Audit Exam 2

in a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. which of the following statements explains the increased inventory turnover ratio?

gross profit percentage decreased

which of the following best characterizes an auditor's exercise of professional skepticism?

having an attitude that includes a questioning mind

which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

inability to generate cash flows from operations while reporting substantial earnings growth

Fraud triangle

incentive(pressure), opportunity, rationalization(attitude)

Fraud Diamond

incentive, opportunity, rationalization, capability

Difference between and error and fraud

intent

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

internal controls during the remaining period are effective

Negative confirmation

is a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information in the request

most likely to be understated

liabilities, expenses

which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

management had frequent disputes with the auditor on accounting matters

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

management places substantial emphasis on meeting earnings projections

tracing forward

from source documents to journal entries provides evidence of completeness

if the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:

accounting records to the source documents

the accounts receivable turnover for year 4 was 5.0 times. what were lore's year 4 sales? Accounts Rec Beg Yr 20000 Accts Rec End Yr 25000

$105,000

Hierarchy of audit evidence

-auditor's direct personal knowledge -external evidence -internal evidence -oral evidence

Curry quick ratio? current liabilities 1,000 cash 300 accounts rec 1,200

1.5

What was cowl's return on assets for Year 4?

6%

Audit risk model

AR = IR x CR x DR

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

exist independently of the financial statement audit

which of the following statements concerning audit evidence is correct?

a client's accounting data cannot be considered sufficient audit evidence to support the financial statements

at Dec 30, Year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. on Dec 31, Year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Current ratio: increased Quick ratio: decreased

an auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. this may indicate that:

fictitious credit sales have been recorded during the year

which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?

a large number of bearer bonds on hand

vouching backward

form journal entries to source documents provides evidence of existence

Positive confirmation

a request that the confirming party respond directly to the auditor by providing the requested information or by stating that the party agrees or disagrees with the information in the request

in testing the existence assertion for an asset, an auditor ordinarily works from the:

accounting records to the supporting evidence

which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?

accounts payable as a percentage of total liabilities of 25 percent, compared to 35 percent for the prior period

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 financial statements

what is the definition of fraud in an audit of financial statements?

an intentional act that results in a material misstatement in financial statements that are the subject of an audit

Most likely to be overstated

assets, revenues

the acceptable level of detection risk is inversely related to the:

assurance provided by substantive tests

What is audit risk

audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated

in analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?

balance sheet

which of the following evidence provides the greatest assurance of reliability?

bank statement

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

bank statements obtained from the client

how would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement?

by assigning more experienced staff or those with specialized skills to high-risk areas.

which fo the following types of audit evidence generally is the most reliable?

confirmation of account information

to measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

cost of goods sold

which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

cost of goods sold/average inventory

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

three elements of audit procedures

nature, extent, timing (NET)

which fo the following pairs of accounts would be analyzed together in the audit documentation?

notes receivable and interest income

lore would use which of the following to determine the days in inventory

numerator: ending inventory denominator: cost of goods sold divided by 365

in determining whether transactions have been recorded, the direction of the audit testing should be from the:

original source documents

as the acceptable level of detection risk decreases, an auditor may:

postpone the planned timing of substantive tests from interim dates to the year-end

an auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?

requesting that management more closely monitor the inventory function

What is the inherent risk

risk of material misstatement occurring in an assertion before considering clients internal controls

Control risk

risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company's internal control

detection risk

risk that the auditor's procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist

which of the following evidence provides the least assurance of reliability?

sales invoice

which of the following documents are examples of audit evidence generated by the client?

shipping documents and receiving reports

as the acceptable level of detection risk decreases, the assurance directly provided from:

substantive tests should increase

What is meant by sufficient and appropriate evidence

sufficient refers to the quantity of audit evidence, appropriateness must be reliable and relevant, depends on it being pertinent, objective, timely, and corroborated by other evidence

which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

supporting accounting records and files that should be readily available are not produced promptly when requested

under which of the circumstances would an auditor be most likely to perform substantive tests before the balance sheet date:

the account in question has very little activity from year to year

the accounts receivable turnover ratio increased significantly over a two-year period. this trend could indicate that:

the company is more aggressively collecting customer accounts

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

the current year's payroll expense with the prior year's payroll expense

which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

the entity's industry is experiencing declining customer demand

an auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

there was an improper cutoff of sales at the end of the year

as the acceptable level of detection risk increases, an auditor may change the:

timing of substantive tests from year-end to an interim date

which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

transactions selected for testing are not supported by proper documentation

Why is there audit risk

you cannot audit everything, inherent risk, reasonable not absolute assurance