audit MC

The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which​ transaction-related objective for​ sales? 1. Accuracy 2. Occurrence 3. Completeness 4. Posting and summarization

1. Accuracy

Which of the following procedures most likely represents an internal control designed to reduce the risk of errors in the billing​ process? 1. Comparing control totals for shipping documents with corresponding totals for sales invoices. 2. Matching receiving documents with approved sales orders before invoice preparation. 3. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. 4. Requiring customers that purchase on account to be approved by the credit department.

1. Comparing control totals for shipping documents with corresponding totals for sales invoices.

Substantive analytical procedures are most likely to be used to test which of the following​ accounts? 1. Interest income 2. Cash 3. Accounts payable 4. Treasury stock

1. Interest income

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 mindset that the audit team should maintain during this​ discussion? 1. Questioning 2. Criticizing 3. Judgmental 4. Presumptive

1. Questioning

An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely accomplish this​ objective? 1. Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal. 2. Compare accounts receivable turnover​ (net credit​ sales/average gross​ receivables) in the current year to that achieved in the prior year. 3. Use common size analysis to compare recorded sales to sales recorded by other companies in the same industry. 4. Select large individual sales recorded during the year and review supporting documentation.

1. Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.

The primary objective of performing tests of controls is to obtain 1. a reasonable degree of assurance that the​ client's internal controls are operating effectively on a consistent basis throughout the year. 2. sufficient appropriate audit evidence to afford a reasonable basis for the​ auditor's opinion, without the need for additional evidence. 3. assurances that informative disclosures in the financial statements are reasonably adequate. 4. knowledge and understanding of the​ client's prescribed procedures and methods.

1. a reasonable degree of assurance that the​ client's internal controls are operating effectively on a consistent basis throughout the year.

Based on evidence gathered and​ evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk​ level, the auditor could 1. decrease detection risk. 2. increase materiality levels. 3. decrease substantive testing. 4. increase inherent risk.

1. decrease detection risk.

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this​ risk, the auditor relies primarily on 1. substantive tests. 2. tests of controls. 3. internal control. 4. statistical analysis.

1. substantive tests.

The risk of material misstatement exists at two​ levels:

1. the overall financial statement level. 2. the assertion level for classes of transactions, account balances, and presentation and disclosures.

Shipments occurring in December 2016 did not get recorded until the first few days of January 2017. 1. The system automatically assigns bill of lading numbers and ensures no duplicates are issued. 2. As goods leave the shipping​ dock, the system generates a bill of lading and associated sales​ invoice, which is automatically recorded in the sales journal. 3. The accounting system requires entry of a valid bill of lading number provided by the shipping department before a sales transaction is accepted for entry. 4. The system prevents the creation of a bill of lading without a customer order dated prior to the shipping date.

2. As goods leave the shipping​ dock, the system generates a bill of lading and associated sales​ invoice, which is automatically recorded in the sales journal.

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from​ fraud? 1. The factors considered in assessing control risk indicated an increased risk of intentional​ misstatements, but only a low risk of unintentional errors in the financial statements. 2. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. 3. An audit is designed to provide reasonable assurance of detecting material​ errors, but there is no similar responsibility concerning fraud. 4. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

2. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt​ write-offs? 1. Employees responsible for authorizing sales and bad debt​ write-offs are denied access to cash. 2. Employees involved in the​ credit-granting function are separated from the sales function. 3. Shipping documents and sales invoices are matched by an employee who does not have the authority to write off bad debts. 4. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

2. Employees involved in the​ credit-granting function are separated from the sales function.

Which of the following is the auditor least likely to consider when developing the overall audit​ strategy? 1. Complexity of the​ company's operations 2. Evaluation of accounts receivable confirmations 3. Preliminary judgment about materiality 4. The economic conditions affecting the industry in which the company operates

2. Evaluation of accounts receivable confirmations

Dan, CPA, has been engaged to audit Modern​ Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent​ risk? 1. Modern Home experienced an increase in working capital. 2. Modern Home recently engaged in a complex derivative transaction. 3. The furniture industry has experienced an overall increase in demand. 4. Modern Home purchased expensive new equipment in the current year.

