Auditing 2

Holding all other factors constant, decreasing the extent of substantive audit procedures for accounts payable ordinarily has what effect on audit risk? a. Increases b. Decreases c. No effect d. Indeterminate

A

Which of the following is an example of fraudulent financial reporting? a. Company management improperly records as revenue the proceeds of a loan. b. The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. c. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. d. An employee bills his company for products not received, using the name of a fictitious supplier.

A

A senior-level manager insists that the accounting manager over accounts receivables adjust the estimate for allowance for doubtful accounts to be more liberal (i.e., fewer people will default on their receivables). The senior-level manager knows that the revised estimates are inaccurate, but he insists on the change because it will increase the company's net income for the quarter to a point where he will receive a bonus. This scenario describes an example of: A. Financial statement fraud B. Asset misappropriation fraud C. Corruption D. None of the above

A.

If the auditor believes the client's internal controls are not effective, she should issue which type of audit opinion? A. Adverse B. Qualified C. Unqualified

A.

In every annual and quarterly filing, management has to state to the public that they evaluated effectiveness of the company's internal controls within __________ prior to the report issued to the public. A. 90 days B. 180 days C. 30 days D. 1 year

A.

The financial statements of HBM Co. have been audited by the same auditor for the past 5 years. In the 2013 filing, HBM presents three years worth of financial statements for comparative purposes. The auditor's report included in the 2013 filing should refer to their audits of which year(s)? A. All three years presented (2011, 2012, 2013) B. 2013 only C. 2013 and 2012 only D. 2011 only

A.

Which of the following is NOT one of the key components of internal control? A. Compliance B. Control activities C. Monitoring D. Control environment

A. Compliance is one of the objectives of internal control, it is not one of the key components of internal control.

Which of the following is an example of an "overall" response to the risk of material misstatement? A. The audit manager increases the level of detail in which she reviews staff-level work B. The auditor chooses higher quality audit procedures to provide him with greater assurance regarding the fairness of an account balance C. An auditor increases sample size in order to reduce the chance of missing a material misstatement D. The auditor tests things near year end instead of at interim periods.

A. Overall responses involve changing factors such as the supervision, predictability, and assignment of responsibility for the audit. These re different from the responses involving the nature, extent, and timing of audit procedures

Which answer below best describes the difference between a material weakness in internal control and a significant deficiency in internal control? A. The difference between the two is the size of the resulting potential misstatement that could get through the control systems undetected. B. The difference is that significant deficiencies are larger in magnitude than material misstatements C. The difference between the two is the probability that a material misstatement will flow through the controls undetected to the financial statements. D. The difference between the two is that significant deficiencies have to be reported to the public and material weaknesses do not

A. The main difference between significant deficiencies and material weaknesses is the size of the potential misstatements that could flow through the system of controls undetected. If it is at least reasonably possible that material misstatements could result it is a material weakness, whereas if it is at least reasonably possible that significant, but not material, misstatements could result it is a significant deficiency.

Type 1 errors result in which of the following: A. reduction in audit efficiency B. Reduction in audit effectiveness C. Neither of the above D. Both of the above

A. When and auditor concludes that the financial statements are NOT fairly stated when in fact they are fairly stated, he or she will do more work than is necessary

If one or more other accounting firms (i.e., other than the engaged audit firm) participate in an audit, where is that disclosure required to be made to the public? A. Form AP B. Wall Street Journal C. Audit Report D. DEF-14A

A. Form AP

The indication of whether or not the auditor believes he has sufficient and appropriate audit evidence to provide a basis for his opinion is ________________ in the audit report. A. stated explicitly B. implied

A. Stated explicitly

Which of the following tasks is the auditor allowed to rely on the internal audit function for? A. Testing specific controls for reliability B. Assessing inherent risk C. Determining whether a misstatement is material to the financial statements D. Assessing the sufficiency of evidence E. The auditor is allowed to rely on the internal audit function for each of the above tasks

