Audit Exam 2
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
Accounts receivable
The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may
Allow the internal auditor to perform tests of internal controls
The reasonableness tests used to gain an understanding of financial statements accounts and relationships
Analytical procedures
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?
Analytical procedures have revealed no unusual or unexpected results
Which of the following is not a way in which auditors use the concept of overall materiality?
As a guide for assessing control risk.
It is acceptable under GAAS for an audit team to:
Assess Risk of Material Misstatement at high and achieve an acceptably low audit risk by performing extensive detection work.
Which of the following statements best describes auditors' responsibility to detect errors and frauds?
Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements
Which of the following is NOT a benefit claimed for the practice of determining materiality of the initial planning stage of an audit?
Being able to decide early what type of audit opinion to issue
The risk that results from significant conditions, events circumstances, actions, or inaction that could adversely affect a company's ability to achieve its objectives and execute its strategies as well as from setting inappropriate objectives and strategies or from changes or complexity in the company's operations or managements
Business risk
Failure to meet company objectives is a result of
Business risk.
The revenue cycle of a company generally includes which accounts?
Cash, notes payable, and capital stock
Enterprise Risk Management is the responsibility of:
Company Management
Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?
Compare financial information with nonfinancial operating data.
Which of the following analytical procedures most likely would be used during the planning stage of an audit?
Comparing current-year to prior-year sales volumes.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:
Completeness
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:
Completeness
Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"?
Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.
To test the operating effectiveness of a control, an audit team might use a combination of each of the following test EXCEPT for
Confirmation of balances
Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the
Current file audit documentation
Scan expense accounts for credit entries
Document inspection (scanning)
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?
Evidence of a conservative systematic bias
An auditor's permanent file audit documentation most likely will contain
Excerpts of the corporate charter and bylaws
Confirmations of accounts receivable provide evidence primarily about which two assertions?
Existence and rights and obligations
When auditing the existence assertion for an asset, auditors proceed from the
General ledger back to the supporting original transaction documents
Which of the following procedures would most likely be performed during planning?
Identifying related parties
Complete an internal control questionnaire.
Inquiry and written representations
Verify existence of fixed assets by locating them.
Inspection of tangible assets
With respect to the concept of materiality, which of the following statements is correct?
Materiality is a matter of professional judgment
Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
The most important fundamental component of an entity's internal control is
People who operate the control system
Which of the following procedures would a CPA most likely perform in planning a financial statement audit
Perform cutoff tests of cash receipts and disbursements
Effectiveness of audit procedures would be reduced by
Performing procedures during the interim period as opposed to at the fiscal year-end date
Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?
Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis
Spreadsheet software would be most useful for which of the following audit activities?
Preparing a comparison of current-year expenses with those from the previous year
Analytical procedures are generally used to produce evidence from:
Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.....Analytical procedures incorporate information from a variety of sources.
Auditing standards do not require auditors of financial statements to
Report all errors and frauds found to police authorities
Auditing Standards do not require auditors of financial statements to
Repot all errors and frauds found to police authorities
Which of the following engagement planning procedures would most likely assist the auditor in identifying related-parties transactions before the balance-sheet date?
Scanning the minutes for significant transactions with members of the board of directors
An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?
Schedules and analyses to be prepared by the client's employees
Which of the following is a preventive control?
Separation of duties between the payroll and personnel departments
An audit plan contains
Specifications of procedures the auditors believe appropriate for the financial statements
An Audit Strategy contains:
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
The risk of material misstatements is composed of which audit risk components?
The Risk of Material Misstatements (RMM) is composed of: Inherent Risk and Control Risk
When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?
The auditors' judgment about their independence with regard to the client
Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?
The discovery of unexplained payments made to government employees.
Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?
The integrity of entity's management is suspect.
In the preparation of an audit plan, which of the following items is not essential?
The preparation of a budget identifying the costs of resources needed
When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report?
The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
There will be a client-imposed scope limitation
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They typically use financial and nonfinancial data aggregated at a high level
While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?
Use more experienced audit team members to perform year-end testing.
A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to
Utilize the speed and accuracy of the computer
One of the typical characteristics of management fraud is
Victimization of investors through the use of materially misleading financial statements
an auditor assess control risk because it:
affects the level of detection risk that the auditor may accept
When initiating communications with predecessor auditors, prospective auditors should expect:
all of the above
Which of the following communications is most likely to be written before the balance sheet date?
an engagement letter
Study predictable financial information patterns (e.g., ratio analysis).
analytical procedures
compare financial information to industry statistics
analytical procedures
compare financial information with budgets and forecasts
analytical procedures
compare financial information with that of prior periods
analytical procedures
study financial information in relation to non financial information
analytical procedures
compared monthly revenue data by month to comparable prior periods and investigated unusual fluctuations
analytical procedures - substantive procedures
The subset of a company's board of directors composed of outside members (those not involved in the day-to-day operations of the company) who can provide a buffer between the audit firm and management
audit committee
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
during the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. the fraudulent transactions can be adjusted so the statements are not materially misstated.
