Audit Theory Test #3

Which assertion does reperformance satsify?

*** NONE, just test of CONTROLS ***

What makes up the overall response when it comes to fraud risks?

- Adjust professional skepticism and audit evidence -Adjust personnel assigned and supervision -Adjust scrutiny given to accounting principles -adjust predictability of auditing procedures

When may analytical procedures be used?

- Beginning and end - for substantive testing

What topics are discussed in communicating with the predecessor auditor?

- Integrity of mgt - Disagreements over acct principles - Communications to those charged with governance -Communication to mgt concerning internal control significant deficiencies and material weaknesses -Predecessor's understanding of reason for change of auditors

What is an example of cutoff review?

- Year end transactions for cash, inventory, purchases and accruals

Which assertion does cutoff review satisfy?

- cutoff (duh)

Which assertion does tracing satisfy?

-Completeness

Which assertion does examination and inspection satisfy?

-Existence -Maybe Rights and obligations

Which assertion does auditing simultaneously satisfy?

-completeness -valuation

Which assertion does observation satisfy?

-existence -occurrence -Maybe completeness

What are the different general types of assertions?

1. Assertions about accounts 2. Assertions about transactions 3. Assertion about disclosures

Rank from most to least reliable: Internal External Oral evidence Direct personal knowledge

1. Auditors direct personal knowledge (observed, examined, recalc.) 2. External (Bank confirms, subsequent bank stmts) 3. Internal (Purchase orders, sales orders, G/L) 4. Oral evidence

List the 6 assertions?

1. Existence or Occurrence 2. Rights and Obligations 3. Completeness 4. Cutoff 5. Valuation, Allocation & Accuracy 6. Presentation and disclosure

What are the audit planning procedures?

1. Plan the Audit 2. Obtain an understanding of the client and its environment, including internal control 3. Assess the risks of misstatement and design further audit procedures 4. Perform further audit procedures 5. Complete the audit 6. Form an opinion and issue the audit report

What is the equation for audit risk?

AR = IR * CR * DR Audit risk = inherent risk * Control risk * detection risk

Define presentation and disclosure assertion

Accounts are described and classified in accordance with generally accepted accounting principles, and financial statement disclosures are complete, appropriate, and clearly expressed.

Define Completeness.

All assets have been recorded.

Define Completeness assertion

All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded.

Define Valuation, allocation and accuracy assertion

All transactions, assets, liabilities, and equity interests are included in the financial statements at proper amounts.

What does this describe: Representations by management that are communicated, explicitly or implicitly, in the financial statements.

Assertions

What term does this describe? d. Representations by management that are communicated, explicitly or implicitly, in the financial statements.

Assertions

Define presentation and disclosure.

Assets are properly classified.

Define valuation.

Assets are recorded at proper amounts.

Define existence or occurrence assertion

Assets, liabilities, and equity interests exist and recorded transactions have occurred.

The __________ of SEC registrants selects the company's audit firm.

Audit committee

What does this describe: A risk that threatens management's ability to achieve the organization's objectives.

Business risk

How do you change the scope of audit procedures?

By changing NET

What is the Acronym for standard audit procedures?

C (the) FIVE CARROT WARS

Define ratio analysis

Compare relationships between two or more financial statement accounts or comparisons of account balances to non-financial data

Which assertion does this describe? d. In directional testing, tracing from source documents to journals most directly addresses this assertion.

Completeness

What does the first C in C (the) FIVE CARROT WARS?

Confirmation

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. a. Inherent risk is the possibility of material misstatement before considering the client's internal control.

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. b. Detection risk does not exist when no audit is performed.

Correct

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. c. Both inherent risk and control risk exist independently of the audit of financial statements.

Correct

If Risk of MM is increased, what would detection risk be?

Decreased

What is another word for misappropriation of assets?

Defalcations

What does the E in C (the) FIVE CARROT WARS stand for?

Examination and inspection

Which assertion does vouching satisfy?