2. Modern Home recently engaged in a complex derivative transaction.

. The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which​ transaction-related objective for​ sales? 1. Accuracy 2. Occurrence 3. Completeness 4. Posting and summarization

2. Occurrence

Which audit procedure is most effective in testing credit sales for​ overstatement? 1. Trace a sample of postings from the sales journal to the sales account in the general ledger. 2. Vouch a sample of recorded sales from the sales journal to shipping documents. 3. Prepare an aging of accounts receivable. 4. Trace a sample of initial sales orders to sales recorded in the sales journal.

2. Vouch a sample of recorded sales from the sales journal to shipping documents.

As the acceptable level of detection risk​ decreases, the auditor may do one or more of the following except change the 1. extent of audit​ procedures, by perhaps using larger sample sizes. 2. assurances provided by audit procedures to a lower level. 3. timing of audit​ procedures, by perhaps performing them at​ year-end rather than an interim date. 4. nature of audit procedures to more effective procedures.

2. assurances provided by audit procedures to a lower level.

As lower acceptable levels of both audit risk and materiality are​ established, the auditor should plan more work on individual accounts to 1. find larger misstatements. 2. find smaller misstatements. 3. increase the performance materiality in the accounts. 4. increase inherent risk in the accounts.

2. find smaller misstatements.

Some account​ balances, such as those for pensions and​ leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as 1. audit risk. 2. inherent risk. 3. detection risk. 4. sampling risk.

2. inherent risk.

An​ auditor's decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the 1. availability of data aggregated at a high level. 2. relative effectiveness and efficiency of the tests. 3. timing of tests performed after the balance sheet date. 4. auditor's familiarity with industry trends.

2. relative effectiveness and efficiency of the tests.

Tracing shipping documents to sales invoices provides evidence that 1. sales billed to customers were actually shipped. 2. shipments to customers were properly invoiced. 3. shipments to customers were recorded as sales. 4. all goods ordered by customers were shipped.

2. shipments to customers were properly invoiced.

Which of the following does not increase the need for sufficient appropriate audit​ evidence? 1. A lower acceptable audit risk 2. A lower acceptable level of detection risk 3. A decrease in the assessed inherent risk 4. An increase in the assessed control risk

3. A decrease in the assessed inherent risk

In the financial statement audit of a nonpublic​ company, the auditor decides to perform tests of the controls related to the occurrence of sales transactions. Which of the following best explains why the auditor decided to test these​ controls? 1. In a nonissuer financial statement​ audit, the auditor is required to test the operating effectiveness of internal controls. 2. The auditor wants to obtain an understanding of the design of the internal controls. 3. Control risk is assessed at below the maximum. 4. The auditor wants to obtain an understanding of the implementation of the internal controls.

3. Control risk is assessed at below the maximum.

Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their​ accounts? 1. A person in accounting reconciles the bank deposit to the cash receipts journal. 2. Transactions recorded in the cash receipts journal are posted on a​ real-time basis to the accounts receivable master file. 3. Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting. 4. Deposits of cash received are made daily.

3. Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.

A sales invoice for​ $5,200 was computed correctly​ but, by​ mistake, was entered as​ $2,500 to the sales journal and posted to the accounts receivable master file. The customer remitted only​ $2,500, the amount on his monthly statement. 1. Sales invoice​ numbers, prices,​ discounts, extensions, and footings are independently checked. 2. The​ customers' monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them. 3. Prelistings and predetermined totals are used to control postings. 4. Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable function.

3. Prelistings and predetermined totals are used to control postings.

To support the​ auditor's initial assessment of control risk below​ maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor​ performing? 1. Tests of details of balances 2. Substantive tests of transactions 3. Tests of controls 4. Tests of trends and ratios

3. Tests of controls

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales​ invoices, an auditor would most likely select a sample of transactions from the population represented by the 1. sales order file. 2. customer order file. 3. shipping document file. 4. sales invoice file.

3. shipping document file.

Tests of controls are most likely to be omitted when 1. an account balance reflects many transactions. 2. control risk is assessed at less than the maximum. 3. the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient. 4. the auditor wishes to increase the acceptable level of detection risk.

3. the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.

An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this​ step? 1. Sales invoices represent existing sales. 2. All sales have been recorded. 3. All sales invoices have been correctly posted to customer accounts. 4. Debit entries in the accounts receivable master file are correctly supported by sales invoices.

4. Debit entries in the accounts receivable master file are correctly supported by sales invoices.

Which of the following procedures would a CPA most likely perform during the planning stage of the​ audit? 1. Evaluate the reasonableness of​ management's allowance for doubtful accounts. 2. Confirm a sample of accounts receivable. 3. Evaluate the significance of uncorrected misstatements. 4. Determine areas where there is a higher risk of material misstatement.

