Final Exam - BACC 7123

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Identify the three broad categories of management assertions.

1. Assertions about classes of transactions and events for a period under audit. 2. Assertions about account balances at period end. 3. Assertions about presentation and disclosure

Which of the following types of audit evidence is generally the most reliable?

A bank confirmation.

The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction − related audit​ objective?

Accuracy

Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the _____ assertion.

Accuracy and valuation

Which of the following statements is usually true?

An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

When the auditor scans the sales journal looking for large and unusual transactions, he is gathering what type of evidence?

Analytical procedures

An _____ is the detailed instruction that explains the audit evidence to be obtained during the audit.

Audit procedure

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

Which of the following is a primary consideration when assessing inherent risk?

Existence of related parties, Nature of client's business, Susceptibility to misappropriation of assets

Management makes the following assertions about account balances:

Existence, completeness, valuation and allocation, and rights and obligations.

A high detection risk equates to a low amount of audit evidence needed.

FALSE

Audit documents are joint property of the auditor and the audit client.

FALSE

If an auditor does a test in the wrong direction, sampling risk will increase.

FALSE

Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective.

FALSE

Since the audit risk model is a planning model, it assists the auditor in evaluating results.

FALSE

The audit risk model that must be used for planning audit procedures and evaluating audit results is: DR / IR * CR = AAR.

FALSE

The effect of a violation of the completeness transaction - related audit objective for cash disbursements transactions would be an overstatement of cash disbursements.

FALSE

The transaction - related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective.

FALSE

Which of the following IS one of the steps used to develop audit objectives?

Know the management assertions about the financial statements, divide the financial statements into cycles, know the specific audit objectives for classes of transactions.

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not _____ are detected.

Material to the financial statements

Auditing standards make _____ distinctions between the auditor's responsibilities for searching for errors and fraud.

No

When the auditor uses the audit procedure vouching she is primarily concerned with which of the following audit objectives when testing classes of transactions?

Occurrence

_____ deals with potential overstatement and _____ deals with understatements (unrecorded transactions).

Occurrence; completeness

Which of the following is a correct relationship?

Planned detection risk and inherent risk have an inverse relationship.

Determining that the footnote disclosures related to long term debt are accurate is an example of the _____ audit objective.

Presentation and disclosure

Which of the following forms of evidence would be least persuasive in forming the​ auditor's opinion about marketable securities and other investments held by the​ company?

Responses to auditor's questions by the president and controller regarding the investments account.

Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to​ evidence?

Sample size AND timing of audit procedures.

Which of the following is the risk that an auditor will reach and incorrect conclusion because a sample is NOT representative of the population?

Sampling risk.

Which of the following statements is true of a public company's financial statements?

Sarbanes Oxley requires both the CEO and CFO to certify the financial statements.

Accounts that require considerable judgement have a higher inherent risk.

TRUE

Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.

TRUE

An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel and/or a more extensive review of audit files.

TRUE

An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.

TRUE

An auditor assesses the risk of material misstatement to determine the impact on the auditor plan and to determine the nature, extent, and timing of the audit procedures.

TRUE

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

TRUE

Auditor judgement is the primary determinant in determining the amount of evidence gathered.

TRUE

Confirmations are among the most expensive type of evidence to obtain.

TRUE

If a particular internal control is not followed by the client exactly 6% of the time, and the auditor's tests of that control find three control violations in a sample of 50, the sample is considered to be representative.

TRUE

If a sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy objective was violated.

TRUE

If an auditor believes the client will have financial difficulties after the audit report is​ issued, and external users will be relying heavily on the financial​ statements, the auditor will probably set acceptable audit risk as low.

TRUE

Rights and obligations is the only balance - related assertion without a similar transaction - related assertion.

TRUE

The auditor's audit objectives follow and are closely related to management assertions.

TRUE

The type of audit evidence known as inquiry requires the audit to obtain oral or written information from the client in response to questions.

TRUE

When an auditor has reduced assessed control risk based on tests of​ controls, he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.

TRUE

Which one of the choices below is most correct regarding a cause of sampling risk?

Testing less that the entire population.

Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?

The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

Audit documentation of the evidence gathered by the auditor should meet which of the following​ criteria?

The content is sufficient to provide support for the​ auditor's opinion, including the​ auditor's representation as to compliance with auditing standards.