Existence

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

Existence (overstatements)

Which assertion does this describe? c. The client recorded receivables that were fictitious.

Existence and occurrence

Describe vouching?

F/s -> Supporting documentation

T/F: The risk of misstatement is the same from one engagement to the next.

False

T/F: Detection risk is assessed

False; is NOT assessed, is either REDUCED or RESTRICTED

What does the F in C (the) FIVE CARROT WARS?

Footing, cross-footing, recalculation

What is the primary challenge?

Identifying undisclosed related party transactions

State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. d. Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it.

Incorrect

If risk of MM is decreased, what would detection risk be?

Increased

What makes up the risk of material misstatement?

Inherent risk * Control risk

What does the I in C (the) FIVE CARROT WARS?

Inquiry

Which of the levels in auditing for fair value is most reliable?

Level 1

What are the various levels in applying valuation techniques in auditing fair values?

Level 1: Inputs of observable quoted prices in active markets for IDENTICAL A or L Level 2: Inputs of observable quoted prices, generally for SIMILAR A or L in active markets Level 3: Inputs that are UNOBSERVABLE for the A or L

Which of the levels in auditing for fair value is least reliable?

Level 3

How does PCAOB define materiality?

Material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altering the 'total mix' of information made available

Which professional standards topic best describes this transaction: b. The relationship between materiality used for planning versus evaluation purposes

Materiality in planning and performing an audit.

What makes audit evidence appropriate?

Must be: - Relevant - Reliable

Which assertion does the representation letter satisfy?

NONE, just written statement

What does the O in C (the) FIVE CARROT WARS stand for?

Observation (tour of business, inventory count)

Which assertion does this describe? a. The client failed to describe in the financial statements significant debt restrictions.

Presentation and disclosure

How long must workpapers be maintained in public firms, what about private firms?

Public: 7 years Private: 5 years

What does the 2nd R in C (the) FIVE CARROT WARS stand for?

Reconciliations

Which professional standards topic best describes this transaction: c. Hanmei, Inc., has transactions with the corporation president's brother

Related parties

What does sufficient mean?

Relates to the quantity

What does the first R in C (the) FIVE CARROT WARS stand for?

Reperformance (making sure IC is accurate, goes well w/ vouching)

What does the 3rd R in C (the) FIVE CARROT WARS stand for?

Representation letter (needs mgt rep letter at the END of audit; NEVER a substitute for testing)

Which assertion does this describe? e. The assertion most directly related to the question of ownership of an asset.

Rights and obligations

What term does this describe? a. An identified risk that requires special audit consideration.

Significant risk

What does the S in C (the) FIVE CARROT WARS stand for?

Subsequent events review (after BAL sheet date until the date of the REPORT)

Define tests of controls

Test the operating effectiveness of controls in preventing material misstatement

Audit procedures that are focused on the effectiveness of internal control are called __________.

Tests of controls

Define rights and obligations assertion

The company holds right to the assets, while liabilities are the obligations of the company.

Define rights and obligations.

The company legally owns the asset.

Define audit risk

The possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated.

Define Existence and Occurrence.

There is such an asset.

In what circumstances should auditors be alert for transactions with related parties?

Those with unusual terms

What does this describe: An estimate of the time required to perform each step in the audit.

Time budget

What term does this describe? b. An estimate of the time required to perform each step in the audit.

Time budget

What does the T in C (the) FIVE CARROT WARS stand for?

Tracing

What is tracing?

Tracing is directional testing. Going from the source doc TO RECORDED amounts

Define Cutoff.

Transactions are recorded in the correct accounting period.

T/F: Strong internal control will increase the reliability of certain types of evidence and reduce the overall quantity of substantive procedures performed by the auditors.

True

Which professional standards topic best describes this transaction: g. Details on considering design effectiveness of controls

Understanding the entity and its environment and assessing the risks of material misstatement

Which assertion does this describe? b. The client had a significant amount of damaged goods that were presented at cost.

Valuation or allocation

What does the V in C (the) FIVE CARROT WARS stand for?