A. Testing specific controls for reliability

The management representation letter should be dated as of which date? A. The audit report date B. The balance sheet date C. The financial statement date D. Multiple dates based on when the representations are made to the auditor

A. The audit report date

If in the auditor's report, she states an opinion regarding the subject matter she evaluated, she is providing which type of assurance? A. Positive B. Negative C. Disclaimer D. None of the above

A. positive

For audits of public companies, the auditor's report is typically addressed to whom? A. The Board of Directors or the Stockholders B. To whom it may concern C. It is not addressed to anyone since it is available to anyone that wishes to read it. D. Management

A. the board of Directors or the stockholders

An accounts payable manager creates a fictitious shell company and submits vendor invoices from that company to her own employer. She then pays those invoices as part of her role as accounts payable manager and then deposits the checks into her fictitious company's bank account. What general type of occupational fraud is described here? A. Financial statement fraud B. Asset misappropriation C. Corruption D. This is not a type of fraud

B

During an inquiry of the CFO of GenZ Co., one of your firm's audit clients, the CFO explains that he believes temporary material manipulation of the financial statements would be appropriate if it meant the company was able to just meet or beat the consenus analyst forecast for earnings. In his mind, this would help shareholders of the company and would provide bonuses to employees who have worked hard to make GenZ Co. such a successful company. Which aspect of the fraud triangle would the auditor be most concerned about based on these comments by the CFO? A. Incentive B. Rationalization C. Opportunity

B

If the auditor believes the client's internal controls are effective, she should issue which type of audit opinion? A. Adverse B. Unqualified C. Qualified

B

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. Senior financial management participates in the selection of accounting principles and the determination of significant estimates. b. Supporting accounting records and files that should be readily available are not produced promptly when requested. c. Related-party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm. d. Senior management has an excessive interest in upgrading the entity's information technology capabilities.

B

In order to ensure that a company doesn't issue payment for fictitious vendor invoices (i.e., invoices received from vendors who did not actually provide goods or services), which three documents should be matched and verified prior to making a payment (a.k.a., a three-way match)? A. Check B. Purchase Order C. Receiving Report D. Vendor Invoice E. Sales Order

B, C, D

Jane Jones, the auditor of Hy Co. has identified a weakness in the client's internal controls that allows upper management to bypass the typical process for entering journal entries into the accounting information system. She should be most concerned with which of the following aspects of the fraud diamond? A. Incentive B. Opportunity C. Rationalization

B.

Of the three main categories of occupational fraud, which has the distinction of being (1) the least common and (2) the most costly? A. Misappropriation of assets B. Fraudulent financial reporting C. Corruption

B.

The Sarbanes-Oxley Act requires that the auditor issue an opinion on the effectiveness of the client's internal control as part of the client's _________________ filing with the SEC. A. quarterly B. annual C. both quarterly and annual

B.

Which of the following risks does the auditor assess rather than set? (i.e. which risk do they not have control over changing its value?) A. Audit risk B. Control risk C. Detection risk

B.

An employee steals inventory from his employer's warehouse. This is an example of: A. Financial statement fraud B. Asset misappropriation fraud C. Corruption D. None of the above

B. This is fraud which involves an employee stealing or misusing company resources

An auditor is unable to obtain adequate audit evidence regarding several material account balances. Which of the following types of audit opinions would most likely be issued? A. Qualified B. Disclaimer C. Unqualified D. Adverse

B. Disclaimer

Which of the following relates to the amount or quantity of evidence the auditor obtains in the course of the financial statement audit? A. Timing of the evidence B. Extent of the evidence C. Nature of the evidence D. Appropriateness of the evidence

B. Extent of the evidence The amount or quantity of the evidence is referred to as the extent of audit evidence or as the sufficiency of evidence.

