ACC 491 Chapter 6 Smartbook
Which of the following statements is correct?
Not all entities undergoing a financial statement audit have audit committees.
During the planning stages of the audit, the auditors develop a(n) ______.
audit plan strategy schedule
A lack of sufficient capital to continue operations is considered a(n) ______ level risk.
financial statement
A possible fraud concern management ______ of the allowance for doubtful accounts.
understatement
Auditor review of subsequent period invoices to verify all receivables are recorded is verification of
completeness
Most revenue transactions involve a
debit to either cash or accounts receivable
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
Which of the following is not a relevant assertion?
Materiality and appropriation
Discussion(s) with audit team members about the susceptibility of the client's financial statements to material misstatements are ______.
always required
Comparing a company's inventory turnover to industry standard rates is an example of ______.
analytical procedures
Analytical procedures provide ______ evidence as to the reasonableness of various revenues and expenses.
direct
The overall risk of association with a particular business is often referred to as
engagement risk
Significant risks often relate to transactions that are ______.
estimation nonroutine
Obtaining evidence about opening balances is necessary ______.
in the first audit of a client
Auditors may respond to fraud risk by all of the following except ______.
increasing use of client staff during substantive procedures
The time interval from the beginning of audit work to the balance sheet date is called the
interim period
The final step of the audit is to ______.
issue the audit report
When a successor auditor is offered an auditing engagement, the successor auditor ______.
must obtain the client's consent before discussing confidential information with the predecessor auditor
Generally accepted accounting principles ______.
have various requirements for the valuation of assets
PCAOB standards explicitly require auditors to determine whether any of the identified risks of material misstatement are
significant
Inherent risk is the risk ______.
of material misstatement of an assertion without considering internal control
Audit fees are composed of ______.
staff salaries overhead profit payroll taxes
Audit data analytic techniques ______.
can be used in tests of controls can be used to perform risk assessments
If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be ______ $50,000.
less than
All of the following are common indications of fraud except ______.
related party transactions
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 ($4,000 / 20%)
Inquiries of predecessor auditors are aimed at obtaining information on ______.
disagreements with management integrity of management reason for change in auditors
Even if specific risks of material misstatement due to fraud are not identified by the auditors, there is always a possibility of management override of
internal controls
Using analysis, modeling, or visualization to analyze patterns, identify anomalies, or extract other useful information related to the subject matter of an audit is the basis of audit
data analytics
An ADA technique that is used to identify unusual relationships based on tendencies over time is called
trend analysis
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion
existence of assets
Required discussions about the susceptibility of the client's financial statements to material misstatement allow experienced team members to emphasize the importance of maintaining the proper degree of _____ _____ regarding the possibility of such misstatements.
professional skepticism
Materiality depends on the ______ and the nature of the item.
dollar amount
The risk of material misstatement of an assertion without considering internal control is called
inherent
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
relevant assertion levels
A dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a ______.
test of controls
Which of the following is not a facet of the overall audit strategy?
Setting a date when the final audit fees will be paid
Many inherent risks arise because of _____ risks faced by management, such as the possibility of material misstatement due to fraud.
business
Typical transaction cycles include ______.
conversion (production) revenue (sales and collections) investing
The engagement letter should include information regarding ______.
inherent limitations of the audit expected form and content of the reports applicable financial reporting framework
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
internal control
Because material misstatements due to fraudulent financial reporting often involve management override of _____ _____ auditors should ordinarily presume there is a fraud risk related to revenue recognition.
internal controls
A risk that has been identified and assessed that, in the auditor's opinion, requires special audit consideration is considered a(n)
significant risk
When auditors obtain evidence of fraud, they should ______ withdraw from the engagement.
sometimes
The basic unit of measurement for audit fees is ______.
staff time
Further audit procedures include ______.
tests of controls substantive procedures
Responsibility for the appointment, compensation, and oversight of the auditors rests with the client's ______.
audit committee
Due to the continuing litigation involving auditors, it is important for CPA firms to develop quality control policies for thoroughly investigating clients ______.
before an engagement is accepted
Risk assessment procedures include ______.
observation and inspection inquiry of external parties analytical procedures
The auditors' understanding of the nature of the client includes ______.
organizational structure accounting policies product lines competitive position
The auditors may use the statement of cash flows while obtaining an understanding of the client, as part of ______ analytical procedures.
risk assessment
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called
audit risk
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 client
Most audit firms organize the substantive portion of their audit plans around the ______ accounts.
balance sheet
Many inherent risks arise because of ______ risks faced by management, such as the possibility of material misstatement due to fraud.
business
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
Physical examination of plant and equipment verifies ______.
existence
Relevant assertions include ______.
existence or occurrence completeness valuation or allocation
A $500 error would most likely be considered material for ______.
a school fund raising organization
If auditors identify fraud risks, the auditors may modify their overall approach to the audit by ______.
adding specialized audit staff increasing third-party confirmations
Competitive position, organizational structure, governance processes, and product lines are all components of the auditors' understanding the nature of the
client
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
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
The audit plan should include ______.
a description of the nature, timing, and extent of planned risk assessment procedures
In a first time audit, if the auditors cannot obtain sufficient evidence about the balance of beginning inventories, they may have to ______.