Vouching

What is vouching?

Vouching is directional testing. Going from recorded amounts TO SOURCE docs

What does the W in C (the) FIVE CARROT WARS stand for?

Walkthrough

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? a. Trace from source documents to journals. b. Vouch from journals to source documents. c. Either (a) or (b).

a. Trace from source documents to journals.

Which of the following best describes what is meant by the term "fraud risk factor"? a. Factors that, when present, indicate that risk exists. b. Factors often observed in circumstances where frauds have occurred. c. Factors that, when present, require modification of planned audit procedures. d. Weaknesses in internal control identified during an audit.

b. Factors often observed in circumstances where frauds have occurred.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? a. Trend analysis. b. A detailed test of balance analysis. c. Ratio analysis. d. Risk analysis.

c. Ratio analysis

Which portion of an audit is least likely to be completed before the balance sheet date? a. Tests of controls. b. Issuance of an engagement letter. c. Substantive procedures. d. Assessment of control risk.

c. Substantive procedures

Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. a. Incentive or pressure. b. Opportunity. c. Supervisory position. d. Attitude.

c. Supervisory position

Which of the following is not a management assertion? a. Existence. b. Rights. c. Verification. d. Valuation.

c. Verification

The major reason auditors gather evidence is to: a. assess control risk. b. evaluate management. c. form an opinion on the financial statements. d. detect fraud.

c. form an opinion on the financial statements.

Which of the following business characteristics is not indicative of high inherent risk? a. Operating results that are highly sensitive to economic factors. b. Large likely misstatements detected in prior audits. c. Substantial turnover of management. d. A large amount of assets.

d. A large amount of assets.

Which of the following should not normally be included in the engagement letter for an audit? a. A description of the responsibilities of client personnel to provide assistance. b. An indication of the amount of the audit fee. c. A description of the limitations of an audit.. d. A listing of the client's branch offices selected for testing.

d. A listing of the client's branch offices selected for testing.

Which of the following is not a financial statement assertion made by management? a. Existence of recorded assets and liabilities. b. Completeness of recorded assets and liabilities. c. Valuation of assets and liabilities. d. Effectiveness of internal control.

d. Effectiveness of internal control

Define substantive procedures

detect material misstatements at relevant assertion level - for analytical procedures - for tests of details of account balances, transactions, and disclosures

Audit risk at the account balance level consists of three components: (1) __________, (2) control risk and (3) detection risk.

inherent risk

Define risk assessment procedures

obtain understanding of the client and its environment including internal control, to assess the risks of material misstatement.

Audit _______ begins with determining the requirements for the engagement.

planning

What does appropriateness mean?

relates to RELEVANCY and RELIABILITY and the assertion its testing

The final step of an audit is issuing the audit ________.

report

Assertions are __________ that are set forth in the financial statements.

representations of management

Performing certain audit procedures at an interim date, rather than at the balance sheet date, results in additional __________ that must be controlled by the auditors.

risk

________assessment procedures are performed when obtaining an understanding of the client.

risk

What is an example of inquiry?

sending attorney letter

Tests of balances and transactions designed to detect material misstatements are called __________.

substantive procedures (tests)

T/F: Audit evidence needs to be sufficient and appropriate

true

What should audit documentation include?

- All significant audit findings and the actions taken to address them

Which assertion does footing, cross-footing satisfy?

- Allocation & valuation

Which assertion does reconciliation satisfy?

- Allocation and valuation -accuracy

What makes up substantive procedures?

- Analytical procedures - Tests of details

What is cross sectional analysis?

- Analyze ratios of similar firms at a point in time

What is vertical analysis?

- Analyze relationships within a period - Common size statements prepared

What are the different types of working papers?

- Audit administrative working papers -Working TB -Lead schedules -Adjusting journal entries and reclassification entries -Supporting schedules -Analysis of a ledger acct -Reconciliations -Computational working papers - Corroborating documents

When are analytical procedures required?

- Beginning & end (aka in planning procedures and as a final review)

What should one do when one discovers fraud?

