Exam 2
The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe and act on it is the definition of
Fraud
There is a(n) ______ relationship between RMM and detection risk. inverse direct
Inverse
At the preliminary stage, analytical procedures are _____ tests.
Reasonableness
Another name for employee fraud, embezzlement, and larceny is
Defalcation
Company discussion boards ______. can be used as a replacement for discussions with client personnel should not be considered a reliable source of company information may be used by anonymous whistle-blowers
May be used by anonymous whistle-blowers
Fraud risk ______. (Select all that apply) must be considered on each audit engagement is the risk of material error by management when issuing financial statements is not specifically mentioned in the audit risk model
Must be considered on each audit engagement Is not specifically mentioned in the audit risk model
Detection risk ______. is the amount of risk the auditor can allow determines the overall level of audit risk is calculated and derived from other risks
is the amount of risk the auditor can allow is calculated and derived from other risks
Audit risk is evaluated at both the overall financial statement level and for each significant _____ and _____
Account & Disclosure
Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of _____ _____ (2 words)
Accounting estimates
The probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated is the definition of
Audit Risk
An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a ______ account or disclosure. material risky relevant significant
Significant
Factors related to the susceptibility of accounts to misstatement or fraud include ______. (Select all that apply) size of account balance the volume of transactions if the account records payables
Size of account balance The volume of transactions
True or false: Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.
True
True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when managements' estimates all exhibit conservatism.
True
The audit plan includes a description of the _____ _____ memorandum. (2 words)
Audit strategy
Auditing standards use the term ______ to refer to misappropriation of assets. larceny error embezzlement defalcation
Defalcation
The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk. detection control inherent
Detection
According to professional auditing standards, which of the following is NOT a type of audit risk? inherent fraud detection control
Fraud
An account or disclosure ______. is only significant if it exceeds the materiality level may be significant even though the balance is below materiality
May be significant even though the balance is below materiality
The type and purpose is referred to as the _____ of an audit procedures.
Nature
Errors are ______ considered fraud. always sometimes never
Never
Based on the allowable or planned level of detection risk, auditors modify the _____, the _____, and the _____ of further audit procedures.
nature, timing & extent
White-collar crimes may ______ the organization. be perpetrated by or upon only be perpetrated by only be perpetrated upon
Be perpetrated by or upon
Employee fraud can be classified as either _____ or _____
Embezzlement or larceny
Misappropriating funds or other property from one's boss in the definition of _____ _____ (2 words)
Employee fraud
An unintentional misstatement or financial statement omission is referred to as a(n) ______. error embezzlement defalcation larceny
Error
In the audit risk model, the assessment of inherent risk and _____ risk lead to a determination of _____
control, detection
Calculating year-to-year changes in balance sheet and income statement accounts is called
horizontal
With respect to accounting estimates, auditors are responsible for ______. (Select all that apply) looking for indications of systematic bias monitoring differences between estimates and audit evidence making accounting estimates ensuring that all accounting estimates are conservative
looking for indications of systematic bias monitoring differences between estimates and audit evidence
Intentional misstatements in financial statements to deceive financial statement users is the definition of _____ _____ _____ (3 words)
Fraudulent financial reporting
Using the audit risk model, the auditor must adjust _____ risk for significant accounts and relevant disclosures.
Detection
On every audit engagement, the risk assessment process includes required _____ sessions in which critical audit areas are discussed.
Brainstorming
When thinking about each of the relevant financial statement assertions, the auditor should focus on what ______. is being done right can go wrong dollar amount is considered significant
Can go wrong
General business sources ______ only relate to an industry and exclude individual companies can relate to an industry or individual company only relate to an individual company and exclude industry publications
Can relate to an industry or individual company
Finding out a client is planning to acquire another company ______. (Select all that apply) results in additional risks for the auditor is a component of understanding the nature of the company is a component of recognizing industry concerns requires the auditor to issue a modified audit opinion
results in additional risks for the auditor is a component of understanding the nature of the company
When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary _____ _____ (2 words)
Analytical procedure
Which of the following statements are correct? (Select all that apply) If an auditor becomes aware of an illegal act procedures must be performed to determine if one occurred. Auditors are not expected to know all relevant laws and regulations affecting their clients. Auditors are not required to provide assurance about indirect-effect noncompliance.
