Auditing Exam 1
Parker is the in-charge auditor for the upcoming annual audit of FGH Company, a continuing audit client. Parker will supervise two assistants on the engagement and will visit the entity before the fieldwork begins. Parker has completed the engagement letter and established an understanding with the Chief Internal Auditor on the assistance to be provided by the internal audit function. Which of the following activities should be considered as preliminary engagement and planning activities? (Select all that apply.) Reading the current year's interim financial statements. Discussing the scope of the examination with management of the client. Establishing the timing of the audit work. Arranging with the client for adequate working space. Coordinating the assistance of client personnel in data preparation. Establishing and coordinating staffing requirements, including time budget. Holding a brainstorming meeting with assistants assigned to the engagement and discussing possible fraud-related issues. Determining the extent of involvement, if any, of consultants, specialists, and internal auditors. Considering the effects of applicable accounting and auditing pronouncements, particularly recent ones. Preparing documentation setting forth the preliminary audit plan. Establish overall materiality and tolerable misstatement. Making a preliminary assessment about control risk. Updating the prior year's written audit program and possibly developing new procedures as warranted by changes in the business. Checking the mathematical accuracy of the company's prior year bank statements. Making the final determination of control risk. Communicating the established preliminary materiality level to management. Communicating with the client's customers regarding the correct valuation of accounts receivable. Writing a rough draft of the audit opinion based on the preliminary assessment.
Reading the current year's interim financial statements. Discussing the scope of the examination with management of the client. Establishing the timing of the audit work. Arranging with the client for adequate working space. Coordinating the assistance of client personnel in data preparation. Establishing and coordinating staffing requirements, including time budget. Holding a brainstorming meeting with assistants assigned to the engagement and discussing possible fraud-related issues. Determining the extent of involvement, if any, of consultants, specialists, and internal auditors. Considering the effects of applicable accounting and auditing pronouncements, particularly recent ones. Preparing documentation setting forth the preliminary audit plan. Establish overall materiality and tolerable misstatement. Making a preliminary assessment about control risk. Updating the prior year's written audit program and possibly developing new procedures as warranted by changes in the business.
The Public Company Accounting Oversight Board: is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards. is a quasi-governmental organization that has legal authority to set accounting standards for public companies. is a quasi-governmental organization that is independent of the SEC in setting auditing standards. is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.
is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.
An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n): lead schedule. supporting schedule. audit control account. working trial balance.
lead schedule.
Tolerable misstatement is: materiality for the income statement as a whole. the amount of misstatement that management is willing to tolerate in the financial statements. materiality used to establish a scope for the audit procedures for the individual account balance or disclosures. materiality for the balance sheet as a whole.
materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.
As generally conceived, the audit committee of a publicly held company should be made up of: members of the board of directors who are not officers or employees. representatives from the entity's management, investors, suppliers, and customers. the audit partner, the chief financial officer, the legal counsel, and at least one outsider. representatives of the major equity interests (preferred stock, common stock).
members of the board of directors who are not officers or employees.
Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. For each situation, indicate whether the first or second type of evidence is more reliable. a. The bank confirmation would be considered _________ the observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger. b. The auditor's recalculation of depreciation is _________ the examination of the raw material requisitions. c. The bank statement would be considered _________ the shipping documents. d. The examination of the common stock certificates would generally be considered _________ the physical examination of inventory components for a personal computer.
more reliable than more reliable than more reliable than more reliable than
The permanent file section of the working papers that is kept for each audit client most likely contains: a schedule of time spent on the engagement by each individual auditor. review notes pertaining to questions and comments regarding the audit work performed. narrative descriptions of the entity's accounting system and control procedures. correspondence with the entity's legal counsel concerning pending litigation.
narrative descriptions of the entity's accounting system and control procedures.
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor: is responsible for expressing an opinion on the financial statements, which are the responsibility of management. realizes that some matters, either individually or in the aggregate, are important, while other matters are not important. assesses the accounting principles used and evaluates the overall financial statement presentation. obtains reasonable assurance about whether the financial statements are free of material misstatement.
obtains reasonable assurance about whether the financial statements are free of material misstatement.
An auditor would be least likely to use confirmations in connection with the examination of: inventory held in a third-party warehouse. long-term debt. refundable income taxes. stockholders' equity.
refundable income taxes.
The assurance bucket is filled with all of the following types of evidence except: tests of details. substantive analytical procedures. the audit report. test of controls.
the audit report.