- Communication to appropriate level of management - If fraud involves senior management or material misstatement, communicate to audit committee.

What is done on first year audits in the planning phase?

- Communication with predecessor auditors -Establishing balances on the financial statements

Which assertion does the subsequent events review satisfy?

- Completeness - Valuation -Allocation

Which assertion does analytical procedures satisfy?

- Completeness -Valuation and allocation

What falls under auditor responsibilities?

- Conducting an audit in accordance w/ GAAS or PCAOB standards -Obtaining an understanding of internal control to plan audit and to determine the nature, timing and extent of procedures -Making communications required by auditing standards

What are the different types of audit working files?

- Current files -Permanent files

What are examples of analytical procedures?

- Current vs. past year - Vertical and horizontal analysis - Scanning R & M stuff

What documents comprise the current files?

- Current year working papers -Index and cross-referencing

What happens in overall audit planning?

- Develop an overall audit strategy and plan -Plan use of client's staff -Plan involvement of other CPAs -Arrange for specialists

What are the steps involved in analytical procedures?

- Develop expectation of acct (or ratio) balance - Determine amount of difference that can be accepted without investigation - Compare the company's account (ratio) with the expectation -Investigate and evaluate significant differences

What are procedures used to assess fraud risks?

- Discussion among engagement team -Inquiries of management and other personnel -Risk assessment analytical procedures (to aid in planning the audit)

What is documented as a part of fraud consideration?

- Discussion of audit team -Procedures used to identify fraud risks -fraud risks and responses - Any other conditions that caused fraud-related procedures -Communications with management or audit committee

When are the different times analytical procedures are performed?

- During risk assessment (aka planning analytical procedures) - During substantive procedures -At final review

What is footing, cross-footing, and recalculation?

- Electronic file and checking accuracy

What makes audit documentation sufficient?

- Enable an experienced auditor to understand the work performed and the significant conclusions reached -Identify who performed and reviewed the work -Show that the accounting agree or reconcile to the financial statements

What makes up response to the possibility of management override when it comes to fraud risks?

- Examining journal entries - Review accounting estimates for biases - Evaluating the business rationale for significant unusual transactions

What are the 2 types of fraud?

- Fraudulent financial reporting -Misappropriation of assets

How should one respond when assessed risks of material misstatement are high?

- Heightened professional skepticism - Assigning more experienced staff - Assigning staff w/ specialized skills -Providing more supervision

What are the different approaches to ratio analysis?

- Horizontal analysis -Cross sectional analysis -Vertical analysis - Other methods

What are the fraud risk factors?

- Incentives or pressure - Opportunity - Attitude or ability to rationalize (AKA Fraud Triangle)

What business characteristics that indicate high inherent risk?

- Inconsistent profitability of client - Operating results highly sensitive to economic factors - Going concern problems - Large misstatements detected in prior audits -Substantial turnover, questionable reputation or inadequate accounting skills of the accounting department

How does FASB define materiality?

- Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity

What goes into determining related parties?

- Inquiries of management - Review SEC filings, stockholder's listings and conflict-of-interest statements

What makes up risk assessment procedures?

- Inquiries of mgt and others w/in the entity -Analytical procedures -Observation & inspection relating to client activities, operations, documents, reports and premises

What are other procedures performed during risk assessment procedures?

- Inquiries of others outside the company (legal counsel, valuation experts) -Reviewing information from external sources such as analysts, banks, rating organizations, newspapers and journals

What are the different types of audit procedures?

- Inspection of records and documents - Inquiry of knowledgeable persons within or outside the entity -External confirmation - Inspection of tangible assets - Observation of processes or procedures being performed by others - Recalculation of mathematical accuracy - Reperformance of procedures - Analytical procedures

What is an example of testing for the assertion, existence or occurrence

- Inventory counting - Cash confirmations *** Occurrence is used more with liabilities ***

What are examples of auditing related accts simultaneously?

