ACC 491 Chapter 6 Smartbook

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Which of the following statements is correct?

Not all entities undergoing a financial statement audit have audit committees.

During the planning stages of the audit, the auditors develop a(n) ______.

audit plan strategy schedule

A lack of sufficient capital to continue operations is considered a(n) ______ level risk.

financial statement

A possible fraud concern management ______ of the allowance for doubtful accounts.

understatement

Auditor review of subsequent period invoices to verify all receivables are recorded is verification of

completeness

Most revenue transactions involve a

debit to either cash or accounts receivable

Assume auditors find a $5,000 misstatement in a sample. As a result, they estimate the entire population is misstated by about $20,000. The sample size must have been _____ % of the population

25

Which of the following is not a relevant assertion?

Materiality and appropriation

Discussion(s) with audit team members about the susceptibility of the client's financial statements to material misstatements are ______.

always required

Comparing a company's inventory turnover to industry standard rates is an example of ______.

analytical procedures

Analytical procedures provide ______ evidence as to the reasonableness of various revenues and expenses.

direct

The overall risk of association with a particular business is often referred to as

engagement risk

Significant risks often relate to transactions that are ______.

estimation nonroutine

Obtaining evidence about opening balances is necessary ______.

in the first audit of a client

Auditors may respond to fraud risk by all of the following except ______.

increasing use of client staff during substantive procedures

The time interval from the beginning of audit work to the balance sheet date is called the

interim period

The final step of the audit is to ______.

issue the audit report

When a successor auditor is offered an auditing engagement, the successor auditor ______.

must obtain the client's consent before discussing confidential information with the predecessor auditor

Generally accepted accounting principles ______.

have various requirements for the valuation of assets

PCAOB standards explicitly require auditors to determine whether any of the identified risks of material misstatement are

significant

Inherent risk is the risk ______.

of material misstatement of an assertion without considering internal control

Audit fees are composed of ______.

staff salaries overhead profit payroll taxes

Audit data analytic techniques ______.

can be used in tests of controls can be used to perform risk assessments

If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be ______ $50,000.

less than

All of the following are common indications of fraud except ______.

related party transactions

If auditors test 20% of a population and find a $4,000 misstatement, they would estimate the entire population is misstated by about ______.

$20,000 ($4,000 / 20%)

Inquiries of predecessor auditors are aimed at obtaining information on ______.

disagreements with management integrity of management reason for change in auditors

Even if specific risks of material misstatement due to fraud are not identified by the auditors, there is always a possibility of management override of

internal controls

Using analysis, modeling, or visualization to analyze patterns, identify anomalies, or extract other useful information related to the subject matter of an audit is the basis of audit

data analytics

An ADA technique that is used to identify unusual relationships based on tendencies over time is called

trend analysis

The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion

existence of assets

Required discussions about the susceptibility of the client's financial statements to material misstatement allow experienced team members to emphasize the importance of maintaining the proper degree of _____ _____ regarding the possibility of such misstatements.

professional skepticism

Materiality depends on the ______ and the nature of the item.

dollar amount

The risk of material misstatement of an assertion without considering internal control is called

inherent

The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at the financial statement and

relevant assertion levels

A dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a ______.

test of controls

Which of the following is not a facet of the overall audit strategy?

Setting a date when the final audit fees will be paid

Many inherent risks arise because of _____ risks faced by management, such as the possibility of material misstatement due to fraud.

business

Typical transaction cycles include ______.

conversion (production) revenue (sales and collections) investing

The engagement letter should include information regarding ______.

inherent limitations of the audit expected form and content of the reports applicable financial reporting framework

During the second stage of the audit process, auditors must obtain an understanding of the nature of _____ _____ because it allows them to identify accounts and classes of transactions that may be misstated and to tailor audit

internal control

Because material misstatements due to fraudulent financial reporting often involve management override of _____ _____ auditors should ordinarily presume there is a fraud risk related to revenue recognition.

