Audit Exam 2

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

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

Allow the internal auditor to perform tests of internal controls

The reasonableness tests used to gain an understanding of financial statements accounts and relationships

Analytical procedures

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

Analytical procedures have revealed no unusual or unexpected results

Which of the following is not a way in which auditors use the concept of overall materiality?

As a guide for assessing control risk.

It is acceptable under GAAS for an audit team to:

Assess Risk of Material Misstatement at high and achieve an acceptably low audit risk by performing extensive detection work.

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 is NOT a benefit claimed for the practice of determining materiality of the initial planning stage of an audit?

Being able to decide early what type of audit opinion to issue

The risk that results from significant conditions, events circumstances, actions, or inaction that could adversely affect a company's ability to achieve its objectives and execute its strategies as well as from setting inappropriate objectives and strategies or from changes or complexity in the company's operations or managements

Business risk

Failure to meet company objectives is a result of

Business risk.

The revenue cycle of a company generally includes which accounts?

Cash, notes payable, and capital stock

Enterprise Risk Management is the responsibility of:

Company Management

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Compare financial information with nonfinancial operating data.

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 would be considered an analytical procedure?

Comparing inventory balances to recent sales activities

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:

Completeness

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:

Completeness

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.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following test EXCEPT for

Confirmation of balances

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

Current file audit documentation

Scan expense accounts for credit entries

Document inspection (scanning)

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

Evidence of a conservative systematic bias

An auditor's permanent file audit documentation most likely will contain

Excerpts of the corporate charter and bylaws

Confirmations of accounts receivable provide evidence primarily about which two assertions?

Existence and rights and obligations

When auditing the existence assertion for an asset, auditors proceed from the

General ledger back to the supporting original transaction documents

Which of the following procedures would most likely be performed during planning?

Identifying related parties

Complete an internal control questionnaire.

Inquiry and written representations

Verify existence of fixed assets by locating them.

Inspection of tangible assets

With respect to the concept of materiality, which of the following statements is correct?

Materiality is a matter of professional judgment

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

The most important fundamental component of an entity's internal control is

People who operate the control system

Which of the following procedures would a CPA most likely perform in planning a financial statement audit

Perform cutoff tests of cash receipts and disbursements

Effectiveness of audit procedures would be reduced by

Performing procedures during the interim period as opposed to at the fiscal year-end date

Which of the following is a specific procedural 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

Spreadsheet software would be most useful for which of the following audit activities?

Preparing a comparison of current-year expenses with those from the previous year

Analytical procedures are generally used to produce evidence from:

Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.....Analytical procedures incorporate information from a variety of sources.

Auditing standards do not require auditors of financial statements to

Report all errors and frauds found to police authorities

Auditing Standards do not require auditors of financial statements to

Repot all errors and frauds found to police authorities

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-parties transactions before the balance-sheet date?

Scanning the minutes for significant transactions with members of the board of directors

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Schedules and analyses to be prepared by the client's employees

Which of the following is a preventive control?

Separation of duties between the payroll and personnel departments

An audit plan contains

Specifications of procedures the auditors believe appropriate for the financial statements

An Audit Strategy contains:

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

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

The Risk of Material Misstatements (RMM) is composed of: Inherent Risk and Control Risk

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

The auditors' judgment about their independence with regard to the client

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.

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?

The integrity of entity's management is suspect.

In the preparation of an audit plan, which of the following items is not essential?

The preparation of a budget identifying the costs of resources needed

When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report?

The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

There will be a client-imposed scope limitation

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They typically use financial and nonfinancial data aggregated at a high level

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.

A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to

Utilize the speed and accuracy of the computer

One of the typical characteristics of management fraud is

Victimization of investors through the use of materially misleading financial statements

an auditor assess control risk because it:

affects the level of detection risk that the auditor may accept

When initiating communications with predecessor auditors, prospective auditors should expect:

all of the above

Which of the following communications is most likely to be written before the balance sheet date?

an engagement letter

Study predictable financial information patterns (e.g., ratio analysis).

analytical procedures

compare financial information to industry statistics

analytical procedures

compare financial information with budgets and forecasts

analytical procedures

compare financial information with that of prior periods

analytical procedures

study financial information in relation to non financial information

analytical procedures

compared monthly revenue data by month to comparable prior periods and investigated unusual fluctuations

analytical procedures - substantive procedures

The subset of a company's board of directors composed of outside members (those not involved in the day-to-day operations of the company) who can provide a buffer between the audit firm and management

audit committee

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

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

during the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. the fraudulent transactions can be adjusted so the statements are not materially misstated.

