Chapter 6 smartbook
Materiality depends on the ______ and the nature of the item. Multiple choice question. number of errors dollar amount intent
dollar amount
The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk. Multiple choice question. audit business engagement inherent
engagement
Substantive procedures should be performed for all significant financial statement accounts ______ controls are considered extremely strong.
even if
Many inherent risks arise because of_____risks faced by management, such as the possibility of material misstatement due to fraud.
business
To obtain the understanding of the entity and its environment, auditors perform ___ ___ procedures.
risk assessment
A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by the_____ _______
time budget
During the second stage of the audit process, auditors use ____ _____procedures to gather information to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures.
risk assessment
An increase in the level of planning materiality results a decrease in ______. Multiple choice question. scope of audit procedures relevant assertions interim period
scope of audit procedures
A $500 error would most likely be considered material for ______. Multiple choice question. no organizations all organizations a school fund raising organization large U.S. manufacturers global corporations
a school fund raising organization
A description of the nature, timing, and extent of the audit procedures to be performed is found in the audit ______.
plan
(1) Incentive or pressure, (2) opportunity, and (3) attitude to rationalize the act are the three fundamental conditions of the fraud _____ ______
risk triangle
The time interval from the beginning of audit work to the balance sheet date is called the ______ period. Multiple choice question. engagement subsequent interim
interim
Many inherent risks arise because of ______ risks faced by management, such as the possibility of material misstatement due to fraud. Multiple choice question. audit. control business
business
Examples of risk assessment procedures include all of the following except ______. Multiple choice question. analytical procedures observation and inspection vouch sales transactions inquiries of management
vouch sales transactions
Auditors test completeness of receivables in order to determine that all ______.
receivables have been recorded
The auditors' understanding of the nature of the client includes ______. Multiple select question. organizational structure product lines competitive position accounting policies general economic environment
organizational structure product lines competitive position accounting policies
To gain an understanding of the client, the auditors will identify methods used by the client to measure and review ______. Multiple choice question. performance risks analytical procedures
performance
When materiality is allocated to a particular account, it is referred to as____materiality
performance
The application of performance materiality to a particular audit procedures is
tolerable misstatement
True or false: Asset valuation is relatively straight-forward for all assets because they are recorded at cost and recorded values are not changed due to the historical cost principle.
False
True or false: Performing audit work during the interim period reduces the total amount of substantive procedures that must be completed.
False
Which of the following is NOT a component of the fraud risk triangle? Multiple choice question. Opportunity Incentive or pressure Fear Rationalization
Fear
Identify which of the following would not be covered in the engagement letter of an audit. Multiple choice question. Applicable financial reporting framework Audit scope Auditor and management responsibilities Internal controls to be tested
Internal controls to be tested
Which of the following is not a facet of the overall audit strategy? Multiple choice question. Consideration of industry reporting requirements Setting the basis of reporting Setting the deadlines for reporting Setting a date when the final audit fees will be paid
Setting a date when the final audit fees will be paid
Select the following items that are identified by the text as conditions indicative of fraud. Multiple select question. Unwillingness to allow auditor access to files or testing Missing documents Unsupported transactions Related party transactions
Unwillingness to allow auditor access to files or testing Missing documents Unsupported transactions
The best source of information about the nature of the client is likely to be obtained by ______. Multiple choice question. inquiries of management and other personnel reading trade publications reading AICPA Audit and Accounting Guides reviewing prior year tax returns
inquiries of management and other personnel
Planning materiality is commonly based on % of ______. Multiple select question. net income total assets total liabilities total revenues
net income total assets total revenues
At the planning stage of an audit, auditors consider materiality to determine their ______. Multiple choice question. scope of the audit opinion business risk
scope of the audit
Assume auditors find a $5,000 misstatement in a sample. As a result, they estimate the entire population is misstated by about $20,000. The sample size must have been____ % of the population
25
True or false: In performing risk assessment, auditors only focus on material misstatement at the financial statement level.
