Audit Exam 2

For all audits of financial statements filed with the Securities and Exchange Commission, which of the following is required?

A quality review (i.e., second) audit partner.

Which of the following statements is not correct about materiality?

An auditor considers materiality for the f/s as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the f/s.

Which of the following statements best describes an auditor's responsibility to detect errors and fraud?

An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the f/s

Which of the following types of audit evidence is the most persuasive?

Bank statements obtained from the client.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement 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.

Which of the following risks is entirely controlled by the auditor?

Detection Risk

In the audit risk model, if an audit team wanted to keep audit risk at a low level, but there was high inherent risk and high control risk, then audit procedures would need to be designed so that:

Detection risk was set at a low level.

During the initial planning phase of an audit, the auditor most likely would:

Discuss the timing of the audit procedures with the client's management.

Physical observation by an audit team would include:

Examination of securities certificates.

Inherent risk and control risk differ from detection risk in that they:

Exist independently of the f/s audit.

Analytical procedures are considered to be "soft" evidence and therefore considered ineffective.

False

Audit care and attention should be greater where business and inherent risks are judged to be lower.

False

Auditors usually choose separate measures of materiality for each financial statement account.

False

Auditors usually prepare an audit plan that summarizes the preliminary analytical review and the materiality assessment.

False

Audits are designed to always detect material and immaterial fraud in financial statements.

False

Detection risk occurs when internal control activities fail to detect material misstatements.

False

Engagement letters are not necessary for continuing clients

False

Frauds are unintentional misstatements or omissions of accounts or disclosures in financial statements.

False

The auditing profession official standard for an acceptable level of overall audit risk is 0.05 at the current level.

False

The concept of materiality emphasizes the accountants' and managers' point of view, not the users' point of view.

False

The demographics of white-collar criminals are similar to typical armed- bank robbers.

False

The nature of extended procedures for fraud detection is limited to those listed in the Professional Standards and Practices for Certified Fraud Examiners.

False

Which of the following is always necessary in a f/s audit? I.Tests of the operating effectiveness of controls II.Analytical procedures III.Risk assessment procedures

II and III

The risk that material misstatements have occurred in transactions entering the accounting system is:

Inherent Risk

Auditing standards do not require that documentation show that:

It conforms to the AICPA model work papers for an audit.

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:

It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.

The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with:

Knowledge necessary for risk assessment and audit planning.

Which of the following matters generally is included in an auditor's engagement letter?

Management's responsibility for the fair presentation of the financial statements

Steps to be taken to determine whether to accept a new client would likely not include which of the following procedures?

Obtain written representation from the client concerning collectability of accounts receivable.

In general, a fraudulent company will prepare financial statements that are materially misleading in which of the following manners:

Overstating revenues and assets

Which of the following is not an example of early information-gathering activities at the client?

Preparing a time budget for the audit team.

In the planning stage, analytical procedures are not used to:

Review the overall quality of the audit process and the evidence gathered.

Audit documentation should:

Show that the accounting records agree or reconcile with the financial statements.

Inherent risk is not a characteristic that is determined by:

Substantive procedures completed.

Which of the following is used to maintain control of the audit and ensure that it is completed on a timely basis?

Time Budget

Analytical procedures are used in planning stages:

To assess the reasonableness of financial statement amounts and helps direct attention to possible problem areas.

A first-time audit typically requires more work than a repeat engagement.

True

A major reason for thinking about overall materiality at the planning stage is to try and "fine-tune" the audit for effectiveness and efficiency.

True

A quality review (i.e., second) audit partner is required for audits of financial statements filed with the SEC.

True

An important element of a public accounting firm's system of quality control is the decision about client acceptance and retention.

True

Audit procedures are intended to enable auditors to conduct work in accordance with the performance principle.

True

Audit risk (AR) is a quality criterion based on professional judgment.

True

Auditing standards require that analytical procedures be applied in the planning stages of each audit.

True

Auditors are generally left without definitive, quantitative guidelines for determining materiality.

True

Auditors discuss two general types of procedures in the audit plan, one set of procedures are designed to obtain evidence about internal control effectiveness, and the other set of procedures are for obtaining evidence about the amounts on the financial statements and disclosures.

True

Auditors look for relationships that do not make sense as indicators of problems in the accounts and use such indicators to plan further audit work.

True

Control risk should not be assessed so low that auditor's place complete reliance on controls and do not perform any other audit work.

True

Fraud consists of knowingly making material misrepresentation of fact, with the intent of inducing someone to believe the falsehood and suffer a loss.

True

Generally, fraudulent financial statements show financial performance and ratios that are better than current industry experience.

True

Knowledge and understanding of a client's business is absolutely essential in completing an audit.

True

Knowledge of the client's business from preliminary analytical procedures can help auditors identify problem areas and make risk assessments.

True

The audit risk model assumes that elements of audit risk are independent, and therefore multiplicative.

True

The most important facet of the current audit evidence files is the requirement that they show the auditor's decision-making process and conclusions reached.

True

When management can exercise discretion over an accounting treatment, auditors tend to exercise more care and use a more stringent materiality criterion.

True

An audit engagement letter should normally exclude the following matter of agreement between the public accounting firm and the client?

Type of opinion to be produced.

The objective of performing analytical procedures in planning an audit is to identify the existence of:

Unusual transactions and events.

The time reports are recorded by budget categories for all the following purposes except for:

a)Compiling a record for billing the client for the audit engagement. b)Providing evidence that the audit plan was satisfied. (This one) c)Evaluating the efficiency of the audit team members on an engagement. d)Compiling a record for planning the next year's audit.

The concept of materiality is used by auditors as a guide to:

a)Evaluating the evidence. b)Planning the nature and extent of audit procedures to be completed on an engagement. c)Making decisions about the audit report

The major cycles that auditors typically group accounts by include:

a)Production and conversion. b)Finance and investment. d)Revenue and collection.