Auditing Final #1

Based on past experience with a client, an auditor determined performance materiality for current assets should be calculated at 1/4 of total materiality (6% of total current assets) and noncurrent assets should be calculated at 1/3 of total materiality (3% of total noncurrent assets). Calculate performance materiality for current assets based on the following: Cash and cash equivalents $800,000 Land 300,000 Accounts receivable 125,000 Prepaids 175,000 Building 200,000 Fixtures and equipment 600,000 Inventory 100,000 Leasehold improvements 150,000

$18,000

Based on past experience with a client, an auditor determined performance materiality for current assets should be calculated at 1/4 of total materiality (7% of total current assets) and noncurrent assets should be calculated at 1/3 of total materiality (4% of total noncurrent assets). Calculate performance materiality for current assets based on the following: Cash and cash equivalents: $900,000 Land: 200,000 Accounts receivable: 150,000 Prepaids: 150,000 Building: 400,000 Fixtures and equipment: 500,000 Inventory: 100,000 Leasehold improvements: 100,000

$22,750

An auditor is reviewing changes in sales for a product. Sales volume (quantity) declined 10% while sales price increased by 25% for the product. Prior year sales were $75,000. The auditor expects this year's sales for the product to be approximately

$84,375

Based on past experience with a client, an auditor determined performance materiality for fixed assets should be calculated at 1/4 of total materiality (3% of total net fixed assets). Calculate performance materiality based on the following: Fixed assets (gross) at 1/1/2017 $2,000,000 Capital expenditures 250,000 Dispositions 200,000 Accumulated depreciation at 1/1/2017 800,000 Accumulated depreciation at 12/31/2017 770,000

$9,600.

Which of the following is a true statement about the required documentation in an audit performed in accordance with generally accepted auditing standards?

A documented audit plan describing the necessary procedures to be performed is required.

In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?

A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

A lack of independent checks.

In an integrated audit, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations?

A material weakness exists.

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

A significant portion of management compensation is represented by stock options.

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

AICPA Accounting Trends and Techniques.

A CPA is conducting the first audit of a nonissuer's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is

Acceptable if the client and the predecessor auditor agree to it.

An auditor is required to attempt communication with the predecessor auditor prior to

Accepting the engagement.

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

Additional audit procedures are required.

An auditor assesses the risks of material misstatement because they

Affect the level of detection risk that the auditor may accept.

B, the newly hired external auditor for P Corp., is planning an audit engagement. When reviewing the work of P's predecessor auditor, B identified several unusual circumstances requiring further clarification. B should speak with the predecessor auditor

After requesting permission from management for the predecessor auditor to respond fully.

Financial statement audit plans usually should be developed

After the auditor has established the overall audit strategy.

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed

After the auditor has obtained an understanding of existing internal control.

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?

An appropriate level of management.

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

An audit plan documenting the procedures to be used to reduce audit risk.

Which of the following procedures is considered a test of controls?

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following statements best describes an auditor's responsibility to detect fraud or error?

An auditor should design an audit to provide reasonable assurance of detecting fraud or error that is material to the financial statements. The auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.

Which of the following statements reflects an auditor's responsibility for detecting fraud and errors?

An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

In an audit of a nonissuer's financial statements, projected misstatement is

An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

An auditor's document includes the following statement: "Our audit is subject to the risk that errors, fraud, or illegal acts, if they exist, will not be detected. However, we will inform you of any such matters that come to our attention." The above passage is most likely from

An engagement letter.

What is the definition of fraud in an audit of financial statements?

An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

An overly complex organizational structure involving unusual lines of authority. Year-end adjustments by the entity that significantly affect financial results.

Which of the following statements about analytical procedures is true?

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

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

Analytical procedures.

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel?

Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Which of the following matters does an auditor usually communicate to management?

Arrangements involving a predecessor auditor.

A successor auditor discovers a possible misstatement in a client's financial statements reported on by a predecessor auditor. Which of the following actions should the successor auditor take next?

Ask the client to arrange a meeting of the predecessor auditor, management, and the successor auditor to discuss the matter.

Risk assessment procedures

Assess the risks of material misstatement of financial statements.

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive procedures.

Discovering patterns and identifying anomalies in audit data using visualization is

Audit data analytics.

The auditor prepared a bar graph using a software package comparing the prior year's expenses with the current year's expenses to highlight the changes. The auditor was using

Audit data analytics.

Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?

Audit plan.

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?

Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the

Auditor's determination about whether audit risk can be sufficiently reduced.

When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client's internal control C = Substantive procedures

BAC.

Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests.

Both I and II.

