ACCTG 439 ch.6

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

business

Reviewing related party transactions to confirm that they are properly recorded is an example of verifying ___________ assets. a. presentation of b. valuation of c. rights to

A. Presentation of

Overall audit strategy

defines audit scope, reporting objectives, timing etc.

Substantive test portion of the audit

tests of financial statement account balances

Missappropriation of assets

theft of client assets by an employee or officer of the organization

The application of performance materiality to a particular procedure is __________ __________.

tolerable misstatement

During the planning stages of the audit, the auditors develop a(n):

-strategy -audit plan -schedule

Four conditions of fraud risk factors (NEW)

1. Incentive or pressure 2. Opportunity 3. attitude 4. Capabilities (new)

Tolerable misstatement ______________ performance materiality. a. is always higher or lower than b. may be the same amount or lower than c. may be the same amount or higher than d. is always equal to

B. May be the same amount or lower than

The three fundamental conditions of the fraud ___________ ________ are (1) incentive or pressure, (2) opportunity and (3) attitude to rationalize the act.

Fraud risk triangle

An increase in the level of planning materiality results a decrease in:

Scope of audit procedures

The audit plan should include:

a description of the nature, timing, and extent of the planned risk assessment procedures

Tests that involve comparisons of financial data of the current year to the prior years, budgets, and industry averages are called ____________ procedures.

analytical

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

audit

Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ___________ of assets.

completeness

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

engagement

The time interval from the beginning of audit work to the balance sheet date is called the __________ period.

interim

The audit __________ is a description of the nature, timing and extent of the audit procedures to be performed.

plan

Systems portion of the audit

procedures to assess the effectiveness of the internal controls

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

Inherent risk

risk of material misstatement of an assertion about an account without considering internal controls

Auditors obtain a representation letter from management:

when completing the audit

Successor auditors seek information from predecessor auditors on communication with the client and those charged with governance regarding: -the timing of the audit and issuance of opinion -fraud and noncompliance with laws and regulations -fees charged for the audit -internal control deficiencies and material weakness

-fraud and noncompliance with laws and regulations -internal control deficiencies and material weakness

Planning materiality is commonly based on % of: -net income -total revenues -total liabilities -total assets

-net income -total revenues -total assets

Auditors test the client's right to assets to verify that all:

-receivables belong to the client

which of the following is not a facet of the overall audit strategy?

-setting a date when the final audit fees will be paid

which of the following are a facet of the overall audit strategy?

-setting the basis of reporting -consideration of industry reporting requirements -setting the deadlines for reporting

Further audit procedures include: -substantive procedures -test of controls -business risk

-substantive procedures -test of controls

A dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a: a. relevant assertion b. test of opening balances c. test of controls

C. Test of controls

Many firms have developed a(n) ________________ _______________ that uses a combination of financial and nonfinancial performance measures to assess the organization.

balanced scoreboard

Relevant assertions include: -existence or occurrence -materiality and appropriation -valuation or allocation -completeness

-existence or occurrence -valuation or allocation -completeness (PACCA DOVER)

Following specific transactions from their source documents forward to their inclusion in the financial statement summary figures is a test of the ________________________ assertion. a. completeness b. valuation c. occurrence

A. Completeness

At the planning stage of an audit, auditors consider materiality to determine their: a. opinion b. business risk c. scope of the audit

C. Scope of the audit

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

Substantive

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: a. client and employee b. auditor and client c. auditor and firm

b. auditor and client

If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be (more/less) _________ than $50,000.

less

A test directed toward the design or operation of a control to assess its effectiveness in preventing material misstatement of financial statement assertion is called a(n): a. audit program b. substantive procedure c. test of controls

C. Test of controls

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. a. inherent b. engagement c. audit d. business

B. Engagement risk

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

Inherent

A common rule of thumb related to a financial statement base used by auditors is: a. 5% to 10% of net income after taxes b 1% of total equity c. 1/2% to 5% of total revenues d. 2% to 10% of total assets

B. 1% of total equity or 5 to 10% of net income before taxes

Examples of risk assessment procedures include all of the following except:

Vouch sales transactions (vouch sales transactions would be completed during further audit procedures, which are performed after the risk assessment procedures.)

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 controls

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

presentation

During the audit the client's staff may prepare a(n):

-analysis of accounts written off -trail balance -aging of accounts receivable NOT analysis of the adequacy of internal controls

Potential significant business risks for a client include: -competition -hiring a new production manager -interest rate increases -material price volatility -changes in government regulations

-competiton -interest rate increases -material price volatility -changes in government regulations

The overall audit strategy involves determining overall characteristics of the engagement that: -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

The systems portion of the audit addresses:

-effectiveness of the client's internal control

The engagement letter should include information regarding: -expected form and content of the reports -applicable financial reporting framework -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

If auditors identify fraud risks, the auditors may modify their overall approach to the audit by: -making additional management inquiries -increasing third-party confirmations -adding specialized audit staff

-increasing third-party confirmations -adding specialized audit staff

Identify the types of further audit procedures performed

-inquiry -confirmation -inspection

Inquiries of predecessor auditors are aimed at obtaining information on:

-integrity of management -disagreements with management -reason for change in auditors NOT profits obtained from the audit

Inquiries of predecessor auditors are aimed at obtaining information on: -integrity of management -reason for change in auditors -profits obtained from the audit -disagreements with management

-integrity of management -reason for change in auditors -disagreements with management

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 NOT auditor's opinion on the financial statements

Significant risks often relate to transactions that are: -nonroutine -routine -estimation -recurring

-nonroutine -estimation

Audit fees are composed of: -payroll taxes -profit -direct materials -staff salaries -overhead

-payroll taxes -profit -staff salaries -overhead

Advantages of interim audit work include:

-timely release of audited financial statements -more uniform workload for the CPA firm -increased assessment of internal controls NOT reduction in the amount of overall work completed (interim work does not reduce the workload; it allows the work to be started earlier)

Which of the following are items that are identified by the text as conditions indicative of fraud. -related party transactions -unsupported transactions -unwillingness to allow auditor access to files or testing -missing documents

-unsupported transactions -unwillingness to allow auditor access to files or testing -missing documents

Which of the following is not a component of the fraud risk triangle? a. fear b. rationalization c. opportunity d. incentive or pressure

A. Fear

Materiality is the: a. idea that some matters are important to the fair presentation of financial statements while others are not b. risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are misstated c. estimates of the time required to perform each step in the audit

A. Idea that some matters are important to the fair presentation of financial statements while others are not

Planning materiality is commonly based on all of the following except % of: a. total expenses b. total equity c. net income d. total assets

A. Total expenses

An audit committee must be composed of at least three: a. outside directors b. high-level employees of the corporation c. officers of the corporation d. current members of the board of directors

A. outside directors

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

B. Before accepting the engagement

Auditors vouch cash receipt transactions occurring near period end to verify: a. existence of assets b. completeness of assets c. cutoff of transactions

C. cutoff of transactions

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

existence

Even a small misstatement, such as a misstatement that affects a client's loan covenants, may be considered a(n) ______________ misstatement to the financial statements.

material

Fraudulent financial reporting

material misstatement of financial statements by management with the intent to mislead financial statement users

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

significant

The ________ portion of the audit program is aimed at confirming financial statement amounts, and is usually organized around the balance sheet accounts.

substantive procedures

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

transaction