4. Determine areas where there is a higher risk of material misstatement.

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the​ entity's financial​ statements? 1. The​ entity's management places no emphasis on meeting publicized earnings projections 2. Monthly bank reconciliations ordinarily include several large outstanding checks. 3. Cash transactions are electronically processed and​ recorded, leaving no paper audit trail. 4. Significant differences between the physical inventory count and the accounting records are not investigated.

4. Significant differences between the physical inventory count and the accounting records are not investigated.

Inherent risk and control risk differ from planned detection risk in that they 1. arise from the misapplication of auditing procedures. 2. may be assessed in either quantitative or nonquantitative terms. 3. can be changed at the​ auditor's discretion. 4. exist independently of the financial statement audit.

4. exist independently of the financial statement audit.

There are eight parts of the planning phase of an audit. Which parts involve the evaluation of​ risk? ​(Select all that​ apply.) 1. Accept client and perform initial audit planning 2. Understand the​ client's business and industry 3. Perform preliminary analytical procedures 4. Set preliminary judgement of materiality and performance materiality 5. Identify significant risks due to fraud or error 6. Assess inherent risk 7. Understand internal control and assess control risk 8. Finalize overall audit strategy and audit plan

5. Identify significant risks due to fraud or error 6. Assess inherent risk 7. Understand internal control and assess control risk

What is meant by acceptable audit​ risk? A. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. B. Acceptable audit risk is the risk that the auditor or audit firm will suffer harm because of a client​ relationship, even though the audit report rendered for the client was correct. C. Acceptable audit risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements that could be​ material, should such misstatements exist. D. Acceptable audit risk is a measure of the​ auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control.

A. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.

List several audit procedures that the auditor can use to determine whether all cash received was recorded. ​(Select all that​ apply.) A. Account for numerical sequence of remittance advices or examine prelisting of cash receipts. B. Observe immediate endorsement of incoming checks. C. Examine indication of internal verification of the recording of cash receipts. D. Discussion with personnel and observation of the separation of duties between handling cash and record keeping. E. Examine sales invoice for supporting documents. F. Trace shipping documents to the sales journal. G. Accountant independently reconciles bank account. H. Observe whether monthly statements are sent to customers. I. Trace from remittance advices or prelisting to cash receipts journal.

A. Account for numerical sequence of remittance advices or examine prelisting of cash receipts. B. Observe immediate endorsement of incoming checks. C. Examine indication of internal verification of the recording of cash receipts. D. Discussion with personnel and observation of the separation of duties between handling cash and record keeping. H. Observe whether monthly statements are sent to customers. I. Trace from remittance advices or prelisting to cash receipts journal.

Select the definition of a substantive test of transactions. A. Audit procedures testing for monetary misstatements to determine the six​ transactions-related objectives have been satisfied for each class of transactions. B. Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. C. Use of comparisons and relationships to assess whether account balances or other data appear reasonable. D. Audit procedures testing for monetary misstatements to determine whether the eight​ balance-related audit objectives have been satisfied for each significant account balance.

A. Audit procedures testing for monetary misstatements to determine the six​ transactions-related objectives have been satisfied for each class of transactions.

What are the three ways auditors respond to fraud​ risks? ​(Select the all three that​ apply.) A. Design and perform audit procedures to address fraud risks B. Critical evaluation of audit evidence C. Design and perform procedures to address management override of controls D. Document all communications among audit team E. Design and perform procedures to analyze earnings by management F. Perform analytical procedures G. Change the overall conduct of the audit to respond to identified fraud risks H. Design and perform audit procedures to analyze income smoothing

A. Design and perform audit procedures to address fraud risks C. Design and perform procedures to address management override of controls G. Change the overall conduct of the audit to respond to identified fraud risks

Explain the importance of proper credit approval for sales. A. Proper credit approval for sales helps minimize the amount of bad debts and the collection effort for accounts receivable by requiring that each sale be evaluated for collection potential. B. Proper credit approval for sales eliminates the amount of bad​ debt, since every sales order on credit is always reviewed by a credit​ manager, no exceptions. C. Proper credit approval for sales helps eliminate goods that are returned from customers who cannot afford them. D. All of the above.