Which party typically signs the management representation letter? A. The auditor B. Management C. The internal auditors D. The board of directors

B. Management

When considering risks related to transactions recorded in the the Sales account, which of the following management assertions would the auditor typically be more concerned about? A. Completeness B. Occurrence

B. Occurrence

If a company's management attempts to improve the appearance of its financial position by failing to write down obsolete inventory on its warehouse shelves, what management assertion is at risk with respect to the Inventory account balance? A. Cutoff B. Valuation C. Existence D. Rights and Obligations E. Completeness

B. Valuation

If management has not exercised sound judgment in determining an appropriate model to accrue the Allowance for Doubtful Accounts balance at the end of the period, which management assertion is at risk? A. Completeness B. Valuation C. Rights and Obligations D. Accuracy

B. Valuation

Which of the following is NOT one of the primary activities of the revenue cycle? A. Bill the customer B. Order inventory C. Fulfill the customer's order D. Receive a customer order

B. ordinary inventory

Which of the following risks does the auditor have control over? (Select all the apply) A. Engagement risk B. Control Risk C. Audit risk D. Inherent risk E. Detection risk

C and E

COSO was originally founded by ______ organizations, including the AICPA. A. Seven B. Three C. Five D. Two

C.

Professional skepticism, when exercised during the consideration of the risk of misstatement due to fraud a. Should only be exercised during the planning stage of the audit. b. Is based on the notion that the client is dishonest. c. Is an attitude that includes a questioning mind. d. Ordinarily includes the use of an outside expert in most audits.

C.

Which of the following best describes management's Cutoff assertion as it relates to transactions in the Revenue Cycle? A. Each sale transaction that is recorded actually happened B. Each sale transaction is recorded for the appropriate dollar amount C. Each sale transaction is recorded in the same accounting period when it was fulfilled D. Each receipt of cash for sales on account has been recorded

C.

Which of the following documents in the Expenditure Cycle would an employee working in shipping and receiving use to document any shortages or damaged items in a delivery received from a vendor? A. Purchase Order B. Sales Order C. Receiving Report D. Vendor Invoice

C.

Which of the following is the correct sequence with regards to the auditor's reliance on the client's internal controls? A. Decision to rely on controls, assess design and implementation of controls, testing controls B. Assess design and implementation of controls, testing controls, decision to rely on controls C. Assess design and implementation of controls, decision to rely on controls, testing controls

C.

Which account is generally NOT considered a part of the revenue cycle? A. Cash B. Accounts Receivable C. Inventory D. Sales

C. Inventory

The following procedure is an example of which type of audit procedure?Watching an employee process a transaction to obtain an understanding of the client's internal controls over the recording of that transaction. A. Inquiry B. Inspection of Tangible Assets C. Observation D. Inspection of Records and Documents

C. Observation

Which account is generally NOT considered a part of the expenditure cycle? A. Cost of Goods Sold B. Cash C. Sales D. Accounts Payable

C. Sales

Which of the following is not an activity in the expenditure cycle? A. Order goods B. Pay for goods C. Sell goods D. Each of the above is an activity in the expenditure cycle E. Receive and use goods

C. Sell Goods

When performing an audit, the auditor concludes that the client's financial statements are presented fairly and in accordance with GAAP. However, after considering all relevant factors, the auditor also concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. Which of the following audit opinions should the auditor issue? A. Disclaimer B. Qualified C. Unqualified D. Adverse

C. Unqualified

Which of the following is not one of the five components of the COSO Framework for internal control? A. Control Environment B. Control Activities C. Risk Assessment D. Fraud Prevention

D

Which of the following is not true regarding the role of the COSO internal control framework? A. It is used to provide guidance regarding best practices for designing and implementing strong systems of internal control B. It is used as a benchmark, or "established criteria" for the audit of internal control over financial reporting C. It is used as the primary source for auditors to establish quality control procedures for their firm D. All of the above are true regarding the role of the COSO internal control framework

D

Which of the following is true regarding the role of the COSO internal control framework? A. It is used to provide guidance regarding best practices for designing and implementing strong systems of internal control B. It is used as a benchmark, or "established criteria" for the audit of internal control over financial reporting C. It is used as the primary source for management to establish quality control procedures D. All of the above are true regarding the role of the COSO internal control framework

D

Background checks of upper management typically focus on which of the following? A. Criminal background B. Personal debt C. Risky behaviors D. All of the above

D.