False
Which of the following is not a relevant assertion? Multiple choice question. Cutoff Existence or occurrence Rights and obligations Materiality and appropriation
Materiality and appropriation
Examples of risks at the financial statement level include ______. Multiple select question. existence or occurrence a declining industry lack of sufficient capital to continue operations ineffective control environment
a declining industry lack of sufficient capital to continue operations ineffective control environment
Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditors'___procedures.
analytical
Comparing current year balances to prior year balances is an example of ______. Multiple choice question. tests of controls analytical procedures performance materiality
analytical procedures
Auditors indirectly verify revenue, cost of goods sold, and expenses by substantiating changes in the _and _accounts.
asset liability
Generally highly reliable evidence is available to substantiate ______. Multiple choice question. revenues and expenses assets and liabilities
assets and liabilities
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called ______ risk. Multiple choice question. engagement audit inherent control
audit
Generally accepted auditing standards require that indications of management fraud should be communicated to the ______, to assist in its oversight of the financial reporting process of the company. Multiple choice question. management board of directors audit committee
audit committee
Competitive position, organizational structure, governance processes, and product lines are all components of the auditors' understanding the nature of the
client
Auditors vouch cash receipt transactions occurring near period end to verify ______. Multiple choice question. cutoff of transactions completeness of assets existence of assets
cutoff of transactions
Analytical procedures provide ______ evidence as to the reasonableness of various revenues and expenses. Multiple choice question. direct indirect no
direct
The nature and extent of the audit work to be performed on a particular engagement depend largely upon the ______. Multiple choice question. work of the predecessor auditor effectiveness of the client's internal control agreed upon fees for the engagement limitations imposed upon the auditor by management
effectiveness of the client's internal control
Successor auditors seek information from predecessor auditors on communication with the client and those charged with governance regarding ______. Multiple select question. the timing of the audit and issuance of opinion fees charged for the audit internal control deficiencies and material weaknesses fraud and noncompliance with laws and regulations
internal control deficiencies and material weaknesses fraud and noncompliance with laws and regulations
Assertions such as existence or occurrence, rights and obligations, completeness, and cutoff are considered ____ assertions
relevant
The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at ______. Multiple choice question. the financial statement and relevant assertion levels neither the financial statement nor relevant assertion level the financial statement level only the relevant assertion level only
the financial statement and relevant assertion levels
An estimate of the number of hours required to perform each step in the audit is called a(n) ______. Multiple choice question. time budget audit plan audit strategy
time budget
Planning materiality is commonly based on all of the following except % of ______. Multiple choice question. total equity total assets total expenses net income
total expenses
The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n
transaction cycle
If assets are subject to depreciation, an analysis of the reasonableness of the cost allocation and verification of the computation of the remaining unallocated cost are important in assessing the____of assets.
valuation
obtain a list of related parties and verify all related party transactions are displayed Reason: This tests disclosure. investigate credit rating for delinquent receivables to verify they are recorded at net realizable value Reason: This tests valuation. vouch sales transactions near the period end to verify sales are recorded in the proper period
vouch sales transactions near the period end to verify sales are recorded in the proper period
If auditors test 20% of a population and find a $4,000 misstatement, they would estimate the entire population is misstated by about ______.
$20,000
If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be ______ $50,000. Multiple choice question. equal to more than less than
less than
Material misstatement of financial statements by management with the intent to mislead financial statement users is called ______.
fraudulent financial reporting
Significant risks often relate to transactions that are ______. Multiple select question. nonroutine estimation recurring routine
nonroutine estimation
Risk assessment procedures include ______. Multiple select question. observation and inspection analytical procedures inquiry of external parties recalculation of balances
observation and inspection analytical procedures inquiry of external parties
Auditors test the client's rights to assets to verify that all ______. Multiple choice question. recorded receivables are valid receivables belong to the client receivables have been recorded
receivables belong to the client
All of the following are common indications of fraud except ______. Multiple choice question. related party transactions missing inventory complaints by management about the conduct of the audit tips to the auditors about fraud
related party transactions
The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at the financial statement and ____ ______ levels.