- L-T liabilities & Interest exp -R & M and Capital - Investments and dividends

What is an example of testing for the assertion, rights and obligations?

- Looking at lease purchase agreements

What is another word for fraudulent financial reporting?

- Management fraud

What makes up altering audit procedures in response to fraud risks?

- More reliable evidence -Shifting timing to year end -Increasing extent (ex: sample size)

What are the main components of the engagement letter?

- Name of entity -Management responsibilities - Auditor responsibilities

When holding the extent of procedures constant one increases the nature and timing how?

- Nature : obtain more reliable evidence - Timing: wait until year-end to obtain evidence from entire set of transactions as contrasted to performing interim testing.

What factors affect inherent risk?

- Nature of the client and its environment - Nature of the particular financial statement element

When is audit evidence is ordinarily more reliable?

- Obtained from knowledgeable independent sources OUTSIDE the company rather than non-independent sources - Generated internally through a system of EFFECTIVE controls rather than ineffective controls - Obtained DIRECTLY by the AUDITOR rather than indirectly or by inference -DOCUMENTARY in form rather than oral - Provided by ORIGINAL documents rather than copies

How do auditors respond to fraud risks?

- Overall response - Alterations in audit procedures - Response to the possibility of management override

What is documented as a part of procedure results?

- Overall responses - Nature, timing and extent of further audit procedures - Linkage of procedures with assessed risks - The results of audit procedures - Conclusions reached about operating effectiveness of controls -Significant risks identified -Circumstances in which substantive procedures alone will not provide sufficient evidence

What is done to obtain an understanding of the client and its environment?

- Performing risk assessment procedures

When is materiality used in?

- Planning the audit (overall f/s level and allocated to performance materiality for individual accts) -Evaluating audit findings

Which assertion does inquiry satisfy?

- Presentation and disclosure -possibly existence

What information is used in developing an expectation for analytical procedures?

- Prior period information -Anticipated results -Relationships among elements of financial information within a period -Industry information -Relationships between financial information and relevant non-financial data

What are examples of examination and inspection?

- Records, docs, or tangible assets, reading the BoD minutes - Tests for existence

What are other methods used in ratio analysis?

- Regression analysis - Reasonableness test

What are basic approaches to auditing accounting estimates?

- Review and test management's process for developing the estimate -Independently develop an estimate to compare to management's estimate - Review subsequent events or transactions bearing on the estimate

What is horizontal analysis?

- Review ratios over time

What should be a part of audit documentation?

- Risk assessment - Procedure results - Consideration of fraud

What are the different types of transactions?

- Routine -Nonroutine -Estimation transactions

What all goes into obtaining clients?

- Submitting a proposal - Communicate with the predecessor auditor - Overall communication is important for evaluation of management integrity

What is an example of testing for the assertion, cutoff?

- Tax expense (verifying the dates)

What is directional testing?

- Test for existence or occurrence - Test for completeness

What makes up the tests of details?

- Tests of acct balances - tests of classes of transactions - tests of disclosures

What are the 2 types of further audit procedures?

- Tests of controls - Substantive procedures

When nature and timing is held constant how does one change the extent?

- The Greater the risk of MM, the greater the needed extent of substantive procedures - Main way to increase the extent of audit procedures is to examine more items -Sample sizes should reduce detection risk so as to restrict audit risk to a low level

What directional testing does testing for completeness use?

- Tracing

What determines materiality?

- Using professional judgement based on that of a reasonable person - Considers both quantitative and qualitative factors

What directional testing does testing for existence or occurrence use?

- Vouching

What knowledge do you need in understanding how a client's internal control?

- What controls exist -Who performs them -How various types of transactions are processed and recorded -What accounting records and supporting documentation exist

Describe estimation transactions

- activities that create accounting estimates - higher inherent risk

What makes up trend analysis?

- analyze changes in accounts of a company over time

Assertions with high inherent risk involves?

- difficult to audit transactions or balances - complex calculations - difficult accounting issues - significant judgement by management - valuations that vary significantly based on economic factors

What is documented as a part of risk assessment?