The substantive analytical procedure known as trend analysis is best described by: development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. the comparison of common-size financial statements over time. the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. the examination of changes in an account over time.
the examination of changes in an account over time.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: evaluation of all matters of continuing accounting significance. understanding as to the reasons for the change of auditors. opinion of any subsequent events occurring since the predecessor's audit report was issued. awareness of the consistency in the application of generally accepted accounting principles between periods.
understanding as to the reasons for the change of auditors.
Which of the following statements relating to attest and assurance services is not correct? Assurance services can be performed to improve the quality or context of information for decision makers. Financial statement auditing is a form of attest service but it is not an assurance service. In performing an attest service, the CPA determines the correspondence of the subject matter (or an assertion about the subject matter) against criteria that are suitable and available to users. Independence is an important attribute of assurance service providers
Financial statement auditing is a form of attest service but it is not an assurance service.
Which of the following is correct concerning required auditor communications about fraud? Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client, who is also a public company. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. Determine the amount of overall materiality for the audit based on these preliminary amounts. (Round your answer to the nearest thousand value.)
Amount of overall materiality = $287,000 Q1 = $1,200,000 Q2 = $1,500,000 Q3 = $1,350,000 ($1,500,000 * 0.90) Q4 = $1,687,500 ($1,350,000 * 1.25) Estimated income before taxes = $5,737,500 $5,737,500 * 0.05 = $286,875 -> $287,000
Section 301 of the Sarbanes-Oxley Act requires that public companies have an audit committee. Independent auditors are increasingly involved with audit committees. Which of the following best describes an audit committee? An audit committee is a committee made up of the board of directors and the upper levels of the audit team to assist in the communication related to the audit. An audit committee is a committee made up of the board of directors and all members of the audit team to assist in the communication related to the audit. An audit committee is a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process.
An audit committee is a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? Management places substantial emphasis on meeting earnings projections. Turnover of senior accounting personnel is low. The rate of change in the entity's industry is slow. Insiders recently purchased additional shares of the entity's stock.
Management places substantial emphasis on meeting earnings projections.
Which of the following concepts are pervasive in the application of auditing standards? Control risk. Expected misstatement. Materiality and audit risk. Internal control.
Materiality and audit risk.
A written understanding between the auditor and the entity concerning the auditor's responsibility for fraud is usually set forth in a(n): internal control letter. engagement letter. letter of audit inquiry. management letter.
engagement letter.
As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to: decrease the risk of overreliance. find larger errors. increase the tolerable misstatements in the accounts. find smaller errors.
find smaller errors.
Which of the following is not a part of the role of internal auditors? Assisting the external auditors. Providing reports on the reliability of financial statements to investors and creditors. Consulting activities. Operational audits.
Providing reports on the reliability of financial statements to investors and creditors.
Select the appropriate component of audit risk for the below definitions. The susceptibility of an assertion in an account or disclosure to a misstatement before consideration of any related controls The risk that a misstatement that could occur will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. The risk that the procedures performed by the auditor will not detect a misstatement that could be material.
Inherent risk Control risk Detection risk
Which of the following best describes the general character of the section of the "Principles Underlying an Audit of Financial Statements," titled "Performance"? Criteria for the content of the auditor's report on financial statements and related footnote disclosures. Description of the competence, independence, and professional care of persons performing the audit. The need to maintain an independence of mental attitude in all matters relating to the audit. Criteria for audit planning and evidence gathering.
Criteria for audit planning and evidence gathering.
Which of the following best describes relationships among auditing, attest, and assurance services? Auditing and attest services represent two distinctly different types of services—there is no overlap. Attest is a type of auditing service. Auditing is a type of assurance service. Assurance is a type of attest service.
Auditing is a type of assurance service.
For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Sending a written request to the entity's customers requesting that they report the amount owed to the entity. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account. Discussing the adequacy of the allowance for doubtful accounts with the credit manager. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years. Examining a new plastic extrusion machine to ensure that this major acquisition was received. Watching the entity's warehouse personnel count the raw materials inventory. Performing test counts of the warehouse personnel's count of the raw material. Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity. Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list. Reviewing the general ledger for unusual adjusting entries.
5 1 1/7 4 8 2 3 7 5 1/7 9
The engagement partner and manager review the work of engagement team members to evaluate which of the following? The work was performed and documented. The objectives of the procedures were achieved. The results of the work support the conclusions reached. All of these are correct.
All of these are correct.
Preliminary engagement activities include: understanding the client and the client's industry. determining audit engagement team requirements. ensuring the independence of the audit team and audit firm. All of these.
