Audit Exam 2

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in

A more efficient matter

Which of the following would not necessarily be a related party transaction?

A sale to another corporation with a similar name.

Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

Additional audit procedures are required.

When should the auditor most likely prepare the audit plan?

After development of the overall audit strategy

Which of the following would least likely appear in an auditor's engagement letter?

After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement

Which of the following is required documentation in an audit in accordance with the auditing standards?

An audit plan documenting the procedures used to reduce audit risk

Analytical Procedures

An overall review of the financial statements at the end of the audit to asses whether they are consistent with the auditor's understanding of the entity

Which of the following statements about analytical procedures is true?

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

The acceptable level of detection risk is inversely related to the

Assurance provided by the substantive procedures

Audit Risk Model

Audit Risk Model = Inherent Risk * Control Risk * Detection Risk

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion?

Auditor judgment.

The most reliable forms of documentary evidence are those documents that are

Authorized by a responsible official

Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true?

Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft

If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors'

Competence and objectivity

Which of the following factors would most likely cause an auditor to not accept a new audit agreement?

Concluding that the entity's management probably lacks integrity

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Consider the possibility of a misstatement in the financial statements.

Which result of an analytical procedure suggests the existence of obsolete merchandise?

Decrease in the inventory turnover rate.

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the

Difficulty and cost involved in testing a particular item.

When normal confirmation of significant receivables is not feasible, the auditor must

Document how (s)he overcame the limitation if an unmodified opinion is expressed

One of the primary roles of an audit plan (program) is to

Document the engagement's objectives, scope, timing, and resource allocation

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business?

Earnings per share.

The scope and nature of an auditor's contractual obligation to the client is ordinarily set forth in the

Engagement letter

Some account balances, such as those for pensions and leases are the result of complex calculations. The susceptibility to material misstatement in these types of accounts is defined as

Inherent Risk

Which of the following steps should an auditor perform first to determine the existence of related parties?

Inquire about the existence of related parties from management.

Substantive Procedures

Intended to create evidence that an auditor assembles to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of the financial records of the entity

Which of the following is not considered an auditor's specialist?

Internal auditor

The auditor's audit documentation related to confirmations noted that negative confirmations were used because

Internal control was strong and many small balances were involved.

Which of the following events most likely indicates the existence of related parties?

Making a loan without scheduled terms for repayment of the funds.

An auditor's engagement letter most likely will include

Management's acknowledgment of its responsibility to maintaining effective internal controls

Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Company has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one of the account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of

Materiality

As the acceptable level of detection risk decreases, an auditor may change

Nature of substantive procedures from a less effective to a more effective procedure

Most of the auditor's work in forming an opinion on financial statements consists of

Obtaining and evaluating audit evidence.

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions.

Which of the following statements about materiality is most likely to be true?

Performance materiality is less than materiality for the financial statements as a whole

Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive procedures?

Relationships involving income statement accounts.

In gathering evidence in the performance of substantive procedures, the auditor most likely

Relies on persuasive rather than conclusive evidence in the majority of cases.

This concept of materiality with respect to the financial statement auditing

Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial statements

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.

Analytical procedures can best be categorized as

Substantive procedures

Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should

Suggest that the auditor obtain the client's permission to discuss the reasons.

Performance Materiality

The amount or amounts set by the auditor at less than materiality for the financial statements as a whole. to reduce to an appropriately low level the probability that the. aggregate of uncorrected and undetected misstatements exceeds. materiality for the financial statements as a whole.

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

The applicability of the same confidentiality requirements to the auditor and the specialist.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

The auditor cannot infer that all nonrespondents have verified their account information.

When a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

Which of the following statements is true about related party transactions?

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

Which of the following statements is true about the use of the work of an auditor's specialist?

The auditor should obtain an understanding of the methods and assumptions used by the specialist.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgement about materiality for the financial statements as a whole?

The entity's year-to-date financial results and positions

Planning Materiality

The expected maximum aggregate value of all identified and unidentified misstatements that an auditor can tolerate without affecting the audit opinion, given the maximum desired level of audit risk

The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true?

The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditors belief that the financial statements as a whole are not materially misstated.

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

The relationship between financial statement assertions and audit procedures should be one-to-one.

Control Risk

The risk that a misstatement may not be prevented or detected and corrected due to a weakness in the entity's internal control mechanism

Audit Risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Detection Risk

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, individually or in combination with other misstatements

Which of the following is correct regarding the communication between successor and predecessor auditors?

The successor auditor should request permission from the prospective client to make an inquiry of the predecessor audit

Inherent Risk

The susceptibility of an assertion to a material misstatement before consideration of the related internal controls

Which of the following statements is true concerning an auditor's use of the work of a specialist?

The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except

Tracing transactions through the system to determine whether procedures are being applied as prescribed.

Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purposes of analytical procedures?

Whether the data were processed in a computer system or in a manual accounting system.

Valuation Assertion

o All financial statements are recorded with the proper value o Physically examining inventory for proper valuation o Evaluating accounts receivable aging to determine if outstanding balance will be paid

Accuracy Assertion

o Auditors confirm accurate calculations, reconciliation, and other transactions o Reviewing internal controls

Classification Assertion

o Confirmation that appropriate amounts have been allocated o Varying special exceptions to applied to various transactions o Appropriate disclosures

Understandability Assertion

o Confirmed all information to contextualize financial statements is present o Verifying financial statements are formatted for accessibility, readability, and clarity

Existence Assertion

o Confirming the existence of physical inventory o Confirmed accounts receivable balances o Examining bank statements to ensure reported cash flows exist

Occurrence Assertion

o Cross-checking accounts receivable balances with sales records o No payroll records include unauthorized amounts o Confirmed transaction are directly connected to the transaction they are recorded to

Rights and obligations Assertion

o Verifying banks accounts actually belong to the company being audited o Confirming ownership of assets o Outstanding liabilities are the obligations of business and not the business owner

Completeness Assertion

o Verifying salaries and wages are fully recorded in the proper accounts o Comparing inventory levels to sales data to confirm inventory is properly recorded o Examine bank statements

Cut-off Assertion

o Verifying that transactions are recorded in the correct period