A. Proper credit approval for sales helps minimize the amount of bad debts and the collection effort for accounts receivable by requiring that each sale be evaluated for collection potential.

What do auditing standards require the auditor to consider when assessing the risk of material misstatements in​ revenue? ​(Select all that​ apply.) A. Revenue and related accounts receivable and cash accounts are especially susceptible to manipulation and theft.​ Therefore, auditors should evaluate the types of revenue and revenue​ transactions, and the assertions related to these​ transactions, which may increase fraud risk. B. Since revenue is the almost always the largest account on the income statement and especially susceptible to​ manipulation; the only useful indicator of fraud is analytical procedures. C. Research finds that a majority of financial statement fraud instances involve revenues and accounts receivable. As a result of the frequency of financial reporting frauds involving revenue​ recognition, auditing standards require the auditor to presume fraud risk is present in revenue recognition in all audits. D. Since revenue and related accounts receivable and cash accounts are especially susceptible to manipulation and theft. Auditors will only test revenue if many potential warning signals or symptoms indicate revenue fraud.

A. Revenue and related accounts receivable and cash accounts are especially susceptible to manipulation and theft.​ Therefore, auditors should evaluate the types of revenue and revenue​ transactions, and the assertions related to these​ transactions, which may increase fraud risk. C. Research finds that a majority of financial statement fraud instances involve revenues and accounts receivable. As a result of the frequency of financial reporting frauds involving revenue​ recognition, auditing standards require the auditor to presume fraud risk is present in revenue recognition in all audits.

Describe the three main techniques used to manipulate revenue. A. Three main techniques use to manipulate revenue​ include: (1) recording of fictitious​ revenue; (2) premature revenue recognition including techniques such as​ bill-and-hold sales and channel​ stuffing; and​ (3) manipulation of adjustments to revenue such as sales returns and allowance and other contra accounts. B. Three main techniques use to manipulate revenue​ include: (1) ensuring the​ company's inventory is kept in one​ warehouse; (2) premature revenue recognition including techniques such as​ bill-and-hold sales and channel​ stuffing; and​ (3) the company enforcing separation of duties in critical areas. C. Three main techniques use to manipulate revenue​ include: (1) using one supplier for all purchases of inventory instead of multiple​ suppliers; (2) not keeping a bad debt account on the​ books; and​ (3) recording of fictitious revenue. D. Three main techniques use to manipulate revenue​ include: (1) manipulation of adjustments to revenue such as sales returns and allowance and other contra​ accounts; (2) using one supplier for all purchases of inventory instead of multiple​ suppliers; and​ (3) not keeping a bad debt account on the books.

A. Three main techniques use to manipulate revenue​ include: (1) recording of fictitious​ revenue; (2) premature revenue recognition including techniques such as​ bill-and-hold sales and channel​ stuffing; and​ (3) manipulation of adjustments to revenue such as sales returns and allowance and other contra accounts.

Provide two examples of factors that might increase the risk of material misstatement at the overall financial statement level. A. significant changes in the industry B. a lower cash balance than the prior year C. declining economic conditions D. a high level of asset purchases in the current year

A. significant changes in the industry C. declining economic conditions

What are the three conditions of fraud often referred to as​ "the fraud​ triangle?" A. (1) Collusion,​ (2) opportunities, and​ (3) incentives/pressures. B. (1) Incentives/Pressures,​ (2) opportunities, and​ (3) attitudes/rationalization. C. (1) Analytical​ procedures, (2)​ attitudes/rationalization, and​ (3) risk factors. D. (1) Horizontal/vertical​ analysis, (2) risk​ factors, and​ (3) collusion.

B. (1) Incentives/Pressures,​ (2) opportunities, and​ (3) attitudes/rationalization.

A CPA firm should attempt to achieve the same audit risk for all audit clients when circumstances are similar. Why is this statement​ true? A. A CPA firm should attempt to use reasonable materiality from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the use of considerable judgment on the part of the auditor and difficulties of measuring audit risk. B. A CPA firm should attempt to use reasonable uniformity from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the lack of consistency within the​ firm, different audit risk preferences for different​ auditors, and difficulties of measuring audit risk. C. A CPA firm should attempt to use reasonable materiality from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the use of considerable judgment on the part of the auditor and the discovery of fraudulent financial reporting during the audit. D. A CPA firm should attempt to use reasonable uniformity from audit to audit when circumstances are similar. Under no circumstances should a different audit risk be used by the auditor.