Which of the following is NOT a reason the auditor may choose to not rely on internal controls for audit evidence? A. The design of controls is not adequate, but controls are implemented well B Testing controls is more time consuming than testing account balances or transactions directly C. The implementation of controls is lacking, but controls are designed effectively D. They are going to use a reliance approach instead E Each of the above is a reason the auditor may choose to not rely on controls as audit evidence

D. Using a reliance approach means the auditor IS going to rely on controls for audit evidence. If either design or implementation is lacking, the auditor may choose to not rely on controls for audit evidence. Similarly, if testing controls is more time consuming than directly testing the transactions or account balances, the auditor may choose to not rely on controls for audit evidence.

Which of the following is NOT on of the fundamental components of fraud? A. Intentional act B. Reliance C. False Representation D. Act by management E. Each of the above is one of the fundamental components of fraud

D. Fraud is not necessarily conducted by management. It could be carried out by an employee at any level of the company or by someone outside of the company

Which of the following documents would be generated last during activities in the Expenditure Cycle? A. Receiving Report B. Vendor Invoice C. Purchase Order D. Check

D. Check

Which authoitative bodies require that auditors disclose in the auditor's report how long they have served as the auditor to that particular client. A. Only the AICPA B. Both the AICPA and the C. PCAOB C. The AICPA, the PCAOB and the SEC D. Only the PCAOB

D. Only the PCAOB

The Accounts Receivable account is considered part of which transaction cycle? A. Payroll cycle B. Financial cycle C. Expenditure cycle D. Revenue cycle

D. Revenue Cycle

In order to reduce the risk of inventory obsolescence and valuation issues, some companies will display a vendor's products on a consignment basis. In a consignment agreement, the vendor retains title to the products while on display, and the distributor sells the product through to an end user without owning the inventory in question. Given this type of arrangement, which of the following assertions becomes important when observing a physical inventory count of products on display at the distributor? A. Valuation B. Cutoff C. Existence D. Rights and Obligations E. Completeness

D. Rights and obligations

Which party typically drafts the management representation letter? A. The board of directors B. The internal audit function C. Management D. The auditor

D. The auditor

Which of the following is not one of the key components of internal control? A. Control environment B. Monitoring C. Information & Communication D. Control activities E. Each of these is a component of the COSO framework

E.

Each of the following must be disclosed regarding a CAM that is identified by the auditor, except: A. Description of what the CAM is B. Discussion of the main considerations leading the auditor to determine that the matter is a CAM C. Description of how the CAM was addressed in the audit D. Reference to the relevant financial statement accounts or disclosures relating to the CAM E. All of the above must be disclosed regarding a CAM identified by the auditor

E. All of the above

Which of the following activities is NOT one of the FASB's required revenue recognition activities? Identify a contract with a customer A. Identify the performance obligations in the contract B. Determine the transaction price C. Allocate the transaction price to the performance obligations D. Complete the performance obligations and record the associated revenue E. Collect cash from the customer

E. Collect cash from the customer

When the auditor is unable to obtain adequate audit evidence regarding one material account balance for a non-pervasive issue, he would most likely issue a(n) ________ opinion. A. Simple B. Adverse C. Disclaimer D. Unqualified E. Qualified

E. Qualified

When an auditor concludes that the financial statements are fairly stated in accordance with GAAP, he or she would issue which type of audit opinion? A. Qualified B. Unqualified with explanatory language C. Disclaimer D. Adverse E. Unqualified