Auditors are not expected to know all relevant laws and regulations affecting their clients. Auditors are not required to provide assurance about indirect-effect noncompliance.
When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts. either before or after after before
Before
Fraud risk ______. may or may not be ignored depending on the assessment of inherent and control risks can never be ignored can only be ignored with continuing audit clients
Can never be ignored
Question an auditor asks when assessing _____ risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"
Control
A misstatement in the financial statements may be caused by a(n) _____ or _____
Error or fraud
According to auditing standards, an "auditors responsibility to detect and report misstatements from illegal acts that have a direct and material effect on the determination of financial statement amounts is the same as that for misstatement caused by ______. error or fraud indirect-effect noncompliance direct-effect noncompliance
Error or fraud
If the potential for fraud is high, auditors should perform _____ _____, including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points. (2 words)
Extended procedures
True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.
False
By definition _____ risks are significant risks.
Fraud
Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their _____ _____ assessment. (2 words)
Fraud Risk
Auditors have a responsibility to detect ______. only fraud that involves management all fraudulent activity regardless of if it affects the financial statements fraudulent activity that results in materially misstated financial statements
Fraudulent activity that results in materially misstated financial statements
Management fraud is sometimes referred to as _____ _____ _____ (3 words)
Fraudulent financial reporting
Which of the following statements are true? (Select all that apply) When a court issues a subpoena, an auditor can refuse to respond on the basis of audit-client privilege. If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. Under SEC rules, limited disclosures to outside agencies of frauds and clients' noncompliance are permitted. Auditors are normally required to keep client information confidential.
If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. Auditors are normally required to keep client information confidential.
Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance? (Select all that apply) If the audit firm resigns or is fired When the auditor is a successor auditor When answering a subpoena
If the audit firm resigns or is fired When answering a subpoena
A violation of equal employment opportunities is an example of _____-_____ noncompliance.
Indirect-effect
The basis for executing an appropriate response to identified risks is ______ risk assessment. inherent detection control fraud
Inherent
The key difference between error and fraud is ______. the magnitude of the misstatement who is responsible intent
Intent
The auditor's responsibility for detecting indirect-effect noncompliance is ______. limited higher than his or her responsibility for direct-effect noncompliance nonexistent as there is no responsibility the same as the responsibility for direct-effect noncompliance
L
When an employee misappropriates funds or property not entrusted to his or her custody, an act of _____ or simple theft has occurred.
Larceny
Factors related to the susceptibility of accounts to misstatement or fraud include ______. liquidity organizational structure complexity
Liquidity & complexity
Noncompliance or suspected noncompliance ______. does not have to be responded to if it is "clearly inconsequential" must always be responded to by the auditor
Must always be responded to by the auditor
Audit teams are concerned ______. only with fraudulent activity that results in materially misstated financial statements with all material and immaterial frauds with all material fraudulent activities whether or not they affect the financial statements with all fraudulent activities that have any connection to the financial statements
Only with fraudulent activity that results in materially misstated financial statements
An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______. permissible, but rarely done not permissible permissible and often done
Permissible, but rarely done
Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called _____ risks.
Significant
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, they must ______ inform the SEC. always sometimes never
Sometimes
Tests of details and analytical procedures which study plausible relationships are the two categories of
Substantive procedures
Auditors are able to reduce detection risk by completing more and stronger ______. substantive tests tests of details
Substantive tests
True or false: Audit team brainstorming sessions are a required audit engagement component.
True
Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements. one; one two; two one; two two; one
Two; two
Most firms express their audit risk ______. using qualitative measures quantitatively (as numbers)
Using qualitative measures
Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called _____ analysis.
Vertical
The misdeeds of people who steal with a pencil or computer terminal are known as _____-_____ crimes.
