quiz questions
COSO components of internal control (5)
1. Control environment 2. Risk assessment 3. Control activities 4. information and communication 5. Monitoring
5 Limitations of Internal Control
1. Human Error 2. Collusion 3. Management Override 4. Compliance deterioration over time 5. New threats (Information tech)
5 Big Standard Controls
1. Segregation of Duties 2. Management Review 3. System Barriers (approved vendors) 4. Involve Others (like your bank) 5. Physical Controls (Locked safe)
List 10 common procedures that a CPA firm may perform in conducting a financial statement audit of a continuing audit client
1. speak with management 2. overall audit strategy 3. audit plan 4. meet with client 5. ask to see prior year work papers 6. develop understanding of clients business and industry 7. determine preliminary judgement about materiality 8. analytical reviews 9. review client records 10. consider need for specialist
Common Indicators of Material Weaknesses
1.) Restatement of previously issued financial statements, where the underlying cause has not been corrected. 2.) Fraud committed by senior management (regardless of whether it's material to the financial statements) 3.) Identification of a material misstatement in the current financial statements detected by the auditor, under circumstances in which the misstatement would have been in the final financial statements if not for the audit. 4.) Ineffective oversight of the company's external financial reporting process
An auditor has accessed client business risk and the risk of material misstatements to the clients financial statements. These are done in order to: A) apply the audit risk model to determine the appropriate extent of audit evidence. B) determine the reliance on the company's internal control systems for financial reporting. C) determine the test of balances to be performed by the audit team. D) assure the CPA firm that they can perform the audit effectively and efficiently.
A) apply the audit risk model to determine the appropriate extent of audit evidence.
Which of the following statements is not correct with respect to analytical procedures? A) Auditing standards emphasize the need for auditors to develop and use expectations. B) Analytical procedures must be performed throughout the audit. C) Analytical procedures may be performed at any time during the audit. D) Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.
B) Analytical procedures must be performed throughout the audit.
Which of the following statements is true regarding communications between predecessor and successor auditors? A) The burden of initiating the communication rests with the predecessor. B) The predecessor's response can be limited to stating that no information will be provided. C) The predecessor should communicate with the successor only if the client is public. D) The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.
B) The predecessor's response can be limited to stating that no information will be provided.
The purpose of an engagement letter is to: A) document the CPA firm's responsibility to external users of the audited financial statements. B) document the terms of the engagement. C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. D) emphasize management's responsibility for approving the audit program.
B) document the terms of the engagement.
The preliminary audit strategy: A) is set before the auditor understands the client's reasons for the audit. B) guides the development of the audit plan. C) is determined after the engagement staffing is set. D) is the detailed steps to be followed for the substantive audit tests.
B) guides the development of the audit plan.
Most auditors assess inherent risk as high for related parties and related-party transactions because: A) of the unique classification of related-party transactions required on the balance sheet. B) of the lack of independence between the parties. C) of the unique classification of related-party transactions required on the income statement. D) it is required by generally accepted accounting principles.
B) of the lack of independence between the parties.
Which of the following is not a potential effect of an auditor's decision that a lower acceptable audit risk is appropriate? a. More evidence is accumulated. b. Less evidence is accumulated. c. Special care is required in assigning experienced staff. d. Review of audit documentation is performed by personnel not assigned to the engagement.
B. Less evidence is required
Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm? A) Management asserts there are no errors, material or immaterial, in the general ledger. B) Auditors assert that the primary audit goal is audit efficiency. C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.
Which of the following is a correct statement regarding analytical procedures? A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. B) Common-size financial statements display all items as a percentage change from a base year. C) Auditors should investigate the most significant differences between budgeted and actual results. D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.
C) Auditors should investigate the most significant differences between budgeted and actual results.
Which of the following is not a primary reason for obtaining a good understanding of the client's industry and external environment? A) Risk associated with a specific industry may affect the auditor's assessment of client business risk. B) Risk associated with a specific industry may affect the auditor's assessment of acceptable audit risk. C) Risk associated with a specific industry may affect the auditor's assessment of acceptable control risk. D) Many control risks are common to all clients in certain industries.
C) Risk associated with a specific industry may affect the auditor's assessment of acceptable control risk.
Business risk: A) is the risk after considering the effectiveness of top management controls. B) is the risk that the client's internal controls will fail. C) can include a new technology which threatens to erode a company's competitive advantage. D) cannot be mitigated by management.
C) can include a new technology which threatens to erode a company's competitive advantage.
In making client acceptance decisions, the audit firm will consider: A) inherent and control risk of the client B) audit risk to the CPA Firm. C) the client's business risk and the risk of material misstatements in the financial statements. D) CPA Firm's potential ongoing revenue from the audit client.
C) the client's business risk and the risk of material misstatements in the financial statements.
