Exam 2

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None.

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?

Reviewing prior year audit documentation and the permanent file for the client.

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

Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

Management's report on internal controls must include each of the following except:

a statement providing management's evaluation of the company's control environment.

The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?

adequate planning and supervision

Which of the following matters does an auditor usually include in the engagement letter?

arrangements regarding fees and billing

Which of the following would be a step in an internal control program?

assess the control risk for sales and collections

a list of audit procedures

audit plan

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

audit risk

Which of the following is not one of the four major cycles?

cash receipts and disbursements

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

compare financial information with non financial operating data

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:

completeness

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

concluding that the entity's management probably lacks integrity

direct correspondence with independent parties

confirmation

When assessing internal auditors' objectivity, an independent auditor should:

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its:

control environment

The probability that the client's internal control policies and procedures will fail to detect material misstatements if they have entered the accounting system.

control risk

Based on audit 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 would:

decrease detection risk

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention.

The probability that audit procedures will fail to produce evidence of material misstatements.

detection risk

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is:

detection risk

An audit team uses the assessed risk of material misstatement to:

determine the acceptable level of detection risk for financial statement assertions

Each of the following is a type of known misstatement, except:

differences between management and the auditor's judgment regarding estimates.

An engagement letter is used primarily to

ensure a clear contractual understanding of the services to be provided by the CPA.

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to:

evaluate the effect on the financial statements

The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered?

examination of documents

The confirmation of a cash balance provides primary evidence regarding which management assertion?

existence

An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of:

existence or occurrence

Documentation prepared by independent parties and sent to the client.

external-internal evidence

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?

high liquidity

C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was K. Post, CPA, whom Monday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

hill, the auditor

In the planning stage, analytical procedures are used to:

identify potential problem areas

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to:

identify unusual conditions that deserve additional audit effort.

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be:

ideological

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

incompatible duties

The probability that material misstatements have occurred in transactions entering the accounting system.

inherent risk

Which of the following is not a component of internal controls?

inherent risk

To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to:

inspect the stock certificates evidencing the investment.

Looking at vendors' invoices for particular information is an example of:

inspection of documents

audit procedure that provides compelling evidence of existance

inspection of tangible assets

Which of the following is not considered one of the three factors increasing the probability of fraud?

lack of training

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should:

obtain knowledge of matters that relate to the nature of the entity's business.

If auditors assess control risk at the maximum level, they will tend to:

perform a great deal of substantive testing during the audit

Inherent risk is the:

probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:

related internal control policies and procedures

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on:

relative size

Which of the following is an information technology general control?

separation of duties in the IT department

audit of details of transactions and balances

substantive procedures

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

the adequacy of the disclosure of the related party transactions

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

the client does not take the remedial action that the auditor considers necessary.

A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as:

the control environment

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence?

the educational level and professional experiences of the internal auditor

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?

the integrity of the entity's management is suspect

Before accepting an engagement to audit a new client, a CPA is required to obtain:

the prospective client's consent to make inquiries of the predecessor, if any.

Which of the following is a definition of control risk?

the risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls

proceeding forward through the accounting and control system, from the evidence to the financial statements

tracing