White-collar
Auditors ______. (Select all that apply) cannot place complete reliance on internal controls to the exclusion of other audit procedures are not permitted to rely exclusively on evidence produced by substantive procedures, even when control risk is high can estimate inherent risk to be zero and omit other evidence-gathering procedures would not seem to exhibit due professional care if the level of audit risk was too high
cannot place complete reliance on internal controls to the exclusion of other audit procedures would not seem to exhibit due professional care if the level of audit risk was too high
The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______. is not dependent on RMM decreases as the RMM increases decreases as the RMM decreases
decreases as the RMM increases
Investigating significant differences at the preliminary stage ______. (Select all that apply) help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work provides direct evidence about the number in the financial statements may be considered attention directing
help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work may be considered attention directing
Examples of business risks include ______. (Select all that apply) industry developments new products and services inaccurate accounting estimates business expansion
industry developments new products and services business expansion
General business sources include ______. (Select all that apply) registration statements and 10-K filings business newspapers company charter and bylaws specialized trade magazines and journals
registration statements and 10-K filings business newspapers specialized trade magazines and journals
In establishing the overall audit strategy, the auditor should take into account the ______. (Select all that apply) results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement nature of communication required by company management significant factors in directing engagement team activities
results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement significant factors in directing engagement team activities
Issues of particular importance in times of economic distress include ______. (Select all that apply) revenue recognition inventory goodwill impairment management compensation fair value measurements
revenue recognition inventory goodwill impairment fair value measurements
All companies trading on the stock exchanges are required to have a(n) _____ _____ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management (2 words)
Audit Committee
The audit strategy memorandum becomes the basis for preparing the ______. engagement plan audit risk model audit plan audit team
Audit plan
The audit strategy is a result of the ______. resources available engagement plan audit plan audit risk model
Audit risk model
Which of the following statements regarding audit risk are correct? (Select all that apply) The auditing professional has an official standard regarding acceptable level of audit risk. Audit risk is generally only evaluated at the overall financial statement level. Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.
Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.
Which of the following statements are true regarding assessing the risk of fraud? (Select all that apply) The easiest way to look for omission of liabilities is the "dangling credit". Balances that contain difficult estimates to audit are very challenging for auditors. Some fraudulent accounting entries only affect one account or place in the financial statements. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.
Balances that contain difficult estimates to audit are very challenging for auditors. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.
The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk. detection inherent control
Control
The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is _____ risk.
Inherent
When performing risk assessment procedures, the first step auditors often take it to assess _____ risk for each relevant assertion related to each of the significant accounts and disclosures identified on an audit engagement.
Inherent
The components of the risk of material misstatement (RMM) are ______ risk and _____ risk.
Inherent & Control Risk
If preliminary findings indicate the possibility of fraud, auditors should ______. enlist the cooperation of the Board of Directors involve fraud examination professionals issue a disclaimer of opinion
Involve fraud examination professionals
Which of the following statements are correct? (Select all that apply) Gaining an understanding of strategies and procedures involves gathering evidence in areas historically addressed by auditors. Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.
Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.
Determining if transactions with them have been properly accounted for and disclosed in the financial statements is the auditor's primary objective in regards to _____ _____ (2 words)
Related parties
Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called _____ _____ (2 words)
Related parties
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion. risky significant relevant material
Relevant
True or false: The professional statements make clear that risk assessment underlies the entire audit process.
True
True or false: The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement.
True
Knowing if a client is centralized or decentralized is a component of ______. identifying related parties recognizing industry concerns understanding the nature of the company assessing detection risk
Understanding the nature of the company
Analytical procedures are required ______. Multiple select question. at the end of the audit as substantive testing procedures at the beginning of the audit
at the end of the audit at the beginning of the audit
A company's performance measures ______. (Select all that apply) identify what managers deem as key indicators of company performance related to management compensation help auditors gain a better understanding of their clients might indicate qualitative factors to consider when determining materiality
identify what managers deem as key indicators of company performance might indicate qualitative factors to consider when determining materiality
An audit team's assessment of control risk as low ______. (Select all that apply) implies controls are effective allows auditors to use smaller sample sizes implies controls can definitely be relied on may limit the use of substantive tests of details
implies controls are effective allows auditors to use smaller sample sizes may limit the use of substantive tests of details
The formula for the audit risk model is ______. inherent risk × control risk × detection risk detection risk - (inherent risk + control risk) inherent risk + control risk + detection risk (inherent risk + control risk) - detection risk
inherent risk × control risk × detection risk
Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses communications to the audit team and audit firm partners
procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses
Interviewing the entity's management, internal auditors, directors, audit committee and other employees ______. (Select all that apply) should not be used to build personal working relationships provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes
provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes
Auditors can and do influence the level of both detection and control risk control, detection and inherent risk both detection and inherent risk detection risk only
Detection risk only
An auditor should consider the laws and regulations that are typically known by auditors to have a potentially material effect on the financial statements for _____-_____ noncompliance.
