Ch 6 Quiz and HW

Assume the following general flow of documents in an accounting system. Source Documents>Journals>Ledgers The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

(1) Trace from source documents to journals.

William CPA LLP requested permission from a prospective client to communicate with the predecessor auditor. The prospective client's refusal to permit this will bear directly on William's decision concerning the: Ability to establish consistency in application of accounting principles between years. Adequacy of the detailed preplanned audit confirmation form. Acceptance of the engagement. Apparent substantive procedure limitation.

Acceptance of the engagement.

Assume the following general flow of documents in an accounting system. Source Documents>Journals>Ledgers Tracing from source documents to journals most directly tests: Completeness (understatements). Existence (overstatements).

Completeness (understatements).

While assessing the risks of material misstatement, auditors identify risks, relate risks to what could go wrong, consider the magnitude of risks, and: Consider the likelihood that the risks could result in material misstatements. Consider the complexity of the transactions involved. Assess the risk of misstatements due to illegal acts. Determine materiality levels.

Consider the likelihood that the risks could result in material misstatements.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as: Control risk. Inherent risk. Account risk. Detection risk.

Detection risk.

The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as Business risk. Engagement risk. Control risk. Detection risk.

Detection risk. Detection risk is the risk that the auditor will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance, when, in fact, such misstatement does exist.

Assume the following general flow of documents in an accounting system. Source Documents>Journals>Ledgers The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

Either (1) or (2).

Which of the following is not a general objective for the audit of asset accounts? Establishing the completeness of assets. Establishing existence of assets. Establishing proper valuation of assets. Establishing proper liabilities relating to assets.

Establishing proper liabilities relating to assets.

Which of the following conditions identified during the audit increases the risk of employee misappropriation of assets? Inventory items of high value. Large amounts of treasury stock. Presence of reconciling items on a client prepared year-end bank reconciliation. Existence of a mandatory vacation policy for employees performing key functions.

Inventory items of high value.

Which of the following elements underlies the application of auditing standards, particularly those related to fieldwork and reporting? Adequate disclosure. Quality control. Materiality and audit risk. Client acceptance.

Materiality and audit risk. Materiality and audit risk underlie the application of auditing standard in that so many audit decisions are affected by the amount used as a materiality measure and the level of audit risk assumed on the engagement.

The audit committee of a company must be made up of: Representatives from the client's management, investors, suppliers, and customers. The audit partner, the chief financial officer, the legal counsel, and at least one outsider. Representatives of the major equity interests, such as preferred and common stockholders. Members of the board of directors who are not officers or employees.

Members of the board of directors who are not officers or employees. Members of the audit committee should be independent of management. Therefore, the individuals should be board members who are not employees or officers, and who have no relationship with management that might impair their objectivity.

Which of the following is least likely to be considered a risk assessment procedure? Performing analytical procedures. Applying of data analytics. Inspecting receiving reports. Observing the physical count of inventory.

Observing the physical count of inventory.

A predecessor auditor will ordinarily initiate communication with the successor auditor: Prior to the Successor's Acceptance of the EngagementSubsequent to the Successor's Acceptance of the Engagement A.YesYes B.YesNo C.NoYes D.NoNo Option C Option A Option B Option D

Option D

As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: Each recorded sale represents a bonafide transaction. All sales have been recorded in the sales journal. All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. Recorded sales have been properly posted to customer accounts.

Recorded sales have been properly posted to customer accounts. Because entries in the sales journal represent recorded sales, tracing entries from it to debits in the accounts receivable ledger provides evidence on whether recorded sales have been properly posted to customer accounts.

Which portion of an audit is least likely to be completed before the balance sheet date? Tests of controls. Issuance of an engagement letter. Substantive procedures. Assessment of control risk.

Substantive procedures. Substantive procedures substantiate the account balances as of the balance sheet date and therefore cannot be completed prior to that date. The other items pertain to the operation of the system during the year under audit and could be completed in the interim period.

Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. Incentive or pressure. Opportunity. Supervisory position. Attitude.

Supervisory position. AICPA AU-C 240 (PCAOB AS 2401) outlines the three factors generally necessary for fraud as (1) incentive or pressure, (2) opportunity, and (3) attitude. Being in a supervisory position is not one of those conditions, although it may provide the individual an opportunity to commit fraud.