B. A CPA firm should attempt to use reasonable uniformity from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the lack of consistency within the​ firm, different audit risk preferences for different​ auditors, and difficulties of measuring audit risk.

What effect do adequate controls in the credit function have on the​ auditor's evidence​ accumulation? A. Adequate controls in the credit function enable the auditor to place more reliance on the accuracy of the​ client's customer list to send positive accounts receivable confirmations to customers. The purpose is to determine that the underlying receivable existed prior to​ write-off. B. Adequate controls in the credit function enable the auditor to place more reliance on the​ client's estimate of uncollectible accounts. Without these​ controls, the auditor would have to make his or her own credit checks on the customers in order to be convinced that the allowance for uncollectible accounts is reasonable. C. Adequate controls in the credit function enable the auditor to place more reliance on the​ client's estimate of uncollectible accounts by the auditor examining Dun and Bradstreet credit records for each customer as an indication of the uncollectibility of an account. D. None of the above.

B. Adequate controls in the credit function enable the auditor to place more reliance on the​ client's estimate of uncollectible accounts. Without these​ controls, the auditor would have to make his or her own credit checks on the customers in order to be convinced that the allowance for uncollectible accounts is reasonable.

Select the definition of tests of​ controls? A. Use of comparisons and relationships to assess whether account balances or other data appear reasonable. B. Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. C. Audit procedures testing for monetary misstatements to determine whether the eight​ balance-related audit objectives have been satisfied for each significant account balance. D. Audit procedures testing for monetary misstatements to determine the six​ transactions-related objectives have been satisfied for each class of transactions.

B. Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk.

Auditors are required to make inquiries of individuals in the company when gathering information to assess fraud risk. Identify those with whom the auditor must make inquiries. A. Auditors must inquire to other audit firms to see if they have detected fraud in any new or unusual ways that might be in connection with the company under current audit. B. Auditors must inquire whether management has knowledge of any fraud or suspected fraud within the company. C. Auditors must look to similar companies within the same industry and determine if fraud or a weakness for fraud is detected within those companies for comparison purposes. D. Auditors must make inquires of others within the entity whose duties lie outside the normal financial reporting lines of responsibility about the existence or suspicion of fraud. E. Auditors must make inquires to the​ company's internal auditors to determine if they have performed any procedures to identify or detect fraud during the year. F. Auditors must inquire to the audit committee about its views of the risks of fraud and whether the audit committee has knowledge of any fraud or suspected fraud.

B. Auditors must inquire whether management has knowledge of any fraud or suspected fraud within the company. D. Auditors must make inquires of others within the entity whose duties lie outside the normal financial reporting lines of responsibility about the existence or suspicion of fraud. E. Auditors must make inquires to the​ company's internal auditors to determine if they have performed any procedures to identify or detect fraud during the year. F. Auditors must inquire to the audit committee about its views of the risks of fraud and whether the audit committee has knowledge of any fraud or suspected fraud.

What should the audit team consider in its planning discussion about fraud​ risks? ​(Select all that​ apply.) A. Any conflict of interest that audit employees have with employees in the accounting departments of the client. B. How assets of the entity could be misappropriated. C. How the auditor might respond to the susceptibility of material misstatements due to fraud. D. How honest and quickly management is in handing over paperwork at the request of the auditors could increase suspicion of fraud. E. How companies of similar industries address fraud through their internal controls. F. How management could perpetrate and conceal fraudulent financial reporting. G. How and where the audit team believes the​ entity's financial statements might be susceptible to material misstatement due to​ fraud, looking at external and internal factors.

B. How assets of the entity could be misappropriated. C. How the auditor might respond to the susceptibility of material misstatements due to fraud. F. How management could perpetrate and conceal fraudulent financial reporting. G. How and where the audit team believes the​ entity's financial statements might be susceptible to material misstatement due to​ fraud, looking at external and internal factors.

Identify four factors that are associated with higher inherent risk in audits. ​(Identify all four answers from the list​ below.) A. Routine transactions B. Nature of the​ client's business C. Results of previous audits D. Initial versus repeat engagement E. Timing of internal control testing F. External use of the financial statements G. Education and experience of the audit staff H. Related parties

B. Nature of the​ client's business C. Results of previous audits D. Initial versus repeat engagement H. Related parties

Different CPA firms should attempt to achieve reasonably similar audit risks for clients with similar circumstances. Why is this statement​ true? A. Complete assurance of the accuracy of the financial statements is the primary goal of auditors. B. The audit opinion issued by different auditors conveys the same meaning regardless of who signs the report. C. All auditors use the same mix of experienced and junior audit staff to complete the audit. D. In all​ audits, auditors want to be certain that the financial statements are not materially misstated.