- discussion of the audit team - Elements of auditors' understanding - Assessment of risk of material misstatement -Risks identified

What falls under management responsibilities?

- f/s -Est. effective internal control over financial reporting -Compliance with laws and regulations -Making all records and client personnel available to the auditors -Providing written representations at end of the audit regarding its responsibilities and belief that the financial statements are free from MM.

Describe non-routine transactions

- involve activities that occur only periodically such as the taking of physical inventories -high inherent risk

What documents comprise the permanent file?

- items of continuing audit interest

What are the different types of ratio analysis?

- liquidity (ex: current ratio) - leverage (debt-to-equity) - profitability (gross profit %age) - activity (inventory turnover)

What is an example of testing for the assertion, completeness?

- looking at subsequent transactions - AP or other liabilities

Describe routine transactions

- recurring financial statement activities recorded in the accounting records in the normal course of business - Lower inherent risk

What are the overall categories of audit procedures?

- risk assessment procedures - further audit procedures

What should further audit procedures include?

- substantive procedures for all material relevant assertions - Tests of controls when the auditors' risk assessment includes an expectation that controls are operating effectively, or when substantive procedures alone are not sufficient.

What are the different types of expectations in analytical procedures?

- trend analysis -Ratio analysis

Which assertion does confirmation satsify?

-Existence -Valuation

What makes up NET?

-Nature (type & form) -Extent (quantity obtained) - Timing (when performed)

What are confirmations?

-Obtain rep from outside 3rd party - Comes directly to auditors

Stages of audit?

1. client acceptance 2. planning 3. risk assessment 4. substantive procedures 5. report

What does the first A in C (the) FIVE CARROT WARS stand for?

Analytical procedures

Which professional standards topic best describes this transaction: d. Comparing a client's unaudited results for the year with last year's audited results

Analytical procedures

The __________ provides an overview which includes the nature, timing and extent of procedures to be performed in an audit.

Audit plan

What does this describe: 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

What term does this describe? c. 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

What does the 2nd A in C (the) FIVE CARROT WARS stand for?

Auditing related accounts simultaneously

Which professional standards topic best describes this transaction: a. Possible risk factors related to misappropriation of assets

Consideration of fraud in a financial statement audit

Which professional standards topic best describes this transaction: f. The need to "brainstorm" among audit team members about how accounts could be intentionally misstated

Consideration of fraud in a financial statement audit

Which professional standards topic best describes this transaction: h. The importance of considering the possibility of overstated revenues (e.g., through premature revenue recognition)

Consideration of fraud in a financial statement audit

Which professional standards topic best describes this transaction: e. Requirements relating to identifying violations of occupational safety and health regulations

Consideration of laws and regulations

What does the 2nd C in C (the) FIVE CARROT WARS stand for?

Cutoff review

The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as a. Business risk. b. Engagement risk. c. Control risk. d. Detection risk.

Detection risk

Which of the risks do the auditors have control over?

Detection risk

T/F: Analytical procedures are only useful near completion of the audit as a final overview of the audited figures.

False

T/F: As a general rule, evidence about the existence of assets is considered most reliable when it is provided by the employee or department with custody of the related assets.

False

T/F: Audit working papers generally provide evidence of compliance with planning and risk assessment requirements of an audit, but not of performing further audit procedures.

False

T/F: Because CPA firms need an adequate return on their time and investment, cost is the primary factor influencing the auditors in deciding what evidence should be obtained.

False

T/F: If strong internal control exists in a client company, then evidence obtained internally is much stronger than evidence obtained from sources outside the client company.

False

T/F: Oral evidence is sufficient by itself if it comes from a top corporate officer.

False

T/F: Valuation of equipment carried at $70,000 could best be established by physically inspecting the equipment.

False

T/F: There is a direct relationship between risk of material misstatement and detection risk

False, they have an indirect relationship

T/F: Copies > original documents

False; Original is always better than copies

What is another way to describe detection risk?