E. Unqualified

Although auditors can assess detection risk, they can not influence it by modifying the nature, extent or timing of audit procedures or through overall responses.T/F

False

Because fraud is more difficult to detect, the auditor is not under the same responsibility for detecting material misstatements caused by client fraud as he is for detecting material misstatements caused by error. T/F

False

High quality evidence must be reliable, but does not always have to be relevant. T/F

False

If the auditor uses a pure substantive approach, he or she will typically still invest significant effort to test the client's controls. T/F

False

It is considered an invasion of privacy and a violation of ethical standards for the auditor to perform background checks of key employees at the client in order to identify fraud risk factors. T/F

False

The COSO framework is used by relatively few public companies in the United States to evaluate the effectiveness of their internal controls. T/F

False

The Sarbanes-Oxley Act of 2002 appoints the external auditor as the party who is ultimately responsible for ensuring that the client establishes and maintains effective internal controls. T/F

False

The audit of financial statements and the audit of internal control over financial reporting should not be conducted by the same external auditor. T/F

False

When auditors complete a high quality audit in accordance with GAAS, they are usually 100% confident that the financial statements are free of material misstatements. T/F

False

Written representations are adequate audit evidence in and of themselves due to the fact that they are written down and signed by management. True/False

False

If an auditor hires a valuation specialist to assist her in valuing a client asset, she can take the specialist's work as her own without doing any additional work. T/F

False The auditor must evaluate the specialist's competence, capabilities, and objectivity in order to rely on his or her work.They also must obtain obtain an understanding of the work and seek to assess the appropriateness of the work.

Vouching involves obtaining a sample from the source documents and working toward the financial statements whereas tracing involves obtaining a sample from the financial statements and working toward source documents. T/F

False The opposite is true. Vouching involves obtaining a sample of recorded sales transactions and working toward the source documents to substantiate the existence or occurrence assertion. Tracing involves obtaining a sample of transactions from source documents and following them to the financial statements to substantiate the completeness assertion.

Using the COSO internal control framework as a benchmark for quality is mandatory for the audit of internal control over financial reporting. T/F

False This statement is not true. Auditors use as a benchmark whichever internal control framework that was used by the client. The company is free to adopt any high quality framework.

A significant deficiency is more serious than a material weakness. T/F

False.

The materiality threshold used for the audit of financial statements is different from the materiality threshold used for determining whether a control deficiency is a material weakness or a significant deficiency. T/F

False.

While auditors may consider all three objectives of internal control, they are primarily concerned with the compliance objective of internal control. T/F

False. Auditors are primarily concerned with the reporting objective of internal control. While compliance is also an important objective of internal control, the auditor would mainly be concerned with compliance insofar as it impacted the financial statements.

Audit efficiency and audit effectiveness are usually positively correlated. In other words, as an audit becomes more effective it also becomes more efficient. T/F

False. Often, audit efficiency and effectiveness are negatively correlated meaning that in order to increase one, the other usually decreases. for example, to get a more effective audit more audit work may need to be completed which reduces the efficiency.

If the auditor chooses not to rely on internal controls for audit evidence, he or she would still need to thoroughly test the controls to obtain a proper understanding of the appropriateness of the design and implementation of controls. T/F

False. The auditor only performs thorough tests of controls when he or she decides to rely on the controls for audit evidence. The auditor evaluates the design and implementation of the controls in the process of deciding whether to rely on controls (i.e. prior to internal control testing).

