Audit Quiz 3

When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C

=BAC B: Preparation of a flowchart documenting the understanding of the client's internal control A: Tests of controls C: Substantive procedures

Which of the following documentation is not required for an audit in accordance with auditing standards

A client letter that details the auditor's planned field work

Which of the following statements about evidence is true

A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets

A lack of independent checks

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in

A more efficient manner

Which of the following would not necessarily be a related party transaction?

A sale to another corporation with a similar name

Which of the following is usually included or shown in the audit documentation

A summary of how significant finding were addressed

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information

AICPA Accounting Trends and Techniques

Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

Additional audit procedures are required

Which of the following statements would least likely appear in an auditor's engagement letter?

After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement

Disclosure of possible fraud to parties other than the client's senior mgmt and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclouse possible fraud exist

All three

Which of the following is required documentation in an audit in accordance with auditing standards

An audit plan documenting the procedures to be used to reduce audit risk

Which of the following statements reflects an auditor's responsibility for detecting fraud and errors

An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements

Which of the following presumptions is least likely to relate to the reliability of audit evidence

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost

Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include

Analysis of capital stock and other equity accounts

Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing

Analysis of income statement accounts

Which of the following statements about analytical procedures is true

Analytical procedures alone may provide the appropriate level of assurance for some assertions

Which of the following statements is true concerning analytical procedures used as risk assessment procedures

Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level

Which of the following is an effective audit planning and control procedure that helps prevent misunderstanding and inefficient use of audit personnel

Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information

When auditing related party transactions, an auditor places primary emphasis on

Assessing the risk of material misstatement of related party transactions

The acceptance level of detection risk is inversely related to the

Assurance provided by substantive procedures

Using personal computers in auditing may affect the methods used to review the work of staff assistants because

Audit documentation may not contain readily observable details of calculations

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud

Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion

Auditor Judgement

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion

Auditor judgement

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the

Auditor's determination about whether audit risk can be sufficiently reduced

An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the

Auditor's report contains a qualified opinion

An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the

Board of Directors

Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to

Both contingencies and balance sheet accounts

In assessing whether to accept a client for an audit engagement, a CPA should consider the

Both the client's business rick and the CPA's business risk

Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement

Both: Financial statement accounts likely to contain a misstatement And; Conditions that require the extension of audit tests

An auditor's audit documentation will least likely show how the

Client's schedules were prepared

Which of the following factors would most likely cause an auditor not to accept a new audit engagement

Concluding that the entity's mgmt probably lacks integrity

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable

Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of an audit

Consider whether the results of audit procedures affect the assessment of the identified risk of material misstatements due to fraud

Analytical procedures used to form an overall audit conclusion generally include

Considering unusual or unexpected account balances that were not previously identified

An auditor is assessing the appropriateness of mgmt's rationale for selecting a model to measure the FV of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is

Consistently applied from prior periods

Audit documentation that records the procedures used by the auditor to gather evidence should be

Designed to meet the circumstances of the particular engagement

When planning an audit, an auditor should

Determine the materiality for the financial statements as a whole

Which of the following circumstances most likely will cause an auditor to suspect that material misstatements exist in a client's financial statements

Differences between reconciliations of control accounts and subsidiary records are not investigated

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the

Difficulty and cost involved in testing a particular item

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to

Document the details of the disagreement with the conclusion reached

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business

Earning per share

The scope and nature of an auditor's contractural obligation to a client is ordinarily set forth in the

Engagement Letter

The objective of analytical procedures performed as risk assessment procedures is to

Enhance the auditor's understanding of the client's business

After identifying a significant related party transaction outside the entity's normal course of business, an auditor should

Evaluate the business purpose of the transaction

The objective of tests of details of transactions performed as tests of controls is to

Evaluate whether internal controls operated effectively

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 dissociated from the resolution of the matter. The audit documentation would probably be

Expanded to detail the assistant auditor's position and how the difference of opinion was resolved

An auditor discovers that a client's AR turnover is substantially lower for the current year than for the prior year. This trend may indicate that

Fictitious credit sales have been recorded during the year

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Financial statement assertions

The risk of material misstatement should be assessed in terms of

Financial statement assertions

The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants

How the results of various auditing procedures performed by the assistants should be evaluated

An auditor most likely obtains an understanding of a new client to

Identify areas of audit emphasis

Which of the following is a step in an auditor's decision to rely on internal controls

Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests and controls

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

Identify the potential financial statement effects of misstatements that we not considered clearly trivial when discovered

Which of the following is an aspect of scheduling and controlling the audit engagement

Include in the audit plan a column for estimated and actual time

Which of the following steps should an auditor perform first to determine the existence of related parties?

Inquire about the existence of related parties from mgmt

Which of the following procedures would provide the most reliable audit evidence

Inspection of bank statements obtained directly from the client's financial institution

Which of the following is not considered an auditor's specialist?

