Audit Chapter 4

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?

0.10.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?

Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to:

Change from 0.25 to 0.1.

Which of the following relationships between types of analytical procedures and sources of information are most logical?

Comparison of current account balances with expected balances: Company's budgets and forecasts

An audit committee is:

Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will:

Decrease.

Which of the following risks is entirely controlled by the auditor?

Detection risk

In the audit risk model, if an audit team wanted to keep audit risk at a low level, but there was high inherent risk and high control risk, then audit procedures would need to be designed so that:

Detection risk was set at a low level.

The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:

Detection risk.

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

Detection.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:

Evaluate the effect of the noncompliance on the financial statements.

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?

Evidence of a conservative systematic bias.

One of the typical characteristics of management fraud is:

Victimization of investors through the use of materially misleading financial statements.

Factors related to the susceptibility of accounts to misstatement or fraud include:

size of account balance, the volume of transactions

Analytical procedures can be used in which of the following ways?

As "attention-directing" methods when planning an audit at the beginning, As substantive audit procedures to obtain evidence during an audit, As a means of overall review near the end of the audit

It is acceptable under generally accepted auditing standards for an audit team to:

Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.

What is the primary objective of the fraud brainstorming session?

Assess the potential for material misstatement due to fraud.

A primary objective of analytical procedures used in the final review stage of an audit is to:

Assist the auditor in evaluating the overall financial statement presentation.

Analytical procedures used when planning an audit should concentrate on:

Accounts and relationships that can represent specific potential problems and risks in the financial statements.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?

Accounts receivable.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of:

Identifying unusual conditions that deserve more auditing effort.

The risk of material misstatement is composed of which audit risk components?

Inherent risk and control risk.

The risk that material misstatements have occurred in transactions entering the accounting system is:

Inherent risk.

Auditors are not responsible for accounting estimates with respect to:

Making the estimates.

The analytical procedures completed during the planning stages typically would not include a comparison of current year account balances with:

Other account balances that are being used as substantive analytical procedures.

In general, a fraudulent companies will prepare financial statements that are materially misleading in which of the following manners:

Overstating revenues and assets

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions?

Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Analytical procedures are generally used to produce evidence from:

Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Auditing standards do not require auditors of financial statements to:

Report all errors and frauds found to police authorities.

Under the Private Securities Litigation Reform Act, independent auditors are required to first:

Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

In the planning stage, analytical procedures are not used to:

Review the overall quality of the audit process and the evidence gathered.

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as:

Risk of material misstatement.

An audit strategy memorandum contains:

Specifications of procedures the auditors believe appropriate for the financial statements under audit.

Inherent risk is not a characteristic that is determined by:

Substantive procedures completed.

Which of the following circumstances would most likely cause an audit team to perform extended procedures?

The client made several large adjustments at or near year-end.

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 significant derivative transactions as hedges.

Analytical procedures are used in planning stages:

To assess the reasonableness of financial statement amounts and helps direct attention to possible problem areas.

The two types of noncompliance discussed in auditing standards are __-effect noncompliance and __-effect noncompliance.

direct, indirect

A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called __ or defalcation.

embezzlement

Inherent risk

is the susceptibility of the account to misstatement, is not created by the auditors

When doing fraud risk assessment, auditors:

must presume improper revenue recognition is a risk

A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a __ assertion.

relevant