internal controls

A risk that has been identified and assessed that, in the auditor's opinion, requires special audit consideration is considered a(n)

significant risk

When auditors obtain evidence of fraud, they should ______ withdraw from the engagement.

sometimes

The basic unit of measurement for audit fees is ______.

staff time

Further audit procedures include ______.

tests of controls substantive procedures

Responsibility for the appointment, compensation, and oversight of the auditors rests with the client's ______.

audit committee

Due to the continuing litigation involving auditors, it is important for CPA firms to develop quality control policies for thoroughly investigating clients ______.

before an engagement is accepted

Risk assessment procedures include ______.

observation and inspection inquiry of external parties analytical procedures

The auditors' understanding of the nature of the client includes ______.

organizational structure accounting policies product lines competitive position

The auditors may use the statement of cash flows while obtaining an understanding of the client, as part of ______ analytical procedures.

risk assessment

The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called

audit risk

During the planning stage of an audit, the auditors establish an understanding with their client as to the nature of services to be provided and the responsibilities of the ______.

auditor and client

Most audit firms organize the substantive portion of their audit plans around the ______ accounts.

balance sheet

Many inherent risks arise because of ______ risks faced by management, such as the possibility of material misstatement due to fraud.

business

The auditor's consideration of ______ risk involves analyzing the design and implementation of internal control to decide if the system appears adequate to detect and correct material misstatements.

control

Physical examination of plant and equipment verifies ______.

existence

Relevant assertions include ______.

existence or occurrence completeness valuation or allocation

A $500 error would most likely be considered material for ______.

a school fund raising organization

If auditors identify fraud risks, the auditors may modify their overall approach to the audit by ______.

adding specialized audit staff increasing third-party confirmations

Competitive position, organizational structure, governance processes, and product lines are all components of the auditors' understanding the nature of the

client

If inherent risk is assessed as low and internal controls seem able to prevent or detect and correct misstatements, the auditors may decide to perform tests of support an assessment that _____ risk is low.

control

Test of account balances and transactions designed to detect any material misstatements in the financial statements are called ______.

substantive procedures

Usually organized around the balance sheet accounts, the _____ _____ portion of the audit program is aimed at confirming financial statement amounts.

substantive procedures

The audit plan should include ______.

a description of the nature, timing, and extent of planned risk assessment procedures

In a first time audit, if the auditors cannot obtain sufficient evidence about the balance of beginning inventories, they may have to ______.

disclaim an opinion on the income statement

An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as a(n)

dual - purpose procedure

An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as a(n) ______ procedure.

dual-purpose

The nature and extent of the audit work to be performed on a particular engagement depend largely upon the ______.

effectiveness of the client's internal control in preventing or detecting material misstatements

The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk.

engagement

Upon acceptance by the client, the _____ letter presents an executor contract between the auditor and the client.

engagement

If the auditors' objective is to test ______, they follow the stream of evidence back to its source.

existence

True or false: Due to the continuing litigation involving auditors, it is important for CPA firms to develop quality control policies for throughly investigating clients as soon as an engagement is accepted.

false

True or false: Every corporation is required to have an audit committee.

false

True or false: Inadequate segregation of duties, management oversight of employees, and systems of authorization and approval of transactions all increase the opportunity to commit fraudulent financial reporting.

false

Successor auditors seek information from predecessor auditors on communication with the client and those charged with governance regarding ______.

fraud and noncompliance with laws and regulations internal control deficiencies and material weaknesses

Applying procedures that provide more reliable evidence, shifting tests from the interim period to near year-end, or increasing the sample size for a particular substantive procedure are all alterations that may be done to address a(n)

fraud risk

The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis for the auditors' selection of

further audit procedures

To gain an understanding of the client, its environment, and internal controls, audits will review the ______.

industry, regulatory, and other external factors affecting the client nature of the client, including the client's application of accounting policies the client's objectives and strategies and related business risks

Examples of risks at the financial statement level include ______.

ineffective control environment a declining industry lack of sufficient capital to continue operations

Top management fraud is often accomplished by ______.