All of these.
Greenbloom Garden Centers is a small, privately held corporation that has two stores in Orlando, Florida. The Greenbloom family owns 100 percent of the company's stock, and family members manage the operations. Sales at the company's stores have been growing rapidly, and there appears to be a market for the company's sales concept—providing bulk garden equipment and supplies at low prices. The controller prepares the company's financial statements, which are not audited. The company has no debt but is considering expanding to other cities in Florida. Such expansion may require long-term borrowings and is likely to reduce the family's day-to-day involvement in all of the company's operations. The family does not intend to sell stock in the company. Required: Which of the following factor(s) is/are are the most likely to make an audit neccessary or valuable for the company? An audit will increase the value of the company's products because the financial statements are more accurate. If long-term financing is required to fund an expansion, an audit might be required by a potential lender. As the company expands, the owners will find that an audit could prove to be an additional monitoring activity. An audit might be required by the government as the company begins to expand across state lines.
An audit will increase the value of the company's products because the financial statements are more accurate. If long-term financing is required to fund an expansion, an audit might be required by a potential lender. As the company expands, the owners will find that an audit could prove to be an additional monitoring activity.
Which of the following is true as it pertains to the auditor's responsibility for detecting fraud? An auditor is responsible for obtaining reasonable assurance that the financial statements are free of all fraud. An auditor is responsible fo obtaining absolute assurance that the financial statements are free from material misstatements due to fraud, but must only provide reasonable assurance that the financial statements are free from materal misstatements due to errors. An auditor bears no responsibilities as it pertains to fraud. An auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatements, whether caused by error or fraud.
An auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatements, whether caused by error or fraud.
Which of the following presumptions is least likely to relate to the reliability of audit evidence? The more effective internal control, the more assurance it provides about the accounting data and financial statements. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.
An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.
Which of these statements concerning illegal acts by clients is correct? An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements.
An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.
Which of the following is a misappropriation of assets? Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales. Classifying inventory held for resale as supplies. Investing cash and earning at a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent. An employee of a consumer electronics store steals 12 CD players.
An employee of a consumer electronics store steals 12 CD players.
A CPA has been asked to audit the financial statements of a publicly held company for the first time. All preliminary verbal discussions and inquiries among the CPA, the company, the predecessor auditor, and all other necessary parties have been completed. The CPA is now preparing an engagement letter. Which of the following items should be included in the typical engagement letter under these circumstances? (Select all that apply.) Arrangements involving the use of specialists or internal auditors. Any limitation of the liability of the auditor or client, such as indemnification to the auditor for liability arising from knowing misrepresentations to the auditor by management or alternative dispute resolution procedures. (Note that regulatory bodies, such as the SEC, may restrict or prohibit such liability-limiting arrangements.) Additional services to be provided relating to regulatory requirements. Arrangements regarding other services (e.g., assurance, tax, or consulting services). A list of the services to be provided by the auditor during the engagement. An explanation of how the services will be provided by the auditor as well as the objectives of each service. An explanation of the potential risks and limitations of the services to be provided. Arrangements for when the auditor will inform the audit committee of certain matters. An explicit statement that the financial statements and other included information are the responsibility of management. An explicit statement that the company's programs and controls to prevent fraud are the responsibility of management. A specific estimate of the fees for the services to be provided. A statement specifying the standards used to conduct the specified services. An explicit statement that the financial statements and other included information are the responsibility of the auditor. An explicit statement that the auditor is responsible for maintaining evidential matter related to provide reasonable support for management's assessment of the operating effectiveness of internal controls over financial reporting. A statement providing absolute assurance that the audit will detect errors and fraud that have a material effect on the financial statements. A specific list of items which will not be shared with the audit committee.
Arrangements involving the use of specialists or internal auditors. Any limitation of the liability of the auditor or client, such as indemnification to the auditor for liability arising from knowing misrepresentations to the auditor by management or alternative dispute resolution procedures. (Note that regulatory bodies, such as the SEC, may restrict or prohibit such liability-limiting arrangements.) Additional services to be provided relating to regulatory requirements. Arrangements regarding other services (e.g., assurance, tax, or consulting services). A list of the services to be provided by the auditor during the engagement. An explanation of how the services will be provided by the auditor as well as the objectives of each service. An explanation of the potential risks and limitations of the services to be provided. Arrangements for when the auditor will inform the audit committee of certain matters. An explicit statement that the financial statements and other included information are the responsibility of management. An explicit statement that the company's programs and controls to prevent fraud are the responsibility of management. A specific estimate of the fees for the services to be provided. A statement specifying the standards used to conduct the specified services.
