Audit Ch 4

21. Which of the following statements best describes auditors' responsibility to detect errors and frauds? A. Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements. B. Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. C. Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. D. Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

a

22. The probability that an audit team will give an inappropriate opinion on financial statements best describes A. audit risk. B. inherent risk. C. control risk. D. detection risk.

a

37. In the planning stage, analytical procedures are used to A. identify potential problem areas. B. provide direct evidence about the balances in accounts. C. determine the mathematical correctness of the financial statements. D. all of these.

a

41. If an auditor encounters significant risks at the client the auditor should do all of the following except A. inform the SEC. B. perform extended procedures. C. include more experienced auditors on the engagement. D. perform tests closer to year end.

a

1. The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on A. employee misappropriation of assets. B. management fraud. C. client fraud on customers. D. employee embezzlement.

b

12. Inherent risk and control risk differ from detection risk in which of the following ways? A. Inherent risk and control risk are calculated by the client. B. Inherent risk and control risk exist independently of the audit. C. Inherent risk and control risk are controlled by the auditor. D. Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

b

3. External auditors are responsible A. for authenticating documents. B. for reporting immaterial frauds to a level of management at least one level above the people involved. C. for finding all intentional misstatements concealed by collusion. D. for reporting all frauds to outside agencies or parties.

b

33. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if A. the noncompliance is a violation of generally accepted accounting principles. B. the client does not take the remedial action that the auditor considers necessary. C. the illegal act was committed during a prior year that was not audited. D. the auditor has already assessed control risk at the maximum level.

b

36. Generally accepted auditing standards states that analytical procedures A. should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B. should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. C. should be applied in the planning stage and can be applied as a substantive test and in the final review stage. D. should be applied in the final review stage, and can be applied as a substantive test and in the planning stage.

b

38. Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should A. consider the matter a scope limitation. B. perform additional audit procedures to investigate the matter further. C. intensify the audit with the expectation of detecting management fraud. D. withdraw from the engagement.

b

42. Horizontal analysis refers to A. the trend of income from year to year of persons suspected of fraud. B. changes of financial statement numbers and ratios across several years. C. financial statement amounts expressed each year as a proportion of a base amount. D. the change in a suspect's net worth from the beginning to the end of a period.

b

2. Management fraud generally refers to A. unintentional mistakes. B. noncompliance. C. intentional distortions of financial statements. D. violations of GAAS.

c

23. Inherent risk is the A. probability that some accounts are more susceptible to misstatement than others. B. probability that the client's internal control policies and procedures will fail to detect material misstatements. C. probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D. probability that the auditor may not detect material misstatements in the financial statements.

c

25. If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A. income would be overstated. B. income would be understated. C. income would not be misstated. D. accounts receivable would be understated.

c

27. The risk of material misstatement differs from detection risk in that it A. arises from the misapplication of audit procedures. B. may be assessed in either quantitative or non-quantitative terms. C. exists independently of the financial statement audit. D. can be changed at the auditor's discretion.

c

39. For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. A. As a substantive test: Yes; In the final review stage: Yes B. As a substantive test: Yes; In the final review stage: No C. As a substantive test: No; In the final review stage: Yes D. As a substantive test: No; In the final review stage: No

c

43. Analytical procedures used in planning an audit should focus on A. reducing the scope of tests of controls and substantive tests. B. providing assurance that potential material misstatements will be identified. C. enhancing the auditor's understanding of the client's business. D. assessing the adequacy of the available evidential matter.

c

19. When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely A. perform extended audit procedures. B. consult with fraud examiners. C. report directly to the Securities and Exchange Commission within one day. D. withdraw from the engagement.

d

26. An audit team uses the assessed risk of material misstatement to A. evaluate the effectiveness of the entity's internal control policies and activities. B. identify transactions and account balances where inherent risk is at the maximum. C. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D. determine the acceptable level of detection risk for financial statement assertions.

d

28. The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is A. audit risk. B. inherent risk. C. control risk. D. detection risk.

d

31. The existence of audit risk is recognized by the statement in the auditor's standard report that the A. auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. B. financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. C. audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

d

40. Which of the following would not likely be found in the minutes of the board of directors? A. Amount of dividends declared B. Approval to pledge assets as security for debts C. Authorization of officers' salaries D. Approval of a new desktop computer for the controller

d

44. Sources of financial and nonfinancial data in do not include A. financial account information for comparable prior periods. B. nonfinancial information such as physical production statistics. C. company budgets and forecasts. D. Bureau of Labor statistics.

d

7. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A. Presumptive B. Judgmental C. Criticizing D. Questioning

d

An auditor assesses the risk of material misstatement because it A. is relevant to the auditor's understanding of the control environment. B. provides assurance that the auditor's overall materiality levels are appropriate. C. indicates to the auditor where inherent risk may be the greatest. D. affects the level of detection risk that the auditor may accept.

d