Audit Chapter 4

(a) Which of the following would likely be found in the minutes of the board of directors?

*Amount of dividends declared. *Approval to pledge assets as security for debts. *Authorization of officers' salaries.

Which of the following is required by AU 240, "Consideration of Fraud in a Financial Statement Audit"?

*Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. *Conduct a discussion by the audit team of the risks of material misstatement due to fraud. *Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor.

(a) Which of the following would be considered an analytical procedure?

*Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. *Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. *Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.

(a) Certain conditions and circumstances are often present when management fraud occurs. Which of the following is such a condition or circumstance

*Unfavorable industry conditions. *Lack of working capital. *Slow customer collections.

sources of financial and nonfinancial data do include

*financial account information for comparable prior periods. *nonfinancial information such as physical production statistics. *company budgets and forecasts.

(a) When determining the inherent risk related to an account balance, an auditor theoretically does explicitly consider the

*liquidity of the account. *degree of management estimation involved in determining the proper account balance. *complexity of calculations involved.

(a) If an auditor encounters significant risks at the client, the auditor should do all of the following

*perform extended procedures. *include more experienced auditors on the engagement. *perform tests closer to year end.

(a) According to auditing standards, external auditors' responsibilities for indirect noncompliance do include

*performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. *considering the qualitative materiality of known and suspected noncompliance. *obtaining written management representations concerning the absence of violations of laws and regulations.

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

An auditor cannot place complete reliance on internal control to the exclusion of other audit procedures. You cannot have a condition where: AR = IR × CR (= 0) × DR = 0

Which of the following statements concerning noncompliance by clients is correct?

An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent.

As a substantive test: No: In the final review stage: Yes

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

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 is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"?

Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

if control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

Detection risk will decrease

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None.

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?

Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable

What are the independent auditor's responsibilities to detect and report errors and frauds?

Independent auditors have the responsibility to (1) assess the risk that errors and frauds may cause a client's financial statements to be materially misstated, and (2) design the audit to provide reasonable assurance of detecting errors and frauds material to the financial statements. Extended procedures should be performed if evidence indicates that material errors or frauds might exist.

Inherent risk and control risk differ from detection risk in which of the following ways?

Inherent risk and control risk exist independently of the audit.

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions

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

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

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles

Revenue

management fraud

The controller changed the journal entry for estimating bad debt expense to a smaller number to hide the poor results from extending credit to high risk customers. This made income materially higher than it otherwise would have been.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

The discovery of unexplained payments made to government employees.

While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?

There is a broad indication of financial reporting fraud.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Use more experienced audit team members to perform year-end testing

error

a bookkeeper inadvertently recorded depreciation by transposing numbers in a journal entry

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of:

a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.

embezzlement or defalcation

a type of fraud involving employees or non-employees wrongfully taking money or property entrusted to their care

interim audit work

a wide range of evidence-gathering activity that occurs before year-end

An auditor assesses the risk of material misstatement because it:

affects the level of detection risk that the auditor may accept

larceny

an employee in a supermarket takes home bags of fresh fruit each day without paying for them

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

Which of the following would not likely be found in the minutes of the board of directors?

approval of a new desktop computer for the controller

the acceptable level of detection risk is inversely related to the

assurance provided by substantive tests

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:

assurances provided by substantive test to a lower level

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

audit risk

the existence of audit risk is recognized by the statement in the auditors standard report that the

auditor obtains reasonable assurance about whether the financial statements are free of material misstatement

sources of financial and nonfinancial data do not include

bureau of labor statistics

audit trail

chain of evidence found at an audit client

horizontal analysis refers to

changes of financial statement numbers and ratios across several years

based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. to achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

decrease detection risk

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include

designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention.

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 actually exists is:

detection risk

An audit team uses the assessed risk of material misstatement to:

determine the acceptable level of detection risk for financial statement assertions.

analytical procedures used in planning an audit should focus on

enhancing the auditors understanding of the clients business

when an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to

evaluate the effect on the financial statements

the risk of material misstatement differs from detection risk in that it:

exists independently of the financial statement audit

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

extent of substantive test of details

vertical analysis

financial statement amounts expressed as proportions of a base

External auditors are responsible:

for reporting immaterial frauds to a level of management at least one level above the people involved

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

functions of the client and its environment whereas detection risk is not

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?

high-liquidity

in the planning stage analytical procedures are used to

identify potential problem areas

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to:

identify unusual conditions that deserve additional audit effort.

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,

income would not be misstated

which of the following is an acceptable response to fraud risks related to sales that were identified in an audit

increase the assessment for detection risk for sales

if an auditor encounters significant risks at the client the auditor should all of the following except

inform the sec

Management fraud generally refers to:

intentional distortions of financial statements

which of the following accounts tends to be most predictable for purposes of analytical procedures

interest expense

managing business risk is the responsibility of

management

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on:

management fraud

white-collar crime

misdeeds done by people who steal with a pencil or computer

experience has shown that the many large fraudulent transactions can be found in

non-routine, nonsytematic journal entries

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) 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

Inherent risk is the:

probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements

analytical procedures

procedures performed that rely on relationships among account balances and or/relevant non-financial data

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?

questioning

horizontal analysis

refers to changes across two or more years

when determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the

related internal control policies and procedures

generally accepted standards states that analytical procedures

should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

the adequacy of the disclosure of the related party transactions.

an auditor who discovers that client employees have committed an illegal act that has material effect on the clients financial statements most likely would withdraw from the engagement if

the client does not take the remedial action that the auditor considers necessary

Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting?

the clients estimate of the allowance for doubtful accounts is lower than the auditors independent evaluation of the allowance.

auditors would use the enterprise risk model

to evaluate managements risk assessment

auditors use brainstorming

to heighten the audit team's awareness of fraud potential

the purpose of an audit strategy is

to set the scope, timing, and direction for auditing each relevant assetion

the type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as

vertical analysis

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely:

withdraw from the engagement

If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk:

would most likely change from 30% to 15%