communicate the matter to those charged with governance

Enterprise risk management is the responsibility of:

company management

analytical procedures at the end of the audit help confirm the _______ reached

conclusions

Obtain accounts receivable confirmations.

confirmation

Obtain client's lawyer's letter.

confirmation

requested the bank to respond to the audtior with the client's account balance

confirmation - substantive procedures

Analytical procedures have revealed no unusual or unexpected results

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

The probability that the client's internal control activities will fail to prevent or detect material misstatements provided that they enter or would have entered the accounting system

control 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 probability that audit procedures will fail to produce evidence of material misstatements, provide any have entered or would have entered the accounting system and have not been prevented or detected and corrected by the clients control activity

detection risk

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

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

the violations of laws or government regulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements

direct-effect noncompliance

Scan payroll check lists for unusually large checks.

document inspection (scanning)

Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger

document inspection (tracing)

Find brokers' invoices and cancelled checks showing agreemenr with record amounts for securities investments

document inspection (vouching)

often, analytical procedures are considered the most ______ procedures for a strong understanding of the client and its business

efficient

A type of fraud involving employees or non employees wrongful taking money or property entrusted to their care, custody , and control, often accompanied by false accounting entries and other forms of lying and cover-up

embezzlement

Analytical procedures used in planning an audit should focus on:

enhancing the auditor's understanding of the client's business.

An engagement letter is used primarily to:

ensure a clear contractual understanding of the services to be provided by the CPA.

The unintentional misstatements or omissions of amounts or disclosures in financial statements

errors

The audit procedures used in response to heightened fraud awareness as the result of the identification of significant risks

extended procedures

when an auditor increases the assessed level of control rick because certain control activities were determined to be ineffective, the auditor would most likely increase the:

extent of test of details

the comparative analysis of year-to-year changes in balance-sheet and income-statement accounts

horizontal analysis

If an auditor encounters significant risks at the client, the auditor should do all of the following except:

inform the SEC.

the probability that the information circulated by an entity will be false or misleading

information risk

the probability that in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements.

inherent risk

asked management to describe any potential or actual legal actions, the probability of an unfavorable outcome, and the amount or range of potential loss for each legal action

inquiry - substantive procedures

ask client personnel about accounting events

inquiry and written representations

obtain written client representation letter

inquiry and written representations

if an auditor of an issuer purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

inspection

reviewed board of director minutes for authorized of new debt financing

inspection - test of controls

in a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that:

involves an estimate

which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer

it is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles

observe a test counting of client's physical inventory taking

observation

watched the payroll distribution on an unannounced basis

observation - test of controls

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should:

obtain knowledge of matters that relate to the nature of the entity's business.

In determining whether transactions have been recorded, the direction of the audit testing should start from the:

original source documents.

in an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

perform substantive procedures for all relevant assertions related to each material class of transactions

in an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. under these circumstances, the auditor most likely would

perform tests of controls to support a lower level of assessed control risk

as the acceptable level of detection risk decreases, an auditor may:

postpone the planned timing of substantive tests from interim dates to the year-end

prior to, or in conjunction, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatment due to fraud. Which of the following best characteristics the mind-set that the auditor discussion

questioning

part of performing analytical procedures involves considering ______

ratios

recompute the client's calculation of depreciation expense

recalculation

computed the amount of depreciation expense based on the book value, company' policy for depreciation, and estimated economic life and agreed the amount to the financial statements

recalculation - substantive procedures

Analyze valuation of receivables by re-aging them by due date.

reperformance

selected various voucher packages that had been approved and matched the invoice, purchase order, and receiving report

reperformance - test of controls

auditing standards ________ analytical procedures at the planning and concluding stages of the audit

require

an audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statement, how should the audit team address the audit procedures to the increased risk?

review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year

Generally accepted auditing 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.

A risk of material misstatement that requires special audit consideration. Fraud risk is always considered significant risk

significant risk

analytical procedures can also be used as ______ procedures in testing

substantive

which of the following circumstance most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statemetns?

supporting accounting records and files that should be readily available are not produced promptly when requested

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

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

to be effective, analytical procedures in the overall review stage of the audit engagement should be performed by

the manager of partner who has comprehensive knowledge of the client's business and industry

the common-size analysis of financial statement amounts created by expressing amounts as proportions of a common base such as sales for the income-statement accounts or total assets for the balance-sheet accounts

vertical analysis

Generally accepted auditing standards require that auditors always prepare and use:

written audit plan