Auditing Chap 5

Which of the following statements best describes why auditors investigate related party transactions?

The substance of related party transactions may differ from their form. Explanation : According to the definition of "related parties," one party may be able to influence the other to the extent that the two parties do not pursue their own separate interests in conducting transactions. Thus, a risk exists that the substance of related party transactions may differ from their form.

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.

false Explanation : The error is the "or immaterially." Audit risk deals with material misstatements.

Which of the following business characteristics is not indicative of high inherent risk?

A large amount of assets. Explanation : A large amount of assets by itself is not indicative of high inherent risk. Operating results highly sensitive to economic factors, large past misstatements, and turnover of management all represent characteristics that may indicate high inherent risk.

Performing analytical procedures may help an auditor to:

Achieve audit objectives related to a particular assertion.

In developing an expectation for analytical procedures, the auditors are least likely to consider:

Anticipated costs of audit completion. Explanation : They will condiser : Relationships between financial information and relevant nonfinancial data. Financial information for comparable prior periods. Relationships among elements of financial information within a period.

Which of the following is not a function of audit working papers?

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

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:

Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. Explanation: The work of a specialist is only referred to in circumstances in which those findings do not support the representations made by management in the financial statements, thus causing the auditors to modify their report.

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

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

Of the following, which is the least reliable type of audit evidence?

Copies of sales invoices inspected by the auditors. Explanation: Copies of sales invoices represent internally generated evidence, which is considered least reliable. Confirmations mailed by outsiders and correspondence between the auditor and suppliers represent more reliable externally generated evidence. Canceled checks, although internally generated, are considered reliable because they bear the endorsement of the payee and a perforation or stamp indicating payment by the bank

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:

Document the assistant auditor's position and how the difference of opinion was resolved. Explanation: When a difference of opinion cannot be resolved, the working papers should be expanded to document the various positions and to describe how the difference of opinion was resolved.

Which of the following is not a financial statement assertion made by management?

Effectiveness of internal control.

In what section of the audit working papers would a long-term lease agreement be filed?

Permanent working paper file.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts?

Ratio analysis

A primary purpose of the audit working papers is to:

Support the auditors' opinion. Explanation: A primary purpose of audit working papers is to provide documented evidence that the auditors had a firm basis for their report.

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?

To increase the efficiency of the audit by eliminating the need for other audit procedures. Explanation: A client letter of representations may never be used as a substitute for other appropriate auditing procedures.

Analytical procedures are most likely to detect:

Unusual transactions.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered:

low

Detection risk is a function of the audit and its procedures. If there is no audit there is no measure of detection risk.

true