Direct-effect
Regardless of when analytical procedures are performed, testing is concluded by ______. comparing expectations with recorded amounts investigating significant differences documenting team findings defining a significant difference developing an expectation
Documenting team findings
A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called _____ or defalcation.
Embezzlement
True or false: A company's failure to provide minutes is not considered a significant scope limitation
False
When doing fraud risk assessment, auditors ______. should not presume improper revenue recognition is a risk without cause plan to test for improper revenue recognition without making any assumptions must presume improper revenue recognition is a risk base the assessment of improper revenue recognition of prior audit reports
Must presume improper revenue recognition is a risk
Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______. (Select all that apply) understating expenses and revenues omitting important information from disclosures overstating assets or understating liabilities
Omitting important information from disclosures Overstating assets or understating liabilities
Internal control is a set of policies and procedures designed to achieve management objectives in three different categories. Maintaining a good business reputation and increasing market share are objectives of the _____ category.
Operations
A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______. noted in the working papers but not reported to anyone outside the audit team reported in notes to the financial statements ignored reported to management above the level of the people involved
Reported to management above the level of the people involved
The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the _____ _____ process and ultimately the audit plan. (2 words)
Risk assessment
A company's failure to provide minutes of the meetings of directors and committees of the board of directors is a significant _____ _____ that could result in the public accounting firm's disclaiming an opinion on the financial statements. (2 words)
Scope limitation
Frauds involving senior management or high-level employees ______. should be reported to the audit committee or Board of Directors may be inconsequential, depending on the threshold level always require the auditor to disclaim an opinion
Should be reported to the audit committee or Board of Directors
A well planned and carefully performed audit ______ audit risk. can virtually eliminate still has some
Still has some
In the audit risk model ______. (select all that apply) detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk the desired level of audit risk is based on the assessed level of inherent, control and detection risk AR = IR × CR × DR detection risk is considered to be independent of inherent and control risks which are interrelated
detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk AR = IR × CR × DR
Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) explanation of why improper revenue recognition is a risk discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion
discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion
Inherent risk ______. (Select all that apply) is not created by the auditors is the susceptibility of the account to misstatement is not related to the nature of the client's business can be controlled by the auditors
is not created by the auditors is the susceptibility of the account to misstatement
Business risk assessment ______. (Select all that apply) makes auditors more knowledgeable about the client's business and environment should focus on gathering evidence in areas historically addressed by auditors is an important component of an audit may involve asking production personnel about labor problems
makes auditors more knowledgeable about the client's business and environment is an important component of an audit may involve asking production personnel about labor problems
When developing an expectation of an account balance, auditors ______. (Select all that apply) may consider third party information should not consider budgets and forecasts may use vertical and horizontal analysis may consider relevant nonfinancial information
may consider third party information may use vertical and horizontal analysis may consider relevant nonfinancial information
Noncompliance or suspected noncompliance ______. (Select all that apply) must always be responded to by the auditors may require discussions with the client's legal council always requires financial statement disclosure should always be recorded to the audit committee
must always be responded to by the auditors may require discussions with the client's legal council
The assessment of inherent risk ______. (select all that apply) does not need to consider the overall materiality level needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure
needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure
Due to the importance of industry characteristics, most large public accounting firms ______. assign auditors to audits of many different industries to improve their knowledge organize their audit staff by industry limit their audit engagements to one or two specific industries
organize their audit staff by industry
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, the auditors must inform the ______. CFO and CEO audit committee board of directors SEC
Board of directors
sks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called _____ risks.
Business
The nature, timing, and extent of resources needed to perform the engagement should be outlined in the audit _____
Strategy
Which of the following statements regarding audit risk are correct? (Select all that apply) Audit risk is generally only evaluated at the overall financial statement level. The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level. The auditing professional has an official standard regarding acceptable level of audit risk.
The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level.