relevant assertion
If auditors obtain evidence of fraud they should evaluate the implications and ______. Multiple choice question. always report the matter directly to the Board of Directors or audit committee Reason: This is done if the fraud involves senior management or material misstatement of the financial statements. immediately withdraw from the engagement Reason: This may be the response in very serious situations. discuss the evidence with the manager they believe is involved in the fraud report the matter to a manager at least one level above the one involved
report the matter to a manager at least one level above the one involved
Further audit procedures include ______. Multiple select question. business risk substantive procedures tests of controls
substantive procedures tests of controls
The planning materiality amount that will require the auditors to gather the most audit evidence is ______. Multiple choice question. $10,000 $50,000 $250,000
$10,000
Auditors consider the overall attractiveness and other characteristics of the client's industry. Which of the following are other characteristics that are considered? Multiple select question. Economic conditions Changes in technology Financial trends Barriers to entry Strength of competitors Governmental regulations
Economic conditions Changes in technology Financial trends Governmental regulations
Responsibility for the appointment, compensation, and oversight of the auditors rests with the client's ______. Multiple choice question. audit committee management board of directors
audit committee
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called
audit risk
Following specific transactions from their source documents forward to their inclusion in the financial statement summary figures is a test of the ______ assertion. Multiple choice question. completeness valuation occurrence
completeness
Relevant assertions include ______. Multiple select question. completeness valuation or allocation materiality and appropriation existence or occurrence
completeness valuation or allocation existence or occurrence
Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ______ assets. Multiple choice question. rights to completeness of valuation of
completeness of
If inherent risk is assessed as low and internal controls seem able to prevent or detect and correct misstatements, the auditors may decide to perform tests of support an assessment that _____ risk is low.
control
The auditor's consideration of ______ risk involves analyzing the design and implementation of internal control to decide if the system appears adequate to detect and correct material misstatements.
control
Inquiries of predecessor auditors are aimed at obtaining information on ______. Multiple select question. disagreements with management reason for change in auditors integrity of management profits obtained from the audit
disagreements with management reason for change in auditors integrity of management
The overall risk of association with a particular business is often referred to as
engagement risk
A lack of sufficient capital to continue operations is considered a(n) ______ level risk. Multiple choice question. inherent financial statement relevant assertion
financial statement
The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis for the auditors' selection of___ audit procedures.
further
Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement____of assets
presentation
A risk that has been identified and assessed that, in the auditor's opinion, requires special audit consideration is considered a(n)
significant risk
PCAOB standards explicitly require auditors to determine whether any of the identified risks of material misstatement are
significant risks
In making inquiries related to fraud, auditors must ask whether the company has entered into any ____ ______ transactions
significant unusual
Significant unusual transactions ______ involve related parties. Multiple choice question. always sometimes never
sometimes
When auditors obtain evidence of fraud, they should ______ withdraw from the engagement. Multiple choice question. never always sometimes
sometimes
Auditors should document several elements of risk assessment including ______. Multiple select question. auditor's opinion on the financial statements audit team discussion nature, timing, and extent of further audit procedures understanding of the entity and its environment
audit team discussion nature, timing, and extent of further audit procedures understanding of the entity and its environment
During the planning stage of an audit, the auditors establish an understanding with their client as to the nature of services to be provided and the responsibilities of the ______. auditor and firm client and employees auditor and client
auditor and client
Auditors should document several elements of risk assessment including all of the following except ______. Multiple choice question. nature, timing, and extent of further audit procedures audit team discussion auditor's opinion on the financial statements understanding of the entity and its environment
auditor's opinion on the financial statements
Most audit firms organize the substantive portion of their audit plans around the ______ accounts. Multiple choice question. income statement equity balance sheet
balance sheet
When evaluating the overall attractiveness of the industry a client operates in, auditors consider ______. Multiple select question. organizational structure bargaining power of customers barriers to entry bargaining power of suppliers strength of competitors
bargaining power of customers barriers to entry bargaining power of suppliers strength of competitors
According to auditing standards, successor auditors must attempt to communicate with predecessor auditors ______. Multiple choice question. immediately after presenting a formal proposal to a new client before accepting the engagement as soon as the engagement is accepted
before accepting the engagement
Achieving management's objectives is always subject to ___ risks.
business
Many inherent risks arise because of _______risks faced by management, such as the possibility of material misstatement due to fraud.
business
Potential significant business risks for a client include ______. Multiple select question. changes in government regulations competition material price volatility hiring a new production manager interest rate increases
changes in government regulations competition material price volatility interest rate increases
The overall audit strategy involves determining overall characteristics of the engagement that ______. Multiple select question. determine the timing of procedures determine the auditors' opinion determine the focus of the audit team define the audit scope
determine the timing of procedures determine the focus of the audit team define the audit scope
Inquiries of predecessor auditors are aimed at obtaining information on ______. Multiple select question. disagreements with management profits obtained from the audit integrity of management reason for change in auditors
disagreements with management integrity of management reason for change in auditors
The systems portion of the audit addresses ______. Multiple choice question. effectiveness of the client's internal control risk assessment procedures substantive tests of account balances
effectiveness of the client's internal control
The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk.