Risk auditors fail to detect material misstatement

Define inherent risk

Risk of a material misstatement occurring in an assertion assuming no related internal controls

Define 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

Define detection risk

Risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist.

What does this describe? supporting (source) doc -> F/s (G/l) testing for completeness

Tracing

What is an audit trail?

Trail of evidence that links original recording of a transactions, journal entries, and ledger entries

Define Cutoff assertion

Transactions and events have been recorded in the correct accounting period

T/F: The information contained in the auditors' working papers constitutes the principal evidence of the auditors' work and their resulting conclusions.

True

T/F: A company's financial statements are the representations and assertions of the company's management.

True

T/F: A confirmation reply from an account receivable account ordinarily would be considered more reliable evidence than an account receivable clerk's reply to an inquiry from the auditor.

True

T/F: A copy of a long-term lease agreement should be filed in the permanent file.

True

T/F: Audit evidence may be defined as any information that corroborates or refutes the auditor's premise that the financial statements present fairly the client's financial position and operating results.

True

T/F: Audit risk must always be at a low level

True

T/F: Documentation is > verbal communicaion

True

T/F: If control risk is assessed at anything BUT HIGH risk, we have to test it

True

T/F: Internal control can increase reliability of internal evidence

True

T/F: One should evaluate the results of audit tests in order to consider fraud throughout the audit

True

T/F: Procedures should be linked with the assessed risks of material misstatement at the relevant assertion level

True

T/F: Related party transactions disclosure requirements must be met

True

T/F: Some high-risk auditing situations would include clients with weak internal control, unsound financial condition, or unreliable management.

True

T/F: Strategy is broader than the audit plan

True

Performing analytical procedures may help an auditor to: a. Achieve audit objectives related to a particular assertion. b. Develop an effective system of quality control. c. Meet PCAOB requirements that analytical procedures be performed relating to every major account. d. Increase the level of detection risk.

a. Achieve audit objectives related to a particular assertion.

Which of the following is not a function of audit working papers? a. Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. b. Assist audit team members responsible for supervision in reviewing the work. c. Assist auditors in planning future engagements. d. Assist peer reviewers and inspectors in performing their roles.

a. Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.

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

a. Completeness (understatements)

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: a. Low. b. High. c. Identical. d. Indeterminate.

a. Low

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? a. To increase the efficiency of the audit by eliminating the need for other audit procedures. b. To remind the client's management of its primary responsibility for the financial statements. c. To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. d. To provide evidence in those areas dependent upon management's future intentions.

a. To increase the efficiency of the audit by eliminating the need for other audit procedures.

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: a. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. b. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. c. Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. d. Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

b. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

In what section of the audit working papers would a long-term lease agreement be filed? a. Current working paper file. b. Permanent working paper file. c. Lead schedule file. d. Corroborating documents file.

b. Permanent working paper file

Which of the following statements best describes why auditors investigate related party transactions? a. Related party transactions generally are illegal acts. b. The substance of related party transactions may differ from their form. c. All related party transactions must be eliminated as a step in preparing consolidated financial statements. d. Related party transactions are a form of management fraud.

b. The substance of related party transactions may differ from their form.

Analytical procedures are most likely to detect: a. Weaknesses of a material nature in internal control. b. Unusual transactions. c. Noncompliance with prescribed control activities. d. Improper separation of accounting and other financial duties.

b. Unusual transactions

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. Use only 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.

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? a. Trace from source documents to journals. b. Vouch from journals to source documents. c. Either (a) or (b).

b. Vouch from journals to source documents.

In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? a. Generous performance-based compensation systems. b. Management preoccupation with increased financial performance. c. An unreliable accounting system. d. Strained relationships between management and the auditors.

c. An unreliable accounting system.

In developing an expectation for analytical procedures, the auditors are least likely to consider: a. Financial information for comparable prior periods. b. Relationships between financial information and relevant nonfinancial data. c. Anticipated costs of audit completion. d. Relationships among elements of financial information within a period.

c. Anticipated costs of audit completion.

