hm 05

Which of the following business characteristics is not indicative of high inherent risk? Multiple Choice Operating results that are highly sensitive to economic factors. Large likely misstatements detected in prior audits. Substantial turnover of management. A large amount of assets.

A large amount of assets.

Performing analytical procedures may help an auditor to: Multiple Choice Achieve audit objectives related to a particular assertion. Develop an effective system of quality control. Meet PCAOB requirements that analytical procedures be performed relating to every major account. Increase the level of detection risk.

Achieve audit objectives related to a particular assertion.

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: Multiple Choice Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

Of the following, which is the least reliable type of audit evidence? Multiple Choice Confirmations mailed by outsiders to the auditors. Correspondence between the auditors and suppliers. Copies of sales invoices inspected by the auditors. Canceled checks returned in the year-end bank statement directly to the client.

Copies of sales invoices inspected by the auditors.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: Multiple Choice Low. High. Identical. Indeterminate.

Low.

In developing an expectation for analytical procedures, the auditors are least likely to consider: Multiple Choice Financial information for comparable prior periods. Relationships between financial information and relevant nonfinancial data. Anticipated costs of audit completion. Relationships among elements of financial information within a period.

Anticipated costs of audit completion.

Which of the following is not a primary approach to auditing an accounting estimate? Multiple Choice Review and test management's process for developing the estimate. Review subsequent transactions. Confirm the amounts. Develop an independent estimate.

Confirm the amounts.

Seeking and treating as more persuasive information that is consistent with one's initial beliefs describes which cognitive bias? Multiple Choice Overconfidence bias. Confirmation bias. Persuasiveness bias. Availability bias.

Confirmation bias.

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: Multiple Choice Gathering evidence concerning account balances that have not changed from the prior year. Retesting internal control procedures. Considering unusual or unexpected account balances that were not previously identified. Performing a test of transactions to corroborate management's financial statement assertions.

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

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: Multiple Choice Remain silent on the matter since it is an internal matter of the auditing firm. Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. Document the additional work required because all disagreements of this type will require expanded substantive procedures. Document the assistant auditor's position and how the difference of opinion was resolved.

Document the assistant auditor's position and how the difference of opinion was resolved.

Which of the following is not a financial statement assertion made by management? Multiple Choice Existence of recorded assets and liabilities. Completeness of recorded assets and liabilities. Valuation of assets and liabilities. Effectiveness of internal control.

Effectiveness of internal control.

In what section of the audit working papers would a long-term lease agreement be filed? Multiple Choice Current working paper file. Permanent working paper file. Lead schedule file. Corroborating documents file.

Permanent working paper file.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? Multiple Choice Trend analysis. A detailed test of balance analysis. Ratio analysis. Risk analysis.

Ratio analysis.

A primary purpose of the audit working papers is to: Multiple Choice Aid the auditors by providing a list of required procedures. Provide a point of reference for future audit engagements. Support the underlying concepts included in the preparation of the basic financial statements. Support the auditors' opinion.

Support the auditors' opinion.

Which of the following statements best describes why auditors investigate related party transactions? Multiple Choice Related party transactions generally are illegal acts. The substance of related party transactions may differ from their form. All related party transactions must be eliminated as a step in preparing consolidated financial statements. Related party transactions are a form of management fraud.

The substance of related party transactions may differ from their form.

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? Multiple Choice To increase the efficiency of the audit by eliminating the need for other audit procedures. To remind the client's management of its primary responsibility for the financial statements. To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. To provide evidence in those areas dependent upon management's future intentions.

To increase the efficiency of the audit by eliminating the need for other audit procedures.

Analytical procedures are most likely to detect: Multiple Choice Weaknesses of a material nature in internal control. Unusual transactions. Noncompliance with prescribed control activities. Improper separation of accounting and other financial duties.

Unusual transactions

For each partial (or complete) definition or illustration in the first column, select the applicable term. If no term is suitable select "No term applies". a. Overvaluing information that quickly comes to mind. b. Starting with an initial belief and then insufficiently adjusting that belief when contrary information is encountered. c. Seeking and treating as more persuasive information that is consistent with one's beliefs. d. Overestimating one's abilities. e. All information prepared within the audited organization. f. Information used by the auditor that corroborates or contradicts the assertions in the financial statements. g. Information used by the auditor that corroborates the assertions in the financial statements. h. The risk that the auditors' procedures will lead them to conclude that a misstatement does not exist when in fact it does exist. i. The risk that a material misstatement that could occur will not be prevented or detected on a timely basis. j. A financial statement assertion that is probable of misstatement given the nature of the further audit procedures performed. k. A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. l. A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially or immaterially misstated. m. An attitude that includes a questioning mind, and a critical assessment of audit evidence. n. An attitude that includes a subjective mind and a detailed assessment of audit evidence. o. Every assumption relating to a significant financial statement assertion. p. As related to an accounting estimate, an assumption for which a reasonable variation would materially affect the measurement of that accounting estimate.

a. availability bias b. anchoring bias c. confirmation bias d. no term applies e. no term applies f. audit evidence g. no term applies h. no term applies i. control risk j. no term applies k. relevant assertion l. no term applies m. professional skepticism n. no term applies o. no term applies p. significant assumption

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. a. The risk of material misstatement is composed of the three components of audit risk. b. Inherent risk is the possibility of material misstatement before considering the client's internal control. c. Less control risk means an increase in the risk of material misstatement. d. Detection risk does not exist when no audit is performed. e. Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it. f. Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk. g. Audit risk refers to the possibility that the auditors may express an inappropriate opinion on financial statements that are materially or immaterially misstated. h. Both inherent risk and control risk exist independently of the audit of financial statements.

a. incorrect b. correct c. incorrect d. correct e. incorrect f. correct g. incorrect h. correct