The two major factors affecting acceptable audit risk are: A) inherent risk and the intended uses of the financial statements. B) control risk and the intended uses of the financial statements. C) the likely statement users and the intended uses of the statements. D) the audit firm and the intended uses of the statements
C) the likely statement users and the intended uses of the statements.
Which of the following is most correct with respect to the use of analytical procedures? A) Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. B) Analytical procedures must be used throughout the audit. C) Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved. D) Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data.
D) Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data.
Which of the following would not be classified as an analytical procedure? A) Benchmarking the company's profitability ratios against others in the industry B) Variance analysis of actual versus budgeted amounts for production C) Reperforming the client's depreciation expense using the client's accounting policies for capital expenditures made during the year D) Reconciling fixed asset dispositions with the fixed asset ledger
D) Reconciling fixed asset dispositions with the fixed asset ledger
When are auditors likely to encounter judgment problems in the use of analytical procedures? A) Whenever the auditor places reliance on management's explanations for unusual fluctuations in account balances without first developing independent expectations B) Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances C) Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them D) The auditor is likely to encounter judgment problems in each of the above instances.
D) The auditor is likely to encounter judgment problems in each of the above instances.
During audit planning, the auditor uses ANALYTICAL PROCEDURES primarily to: A) identify weaknesses in internal control. B) determine if the company's financial statements appear reasonable and are free of material misstatement. C) determine the correspondence of the company's financial statements to the valuation and accuracy audit objectives. D) determine the nature, extent, and timing of audit procedures.
D) determine the nature, extent, and timing of audit procedures.
Analytical procedures: A) are not a type of audit evidence. B) are not required during the completion phase of the audit. C) performed during the planning phase of the audit are used as a substantive test in support of account balances. D) performed in the completion phase serve as a final review for material misstatements or financial problems.
D) performed in the completion phase serve as a final review for material misstatements or financial problems.
When selecting staff for the audit engagement: A) only staff members who are CPAs should be assigned to the audit. B) only managers and above need to have appropriate competence and capabilities to perform the audit. C) continuity of staff members from year to year should not be a factor. D) staff assigned to the audit must be knowledgeable about the client's industry.
D) staff assigned to the audit must be knowledgeable about the client's industry.
A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in determining A. The nature of the CPA's report qualification. B. The scope of the CPA's auditing procedures. C. Requirements for the review of the entity and its environment. D. Whether the CPA should undertake an audit engagement.
D. Whether the CPA should undertake an audit engagement.
Insert risk and control risk are normally assessed for the overall audit.
False
analytical reviews (analytics) are used by auditors in the planning and fieldwork portions of an examination, but not in the reporting portion.
False
Inherent risk and control risk are directly related.
False Inversely related
A qualified opinion states that the financial present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP.
False, an UNQUALIFIED opinion does
T/F: The report is generally addressed to management in the auditor's report.
False, it's to the company, its stockholders and/or board of directors
As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.
True
When a successor auditor requests information from a company's previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor's response to the new auditor may be limited to stating that no information will be provided. A) True B) False
True might get sued of disclose info to other companies
The major concern when using nonfinancial data in analytical procedures is the: A) accuracy of the nonfinancial data. B) source of the nonfinancial data. C) type of nonfinancial data. D) presence of multiple sources of nonfinancial data.
a
Which of the following is not an essential component of quality control? A) Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies. B) Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards. C) Policies to ensure that personnel maintain their independence in fact and in appearance. D) Policies that ensure that monitoring activities are effectively applied.
a. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies
which of the following is not correct regarding the communications between the successor and the predecessor auditors? a. The burden of initiating the communication rests with the predecessor auditor. b. The burden of initiating the communication rests with the successor auditor. c. The predecessor auditor must receive their former client's permission prior to divulging information to the successor auditor d. The predecessor auditor may choose to provide a limited response to a successor auditor.
a. The burden of initiating the communication rests with the predecessor auditor.
Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in: A) engagement letter. B) representation letter. C) responsibility letter. D) client letter.
a. engagement letter
The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4
b. 3,4,2,1,5
The audit team gathers information about a new client's business and industry in order to obtain: A) an understanding of the clients internal control system for financial reporting. B) an understanding of how economic events and transactions have an effect on the company's financial statements. C) information about control risk. D) information regarding whether the company is engaging in financial statement fraud.
b. an understanding of how economic events and transactions have an effect on the company's financial statements.
which of the following is not correct with respect to analytical procedures? a. statements on auditing standards emphasize expectations developed by the auditor b. analytical procedures should be performed in every phase of the audit c. analytical procedures may be performed at any time during the audit d. analytical procedure use comparison and relationships to assess whether account balances appear to be reasonable.
b. analytical procedures should be performed in every phase of the audit
An official record of meetings of the board of directors and stockholders is included in the corporate: A) bylaws. B) charter. C) minutes. D) license.
c. minutes
Which of the following is least likely to be considerd when assessing inherent risk?
d. expected effectiveness of controls
which of the following procedures would an auditor most likely include in inital planning of an audit of financial statements?
discussing the audit with firm personnel responsible for non-audit services to the client.
which of the following statements about the existence and completeness objectives is not true?
existence deals with understatements and completeness deals with overstatements.