disclaim an opinion on the income statement
An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as a(n)
dual - purpose procedure
An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as a(n) ______ procedure.
dual-purpose
The nature and extent of the audit work to be performed on a particular engagement depend largely upon the ______.
effectiveness of the client's internal control in preventing or detecting material misstatements
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
Upon acceptance by the client, the _____ letter presents an executor contract between the auditor and the client.
engagement
If the auditors' objective is to test ______, they follow the stream of evidence back to its source.
existence
True or false: Due to the continuing litigation involving auditors, it is important for CPA firms to develop quality control policies for throughly investigating clients as soon as an engagement is accepted.
false
True or false: Every corporation is required to have an audit committee.
false
True or false: Inadequate segregation of duties, management oversight of employees, and systems of authorization and approval of transactions all increase the opportunity to commit fraudulent financial reporting.
false
Successor auditors seek information from predecessor auditors on communication with the client and those charged with governance regarding ______.
fraud and noncompliance with laws and regulations internal control deficiencies and material weaknesses
Applying procedures that provide more reliable evidence, shifting tests from the interim period to near year-end, or increasing the sample size for a particular substantive procedure are all alterations that may be done to address a(n)
fraud risk
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
further audit procedures
To gain an understanding of the client, its environment, and internal controls, audits will review the ______.
industry, regulatory, and other external factors affecting the client nature of the client, including the client's application of accounting policies the client's objectives and strategies and related business risks
Examples of risks at the financial statement level include ______.
ineffective control environment a declining industry lack of sufficient capital to continue operations
Top management fraud is often accomplished by ______.
intentionally misstating accounting estimates unusual transactions that involve related parties
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.)
material
Auditors should document several elements of risk assessment including ______.
nature, timing, and extent of further audit procedures audit team discussion understanding of the entity and its environment
An audit committee must be composed of at least three ______.
outside directors
When a new client has been accepted and no satisfactory recent audit has been performed the auditor must ______.
perform an extensive analysis of prior years' transactions to establish opening balances
When an audit firm is considering a new client, they are required to attempt to communicate with the ______ auditor.
predecessor
Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement
presentation of assets
The auditors may use the statement of cash flows while obtaining an understanding of the client, as part of _____ assessment analytical procedures. (Enter only one word per blank.)
risk
Trend analysis and analyzing general ledger fluctuations are two common ADA techniques used in
risk assessment
An increase in the level of planning materiality results a decrease in ______.
scope of audit procedures
During the ______ stage of the audit process, auditors use risk assessment 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.
second
For recurring audits, a revision in the terms of the audit engagement may be indicated when there is a change in ______.
senior management reporting requirements the size of the client
A company's management searching for auditors who would accept a questionable revenue recognition method as being in accordance with GAAP is called
shopping for accounting principles
Silver Corporation is seeking a new auditor due to a disagreement with the current audit firm regarding a financial statement disclosure. Silver is looking for a new auditor who will provide a clean opinion on the statements. This is known as ______.
shopping for accounting principles
In making inquiries related to fraud, auditors must ask whether the company has entered into any _____ _____ transactions.
significant unusual
Engagement letters should include all of the following except ______.
the exact fees to be charged for the audit
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 relevant assertion levels
An estimate of the number of hours required to perform each step in the audit is called a(n) ______.
time budget
The application of performance materiality to a particular audit procedures is
tolerable misstatement
Planning materiality is commonly based on % of ______.
total revenues net income total assets
The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n) _____ cycle
transaction
Auditors obtain a representation letter from management ______.
when completing the audit
Auditors consider the overall attractiveness and other characteristics of the client's industry. Which of the following are other characteristics that are considered?
Governmental regulations Financial trends Economic conditions Changes in technology
A common rule of thumb related to a financial statement base used by auditors is ______.
1% of total equity
Risk factors reflective of employee attitudes and/or rationalizations that allow them to justify misappropriation of assets include ______.
overriding existing internal controls behavior indicating dissatisfaction with the company changes in lifestyle
When materiality is allocated to a particular account, it is referred to as
performance materiality
A description of the nature, timing, and extent of the audit procedures to be performed is found in the audit ______.
plan
The auditor should record the terms of the engagement annually in an engagement letter to the audit committee for ______.
public company clients only
Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditors'
analytical procedures
When auditors are aware of a fraud risk they may ______.
apply procedures that provide more reliable evidence interview personnel involved in areas where risks are identified increase sample sizes for substantive procedures
Opportunities for the misappropriation of assets are increased when there ______.
are no mandatory vacations for employees performing key control functions is inadequate recording keeping is a large amount of cash on hand
Auditors indirectly verify revenue, cost of goods sold, and expenses by substantiating changes in the Blank______ accounts.
asset and liability
Generally highly reliable evidence is available to substantiate ______.
assets and liabilities
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.
audit committee
The overall audit strategy involves determining overall characteristics of the engagement that ______.
determine the timing of procedures define the audit scope determine the focus of the audit team
ADA techniques are most useful in substantive analytical procedures because they can be used to ______.
develop more accurate and precise expectations
A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by the
time budget
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
valuation of assets