Internal Auditor

With respect to the auditor's planning of a year-end audit, which of the following statements is always true

It is an acceptable practice to carry out part of the audit at interim dates

The audit working paper that reflects the major components of an amount reported in the financial statements is the

Lead schedule

Before accepting an engagement to audit a new client, an auditor is required to

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that

Material misstatements may exist in the financial statements

Co. A has a few large AR that total 1 million. Co. B has a great number of small AR that also total 1 million. The importance of a misstatement in any one account is therefore greater for Co. A than for Co. B. This is an example of the auditor's concept of

Materiality

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting

Mgmt is interested in maintaining the entity's earnings trend by using aggressive accounting practices

An auditor's engagement letter most likely will include

Mgmt's acknowledgment of its responsibility for maintaining effective internal control

As the acceptable level of detection risk decreases, an auditor may change the

Nature of substantive procedures from a less effective to a more effective procedure

An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

Observation and inquiry

Which of the following procedures concerning AR is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls

Observing an entity's employee prepare the schedule of a past due AR

When performing procedures to identify and assess the risk of material misstatement for accounting estimates, the auditor should

Obtain an understanding of how mgmt developed its estimates

Most of the auditor's work in forming an opinion on financial statements consists of

Obtaining and evaluating audit evidence

Analytical procedures are most appropriate when testing which of the following types of transactions

Operating expense transactions

In developing an audit plan, an auditor should

Perform risk assessment procedures

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

Perform risk assessment procedures

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation

Performance of audit tests on a continuous basis

A basic premise underlying analytical procedures is that

Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary

Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

Professional skepticism

An auditor ordinarily uses a working trail balance resembling the financial statements without notes, but containing coloums for

Re-classifications and adjustments

To obtain an understanding of a continuing client in planning an audit, an auditor most likely would

Read internal audit reports

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including

Reperformance and observation

An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a not on related party transactions

Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

Results are consistent with the conclusions to be presented in the auditor's report

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered

Results of performing further audit procedures

Co. is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees of the affiliate's indebtedness have been detected?

Review client minutes and obtain a representation letter

Which of the following procedures will most likely assist an auditor in determining whether mgmt has identified all accounting estimates that could be material to the financial statements?

Review the lawyer's letter for information about litigation

Which of the following statements about the auditor's response to assessed risk of material misstatement in a financial statement audit is true

Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?

Search for unrecorded cash receipts

Which of the following is an auditor least likely to perform in planning a financial statement audit

Selecting a sample of vendors' invoices for comparison with receiving reports

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit

Square footage of selling space

Regardless of the assessed risks of material misstatement, an auditor should perform some

Substantive procedures to restrict detection risk for significant transaction classes

Which of the following statements is most accurate regarding sufficient and appropriate documentation

Sufficient and appropriate documentation should include evidence that it has been reviewed

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about

Suspense debits that mgmt believes will benefit future operations

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate

Test the operating effectiveness of such controls in the current audit.

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

The applicability of the same confidentiality requirements to the auditor and the specialist

When a mgmt's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory

Which of the following statements is true about related party transactions?

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed

Which of the following statements is true about the use of the work of an auditor's specialist?

The auditor should obtain an understanding of the methods and assumptions used by the specialist

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes

The auditor's responsibility for ensuring that mgmt and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because

The business structure may be deliberately designed to obscure related party transactions

Which of the following characteristics most likely will heighten an auditor's concern about the risk of material misstatements due to fraud in an entity's financial statements

The entity's industry is experiencing declining customer demand

Which of the following would an auditor most likely use in determining the auditor's preliminary judgement about materiality for the financial statements as a whole

The entity's year-to-date financial results and position

A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation

The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statments

In performing tests of controls, the auditor will normally find that

The rate of deviations in the sample exceeds the rate of error in the accounting records

Based on an understanding of internal control completed at an interim date, the auditor assessed the risk of material misstatement at the relevant assertion level and performed interim substantive procedures. The records will most likely be tested again at year end if

The remaining period is long

Which of the following statements about audit evidence is true

The sufficiency and appropriateness of audit evidence is a matter of professional judgement

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed

There is a substantial risk of intentional misapplication of accounting procedures

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement

There will be a client-imposed scope limitation

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement

Tour the client's facilities

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of an income statement deals with the verification of

Transactions

Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements

Transactions selected for testing are not supported by proper documentation

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities

Unrecorded sales

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud

Unusual discrepancies between the entity's records and confirmation replies

The objective of performing analytical procedures in planning an audit is to identify the existance of

Unusual transactions and events

Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business

Verify commission expense by multiplying sales revenue by the company's standard commission rate

Tests of controls are concerned primarily with each of the following questions except

Were the controls approved by the board of directors

Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purpose of analytical procedures

Whether the data were processed in a computer system or in a manual accounting system

After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on

Whether the financial statements are consistent with the auditor's understanding of the entity

Which of the following audit risk components may be assessed in nonquantitative terms

Yes To All: Control Risk Detection Risk Inherent Risk

When assessing the risk of material misstatement at a low level, an auditor is required to document the auditor's

Yes to Both: Understanding of the Entity's Control Environment Overall Responses to Assessed Risks

For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as

Yes to Risk assessment procedures No to Substantive procedures Yes to In the review stage