The primary objective of final analytical procedures is to: Identify areas that represent specific risks relevant to the audit. Satisfy doubts when questions arise about an entity's ability to continue in existence. Obtain evidence from details tested to corroborate particular assertions. Assist the auditor in assessing the validity of the conclusions reached on the audit.
Assist the auditor in assessing the validity of the conclusions reached on the audit.
Section 301 of the Sarbanes-Oxley Act requires that public companies have an audit committee. Independent auditors are increasingly involved with audit committees. Which of the following best describes why audit committees are formed? Audit committess are formed so that management can maintain the confidentiality of information. Audit committees are formed to satisfy the shareholders' need for assurance that directors are exercising due care in the performance of their duties. Audit committees are formed because the governement wants to obtain some authority into the communication and management of the business.
Audit committees are formed to satisfy the shareholders' need for assurance that directors are exercising due care in the performance of their duties.
For each of the following specific audit procedures, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. a. Sending a written request to the entity's customers requesting that they report the amount owed to the entity. b. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period. c. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account. d. Discussing the adequacy of the allowance for doubtful accounts with the credit manager. e. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years. f. Examining a new plastic extrusion machine to ensure that this major acquisition was received. g. Watching the entity's warehouse personnel count the raw materials inventory. h. Performing test counts of the warehouse personnel's count of the raw material. i. Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity. j. Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list. k. Reviewing the general ledger for unusual adjusting entries.
Category of Assertion a. Assertions about account balances b. Assertions about classes of transactions and events c. Assertions about account balances d. Assertions about account balances e. Assertions about account balances f. Assertions about account balances g. Assertions about account balances h. Assertions about account balances i. Assertions about account balances j. Assertions about classes of transactions and events k. Assertions about account balances Assertion a. Existence b. Cutoff c. Completeness d. Accuracy, valuation, and allocation e. Accuracy, valuation, and allocation f. Existence g. Completeness/Existence h. Completeness/Existence i. Accuracy, valuation, and allocation/Completeness j. Accuracy k. Accuracy, valuation, and allocation
Which of the following is an example of fraudulent financial reporting? An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.
Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.
Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? Reviewing standard bank confirmations for indications of cash manipulations. Confirming a sample of recorded receivables by direct communication with the debtors. Observing the entity's distribution of payroll checks. Comparing a sample of shipping documents to related sales invoices.
Comparing a sample of shipping documents to related sales invoices.
Management makes assertions about components of the financial statements. Select the management assertions shown in the right-hand column with the proper description of the assertion shown in the left-hand column. The accounts and transactions that should be included are included; thus, the financial statements are complete. Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described. The assets are the rights of the entity, and the liabilities are its obligations. The assets and liabilities exist, and the recorded transactions have occurred.
Completeness Accuracy, valuation, and allocation Rights and obligations Existence or occurrence
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? Computations made by the auditor. Bank statements obtained from the entity. Prenumbered entity sales invoices. Vendors' invoices included in the entity's files.
Computations made by the auditor.
Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements. Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work. An entity may have a poorly designed internal control system.
Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.
The auditing standards that are used to guide the conduct of the audit are: Implicitly referred to in the basis for opinion section of the auditor's standard report. Implicitly referred to in the critical audit matters section of the auditor's standard report. Explicitly referred to in the critical audit matters section of the auditor's standard report. Explicitly referred to in the basis for opinion section of the auditor's standard report. Explicitly referred to in the opinion section of the auditor's standard report. Implicitly referred to in the opinion section of the auditor's standard report.
Explicitly referred to in the basis for opinion section of the auditor's standard report.
Forestcrest Woolen Mills is a closely held North Carolina company that has existed since 1920. The company manufactures high-quality woolen cloth for men's and women's outerwear. Your firm has audited Forestcrest for 15 years. Five years ago, Forestcrest signed a consent decree with the North Carolina Environmental Protection Agency. The company had been convicted of dumping pollutants (such as bleaching and dyeing chemicals) into the local river. The consent decree provided that Forestcrest construct a water treatment facility within eight years. You are conducting the current-year audit, and you notice that there has been virtually no activity in the water treatment facility construction account. Your discussion with the controller produces the following comment: "Because of increased competition and lower sales volume, our cash flow has decreased below normal levels. You had better talk to the president about the treatment facility." The president (and majority shareholder) tells you the following: "Given the current cash flow levels, we had two choices: lay off people or stop work on the facility. This is a poor rural area of North Carolina with few other job opportunities for our people. I decided to stop work on the water treatment facility. I don't think that the state will fine us or close us down." When you ask the president if the company will be able to comply with the consent decree, he informs you that he is uncertain. Which of the following statement(s) is/are correct regarding the implications of this situation if these events occurred in the seventh year after the signing of the audit decree? The auditor would not be concerned with this situation because it has no bearing on the financial statements. If the facility cannot be completed, the auditor would most likely issue a standard unqualified report. If the facility cannot be completed on time and the penalties under the consent decree are significant enough to raise doubts about the company's continued existence, the auditor would likely issue a modified report with an explanatory paragraph for going concern.
