Audit Chapter 6

The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

(1) Trace from source documents to journals.

The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

(2) Vouch from journals to source documents.

Which of the following topics is not normally included in an engagement letter? The auditors' responsibilities with respect to the audit. A request that the client sign a copy of the letter. Client responsibilities regarding the audit. A schedule of individual audit team member billing rates.

A schedule of individual audit team member billing rates.

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 is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the auditors. Arrange to provide the client with copies of the audit plans to be used during the audit. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. Arrange to have the auditors prepare and post any necessary adjusting or reclassification entries prior to final closing.

Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Representations by management that are communicated, explicitly or implicitly, in the financial statements.

Assertions

Which of the following is a basic tool used by the auditors to control the audit work and review the progress of the audit? Time and expense summary. Engagement letter. Progress flowchart. Audit plan.

Audit Plan

A description of the nature, timing, and extent of the audit procedures to be performed.

Audit plan

At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated.

Audit risk

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.

B) Detection Risk.

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 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.

A risk that threatens management's ability to achieve the organization's objectives.

Business risk

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.

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.

Tracing from source documents to journals most directly tests: Completeness (understatements). Existence (overstatements).

Completeness (understatements).

Which of the following is the best example of a substantive procedure? Examining a sample of cash disbursements to test whether expenses have been properly approved. Confirming balances of accounts receivable. Comparing signatures on checks to a list of authorized check signers. Flowcharting a client's cash receipts system.

Confirming balances of accounts receivable.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? Decrease the use of professional skepticism and increase the use of internally generated evidence. Use predictable, well established audit procedures. Consider further management's selection and application of significant accounting principles. Supervise members of the audit team less closely and rely more upon judgment.

Consider further management's selection and application of significant accounting principles.

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.

Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud? Are financial reporting operations controlled by and limited to one location? Does it have knowledge of fraud or suspect fraud? Has the possibility of management override been assessed? Does the company have insurance against all forms of fraud?

Does it have knowledge of fraud or suspect fraud?

The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2). Either (1) or (2). (if transaction is recorded, testing in either direction will address recording for the proper amount—valuation)

Either (1) or (2).

The purpose of this document is to avoid misunderstandings between the auditors and the client.

Engagement letter

Vouching from journals (or ledgers) to source documents most directly tests: Completeness (understatements). Existence (overstatements).

Existence (overstatements).

Auditors should never spend more time on an audit than is called for in a conscientiously developed time budget. True False

False

CPAs cannot ethically refuse to provide auditing services to any prospective client which the CPAs are competent to audit, if the prospective client is willing to pay the CPAs' standard audit fees. True False

False

The risk of material misstatement of an assertion about an account without considering internal control.

Inherent risk

Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: adequacy of the preplanned audit plan. ability to establish consistency in application of accounting principles between years. apparent scope limitation. integrity of management.

Integrity of management

Which of the following risk factors indicates an increased risk of misappropriation of assets? High turnover of senior management. Strained relationships between management and auditors. Overly complex organizational structure. Lack of mandatory vacations for employees performing key functions.

Lack of mandatory vacations for employees performing key functions.

An identified risk that requires special audit consideration.

Significant risk

Which of the following is least likely to be considered a risk assessment procedure in a financial statement audit? Analytical procedures. Inquiries of management. Observation and inspection relating to client activities. Tests of controls.

Tests of controls

Which of the following statements is not correct regarding the auditor's determination of materiality? It is the smallest amount of misstatement that would probably influence the judgment of a reasonable person relying upon the financial statements. Auditing standards require auditors to consider materiality in planning the audit. The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement. The appropriate financial statement base for computing materiality may vary based on the nature of the client's business.

The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement.

Which of the following is correct concerning audit plans? Plans are required for public company audits, but not for non-public company audits. They are often revised throughout the audit. It is essential that the audit engagement team perform every audit step. They are generally less detailed than are audit engagement letters.

They are often revised throughout the audit.

An estimate of the time required to perform each step in the audit.

Time budget

Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement? Prepare a rough draft of the financial statements and of the auditors' report. Consider internal control. Tour the client's facilities and review the general records. Consult with and review the work of the predecessor auditors prior to discussing the engagement with the client management.

Tour the client's facilities and review the general records.

A documented audit plan is required on all audits. True False

True

An engagement letter represents a written contract between the auditors and the client. True False

True

Tests of controls are designed to determine whether the client's controls are operating effectively. True False

True

An audit committee's responsibilities normally would not include: discussing the meaning and significance of audited financial statements. discussing problems and experience with independent auditors in completing the audit of annual financial statements. nominating the independent auditors. discussing all details of the audit plans of the independent auditors.

discussing all details of the audit plans of the independent auditors.

The portions of the auditors' audit plans relating to internal control are generally organized around the: major transaction cycles. substantive procedures. analytical procedures. inherent risk assessment.

major transaction cycles.

A successor auditor should attempt communication with a predecessor auditor: prior to accepting the engagement. after the engagement has been accepted. both prior to acceptance of the engagement and after the engagement has been accepted. is not required to do so.

prior to accepting the engagement.