A predecessor auditor who has been contacted by a successor auditor for information about the client does not have to obtain permission from the former client before providing any confidential information to the successor auditor because the confidentiality requirement does not extend to former clients. A) True B) False
false
Achieved detection risk can be reduced only by accumulating more audit evidence.
false
Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year's audit
false
Before accepting a new client, most CPA firms investigate the company to determine its acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties--namely the company's attorneys and bankers--during this investigation. A) True B) False
false
For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit.
false
For prospective clients that have previously been audited by another CPA firm, the predecessor auditor is required to communicate with the successor auditor. A) True B) False
false
If the preliminary judgment of materiality increases, the amount of audit evidence required will also increase.
false
Ordinarily, the auditor should review and abstract copies of contracts during the later stages of an audit
false
Statements on Auditing Standards provide detailed, objective guidance on how auditors are to establish a preliminary materiality level, thus eliminating the need for subjective auditor judgment in this task.
false
The most important element of the audit risk model is control risk.
false
To evaluate a specialist's work the auditor must himself/herself be considered a specialist. A) True B) False
false
To maximize audit effectiveness, the auditor should establish a high preliminary judgment about materiality and allocate most of the amount to balance sheet accounts.
false
Tolerable misstatement is the maximum combined total of all misstatements in the financial statements that the auditor is willing to allow, or tolerate, when issuing a standard unqualified opinion.
false
allocating the preliminary judgement about materiality to individual accounts is the first step the auditor conducts related to materiality
false
an auditor may use the services of a "specialist" in conducting the audit, but if only the use of a specialist is mentioned in the audit report
false
internal auditors may never be used by the external auditors to assist in the audit of financial statements
false
the type of business a client is in is not a factor that the auditor considers when determining materiality on an audit engagement
false
If a prospective client has been audited in the past, the successor auditor will typically rely solely on the representations about the client by the predecessor auditor. A) True B) False
false *Key Word* Soley can get information from other places not just the predecessor
One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk. A) True B) False
false analytics is comparing; has nothing to do with controls
When a successor auditor contacts a company's previous auditor, the predecessor auditor is required to respond fully and without limit to the request for information. A) True B) False
false predecessor is required to fully respond, or INDICATE that response is limited.
If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.
false must be low
acceptable audit risk is a measure of the auditor's willingness to accept that the financial statements do not contain material misstated after the audit is completed and a qualified opinion has been issued is
false acceptable audit risk is measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:
Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus.
false inherent and detection risk
The two major factors that affect acceptable audit risk are the likely users of the financial statements and the likelihood of issuing unqualified audit opinion
false reversed the likely statement users and the intended uses of the statements.
an auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:
obtain a knowledge of matters that relate to the nature of the entity's business.
in planning the audit engagement, the auditor should consider each of the following except
the kind of opinion (unqualified, qualified, or adverse) that will likely be expressed.
what is most likely first step an auditor would perform at the beginning of an initial audit engagement?
tour the clients facilities and review the general records
A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment. A) True B) False
true
Acceptable audit risk and the amount of substantive evidence required are inversely related.
true
An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work. A) True B) False
true
An engagement letter can affect the CPA firm's legal responsibilities to the client, but does not affect responsibility to external users of audited financial statements. A) True B) False
true
An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies. A) True B) False
true
An unqualified opinion does not equal a good investment.
true
As acceptable audit risk is decreased, the likely cost of conducting an audit increases. A) True B) False
true
Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what decisions will be made.
true
Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk. A) True B) False
true
Auditors should obtain copies of the client's articles of incorporation, bylaws, and minutes of the meetings of the board of directors to aid in their understanding of the company's management and governance structure.
true
Auditors should obtain copies of the client's code of ethics and minutes of the meetings of the board of directors to aid in their understanding of the company's management and governance structure. A) True B) False
true
Because of audit risk, some CPA firms now refuse any new clients in certain high-risk industries. A) True B) False
true
If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned.
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
Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus.
true
Management is the primary source for identifying client business risks. A) True B) False
true
Many inherent risks are common to all clients in certain industries. A) True B) False
true
The auditor's preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users.
true
The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate.
true
To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit.
true
When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account. A) True B) False
true
all known related parties must be identified and included in the auditor's permanent files related to the client
true
inherent risks typically vary across industries
true
