EXAM CH 5

a. Which of the following is not a financial statement assertion made by management?

Effectiveness of internal control.

Vouching

Establishing the validity of a transaction by examining supporting documents.

b. Which of the following business characteristics is not indicative of high inherent risk?

A large amount of assets.

Completeness

All assets have been recorded.

Reperformance

An independent execution of procedures or controls that were originally performed by the client

Calculate the ratio of bad debt expense to credit sales.

Analytical procedures

Compare current financial information with comparable prior periods.

Analytical procedures

Presentation and disclosure

Assets are properly classified.

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

CORRECT

g. Which of the following is not a primary approach to auditing an accounting estimate?

Confirm the amounts.

e. Of the following, which is the least reliable type of audit evidence?

Copies of sales invoices inspected by the auditors.

j. Which of the following is not a function of audit working papers?

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

k. 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:

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

Inspection of records

Examining a document or record.

The risk of misstatement is the same from one engagement to the next.

FALSE

External confirmation

Obtaining a written response about a particular item from a third party

Inspection of tangible assets

Physically examining an asset.

Recalculation

Testing the mathematical accuracy of documents or records

Determine whether disbursements are properly approved.

Tests of controls

Audit working papers should include:

content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards

A principal purpose of a representation letter from management is to:

remind management of its primary responsibility for the financial statements.

The auditors develop __________ to recommend to management to correct the effects of errors or fraud in the client's accounting records.

the client's accounting records. adjusting entries

The __________ is a schedule listing the balances of accounts in the client's general ledger.

working trial balance

i. In what section of the audit working papers would a long-term lease agreement be filed?

Permanent working paper file.

c. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts?

Ratio analysis.

A __________ is a type of documentary evidence transmitted directly to the auditors by a third party (e.g., a customer or a vender).

confirmation reply

Tests of controls and __________ are referred to as "further audit procedures."

substantive procedures

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

INCORRECT

h. A primary purpose of the audit working papers is to:

Support the auditors' opinion.

A confirmation reply from an account receivable account ordinarily would be considered more reliable evidence than an account receivable clerk's reply to an inquiry from the auditor.

TRUE

d. Which of the following statements best describes why auditors investigate related party transactions?

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

Which of the following is not a management assertion?

Verification

The examination of large data sets to uncover hidden patterns, unknown correlations and other useful information is referred to as _________.

data analytics

Valuation

Assets are recorded at proper amounts

Cutoff

Transactions are recorded in the correct accounting period

f. Analytical procedures are most likely to detect:

Unusual transactions.

A letter signed by officers of the client company at the auditors' request which sets forth certain assertions about the company's financial position and operations is known as a __________.

representation letter

Analytical procedures are:

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

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

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

Incorrect

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

TRUE

The information contained in the auditors' working papers constitutes the principal evidence of the auditors' work and their resulting conclusions.

TRUE

Confirm accounts receivable.

Tests of details of account balances, transactions, or disclosures

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

Without regard to the effect of controls, __________ have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.

relevant assertions

The term __________ relates to the quantity of evidence that the auditors should obtain.

sufficient

Prepare a flowchart of internal control over sales.

Risk assessment procedures (other than analytical procedures)

Tracing

Following a transaction from a source document to recorded entries

A company's financial statements are the representations and assertions of the company's management.

TRUE

Rights and obligations

The company legally owns the assets.

Existence and occurrence

There is such an asset.

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

FALSE

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