion of the audit addresses ______. Multiple choice question. effectiveness of the client's internal control risk assessment procedures substantive tests of account balances

effectiveness of the client's internal control

The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk.

engagement

If the auditors' objective is to test ______, they follow the stream of evidence back to its source. Multiple choice question. valuation completeness existence

existence

Physical examination of plant and equipment verifies ______. Multiple choice question. existence existence and ownership

existence

The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion _____of assets.

existence

The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ______ assets. Multiple choice question. valuation of existence of rights to

existence of

Inquiries to find information about the nature of the client should ______. Multiple choice question. not include discussions with management include both management and other personnel be limited to discussions with management

include both management and other personnel

Advantages of interim audit work include ______. Multiple select question. increased assessment of internal control timely release of audited financial statements reduction in the amount of overall work completed more uniform workload for the CPA firm

increased assessment of internal control timely release of audited financial statements more uniform workload for the CPA firm

The engagement letter should include information regarding ______. Multiple select question. inherent limitations of the audit the audit opinion to be expressed expected form and content of the reports applicable financial reporting framework

inherent limitations of the audit expected form and content of the reports applicable financial reporting framework

The risk of material misstatement of an assertion without considering internal control is called

inherent risk

During the second stage of the audit process, auditors must obtain an understanding of the nature of ____ _____ because it allows them to identify accounts and classes of transactions that may be misstated and to tailor audit procedures to the existing system.

internal control

The nature and extent of the audit work to be performed on a particular engagement depend largely upon the effectiveness of the client's____ ____ in preventing or detecting material misstatements.

internal control

According to the FASB, if, in light of surrounding circumstances, the magnitude of an item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item, the omission of the item in a financial report is considered a(n) ______ deficiency. (Enter only one word per blank.) circumstances material omission

material

Tolerable misstatement ______ performance materiality. Multiple choice question. may be the same amount or lower than may be the same amount or higher than is always equal to is always higher or lower than

may be the same amount or lower than

To determine if the ending financial statement balance is correct, auditors ______.

may test controls over transactions or test the ending balance directly

When a successor auditor is offered an auditing engagement, the successor auditor ______. Multiple choice question. must obtain the client's consent before discussing confidential information with the predecessor auditor is prohibited from accepting the engagement if communication with the predecessor auditor is denied by management is granted permission to contact the predecessor auditor by default

must obtain the client's consent before discussing confidential information with the predecessor auditor

Inherent risk is the risk ______. Multiple choice question. that material misstatement will not be prevented on a timely basis by internal control Reason: Control risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated Reason: Audit risk of material misstatement of an assertion without considering internal control

of material misstatement of an assertion without considering internal control

To identify fraud risks, auditors perform a number of procedures including ______. Multiple select question. performing analytical procedures inquiries of management inquiries of legal representation considering fraud risk factors

performing analytical procedures inquiries of management considering fraud risk factors

Auditors consider materiality to determine their scope of the audit during the ______ stage of an audit. Multiple choice question. substantive procedures planning test of controls

planning

When an audit firm is considering a new client, they are required to attempt to communicate with the ______ auditor. Multiple choice question. subsequent successor current predecessor

predecessor

f auditors obtain evidence of fraud they should evaluate the implications and ______. Multiple choice question. always report the matter directly to the Board of Directors or audit committee report the matter to a manager at least one level above the one involved discuss the evidence with the manager they believe is involved in the fraud immediately withdraw from the engagement

report the matter to a manager at least one level above the one involved

Auditors indirectly verify revenue, cost of goods sold, and expenses. By substantiating changes in the asset and liability accounts, auditors indirectly verify_________accounts

revenue expense

During the planning stages of the audit, the auditors develop a(n) ______. Multiple select question. strategy schedule opinion audit plan

strategy schedule audit plan

Procedures aimed directly at financial statement account balances are included in the_____ portion of the audit program.

substantive

Test of account balances and transactions designed to detect any material misstatements in the financial statements are called _____ procedures.

substantive

Test of account balances and transactions designed to detect any material misstatements in the financial statements are called ______.

substantive procedures

Usually organized around the balance sheet accounts, the_____ ______ portion of the audit program is aimed at confirming financial statement amounts.

substantive procedures

To gain an understanding of the client, its environment, and internal controls, audits will review the ______. Multiple select question. representation letter obtained from the management of the client the client's objectives and strategies and related business risks nature of the client, including the client's application of accounting policies industry, regulatory, and other external factors affecting the client

the client's objectives and strategies and related business risks nature of the client, including the client's application of accounting policies industry, regulatory, and other external factors affecting the client