ACC 401 Ch.3 Review

Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to 1. Contingencies 2. Balance sheet accounts

1. Yes 2. Yes

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

A lack of independent checks.

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in

A more efficient manner.

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

A significant portion of management compensation is represented by stock options

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

A significant portion of management compensation is represented by stock options.

Which of the following statements reflects an auditor's responsibility for detecting fraud and errors?

An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive procedures.

Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?

Audit plan.

Analytical procedures are required for which of the following?

Audit planning.

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?

Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.

Detection risk differs from both control risk and inherent risk in that detection risk

Can be changed at the auditor's discretion.

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?

Communicate the matter to those charged with governance.

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities.

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Comparing the current-year account balances for conformity with predictable patterns.

An auditor's response to the assessment of the risks of material misstatement due to fraud takes various forms. A response with an overall effect on the conduct of the audit is to

Consider whether management's applications of accounting principles indicates a bias.

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Analytical procedures used to form an overall conclusion of an audit generally would include

Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Analytical procedures used to form an overall audit conclusion generally include

Considering unusual or unexpected account balances that were not previously identified.

Which of the following types of risks most likely would increase if accounts receivable are confirmed 3 months before year end?

Detection.

Which of the following would be considered an analytical procedure?

Developing the current year's expected net sales based on the entity's sales trend of prior years.

When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the

Extent of tests of details.

An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that

Fictitious credit sales have been recorded during the year.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Functions of the client and its environment, but detection risk is not.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment

Is based on evaluating whether the entity's related controls have been suitably designed and implemented.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fraudulent financial reporting when

Management is dominated by one individual who is also a shareholder.

Which of the following elements underlies the development of an overall audit strategy?

Materiality and audit risk.

Which one of the following statements is correct concerning the concept of materiality?

Materiality is a matter of professional judgment.

As the acceptable level of detection risk decreases, an auditor may change the

Nature of substantive procedures from a less effective to a more effective procedure.

The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor's attention is that

Noncompliance by clients often relates to operating aspects rather than accounting aspects.

In developing an audit plan, an auditor should

Perform risk assessment procedures.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Perform the planned auditing procedures closer to the balance sheet date.

With respect to fraud or error, the auditor should assess the risk that fraud or error may cause a material misstatement of the financial statements and should design the audit to

Provide reasonable assurance of detecting material fraud or error.

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should

Raise or lower the materiality level as appropriate to the situation.

A precondition for an audit most likely is not present when management

Refuses to acknowledge its responsibility for the fair presentation of the financial statements in accordance with the applicable reporting framework.

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit?

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?

Review the risk assessment of the opening balances of the financial statements.

In a financial statement audit, substantial consideration must be given to potential fraud. The conditions for fraud ordinarily include

The ability to rationalize commission of fraud.

Which of the following is a true statement about an auditor's responsibility regarding consideration of fraud in a financial statement audit?

The auditor should assess the risks of material misstatement due to fraud.

An auditor compares this year's revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that

The client changed its capitalization policy for small tools this year

An auditor compares this year's revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that

The client changed its capitalization policy for small tools this year.

Which of the following statements is correct concerning an auditor's responsibility to report fraud?

The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility.

An auditor's inquiries of the predecessor auditor should include questions regarding

The predecessor's understanding as to the reasons for the change in auditors.

Prior to the audit, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?

The schedules and analyses that the client's staff should prepare.

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They usually use financial and nonfinancial data aggregated at a high level.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed.

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud?

Unusual discrepancies between the entity's records and confirmation replies.