Detection risk differs from both control risk and inherent risk in that detection risk

Can be changed at the auditor's discretion.

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

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

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it

Changes the company's operating results from a net loss to a net income.

When one auditor succeeds another, the auditor should request the

Client to authorize the predecessor auditor to allow a review of the predecessor auditor's audit documentation.

In assessing whether to accept a client for an audit engagement, a CPA should consider the

Client's Business Risk: YES CPA's Business Risk: YES

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Compare financial information with nonfinancial operating data.

Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?

Compare recorded financial information with anticipated results from budgets and forecasts.

As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the client's payroll-transaction data. Which of the following audit tests of controls using computer-assisted audit techniques would best meet the objective?

Comparing Social Security numbers paid in the payroll transaction file to a file of government- authorized Social Security numbers.

Which of the following is an analytical procedure?

Comparing current-year balances to prior-year balances.

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

Comparing current-year to prior-year sales volumes.

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities. Developing the current year's expected net sales based on the entity's sales trend of prior years.

Which of the following audit activities is an analytical procedure used to form an overall conclusion to ensure that the financial statements are free from material misstatement?

Comparing the current year's financial statements with those of the prior year.

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Comparing the current-year account balances for conformity with predictable patterns. Comparing current-year balances to budgeted balances.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements with anticipated results. Performing analytical procedures to identify areas that may represent specific ris

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

Concluding that the entity's management probably lacks integrity.

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

Consider the possibility of a misstatement in the financial statements.

An auditor's response to the assessment of the risks of material misstatement due to fraud takes various forms. A response with an overall effect on the conduct of the audit is to

Consider whether management's applications of accounting principles indicates a bias.

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?

Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

Fact Pattern: During the annual audit of BCD Corp., an issuer, Smith, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past 7 years, including the year under audit. Smith notified the directors of BCD Corp. of the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Because management took no action, Smith should

Consider withdrawing from the engagement.

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be

Considered in the evaluation of audit findings in the current year.

Analytical procedures used to form an overall conclusion of an audit generally would include

Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor's concern about the risk of material misstatements due to fraud is least likely to be increased if management

Consists of many individuals that make operating and financing decisions.

Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to

Contingencies: YES Balance Sheet Accounts: YES

Which of the following audit risk components may be assessed in nonquantitative terms?

Control Risk: YES Detection Risk: YES Inherent Risk: YES

In general, fraudulent financial reporting perpetrated by which of the following are most difficult to detect?

Controller.

An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for bad debts in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for bad debts and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences?

Debit bad debt expense $700,000; Credit allowance for bad debts $700,000.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risks of material misstatement from those originally planned. To achieve an overall audit risk that is substantially the same as the planned audit risk, the auditor would

Decrease detection risk.

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

Decrease in the inventory turnover rate.

It would not be appropriate for the auditor to initiate discussion with the audit committee concerning

Details of the procedures that the auditor intends to apply.

The objective of tests of details of transactions performed as substantive procedures is to

Detect material misstatements at the relevant assertion level.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is

Detection risk.

Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?

Detection.

When planning an audit, an auditor should

Determine materiality for the financial statements as a whole.

An auditor most likely will use analytical procedures to form an overall conclusion to

Determine whether additional audit evidence may be needed.

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?

Determining the extent of involvement of the client's internal auditors.

Which of the following procedures should an auditor most likely include in the planning of an audit of financial statements?

Determining the need for specialized skills.

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden internal control?

Differences are always disclosed on a computer exception report.

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

An auditor most likely would make specific inquiries of the predecessor auditor regarding

Disagreements with management as to auditing procedures.

K, the external auditor for B Co., is planning an initial audit engagement with the management of B. During the course of planning, K most likely should not

Discuss the nature and timing of detailed procedures.

During the initial planning phase of an audit, a CPA most likely would

Discuss the timing of the audit procedures with the client's management.

Which of the following communications between the auditor with final responsibility for an engagement and the audit engagement team regarding the susceptibility of a client's financial statements to material misstatements due to error or fraud is required by auditing standards?

Discussing the need to maintain a questioning mind and to exercise professional skepticism throughout the audit.

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the

Employees' actions affect the auditor's ability to rely on management's representations.

A document in an auditor's audit documentation includes the following statement: "Our audit is subject to the inherent risk that material misstatements, if they exist, will not be detected." The above passage is most likely from a(n)

Engagement letter.

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

Engagement letter.

The objective of analytical procedures performed as risk assessment procedures is to

Enhance the auditor's understanding of the client's business.

Analytical procedures used in planning an audit should focus on

Enhancing the auditor's understanding of the client's business.