If the facility cannot be completed on time and the penalties under the consent decree are significant enough to raise doubts about the company's continued existence, the auditor would likely issue a modified report with an explanatory paragraph for going concern.
When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist? In response to inquiries from a successor auditor. When the amount is material. When a line manager rather than a lower-level employee commits the fraudulent act. When the fraud results from misappropriation of assets rather than fraudulent financial reporting.
In response to inquiries from a successor auditor.
Which of the following best places the events of the last decade in proper sequence? Increased consulting services to auditees, Sarbanes-Oxley Act, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB. Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of PCAOB.
Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.
Risk of material misstatement refers to a combination of which two components of the audit risk model? Control risk and detection risk. Audit risk and control risk. Audit risk and inherent risk. Inherent risk and control risk.
Inherent risk and control risk.
Which of the following statements best describes what is meant by an unqualified audit opinion? Issuance of an unqualified auditor's report indicates that the auditor is not qualified to express an opinion that the client's financial statements are fairly presented in accordance with agreed-upon criteria. Issuance of a standard unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases. Issuance of an unqualified auditor's report indicates that the auditor is expressing different opinions on each of the basic financial statements regarding whether the client's financial statements are fairly presented in accordance with agreed-upon criteria. Issuance of an unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are not fairly enough presented in accordance with agreed-upon criteria to qualify for a clean opinion.
Issuance of a standard unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.
An independent audit adds value to the communication of financial information because the audit: confirms the exact accuracy of management's financial representations. assures the readers of financial statements that any fraudulent activity has been corrected. lends credibility to the financial statements. guarantees that financial data are fairly presented.
Lends credibility to the financial statements
Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.
Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.
Select the three conditions that are generally present when fraud occurs: (Select all that apply.) Management or other employees have an incentive or are under pressure that provides a reason to commit fraud. Circumstances exist that provide an opportunity for a fraud to be carried out. Those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act. Those involved have less than a high-school education. Those involved have no religious affiliations. Those involved are in their first year at the company.
Management or other employees have an incentive or are under pressure that provides a reason to commit fraud. Circumstances exist that provide an opportunity for a fraud to be carried out. Those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act.
Which of the following would be considered a nonattest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements. II. Reporting that a company's sustainability metrics are complete and accurate. I only. II only. Both I and II. Neither I nor II.
Neither I nor II.
A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor's opinion. Which kind of audit report would an auditor most likely issue under these circumstances? Standard unqualified opinion. Qualified opinion due to departure from GAAP. Adverse opinion. No opinion at all.
Qualified opinion due to departure from GAAP.
Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? ASB PCAOB Public company audits Nonpublic company audits Public company audits Public company audits Nonpublic company audits Nonpublic company audits Nonpublic company audits Public company audits
Nonpublic company audits Public company audits
Which of the following types of audit evidence is the least reliable? Bank statements obtained from the entity. Test counts of inventory performed by the auditor. Prenumbered purchase order forms prepared by the entity. Correspondence from the entity's attorney about litigation.
Prenumbered purchase order forms prepared by the entity.
Section 301 of the Sarbanes-Oxley Act requires that public companies have an audit committee. Independent auditors are increasingly involved with audit committees. Select all of the following that are functions of the audit committee: (Select all that apply.) Selection of the independent auditor, discussion of audit fee with the auditor, and review of the auditor's engagement letter. Review of the independent auditor's overall audit plan (scope, purpose, and general audit procedures). Review of the annual financial statements before submission to the full board of directors for approval. Review of the results of the auditor's examination including experiences, restrictions, cooperation received, findings, and recommendations. Matters that the auditor believes should be brought to the attention of the directors or shareholders should be considered. Review of the independent auditor's evaluation of the company's internal control systems. Review of the company's accounting, financial, and operating controls. Review of the reports of internal audit staff. Review of interim financial reports to shareholders before the board of directors approves them. Review of the audit workpapers to ensure that the audit was conducted properly. Review of the makeup of the board of directors to ensure that they are qualified to oversee the audit process. Review of the qualifications of the audit staff to ensure that they are qualified to conduct the audit. Review of the applicable audit standards to ensure that they apply to the audited company.
