Audit Chapter 5

In developing an expectation of analytical procedures, the auditors are least likely to consider: A. Financial information for comparable prior periods B. Relationships between financial information and relevant nonfinancial data C. Anticipated costs of audit completion D. Relationships among elements of financial information within a period

C. Anticipated costs of audit completion

Which of the following is not a primary approach to auditing an accounting estimate: A. Review and test management's process for developing the estimate B. Review subsequent transactions C. Confirm the amounts D. Develop an independent estimate

C. Confirm the amounts

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: A. Gathering evidence concerning account balances that have not changed from the prior year B. Retesting internal control procedures C. Considering unusual or unexpected account balances that were not previously identified D. Performing a test of transactions to corroborate management's financial statement assertions

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

Of the following, which is the least reliable type of audit evidence: A. Conformations mailed by outsiders to the auditors B. Correspondence between the auditors and suppliers C. Copies of sales invoices inspected by the auditors D. Canceled checks returned in the year-end bank statement directly to the client

C. Copies of sales invoices inspected by the auditors

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts: A. Trend analysis B. A detailed test of balance analysis C. Ratio analysis D. Risk analysis

C. Ratio analysis

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: B. Inherent risk is the possibility of material misstatement before considering the client's internal control

Correct

Which of the following business characteristics is not indicative of high inherent risk: A. Operating results that are highly sensitive to economic factors B. Large likely misstatements detected in prior audits C. Substantial turnover of management D. A large amount of assets

D. A large amount of assets

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: A. Remain silent on the matter since it is an internal matter of the auditing firm B. Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion C. Document the additional work required, since all disagreements of this type will require expanded substantive procedures D. Document the assistant auditor's position and how the difference of opinion was resolved

D. Document the assistant auditor's position and how the difference of opinion was resolved

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: A. The risk of material misstatement is composed of the three components of audit risk

Incorrect

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: C. Less control risk means an increase in the risk of material misstatement

Incorrect

Assertion: Completeness

Statement: All assets have been recorded

Assertion: Presentation and disclosure

Statement: Assets are properly classified

Assertion: Valuation

Statement: Assets are recorded at proper amounts

Audit Procedures: Calculate the ratio of bad debt expense to credit sales

Type of Audit Procedure: Analytical procedures

Audit Procedures: Compare current financial information with comparable prior periods

Type of Audit Procedure: Analytical procedures

Audit Procedures: Confirm accounts receivable

Type of Audit Procedure: Test of details of account balances, transactions, and disclosures

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: A. Low B. High C. Identical D. Indeterminate

A. Low

In what section of the audit working papers would a long-term lease agreement be filed: A. Current working paper file B. Permanent working paper file C. Lead schedule file D. Corroborating documents file

B. Permanent working paper file

Performing analytical procedures may help an auditor to: A. Achieve audit objectives related to a particular assertion B. Develop an effective system of quality control C. Meet PCAOB requirements that analytical procedures be preformed relating to every major account D. Increase the level of detection risk

A. Achieve audit objectives related to a particular assertion

Which of the following is not a function of audit working papers: A. Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles B. Assist audit team members responsible for supervision in reviewing the work C. Assist auditors in planning future engagements D. Assist peer reviewers and inspectors in performing their roles

A. Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter: A. To increase the efficiency of the audit by eliminating the need for other audit procedures B. To remind the client's management of its primary responsibility for the financial statements C. To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement D. To provide evidence in those areas dependent upon management's future intentions

A. To increase the efficiency of the audit by eliminating the need for other audit procedures

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: A. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist B. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements C. Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements D. Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist

B. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements

Which of the following statements best describes why auditors investigate related party transactions: A. Related party transactions generally are illegal acts B. The substance of related party transactions may differ from their form C. All related party transactions must be eliminated as a step in preparing consolidated financial statements D. Related party transactions are a form of management fraud

B. The substance of related party transactions may differ from their form

Analytical procedures are most likely to detect: A. Weaknesses of a material nature in internal control B. Unusual transactions C. Noncompliance with prescribed control activities D. Improper separation of accounting and other financial duties

B. Unusual transactions

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: D. Detection risk does not exist when no audit is performed

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: F. Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: H. Both inherent risk and control risk exist independently of the audit of financial statements

Correct

Which of the following is not a financial statement assertion made by management: A. Existence of recorded assets and liabilities B. Completeness of recorded assets and liabilities C. Valuation of assets and liabilities D. Effectiveness of internal control

D. Effectiveness of internal control

A primary purpose of the audit working papers is to: A. Aid the auditors by providing a list of required procedures B. Provide a point of reference for future audit engagements C. Support the underlying concepts included in the preparation of the basic financial statements D. Support the auditors' opinion

D. Support the auditors' opinion

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: E. Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it

Incorrect

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk: G. Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated

Incorrect

Assertion: Rights and obligations

Statement: The company legally owns the assets

Assertion: Existence and occurrence

Statement: There is such an asset

Assertion: Cutoff

Statement: Transaction have been recorded in the correct accounting period

Audit Procedures: Prepare a flowchart of internal control over sales

Type of Audit Procedure: Risk assessment procedures (other than analytical procedures)

Audit Procedures: Determine whether disbursements are properly approved

Type of Audit Procedure: Test of controls