intentionally misstating accounting estimates unusual transactions that involve related parties

According to the FASB, if, in light of surrounding circumstances, the magnitude of an item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item, the omission of the item in a financial report is considered a(n) ______ deficiency. (Enter only one word per blank.)

material

Auditors should document several elements of risk assessment including ______.

nature, timing, and extent of further audit procedures audit team discussion understanding of the entity and its environment

An audit committee must be composed of at least three ______.

outside directors

When a new client has been accepted and no satisfactory recent audit has been performed the auditor must ______.

perform an extensive analysis of prior years' transactions to establish opening balances

When an audit firm is considering a new client, they are required to attempt to communicate with the ______ auditor.

predecessor

Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement

presentation of assets

The auditors may use the statement of cash flows while obtaining an understanding of the client, as part of _____ assessment analytical procedures. (Enter only one word per blank.)

risk

Trend analysis and analyzing general ledger fluctuations are two common ADA techniques used in

risk assessment

An increase in the level of planning materiality results a decrease in ______.

scope of audit procedures

During the ______ stage of the audit process, auditors use risk assessment procedures to gather information to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures.

second

For recurring audits, a revision in the terms of the audit engagement may be indicated when there is a change in ______.

senior management reporting requirements the size of the client

A company's management searching for auditors who would accept a questionable revenue recognition method as being in accordance with GAAP is called

shopping for accounting principles

Silver Corporation is seeking a new auditor due to a disagreement with the current audit firm regarding a financial statement disclosure. Silver is looking for a new auditor who will provide a clean opinion on the statements. This is known as ______.

shopping for accounting principles

In making inquiries related to fraud, auditors must ask whether the company has entered into any _____ _____ transactions.

significant unusual

Engagement letters should include all of the following except ______.

the exact fees to be charged for the audit

The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at ______.

the financial statement and relevant assertion levels

An estimate of the number of hours required to perform each step in the audit is called a(n) ______.

time budget

The application of performance materiality to a particular audit procedures is

tolerable misstatement

Planning materiality is commonly based on % of ______.

total revenues net income total assets

The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n) _____ cycle

transaction

Auditors obtain a representation letter from management ______.

when completing the audit

Auditors consider the overall attractiveness and other characteristics of the client's industry. Which of the following are other characteristics that are considered?

Governmental regulations Financial trends Economic conditions Changes in technology

A common rule of thumb related to a financial statement base used by auditors is ______.

1% of total equity

Risk factors reflective of employee attitudes and/or rationalizations that allow them to justify misappropriation of assets include ______.

overriding existing internal controls behavior indicating dissatisfaction with the company changes in lifestyle

When materiality is allocated to a particular account, it is referred to as

performance materiality

A description of the nature, timing, and extent of the audit procedures to be performed is found in the audit ______.

plan

The auditor should record the terms of the engagement annually in an engagement letter to the audit committee for ______.

public company clients only

Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditors'

analytical procedures

When auditors are aware of a fraud risk they may ______.

apply procedures that provide more reliable evidence interview personnel involved in areas where risks are identified increase sample sizes for substantive procedures

Opportunities for the misappropriation of assets are increased when there ______.

are no mandatory vacations for employees performing key control functions is inadequate recording keeping is a large amount of cash on hand

Auditors indirectly verify revenue, cost of goods sold, and expenses by substantiating changes in the Blank______ accounts.

asset and liability

Generally highly reliable evidence is available to substantiate ______.

assets and liabilities

Generally accepted auditing standards require that indications of management fraud should be communicated to the ______, to assist in its oversight of the financial reporting process of the company.

audit committee

The overall audit strategy involves determining overall characteristics of the engagement that ______.

determine the timing of procedures define the audit scope determine the focus of the audit team

ADA techniques are most useful in substantive analytical procedures because they can be used to ______.

develop more accurate and precise expectations

A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by the

time budget

If assets are subject to depreciation, an analysis of the reasonableness of the cost allocation and verification of the computation of the remaining unallocated cost are important in assessing the

valuation of assets


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