ACCY 131 Ch. 6

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? A) Are financial reporting operations controlled by and limited to one location? B) Does it have knowledge of fraud or suspect fraud? C) Does it have programs to mitigate fraud risks? D) Has it reported to the audit committee the nature of the company's internal control?

A) Are financial reporting operations controlled by and limited to one location?

Tracing from source documents to journals most directly addresses which financial statement assertion? A) Completeness. B) Existence. C) Valuation. D) Rights.

A) Completeness.

Which statement best describes the interaction of the systems and substantive approaches in the audit plan? A) The systems approach focuses on testing controls to make sure they are effective, while the substantive approach is the detailed testing of specific accounts for accuracy. B) The systems approach focuses on detailed testing of specific accounts for accuracy, while the substantive approach is the testing controls to make sure they are effective. C) The systems approach focuses on the use of computer systems to aid in the audit while the substantive approach focuses on more manual tests. D) A thoroughly designed systems approach to auditing can eliminate the need for any substantive procedures.

A) The systems approach focuses on testing controls to make sure they are effective, while the substantive approach is the detailed testing of specific accounts for accuracy.

Which of the following best describe what is meant by the term "fraud risk factor"? A) Factors that, when present, indicate that risk exists B) Factors often observed in circumstance where frauds have occurred C) Factors that, when present, require modification of planned audit procedures D) Weakness in internal control identified during an audit

B) Factors often observed in circumstance where frauds have occurred

Which of the following is most likely to be presumed to represent a fraud risk on an audit? A) Capitalization of repairs and maintenance expense into the property, plant and equipment asset account. B) Improper revenue recognition. C) Improper interest expense accrual. D) Introduction of significant new products.

B) Improper revenue recognition.

In which circumstance would a CPA be most likely to decline to accept a new audit engagement? A) Management acknowledges that the entity has had recurring operating losses. B) Management is unwilling to permit inquiry of its legal counsel. C) The CPA does not understand the entity's operations and industry. D) A predecessor auditor exists.

B) Management is unwilling to permit inquiry of its legal counsel.

Prior to beginning fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? A) The appropriateness of the entity's plans for dealing with adverse economic conditions. B) The coordination of the assistance of the client's personnel in data preparation. C) The control weaknesses to be included in the communication with the audit committee. D) The determination of the fraud risk factors that exist within the client's operations.

B) The coordination of the assistance of the client's personnel in data preparation.

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

B) Use less predictable audit procedures

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

B) Use less predictable audit procedures.

An engagement letter is best described as which of the following? A) A letter from company management to the auditors specifying management's expectations for completion of the audit on a timely basis and the fees. B) A letter from the auditors to company management specifying that management is responsible for the financial statements, and the auditors will issue an opinion on the financial statements. C) A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion. D) A letter from the Board of Directors' audit committee to the auditor that indicates the auditor has been engaged to perform the audit and the fees to be paid.

C) A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion.

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

C) An unreliable accounting system

B&M auditors have been accepted as the auditors of World Wide Widgets (3W). What are B&M's responsibilities with regard to contacting 3W's predecessor auditors? A) If 3W had a disagreement with its predecessor auditors, B&M should not contact the predecessor auditors. B) B&M is not required to attempt communication with the predecessor auditors under any circumstances. C) B&M should attempt communications with the predecessor auditors and ask if they had any accounting policy disagreements with 3W. D) It would be unethical for B&M to ask the predecessor auditors about the integrity of 3W's management.

C) B&M should attempt communications with the predecessor auditors and ask if they had any accounting policy disagreements with 3W.

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

C) Detect material misstatements in the financial statements

Which of the following element underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? A) Adequate disclosure B) Quality control C) Materiality and audit risk D) Client acceptance

C) Materiality and audit risk

Which portion of an audit is least likely to be completed before the balance sheet date? A) Test of controls B) Issuance of an engagement letter C) Substantive procedures D) Assessment of control risk

C) Substantive procedures

Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions A) Incentive or pressure B) Opportunity C) Supervisory postion D) Attitude

C) Supervisory postion

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

D) A listing of the client's branch offices selected for testing

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 A) Business risk B) Engagement risk C) Control risk D) Detection risk

D) Detection risk

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

D) Facts that might bear on the integrity of management

Which of the following is least likely to be required on an audit? A) Test appropriateness of journal entries and adjustment. B) Review accounting estimates for biases C) Evaluate the business rationale for significant, unusual transactions. D) Make a legal determination of whether fraud has occurred.

D) Make a legal determination of whether fraud has occurred.

Materiality can best be described as which of the following? A) Materiality is typically measured as a fixed percentage of assets. B) Materiality is typically measured as a fixed percentage of net income. C) Materiality does not depend on the company being audited, but is solely dependent on the auditors discretion. D) Materiality is the amount at which judgments based on the financial statements may be altered.

D) Materiality is the amount at which judgments based on the financial statements may be altered.

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

D) Members of the board of directors who are not officers or employees

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: A) Each recorded sales represents a bona fide transaction B) All sales have been recorded in the sales journal C) All debit entires in the accounts receivable subsidiary ledger are properly supported by sales journal entries D) Recorded sales have been properly posted to customers accounts

D) Recorded sales have been properly posted to customers accounts

Adequate planning and design of an audit is necessary for an auditor to restrict which type of audit risk? A) Control Risk. B) Detection Risk. C) Sufficiency Risk. D) Inherent Risk.

Detection Risk.