Analytical procedures used as risk assessment procedures should focus on

Enhancing the auditor's understanding of the entity and its environment.

Inherent risk and control risk differ from detection risk in that they

Exist independently of the financial statement audit.

When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the

Extent of tests of details.

In order to respond to the increased risks that could be present in the initial audit of an entity, an external auditor should consider the assignment of

External audit personnel with appropriate levels of capabilities and competence.

Which of the following factors most likely would cause an auditor to decline a new audit engagement?

Failure of management to satisfy the preconditions for an audit.

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Financial statement assertions.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Functions of the client and its environment, but detection risk is not.

An auditor uses the audit evidence provided by the understanding of internal control and the assessment of the risks of material misstatement to determine the nature, timing, and extent of

Further audit procedures.

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

Hill, the auditor.

An auditor who is engaged in obtaining information to identify the risks of material misstatement due to fraud should perform which procedures? I. Make inquiries directly to the audit committee or its chair II. Apply analytical procedures to revenue accounts III. Obtain personal financial statements from senior management

I and II only.

An auditor most likely obtains an understanding of a new client to

Identify areas of audit emphasis.

While performing procedures in planning an audit, the auditor's comparison of expectations with recorded amounts yield unusual and unexpected relationships. The auditor should consider the results of the analytical procedures in which of the following?

Identifying the risks of material misstatement due to fraud.

An auditor should design the audit plan to

Implement the audit strategy.

Which of the following is an aspect of scheduling and controlling the audit engagement?

Include in the audit plan a column for estimated and actual time.

In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion

Includes brainstorming about how assets can be misappropriated.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would

Increase the assessment of control risk and increase the extent of substantive tests.

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that

Involves an estimate.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment

Is based on evaluating whether the entity's related controls have been suitably designed and implemented.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods: Year 3 - 4.3 Year 2 - 6.2 Year 1 - 7.3 Which of the following is the most likely cause of the decrease in accounts receivable turnover?

Liberalization of credit policy.

An auditor's engagement letter most likely would include a statement that

Limits the auditor's responsibility to detect fraud and error.

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Make a preliminary judgment about materiality.

Before accepting an engagement to audit a new client, an auditor is required to

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

Management fails to take the appropriate remedial action.

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if

Management is closely involved in operations.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fraudulent financial reporting when

Management is dominated by one individual who is also a shareholder.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

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

Management is responsible for making all financial records and related information available to us.

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Management is unwilling to permit inquiry of its legal counsel.

In every audit, which of the following must be identified as a potential risk of material misstatement due to fraud?

Management override of controls.

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.

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Management's disregard of its responsibility to maintain an adequate internal control environment.

An auditor's engagement letter most likely would include a statement regarding

Management's responsibility to provide certain written representations to the auditor.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement?

Management's unwillingness to make all financial records available to the CPA.

The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that

Material misstatements that occur will not be detected by the audit.

Which of the following elements underlies the development of an overall audit strategy?

Materiality and audit risk.

Which one of the following statements is correct concerning the concept of materiality?

Materiality is a matter of professional judgment.

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

Materiality.

In comparison with the detailed audit plan of the independent auditor who is engaged to audit the financial statements of a large publicly held company, the audit client's comprehensive internal audit plan is

More detailed and covers areas that normally are not considered by the independent auditor.

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

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

Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company?

Net income to working capital.

When performing procedures for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software (GAS) package?

Observing inventory.

Which of the following procedures would an auditor most likely perform before auditing the balance sheet?

Obtain an understanding of the client's internal control activities.

The auditor should perform tests of controls when the auditor's risk assessment includes an expectation

Of the operating effectiveness of internal control.

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?

Other audit procedures to be performed to comply with generally accepted auditing standards.

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Payroll expense. Interest expense.

Analytical procedures reveal significant unexpected differences between recorded amounts and the expectations developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should

Perform additional audit procedures to investigate the matter further.

In developing an audit plan, an auditor should

Perform risk assessment procedures.

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

Perform risk assessment procedures.

In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

Perform substantive procedures for all relevant assertions related to each material class of transactions.

A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would

Perform tests several times during the year, rather than only at year end.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Perform the planned auditing procedures closer to the balance sheet date.

An auditor may be able to reduce audit risk to an acceptably low level for some relevant assertions by

Performing analytical procedures.

Which of the following procedures would an auditor most likely use to identify unusual year-end transactions?

Performing analytical procedures.

Audit planning for an initial audit most likely includes

Performing procedures involving opening balances.

As the acceptable level of audit risk decreases, an auditor may

Postpone the planned timing of substantive tests from interim dates to the year end.