Selection of the independent auditor, discussion of audit fee with the auditor, and review of the auditor's engagement letter. Review of the independent auditor's overall audit plan (scope, purpose, and general audit procedures). Review of the annual financial statements before submission to the full board of directors for approval. Review of the results of the auditor's examination including experiences, restrictions, cooperation received, findings, and recommendations. Matters that the auditor believes should be brought to the attention of the directors or shareholders should be considered. Review of the independent auditor's evaluation of the company's internal control systems. Review of the company's accounting, financial, and operating controls. Review of the reports of internal audit staff. Review of interim financial reports to shareholders before the board of directors approves them.
Select the items that are most likely to be objectives of the "brainstorming" meeting that is held among the engagement team members: (Select all that apply.) Share insights about the entity and its environment and the entity's business risks. Provide an opportunity for the team members to discuss how and where the entity might be susceptible to fraud. Emphasize the importance of maintaining professional skepticism throughout the audit regarding the potential for material misstatement due to fraud. Discuss which client employees could be motivated to commit a fraudulent act based on the team's first impressions. Ensure that all engagement team members understand that it is their responsibility to ensure that all fraud is detected.
Share insights about the entity and its environment and the entity's business risks. Provide an opportunity for the team members to discuss how and where the entity might be susceptible to fraud. Emphasize the importance of maintaining professional skepticism throughout the audit regarding the potential for material misstatement due to fraud.
Which of the following would be the best audit evidence to verify the assertion of accounts receivable? The auditors could have examined the accounts receivable percentage of other companies in the same industry and compared to Lernout & Hauspie's recorded amounts. The auditors could have reviewed the accounts receivable accounts to determine if they are consistent with the sales for each customer. The auditor could confirm a sample of accounts receivable with customers, perhaps asking the customers to fill in the dollar amount that they owe as of the balance sheet date. The auditors could have interviewed personnel at Lernout & Hauspie to inquire as to the validity of the accounts receivable.
The auditor could confirm a sample of accounts receivable with customers, perhaps asking the customers to fill in the dollar amount that they owe as of the balance sheet date.
Forestcrest Woolen Mills is a closely held North Carolina company that has existed since 1920. The company manufactures high-quality woolen cloth for men's and women's outerwear. Your firm has audited Forestcrest for 15 years. Five years ago, Forestcrest signed a consent decree with the North Carolina Environmental Protection Agency. The company had been convicted of dumping pollutants (such as bleaching and dyeing chemicals) into the local river. The consent decree provided that Forestcrest construct a water treatment facility within eight years. You are conducting the current-year audit, and you notice that there has been virtually no activity in the water treatment facility construction account. Your discussion with the controller produces the following comment: "Because of increased competition and lower sales volume, our cash flow has decreased below normal levels. You had better talk to the president about the treatment facility." The president (and majority shareholder) tells you the following: "Given the current cash flow levels, we had two choices: lay off people or stop work on the facility. This is a poor rural area of North Carolina with few other job opportunities for our people. I decided to stop work on the water treatment facility. I don't think that the state will fine us or close us down." When you ask the president if the company will be able to comply with the consent decree, he informs you that he is uncertain. Which of the following statement(s) is/are correct regarding the implications of this situation for the audit and the audit report? (Select all that apply.) The auditor might require the client to provide more detailed disclosure of the issue in the footnotes to the financial statements. If the client provides some assurance that work will start on the facility and that construction can be completed on time, the auditor will likely issue a standard unqualified audit report. The auditor should require the company to continue working on the water treatment facility regardless of the consequences. If the client refuses, then the auditor should issue a going concern opinion. The auditor would not be concerned with this situation because it has no bearing on the financial statements.
The auditor might require the client to provide more detailed disclosure of the issue in the footnotes to the financial statements. If the client provides some assurance that work will start on the facility and that construction can be completed on time, the auditor will likely issue a standard unqualified audit report.
In testing the existence assertion for an asset, an auditor ordinarily works from the: supporting documents to the accounting records. accounting records to the supporting documents. financial statements to the potentially unrecorded items. potentially unrecorded items to the financial statements.
accounting records to the supporting documents.
