Ch 5 HW

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

A large amount of assets.

Completeness

All assets have been recorded

Calculate the ratio of bad debt expense to credit sales

Analytical procedures

Compare current financial information with comparable prior periods

Analytical procedures

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

Anticipated costs of audit completion.

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

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

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

Confirm the amounts.

Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk

Correct

Both inherent risk and control risk exist independently of the audit of financial statements.

Correct

Detection risk does not exist when no audit is performed.

Correct

Inherent risk is the possibility of material misstatement before considering the client's internal control.

Correct

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

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

Inventory turnover Year 2- 4.01 Year 1- 6.32

Due to a more severe than expected economic downturn, buyers have shifted to economy cars, resulting in higher than expected ending year 2 inventory

Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated.

Incorrect

Less control risk means an increase in the risk of material misstatement.

Incorrect

Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it.

Incorrect

The risk of material misstatement is composed of the three components of audit risk

Incorrect

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

Low

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

Permanent working paper file.

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

Ratio analysis

Prepare a flowchart of internal control over sales

Risk assessment procedures (other than analytical procedures)

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

Support the auditors' opinion.

Determine whether disbursements are properly approved

Tests of controls

Confirm accounts receivable

Tests of details of account balances, transactions, or disclosures

Rights and obligations

The company legally owns the assets

Debt to equity Year 2- 3.2 Year 1- 4.3

The company made a required principal payment on its long-term debt

Net fixed assets to equity Year 2- 19.1% Year 1- 23.2%

The company reclassified its international production facilities to held-for-sale

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

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

Existence and occurrence

There is such an asset

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

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

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

Achieve audit objectives related to a particular assertion.

Presentation and disclosure

Assets are properly classified.

Valuation

Assets are recorded at proper amounts

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

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

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

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

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

Copies of sales invoices inspected by the auditors.

Return on assets Year 2- 10.5% Year 1- 12.2%

Due to a more severe than expected economic downturn, buyers have shifted to economy cars, resulting in higher than expected ending year 2 inventory

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

Effectiveness of internal control.

During the audit of a dealership selling only new luxury automobiles, the auditors calculated the year 2 and year 1 ratios in the table below. Select the most reasonable explanation the controller will provide relating to year 2 for each change. An explanation may be used once, more than once, or not at all. Consider each ratio independently. Days sales in accounts receivable Year 2- 32 Year 1- 20

Sales managers recorded fraudulent sales at year-end to receive larger commissions

Cutoff

Transactions are recorded in the correct accounting period

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

Unusual transactions.