Tests of controls provide which type of audit evidence? A. Indirect B. Direct C. Substantive D. None of the above

Indirect

The following language was taken from an auditor's report on a client's financial statements:"The Company's financial statements do not disclose [describe the nature of the omitted information that is not practicable to present in the auditor's report]. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America.In our opinion, except for the omission of the information described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0."This is an example of what kind of an opinion? A. Adverse with an explanation B. Modified unqualifed opinion C. Unqualifed D. Adverse E. Qualified

Qualified

A significant deficiency is less serious than a material weakness. T/F

True

Audit Risk is defined as the risk that the auditor issues an unqualified opinion (i.e., clean opinion) on a set of financial statements that are, in fact, materially misstated. T/F

True

Auditors are responsible for obtaining reasonable assurance that the financial statements are free of material misstatements, regardless of whether the misstatements were caused by error or fraud. T/F

True

Auditors have the option of testing account balances directly or testing transactions that make up the account balance. T/F

True

During a review of financial statements, the auditor would NOT perform substantive analytical procedures. True/False

True

Generally speaking, auditors are more concerned about the Completeness assertion than the Existence or Occurrence assertions for liability and expense account balances and their underlying transactions. T/F

True

If an engaged audit firm chooses to use another audit firm to provide 6% of the total audit work for an audit of a publicly-traded company in the United States, the auditor who issues the opinion must disclose the identity of the other audit firm to the public. True/False

True

Management is ultimately responsible for establishing and maintaining internal controls at the company. T/F

True

Risk assessment procedures performed when deciding whether to audit the client and during the planning phase of the audit are included in the required evidence auditors must obtain when performing an audit. True/False

True

The COSO framework is by far the most popular internal control framework used by companies in the United States. T/F

True

The Control Environment component of internal control relates to client integrity, proper board oversight and reporting channels, commitment to hiring competent employees, and proper accountability for internal control related actions. T/F

True

The Revenue Cycle consists of activities involved in a company's activities designed to generate income by providing goods and services to its customers. T/F

True

The Risk of Material Misstatement is the product of Inherent Risk and Control Risk in the audit risk model equation.T/F

True

The auditor must become familiar with the client's controls even if he or she is only engaged to audit the financial statements.T/F

True

The auditor must communicate ALL deficiencies she discovers; whether deficiencies, significant deficiencies, or material weaknesses; to the client. T/F

True

The auditor's report on a review of financial statements provides negative assurance regarding the fair presentation of the financial statements. True/False

True

The following language was taken from the auditor's report on financial statements:"In our opinion, because of the significance of the matter discussed in the previous paragraph, the consolidated financial statements referred to above do not present fairly the financial position of ABC Company and its subsidiaries as of December 31, 20X1"This is an example of an adverse opinion. True/False

True

Understanding the role and function of the internal audit function is an important part of understanding the client. T/F

True

When the auditor signs the audit report in the United States, he signs the name of his firm rather than his own name. True/False

True

If an auditor fails to obtain a written representation (management representation letter) from management on an audit engagement it is a scope limitation. True/False

True This statement is true. The auditor must obtain a written representation from management or it is a scope limitation resulting in disclaimer of the audit opinion or withdrawal from the engagement.

Auditing standards require that all key members of the audit engagement team participate in a brainstorming session about how the client's financial statements might be susceptible to fraud and how management could perpetrate and conceal fraud. T/F

True.

Smaller clients are generally greater fraud risks than larger clients. T/F

True.

The auditor has the same responsibility for detecting material misstatements cause by client fraud as the do for detecting material misstatements cause by error. T/F

True.

The definition of audit risk is very similar to the definition of a Type 2 error. Both are defined as the risk that auditors provide an unqualified opinion on financial statements when a material misstatement exists. T/F

True.

The nature of audit procedures relates to the type or quality of the procedure performed. T/F

True.

If the auditor uses a pure substantive approach, he or she will typically not test the client's controls. T/F

True. Using a pure substantive approach means that the auditor is not going to rely on controls for any evidence. Therefore, the auditor would not test controls.

The audit of financial statements and the audit of internal control over financial reporting should be conducted by the SAME external auditor. T/F

True/ Doing so allows the auditor to learn important information about financial statements through testing controls, and important information about controls through testing financial statement accounts and transactions. Thus, this approach is called an integrated audit.