An auditor's decision whether to apply analytical procedures as substantive procedures usually is determined by the

Precision and reliability of the data used to develop expectations.

Three conditions are generally present in the client's organization when fraud occurs. Those conditions include each of the following except a(n)

Professional skepticism about the likelihood of fraud.

Because an audit in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the audit with an attitude of

Professional skepticism.

Which of the following would not be considered an analytical procedure?

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?

Ratio analysis.

Which of the following is an analytical procedure that an auditor most likely uses to form an overall conclusion?

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.

A precondition for an audit most likely is not present when management

Refuses to acknowledge its responsibility for the fair presentation of the financial statements in accordance with the applicable reporting framework.

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit?

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered?

Results of performing substantive procedures.

During consideration of internal control in a financial statement audit, an auditor is not obligated to

Search for significant deficiencies in the operation of internal control.

Which of the following is an auditor least likely to perform in planning a financial statement audit?

Selecting a sample of vendors' invoices for comparison with receiving reports.

Which of the following events most likely would indicate the existence of related parties?

Selling real estate at a price significantly different from appraised value.

Which of the following circumstances would most likely cause an auditor to suspect that fraud exists in a client's financial statements?

Significantly fewer responses to confirmation requests are received than expected.

Analytical procedures can best be categorized as

Substantive procedures.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

Supporting accounting records and files that should be readily available are not produced promptly when requested.

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

Supporting records that should be readily available are frequently not produced when requested.

Which of the following is an example of an inherent risk that an auditor should consider?

Technological developments that may render inventory obsolete.

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?

The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

Audit plans should be designed so that

The audit evidence gathered supports the auditor's conclusions.

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

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

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

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

While testing a sample of an audit client's bank reconciliations during the year under audit, an auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner. The auditor suspects there may be fraud. Which of the following audit responses is most appropriate in this situation?

The auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit.

The auditor should establish an overall audit strategy. Which one of the following statements is most consistent with this requirement?

The auditor should plan the audit so that it will be performed effectively.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

The auditor's judgment.

Which of the following statements about the assessment of the risks of material misstatement in a client's computer environment is true?

The auditor's objectives with respect to the assessment of the risks of material misstatement are the same as in a manual system.

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except

The cost of correcting the misstatements.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?

The entity enters into derivative transactions as hedges.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting?

The entity's industry is experiencing declining customer demand. Management displays a significant disregard for regulatory authorities.

In planning the audit engagement, the auditor should consider each of the following except

The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.

The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider?

The nature of the assertion tested.

An auditor's inquiries of the predecessor auditor should include questions regarding

The predecessor's understanding as to the reasons for the change in auditors.

Before accepting an engagement to audit a new client, a CPA is required to obtain

The prospective client's consent to make inquiries of the predecessor, if any.

Which of the following factors is most important concerning an auditor's responsibility for considering fraud?

The risk that the financial statements are not fairly presented in all material respects, in accordance with the applicable reporting framework.

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

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

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They usually use financial and nonfinancial data aggregated at a high level.

In planning an audit, an auditor should document in the working papers the auditor's risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present?

Those risk factors identified.

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

To assist the auditor to accurately interpret information obtained during an audit.

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement?

Tour the client's facilities.

When performing analytical procedures as risk assessment procedures, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Unaudited information from internal quarterly reports.

When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether

Uncorrected misstatements are material.

Which of the following audit procedures is an auditor most likely not to perform related to newly identified related party transactions outside the normal course of business?

Understand the controls over authorization and approval of such transactions.

Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding the predecessor's

Understanding as to the reasons for the change of auditors. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.

The audit plan usually cannot be finalized until the

Understanding of the entity and its environment has been completed.

An auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's

Understanding of the reasons for the change in auditors.

An auditor reviews an audit client's accounting policies when considering which of the following matters?

Understanding the entity and its environment, including its internal control.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities?

Unrecorded sales.

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud?

Unusual discrepancies between the entity's records and confirmation replies.

The objective of performing analytical procedures in planning an audit is to identify the existence of

Unusual transactions and events.

One reason the independent auditor applies analytical procedures with regard to the client's operations is to identify

Unusual transactions.

An auditor's analytical procedures most likely would be facilitated if the entity

Uses a standard cost system that produces variance reports.

Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business?

Verify commission expense by multiplying sales revenue by the company's standard commission rate.

Which of the following statements is true concerning analytical procedures?

When expectations are more precise, significant variances are more likely to be due to misstatements.

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

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

When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except

Whether there has been any turnover of the component's board members.