B. The audit opinion issued by different auditors conveys the same meaning regardless of who signs the report.

Auditing standards require that auditors document the following matters related to the​ auditor's consideration of material misstatements due to​ fraud: ​(Select all that​ apply.) A. Reasons supporting a conclusion that there is not a significant risk of improper expense recognition. B. The nature of communications about fraud made to​ management, the audit​ committee, or others. C. Procedures performed to obtain information necessary to identify and assess the risks of material fraud. D. Results of the procedures performed to address the risk of management override of controls. E. Other conditions and analytical relationships indicating that additional auditing procedures or other responses were​ required, and the actions taken by the auditor. F. Significant decisions made during the discussion among engagement team personnel in planning the audit about the susceptibility of the​ entity's financial statements to material​ fraud, including how and when the discussion occurred and who participated. G. Reasons supporting a conclusion that there is not a significant risk of material improper revenue recognition. H. All interactions between the audit​ team, the audit​ committee, and internal audit regarding the collaboration of developing an audit procedure to eliminate the risk of fraud and overseeing the financial reporting process. I. Specific risks of material fraud that were identified at both the overall financial statement level and the assertion level and a description of the​ auditor's responses to those risks.

B. The nature of communications about fraud made to​ management, the audit​ committee, or others. C. Procedures performed to obtain information necessary to identify and assess the risks of material fraud. D. Results of the procedures performed to address the risk of management override of controls. E. Other conditions and analytical relationships indicating that additional auditing procedures or other responses were​ required, and the actions taken by the auditor. F. Significant decisions made during the discussion among engagement team personnel in planning the audit about the susceptibility of the​ entity's financial statements to material​ fraud, including how and when the discussion occurred and who participated. G. Reasons supporting a conclusion that there is not a significant risk of material improper revenue recognition. I. Specific risks of material fraud that were identified at both the overall financial statement level and the assertion level and a description of the​ auditor's responses to those risks.

Describe the types of procedures that constitute risk assessment procedures. ​(Select all that​ apply.) A. Perform tests of details of balances B. Discussion among the client management team members C. Analytical procedures D. Discussion among engagement team members E. Observation and inspection F. Inquiries of management and others within the entity

C. Analytical procedures D. Discussion among engagement team members E. Observation and inspection F. Inquiries of management and others within the entity

Define what is meant by inherent risk. A. Inherent risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. B. Inherent risk is a measure of​ auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the​ client's internal controls. C. Inherent risk is a measure of the​ auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. D. Inherent risk is a measure of the risk that the audit evidence for a segment will fail to detect misstatements exceeding a tolerable​ amount, should such misstatements exist.

C. Inherent risk is a measure of the​ auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control.

Why is it important for the auditor to consider the risk of material misstatement at the overall financial statement​ level? A. It is important for the auditor to consider risks at the overall financial statement level given those risks may eliminate the need to perform analytical procedures. B. It is important for the auditor to consider risks at the overall financial statement level because each of the aspects considered must be explained in the audit report. C. It is important for the auditor to consider risks at the overall financial statement level given those risks may increase the likelihood of risks of material misstatement across a number of accounts and assertions for those accounts. D. It is important for the auditor to consider risks at the overall financial statement level given those risks may decrease the likelihood of risks of material misstatement across a number of accounts and assertions for those accounts.

C. It is important for the auditor to consider risks at the overall financial statement level given those risks may increase the likelihood of risks of material misstatement across a number of accounts and assertions for those accounts.