engagement
If the auditors' objective is to test ______, they follow the stream of evidence back to its source. Multiple choice question. valuation completeness existence
existence
Physical examination of plant and equipment verifies ______. Multiple choice question. existence existence and ownership
existence
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion _____of assets.
existence
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ______ assets. Multiple choice question. valuation of existence of rights to
existence of
Inquiries to find information about the nature of the client should ______. Multiple choice question. not include discussions with management include both management and other personnel be limited to discussions with management
include both management and other personnel
Advantages of interim audit work include ______. Multiple select question. increased assessment of internal control timely release of audited financial statements reduction in the amount of overall work completed more uniform workload for the CPA firm
increased assessment of internal control timely release of audited financial statements more uniform workload for the CPA firm
The engagement letter should include information regarding ______. Multiple select question. inherent limitations of the audit the audit opinion to be expressed expected form and content of the reports applicable financial reporting framework
inherent limitations of the audit expected form and content of the reports applicable financial reporting framework
The risk of material misstatement of an assertion without considering internal control is called
inherent risk
During the second stage of the audit process, auditors must obtain an understanding of the nature of ____ _____ because it allows them to identify accounts and classes of transactions that may be misstated and to tailor audit procedures to the existing system.
internal control
The nature and extent of the audit work to be performed on a particular engagement depend largely upon the effectiveness of the client's____ ____ in preventing or detecting material misstatements.
internal control
According to the FASB, if, in light of surrounding circumstances, the magnitude of an item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item, the omission of the item in a financial report is considered a(n) ______ deficiency. (Enter only one word per blank.) circumstances material omission
material
Tolerable misstatement ______ performance materiality. Multiple choice question. may be the same amount or lower than may be the same amount or higher than is always equal to is always higher or lower than
may be the same amount or lower than
To determine if the ending financial statement balance is correct, auditors ______.
may test controls over transactions or test the ending balance directly
When a successor auditor is offered an auditing engagement, the successor auditor ______. Multiple choice question. must obtain the client's consent before discussing confidential information with the predecessor auditor is prohibited from accepting the engagement if communication with the predecessor auditor is denied by management is granted permission to contact the predecessor auditor by default
must obtain the client's consent before discussing confidential information with the predecessor auditor
Inherent risk is the risk ______. Multiple choice question. that material misstatement will not be prevented on a timely basis by internal control Reason: Control risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated Reason: Audit risk of material misstatement of an assertion without considering internal control
of material misstatement of an assertion without considering internal control
To identify fraud risks, auditors perform a number of procedures including ______. Multiple select question. performing analytical procedures inquiries of management inquiries of legal representation considering fraud risk factors
performing analytical procedures inquiries of management considering fraud risk factors
Auditors consider materiality to determine their scope of the audit during the ______ stage of an audit. Multiple choice question. substantive procedures planning test of controls
planning
When an audit firm is considering a new client, they are required to attempt to communicate with the ______ auditor. Multiple choice question. subsequent successor current predecessor
predecessor
f auditors obtain evidence of fraud they should evaluate the implications and ______. Multiple choice question. always report the matter directly to the Board of Directors or audit committee report the matter to a manager at least one level above the one involved discuss the evidence with the manager they believe is involved in the fraud immediately withdraw from the engagement
report the matter to a manager at least one level above the one involved
Auditors indirectly verify revenue, cost of goods sold, and expenses. By substantiating changes in the asset and liability accounts, auditors indirectly verify_________accounts
revenue expense
During the planning stages of the audit, the auditors develop a(n) ______. Multiple select question. strategy schedule opinion audit plan
strategy schedule audit plan
Procedures aimed directly at financial statement account balances are included in the_____ portion of the audit program.
substantive
Test of account balances and transactions designed to detect any material misstatements in the financial statements are called _____ procedures.
substantive
Test of account balances and transactions designed to detect any material misstatements in the financial statements are called ______.
substantive procedures
Usually organized around the balance sheet accounts, the_____ ______ portion of the audit program is aimed at confirming financial statement amounts.
substantive procedures
To gain an understanding of the client, its environment, and internal controls, audits will review the ______. Multiple select question. representation letter obtained from the management of the client the client's objectives and strategies and related business risks nature of the client, including the client's application of accounting policies industry, regulatory, and other external factors affecting the client
the client's objectives and strategies and related business risks nature of the client, including the client's application of accounting policies industry, regulatory, and other external factors affecting the client