communicate the matter to those charged with governance
Enterprise risk management is the responsibility of:
company management
analytical procedures at the end of the audit help confirm the _______ reached
conclusions
Obtain accounts receivable confirmations.
confirmation
Obtain client's lawyer's letter.
confirmation
requested the bank to respond to the audtior with the client's account balance
confirmation - substantive procedures
Analytical procedures have revealed no unusual or unexpected results
consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
The probability that the client's internal control activities will fail to prevent or detect material misstatements provided that they enter or would have entered the accounting system
control risk
According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:
designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention.
the probability that audit procedures will fail to produce evidence of material misstatements, provide any have entered or would have entered the accounting system and have not been prevented or detected and corrected by the clients control activity
detection risk
An audit team uses the assessed risk of material misstatement to:
determine the acceptable level of detection risk for financial statement assertions.
the violations of laws or government regulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements
direct-effect noncompliance
Scan payroll check lists for unusually large checks.
document inspection (scanning)
Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger
document inspection (tracing)
Find brokers' invoices and cancelled checks showing agreemenr with record amounts for securities investments
document inspection (vouching)
often, analytical procedures are considered the most ______ procedures for a strong understanding of the client and its business
efficient
A type of fraud involving employees or non employees wrongful taking money or property entrusted to their care, custody , and control, often accompanied by false accounting entries and other forms of lying and cover-up
embezzlement
Analytical procedures used in planning an audit should focus on:
enhancing the auditor's understanding of the client's business.
An engagement letter is used primarily to:
ensure a clear contractual understanding of the services to be provided by the CPA.
The unintentional misstatements or omissions of amounts or disclosures in financial statements
errors
The audit procedures used in response to heightened fraud awareness as the result of the identification of significant risks
extended procedures
when an auditor increases the assessed level of control rick because certain control activities were determined to be ineffective, the auditor would most likely increase the:
extent of test of details
the comparative analysis of year-to-year changes in balance-sheet and income-statement accounts
horizontal analysis
If an auditor encounters significant risks at the client, the auditor should do all of the following except:
inform the SEC.
the probability that the information circulated by an entity will be false or misleading
information risk
the probability that in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements.
inherent risk
asked management to describe any potential or actual legal actions, the probability of an unfavorable outcome, and the amount or range of potential loss for each legal action
inquiry - substantive procedures
ask client personnel about accounting events
inquiry and written representations
obtain written client representation letter
inquiry and written representations
if an auditor of an issuer purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting
inspection
reviewed board of director minutes for authorized of new debt financing
inspection - test of controls
in a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that:
involves an estimate
which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer
it is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles
observe a test counting of client's physical inventory taking
observation
watched the payroll distribution on an unannounced basis
observation - test of controls
Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should:
obtain knowledge of matters that relate to the nature of the entity's business.
In determining whether transactions have been recorded, the direction of the audit testing should start from the:
original source documents.
in an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?
perform substantive procedures for all relevant assertions related to each material class of transactions
in an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. under these circumstances, the auditor most likely would
perform tests of controls to support a lower level of assessed control risk
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
prior to, or in conjunction, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatment due to fraud. Which of the following best characteristics the mind-set that the auditor discussion
questioning
part of performing analytical procedures involves considering ______
ratios
recompute the client's calculation of depreciation expense
recalculation
computed the amount of depreciation expense based on the book value, company' policy for depreciation, and estimated economic life and agreed the amount to the financial statements
recalculation - substantive procedures
Analyze valuation of receivables by re-aging them by due date.
reperformance
selected various voucher packages that had been approved and matched the invoice, purchase order, and receiving report
reperformance - test of controls
auditing standards ________ analytical procedures at the planning and concluding stages of the audit
require
an audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statement, how should the audit team address the audit procedures to the increased risk?
review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year
Generally accepted auditing standards states that analytical procedures:
should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.
A risk of material misstatement that requires special audit consideration. Fraud risk is always considered significant risk
significant risk
analytical procedures can also be used as ______ procedures in testing
substantive
which of the following circumstance most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statemetns?
supporting accounting records and files that should be readily available are not produced promptly when requested
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:
the client does not take the remedial action that the auditor considers necessary.
to be effective, analytical procedures in the overall review stage of the audit engagement should be performed by
the manager of partner who has comprehensive knowledge of the client's business and industry
the common-size analysis of financial statement amounts created by expressing amounts as proportions of a common base such as sales for the income-statement accounts or total assets for the balance-sheet accounts
vertical analysis
Generally accepted auditing standards require that auditors always prepare and use:
written audit plan