Which of the following is not a primary approach to auditing an accounting estimate? a. Review and test management's process for developing the estimate. b. Review subsequent transactions. c. Confirm the amounts. d. Develop an independent estimate.

c. Confirm the amounts

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: a. Gathering evidence concerning account balances that have not changed from the prior year. b. Retesting internal control procedures. c. Considering unusual or unexpected account balances that were not previously identified. d. Performing a test of transactions to corroborate management's financial statement assertions.

c. Considering unusual or unexpected account balances that were not previously identified.

Of the following, which is the least reliable type of audit evidence? a. Confirmations mailed by outsiders to the auditors. b. Correspondence between the auditors and suppliers. c. Copies of sales invoices inspected by the auditors. d. Canceled checks returned in the year-end bank statement directly to the client.

c. Copies of sales invoices inspected by the auditors.

The primary objective of tests of details of transactions performed as substantive procedures is to: a. Comply with generally accepted auditing standards. b. Attain assurance about the reliability of the accounting system. c. Detect material misstatements in the financial statements. d. Evaluate whether management's policies and procedures are operating effectively.

c. Detect material misstatements in the financial statements.

The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? a. Trace from source documents to journals. b. Vouch from journals to source documents. c. Either (a) or (b)

c. Either (a) or (b)

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. Adequate disclosure. b. Quality control. c. Materiality and audit risk. d. Client acceptance.

c. Materiality and audit risk

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: a. from non-independent sources within the client company rather than independent sources outside the client company. b. a facsimile of original documents, rather than photocopy. c. documentary in form rather than an oral representation. d. generated internally through a system of effective controls rather than through a computerized system of controls.

c. documentary in form rather than an oral representation.

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: a. perform tests of controls. b. observe the taking of physical inventory on the balance sheet date. c. perform analytical procedures. d. use statistical sampling.

c. perform analytical procedures.

Evidence is generally considered sufficient when: a. it is reliable. b. it has been obtained by random selection. c. there is enough of it to afford a reasonable basis for an opinion on the financial statements. d. it has the qualities of being relevant, objective, and free from bias.

c. there is enough of it to afford a reasonable basis for an opinion on the financial statements.

The term __________ refers to the process of determining that transactions are reflected in the proper accounting period.

cutoff

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: a. Remain silent on the matter since it is an internal matter of the auditing firm. b. Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. c. Document the additional work required because all disagreements of this type will require expanded substantive procedures. d. Document the assistant auditor's position and how the difference of opinion was resolved.

d. Document the assistant auditor's position and how the difference of opinion was resolved.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? a. Analysis of balance sheet accounts. b. Analysis of income statement accounts. c. All matters of continuing accounting significance. d. Facts that might bear on the integrity of management.

d. Facts that might bear on the integrity of management.

The audit committee of a company must be made up of: a. Representatives from the client's management, investors, suppliers, and customers. b. The audit partner, the chief financial officer, the legal counsel, and at least one outsider. c. Representatives of the major equity interests, such as preferred and common stockholders. d. Members of the board of directors who are not officers or employees.

d. Members of the board of directors who are not officers or employees.

As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: a. Each recorded sale represents a bona fide transaction. b. All sales have been recorded in the sales journal. c. All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. d. Recorded sales have been properly posted to customer accounts.

d. Recorded sales have been properly posted to customer accounts.

A primary purpose of the audit working papers is to: a. Aid the auditors by providing a list of required procedures. b. Provide a point of reference for future audit engagements. c. Support the underlying concepts included in the preparation of the basic financial statements. d. Support the auditors' opinion.

d. Support the auditors' opinion.

Analytical procedures are: a. diagnostic tests of financial information that may not be classified as audit evidence. b. analytical tests of financial information made by a computer. c. statistical tests of financial information designed to identify areas requiring intensive investigation. d. tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

d. tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

Tests of controls are performed to determine whether key controls operate __________.

effectively

_______risk is the risk of material misstatement of an assertion without considering internal control.

inherent