Explain what is meant by lapping and discuss how the auditor can uncover it. A. Lapping of sales is the postponement of entries for the release of inventory to conceal an existing inventory shortage. The embezzlement is perpetrated by a person who handles inventory controls and then enters them into the computer system. He or she defers recording the release of inventory from one customer and covers the shortages with sales of another. These in turn are covered from the sale of a third customer a few days later. The employee must continue to cover the shortage through repeated​ lapping, replace the stolen​ inventory, or find another way to conceal the shortage. This fraud can be detected by comparing the​ name, amount and dates shown on sales invoices to sales journal. B. Lapping of sales is the postponement of entries for only the collection of cash sales to conceal an existing cash shortage. The embezzlement is perpetrated by a person who handles cash receipts and then enters them into the computer system. He or she defers recording the cash receipts from one customer and covers the shortages with receipts of another. These in turn are covered from the receipts of a third customer a few days later. The employee must continue to cover the shortage through repeated​ lapping, replace the stolen​ money, or find another way to conceal the shortage. This fraud can be detected by comparing the​ name, amount and dates shown on remittance advices to cash receipts journal entries and related duplicate deposit slips. C. Lapping of accounts receivable is the postponement of entries for the collection of receivables to conceal an existing cash shortage. The embezzlement is perpetrated by a person who handles cash receipts and then enters them into the computer system. He or she defers recording the cash receipts from one customer and covers the shortages with receipts of another. These in turn are covered from the receipts of a third customer a few days later. The employee must continue to cover the shortage through repeated​ lapping, replace the stolen​ money, or find another way to conceal the shortage. This fraud can be detected by comparing the​ name, amount and dates shown on remittance advices to cash receipts journal entries and related duplicate deposit slips. D. None of the above.

C. Lapping of accounts receivable is the postponement of entries for the collection of receivables to conceal an existing cash shortage. The embezzlement is perpetrated by a person who handles cash receipts and then enters them into the computer system. He or she defers recording the cash receipts from one customer and covers the shortages with receipts of another. These in turn are covered from the receipts of a third customer a few days later. The employee must continue to cover the shortage through repeated​ lapping, replace the stolen​ money, or find another way to conceal the shortage. This fraud can be detected by comparing the​ name, amount and dates shown on remittance advices to cash receipts journal entries and related duplicate deposit slips.

Under what circumstances should the auditor make a special effort to uncover​ lapping? A. Even though the procedure to uncover lapping is relatively​ time-consuming, auditors always perform this procedure during a regular audit. B. Since the procedure to uncover lapping is relatively​ time-consuming, auditors ordinarily perform the procedure during only the first year of an audit to verify if internal control deficiencies exist. C. Since the procedure to uncover lapping is relatively​ time-consuming, auditors ordinarily perform the procedure only where there is a specific concern with fraud because of internal control deficiencies discovered. D. None of the above.

C. Since the procedure to uncover lapping is relatively​ time-consuming, auditors ordinarily perform the procedure only where there is a specific concern with fraud because of internal control deficiencies discovered.

A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements. Why is this statement​ true? A. The more external users rely on the​ statements, the less likely a CPA firm will get sued by the client. B. A large number of financial statement users increases the likelihood that management might have questionable integrity and conduct their business affairs in a manner that results in conflicts with their​ stockholders, regulators, and customers. C. Users who rely heavily upon the financial statements need more reliable information than those who do not place heavy reliance on the financial statements. D. All of the above are reasons the statement is true.

C. Users who rely heavily upon the financial statements need more reliable information than those who do not place heavy reliance on the financial statements.

A CPA firm should decrease acceptable audit risk for audit clients when engagement risk is high. Why is this statement​ true? A. A client with questionable integrity might conduct their business affairs in a manner that results in conflicts with their​ stockholders, regulators, and customers. B. A large number of external users placing heavy reliance on financial statements places a greater burden on the auditors. A great social harm can result if a significant misstatement remains undetected in the financial statements. C. The auditor is likely to face greatest legal exposure in situations where external users rely heavily upon the statements. D. All of the above are reasons the statement is true.

D. All of the above are reasons the statement is true.

What is the difference between the​ auditor's approach in verifying sales returns and allowances and that for​ sales? Explain the reasons for the difference. A. The verification of sales returns and allowances is quite different from the verification of​ sales, the primary emphasis the auditor places on sales returns and allowances is to determine that returns and allowances are properly authorized and that sales are not overstated at​ year-end and subsequently reversed by the issuance of returns. B. The verification of sales returns and allowances is quite different from the verification of​ sales, sales returns and allowances are normally an insignificant portion of operations and therefore receive little attention from the auditor. C. The verification of sales returns and allowances is quite different from the verification of​ sales, the completeness objective cannot be ignored because unrecorded sales returns and allowances can materially overstate net income. D. All of the above.

D. All of the above.