When planning an audit, an auditor should: consider whether the extent of substantive procedures may be reduced based on the results of tests of controls. conclude whether changes in compliance with prescribed internal controls justify reliance on them. evaluate detected misstatements. determine overall materiality for audit purposes.
determine overall materiality for audit purposes.
If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors': competence and objectivity. efficiency and experience. independence and review skills. training and supervisory skills.
competence and objectivity.
Which of the following statements best describes the role of materiality in a financial statement audit? Materiality refers to the "material" from which audit evidence is developed. The level of materiality has no bearing on the amount of evidence the auditor must gather. The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.
The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.
Which of the following statements concerning audit evidence is correct? The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. The measure of the reliability of audit evidence lies in the auditor's judgment. An entity's general ledger may be sufficient audit evidence to support the financial statements. To be appropriate, audit evidence should be either persuasive or relevant but need not be both.
The measure of the reliability of audit evidence lies in the auditor's judgment.
Which of the following is the most important reason for an auditor to gain an understanding of an audit client's system of internal control over financial reporting? Understanding a client's system of internal control is not a required part of the audit process. Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely. Understanding a client's system of internal control can help the auditor make valuable recommendations to management at the end of the engagement. Understanding a client's system of internal control can help the auditor sell consulting services to the client.
Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.
Which of the following would an auditor most likely use in determining overall materiality when planning the audit? The anticipated sample size of the planned substantive tests. The entity's income before taxes for the period-to-date (e.g., 6 months). The results of tests of controls. The contents of the engagement letter.
The entity's income before taxes for the period-to-date (e.g., 6 months).
During the initial planning phase of an audit, a CPA most likely would: identify specific internal control activities that are likely to prevent fraud. discuss the timing of the audit procedures with the entity's management. evaluate the reasonableness of the entity's accounting estimates. inquire of the entity's attorney if it is probable that any unrecorded claims will be asserted.
discuss the timing of the audit procedures with the entity's management.
The auditor should consider audit risk when planning and performing an audit of financial statements. Audit risk should also be considered together in determining the nature, timing, and extent of auditing procedures and in evaluating the results of those procedures. Which of the following best describes audit risk? The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. The risk that an auditor expresses an inappropriate audit opinion when the financial statements are not materially misstated. The risk that an auditor will be unable to complete the audit because of limitations imposed by the client. The risk that the client will not disclose relevant information to the auditor during the audit.
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? Whether management has ever intentionally violated the securities laws. Management's attitude about hiring ethical employees. Whether management has any knowledge of fraud that has been perpetrated on or within the entity. Management's attitudes toward regulatory authorities.
Whether management has any knowledge of fraud that has been perpetrated on or within the entity.
Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed. To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed.
To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.
For what primary purpose does the auditor obtain an understanding of the entity and its environment? To limit audit risk to an appropriately high level. To plan the audit and determine the nature, timing, and extent of audit procedures to be performed. To determine the audit fee. To decide which facts about the entity to include in the audit report.
To plan the audit and determine the nature, timing, and extent of audit procedures to be performed.
Inspection of records and documents relates to the auditor's examination of entity accounting records and other information. One issue that affects the reliability of documentary evidence is whether the documents are internal or external. Following are examples of documentary evidence: Classify each document as internal or external evidence and as to its reliability (high, moderate, or low). 1.Duplicate copies of sales invoices. 2.Purchase orders. 3.Bank statements. 4.Remittance advices. 5.Vendors' invoices. 6.Materials requisition forms. 7.Overhead cost allocation sheets. 8.Shipping documents. 9.Payroll checks. 10.Long-term debt agreements.
Type 1. Internal 2.Internal 3. External 4. External 5. External 6. Internal 7. Internal 8. Internal 9. Internal 10. External Reliability 1. High if internal control is excellent, moderate to low otherwise. 2. High if internal control is excellent, moderate to low otherwise. 3. High because it comes from an external party. 4. High to moderate because the document has been circulated to a party outside the entity. 5. High because it comes from an external party. 6. High if internal control is excellent, moderate to low otherwise. 7. High if internal control is excellent, moderate to low otherwise. 8. High if internal control is excellent, moderate to low otherwise. 9. High to moderate because the document has been circulated to a party outside the entity. 10. High because it comes from an external party.