Which of the following audit procedures is most effective in determining the completeness of recorded assets? Vouching transactions. Tracing from source documents to entries in the accounting records. Performing cyclical procedures. Assessing overall asset audit risk.

Tracing from source documents to entries in the accounting records.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? Supervise members of the audit team less closely and rely more upon judgment. Use less predictable audit procedures. Use only certified public accountants on the engagement. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

Use less predictable audit procedures. Less predictable audit procedures are likely to be used when fraud risks are high. SAS 99 also suggest that the auditors have increased skepticism, assign more skilled staff, and consider further management's selection and application of accounting principles. Supervise members of the audit team less closely and rely more upon judgment, is incorrect because supervision of members of the audit team will be closer, not less. Use only certified public accountants on the engagement, is incorrect because team members may or may not be CPAs (e.g., a fraud specialist who is not a CPA might be added to the team). Place increased emphasis on the audit of objective transactions rather than subjective transactions, is incorrect because subjective, rather than objective transactions may often be emphasized—depending upon the nature of the fraud risks identified.

Assume the following general flow of documents in an accounting system. Source Documents>Journals>Ledgers Vouching from journals (or ledgers) to source documents most directly tests: Completeness (understatements). Existence (overstatements).

Existence (overstatements).

Which of the following should not normally be included in the engagement letter for an audit? A description of the responsibilities of client personnel to provide assistance. An indication of the amount of the audit fee. A description of the limitations of an audit. A listing of the client's branch offices selected for testing.

A listing of the client's branch offices selected for testing. Management should not be informed about which branches were selected for testing at all or at least not until just before testing is to be done.

In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? Generous performance-based compensation systems. Management preoccupation with increased financial performance. An unreliable accounting system. Strained relationships between management and competing companies.

An unreliable accounting system. An unreliable accounting system provides an opportunity for an individual to misappropriate assets. The other items create risks of fraudulent financial reporting.

The primary objective of tests of details of transactions performed as substantive procedures is to: Comply with auditing standards. Attain assurance about the reliability of the accounting system. Detect material misstatements in the financial statements. Evaluate whether management's policies and procedures are operating effectively.

Detect material misstatements in the financial statements. The objective of tests of details of transactions performed as substantive procedures is to detect material misstatements in the financial statements as transactions are tested to determine whether they have been properly recorded.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? Capital structure including various operating subsidiaries. Low turnover of senior management. Extreme degree of competition within the industry. Sales goals in excess of any of the preceding three years.

Extreme degree of competition within the industry.

Which of the following best describes what is meant by the term "fraud risk factor"? Factors that, when present, indicate that risk exists. Factors often observed in circumstances where frauds have occurred. Factors that, when present, require modification of planned audit procedures. Weaknesses in internal control identified during an audit.

Factors often observed in circumstances where frauds have occurred. Fraud risk factors are factors that have been observed in circumstances in which fraud has occurred. The fraud risk factors were identified by researchers and practitioners through analyses of many past frauds. Yet, none of the factors was always present in the various individual cases included in the analyses. Factors that, when present, indicate that risk exists, is incorrect because in any particular circumstance, the existence of a fraud risk factor may or may not indicate that in that circumstance the risk of fraud is high. Factors that, when present, require modification of planned audit procedures, is incorrect because the existence of a fraud risk factor may not require modification of planned audit procedures (e.g., the audit plan may already have audit procedures that consider the factor). Weaknesses in internal control identified during an audit, is incorrect because a fraud risk factor may or may not be a significant deficiency.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? Analysis of balance sheet accounts. Analysis of income statement accounts. All matters of continuing accounting significance. Facts that might bear on the integrity of management.

Facts that might bear on the integrity of management. Before accepting an engagement the possible successor should ask questions about the integrity of management, disagreements with management, and the reasons for the change in auditors. All of the other replies are incorrect because they represent information that the successor may wish to obtain after accepting the engagement.

Which of the following procedures is not performed as a part of planning an audit engagement? Reviewing the working papers of the prior year. Verifying each cutoff procedure. Developing an overall audit strategy. Designing an audit plan.

Verifying each cutoff procedure.

Assume the following general flow of documents in an accounting system. Source Documents>Journals>Ledgers The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

(2) Vouch from journals to source documents.