Two overriding considerations affect the many ways an auditor can accumulate​ evidence: 1. Sufficient appropriate evidence must be accumulated to meet the​ auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized.

The first is more important than the second.

Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?

The general audit objectives are applicable to every class of transactions.

Which of the following is the most objective type of evidence?

The physical count of securities and cash

Which of the following statements regarding the relevance of evidence is correct?

To be relevant, evidence must pertain to the audit objective of the evidence.

The permanent files included as part of audit documentation do not normally include

a copy of the current and prior years' audit programs.

When practical and reasonable, US auditing standards require the confirmation of

accounts receivable.

The posting and summarization audit objective is the auditor's counterpart to management's assertion of

accuracy.

An example of an external document that provides reliable information for the auditor is

an bank statement.

The evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data is the definition of

analytical procedures.

Two determinants of the persuasiveness of evidence are

appropriateness and sufficiency.

The detail line in objective is not concerned that the details in the account balance

are properly disclosed in accordance with GAAP.

Evidence is usually more persuasive for balance sheet accounts when it is obtained

as close to the balance sheet date as possible.

As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the

assurances provided by audit procedures to a lower level.

When making audit evidence decisions,

audit engagement software can assist the auditor in making evidence decisions.

To determine if a sample is truly representative of the population, an auditor would be required to

audit the entire population.

The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must

be persuasive enough to enable the auditor to issue an audit report.

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely

be reduced.

If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal​ control, assessing control​ risk, testing​controls, and analytical​ procedures, then the auditor

can significantly reduce other substantive tests.

"Physical examination" is the inspection or count by the auditor of items such as

cash, inventory, securities, notes receivable, and tangible fixed assets.

If a short term note payable is included in the accounts payable balance on the financial statements, there is a violation of the

classification assertion.

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

company management.

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and a

critical assessment of the audit evidence.

The term audit objective refers to all of the following except for

cycle related audit objectives.

If the auditor decides to reduce acceptable audit risk, planned detection risk

decreases.

An auditor can increase the likelihood that a sample is representative by using care in both

designing the sampling process AND designing the sample selection.

When assessing risk, it is important to remember that

detection risk can only be determined after audit risk, inherent risk, and control risk are determined.

Planned detection risk

determines the amount of substantive evidence the auditor plans to accumulate.

Management assertions are

directly related to the financial reporting framework used by the company, usually US GAAP or IFRS.

Another term for misappropriation of assets is

employee fraud.

Inherent risk and control risk differ from planned detection risk in that they

exist independently of the financial statement audit.

The primary purpose of audit procedures is to

gather corroborative audit evidence about management's assertions regarding the client's financial statements.

An auditor most likely would apply analytical procedures in the overall review stage of an audit to

identify unusual or unexpected balances that were not previously identified.

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit

in accordance with generally accepted auditing standards GAAS.

One of the causes of nonsampling risk is

ineffective audit procedures.

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

inherent risk.

The measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as

inherent risk.

Inherent risk and control risk are

inversely related to detection risk.

The classification balances - related audit objective

involves determining if items included on a client's listing are included in the correct GL accounts.

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud

is greater for management fraud because of management's ability to override existing internal controls.

The permanent audit file would usually include the

organizational chart of the company's employees.

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

planned detection risk.

Auditor's accumulate evidence to

reach a conclusion about the fairness of the financial statements.

The two characteristics of the appropriateness of evidence are

relevance and reliability.

A sample in which the characteristics of the sample are the same as those of the population is a

representative sample.

According to PCAOB audit standards, audit documentation must be retained for

seven years.

Audit documentation

should identify the items tested when the audit procedures involve sampling of transactions or balances.

Audit procedures can result in significant, unexpected differences. The auditor should investigate further if BOTH

significant differences are not expected but do exist AND significant differences are expected but do not exist.

Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)

test of details of balances.

The procedures used to test the effectiveness of the internal controls are known as

tests of controls.

The objective of an audit of the financial statements is an expression of an opinion on

the fairness of the financial statements in all material respects.

The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to

trace a sample of shipping documents to related duplicate sales invoices.

Factors that determine the auditor's willingness to accept a document as reliable evidence include,

whether it is an original document or photocopy, whether it was created and processed under conditions of effective internal control, whether it is internal or external.


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