Audits can be categorized into five types: (1) financial statement audits, (2) audits of internal control, (3) compliance audits, (4) operational audits, and (5) forensic audits. For each of the following descriptions, indicate which type of audit (financial statement audit, audit of internal control, compliance audit, operational audit, or forensic audit) best characterizes the nature of the audit being conducted. Also indicate which type of auditor (external auditor, internal auditor, government auditor, or forensic auditor) is likely to perform the audit engagement. (If more than one option is appropriate for one of the dropdowns below, select the choice that represents all applicable options.) a. Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new drugs to market. b. Determine the fair presentation of Ajax Chemical's balance sheet, income statement, and statement of cash flows. c. Review the payment procedures of the accounts payable department for a large manufacturer. d. Examine the financial records of a division of a corporation to determine if any accounting irregularities have occurred. e. Evaluate the feasibility of forecasted rental income for a planned low-income public housing project. f. Evaluate a company's computer services department in terms of the efficient and effective use of corporate resources. g. Audit the partnership tax return of a real estate development company. h. Investigate the possibility of payroll fraud in a labor union pension fund.
Type of Audit a. Operational b. Financial statement c. Compliance or operational or possibly internal control d. Forensic or Financial statement e. Operational f. Operational g. Compliance h. Compliance or forensic Type of Auditor a. Government b. External c. Internal or external d. Internal, external, or forensic e. Government, external, or internal f. Internal or external g. Government h. Government, external, or forensic
The current file of the auditor's working papers should generally include: organization charts. a flowchart of the accounting system. copies of bond and note indentures. a copy of the financial statements.
a copy of the financial statements.
John Josephs, an audit manager for Tip, Acanoe & Tylerto, was asked to speak at a dinner meeting of the local Small Business Administration Association. The president of the association has suggested that he talk about the various phases of the audit process to help small business owners better understand what auditors do. John has asked you, his trusted assistant, to prepare an outline for his speech. He suggests that you answer the following: a(1). Below are the various phases of an audit. Using the column on the right, determine the correct order of each phase (1 - first, 7 - last). Plan the audit Complete the audit Client acceptance/continuance Audit business processes and related accounts Preliminary engagement activities Evaluate results and issue the audit report Consider and audit internal control a(2). Match the definition of each phase of the audit with the specific phase it relates to. The auditor understands and evaluates the client's internal controls in order to assess the risk that they will not prevent or detect a material misstatement. In the case of a public company, the auditor will conduct an audit of internal control over financial reporting. Based on the collection and evaluation of evidence, the auditor issues a report on whether the financial statements are fairly presented. During this phase of the audit, the auditor uses the knowledge of the client to plan the audit and perform preliminary analytical procedures. The auditor decides to accept a new client or retain an existing client. The auditor searches for contingent liabilities and subsequent events, and performs a final review of the evidence gathered. This phase involves (1) determining the audit engagement team requirements, (2) ensuring the independence of the audit team and audit firm, and (3) establishing an understanding with the client regarding the services to be performed and the other terms of the engagement. The auditor conducts substantive tests, including analytical procedures and the details of the account balances, searching for material misstatements.
a(1): 3, 6, 1, 5, 2, 7, 4 a(2): Consider and audit internal control, Evaluate results and issue the audit report, Plan the audit, Client acceptance/continuance, Complete the audit, Preliminary engagement activities, Audit business processes and related accounts.
You were recently hired by the CPA firm of Honson & Hansen. Within two weeks, you were sent to the first-year staff training course. The instructor asks you to prepare answers for the following questions: a. Which of the following provides the best definition of audit evidence? All information available to the auditor regarding the client, as long as it was not provided by the client. Client information which is admissible in court under state or federal law. The underlying accounting data and any additional information available to the auditor, whether originating from the client or externally. b. Which of the following best describes the relationship between evidence and the assertions/audit opinion? Audit evidence provides 50% of assurance necessary to support the audit report. Audit evidence helps the auditor determine whether management's assertions are being met. Audit evidence is of limited value in most financial statement audits. Audit evidence helps the client prove that the auditor's assertions are being met. c. What characteristics of evidence should an auditor be concerned with when searching for and evaluating audit evidence? relevance and reliability completeness and quantity origination and timing
a. The underlying accounting data and any additional information available to the auditor, whether originating from the client or externally. b. Audit evidence helps the auditor determine whether management's assertions are being met. c. relevance and reliability
Operational auditing is oriented primarily towards: verification that an entity's financial statements are fairly presented. efficiency and future improvements to accomplish the goals of management. past protection provided by existing internal control. the accuracy of data reflected in management's financial records.
efficiency and future improvements to accomplish the goals of management.
