Audit Exam 2 (Ch 4,5 & 6)

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. A. Existence B. Completeness C. Authorization D. Accuracy E. Classification F. Accounting and posting G. Proper period

1. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date. G 2. The auditors traced a sample of daily cash reports to the cash receipts journal. B 3. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. A 4. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts. D 5. The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts. F

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

A bank lockbox system

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

A bank lockbox system.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?

A large number of bearer bonds on hand.

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

A manager or partner who has a comprehensive knowledge of the client's business and industry.

Which of the following situations represents a limitation, rather than a failure, of internal control?

A purchasing employee and an outside vendor participate in a kickback scheme.

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

A written audit plan. Explanation A written audit plan is required to be documented by U.S. GAAS (Clarified Standards SectionAU-C 300.14).

Auditors use brainstorming A. To heighten the audit team's awareness of fraud potential. B. To heighten management's awareness of fraud potential. C. To determine detection risk. D. To set materiality.

A. To heighten the audit team's awareness of fraud potential.

In testing the existence assertion for an asset, an auditor ordinarily works from the:

Accounting records to the supporting evidence.

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. Explanation Management assertions in financial statements are not the direct object of preliminary attention‑directing analytical procedures.

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the

Accounts receivable bookkeeper to update the subsidiary accounts receivable records. Explanation: The individuals with record-keeping responsibility should not have custody of cash. Hence, those individuals should use either the remittance advices or a list of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effective control.

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?

All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Allowing for greater management oversight of incompatible activities.

Which of the following procedures is considered a test of controls?

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following statements concerning noncompliance by clients is correct? a. 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 b. An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. c. An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

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

Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

An indication in the audit documentation that the accounting records agree or reconcile with the financial statements.

Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud?

Analysis of sales commissions over the most recent five-year period.

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Approving a summary of hours each employee worked during the pay period.

Which of the following client internal control activities is not usually performed in the treasurer's department?

Approving vendors' invoices for payment

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

As a guide for assessing control risk.

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.

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. Explanation: The fraud brainstorming session is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements. While information may come to light during the session that relates to audit risk assessment and/or materiality determination, it is not the primary objective of the session, according to professional standards (i.e., SAS No. 99).

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

Assessment of inherent risk, no; assessment of control risk, no.

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. The audit team must design their tests to obtain reasonable assurance that all noncompliance with direct material statement effects are detected.

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that

Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. Whether the cost of control work exceeds (or does not exceed) the cost of year-end work is irrelevant. Efficiency relates to the cost that can be saved as a result of control evaluation work.

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: A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.

B) decrease detection risk.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? A. The exchange of property for similar property in a nonmonetary transaction. B. The discovery of unexplained payments made to government employees. C. The presence of several difficult-to-audit transactions affecting expense accounts. D. The failure to develop adequate procedures that detect unauthorized purchases.

B. The discovery of unexplained payments made to government employees.

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:

Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. Explanation The history of errors is not a factor.

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash?

Cash budgets. Because the sources and use of cash can vary greatly from year to year, balances in prior year are of little use.

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

Compare financial information with nonfinancial operating data. Explanation: Making inquiries of the client's lawyer concerning pending litigation is a step that is carried out during the audit. Importantly, the step is typically finalized during the final stages of the audit. Thus, it would not be completed during planning.

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 procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results.

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. Explanation: 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.

The primary reason auditors request responses to attorney letters is to provide auditors

Corroboration of the information furnished by management about litigation, claims, and assessments. Explanation: While the attorney letter will ask for corroboration of management's information regarding the probable outcome of the litigation, claims, and assessments, management is the primary source of this information.

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. Explanation Since this is evidence that relates directly on the year under audit, the current file is appropriate.

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the:

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Which of the following should an auditor do when control risk is assessed at the maximum level?

Document the assessment.

The auditor with final responsibility for engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to:

Document the details of the disagreement with the conclusion reached.

Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important?

Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.

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.

Once the auditor detects a control deficiency, which of the following steps must he or she take first?

Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. Explanation An auditor may modify the planned substantive procedures as a result of the deficiency. However, before doing so, the auditor would have to evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.

During an audit of cash, the auditor is most concerned with the management assertion of

Existence. Explanation: The existence of cash is always a relevant assertion for cash because an overstatement of cash might indicate that fraudulent revenue was recorded.

Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern:

Failure to meet forecasted earnings per share.

When completing the audit of internal controls for an issuer, the PCAOB requires the audit team to audit internal controls over:

Financial reporting.

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

General ledger back to the supporting original transaction documents. By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded.

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

Identifying related parties. Exp. Identifying related parties is an important part of the audit planning process.

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

Identifying unusual conditions that deserve more auditing effort. Explanation Significant assertions are determined by understanding the company, not by analytical procedures.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

Incompatible duties.

Which of the following is not a component of internal controls?

Inherent risk.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Inquiry and inspection of records

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include

Inquiry of appropriate personnel and reperformance of the control activity. Explanation: When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance. So, while reperformance is an appropriate response, it should be combined with inquiry.

An auditor is engaged to report on the fairness of the financial statements of ABC Corp., a nonissuer. The auditor identifies several material misstatements in sales, which were caused by a control deficiency in the sales orders' preparation process. This was the only control deficiency and the only material misstatement identified in testing. The auditor presented a journal entry to the client to correct these misstatements, which the client agreed to record. Which of the following actions is the auditor least likely to perform?

Issue a qualified opinion on the financial statements.

Which of the following is not true about the report release date?

It is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.

A material weakness is a situation in which

It is reasonably possible that a material misstatement would not be detected on a timely basis. The misstatement must be material.

Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?

Jackson is required to audit and report on Saffer's internal control.

Which of the following characteristics most likely would be indicative of check kiting?

Low average balance compared to high level of deposits.

Auditors are not responsible for accounting estimates with respect to:

Making the estimates.

Which of the following management policies would increase the probability of fraud in a company?

Measuring performance and awarding bonuses based on short-term operating results.

If an audit team examined 100 transactions and found one deviation from an important control procedure, the audit conclusion could be that control risk can be assessed at the associated control risk level when

More information about decision criteria is available. Explanation: Without knowledge of the risk of overreliance, it is impossible to calculate the ULRD for a sample of 100 transactions with one deviation. For example, with a risk of overreliance of 5 percent, the ULRD is 4.7 and a tolerable rate of deviation of 2%, 3%, or 4% would not allow the audit team to assess control risk at the appropriate level. However, if the risk of overreliance is 10 percent, the ULRD would be 3.9 and a tolerable rate of deviation of 4% would allow the audit team to assess control risk at the appropriate level.

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud?

Negligence on the part of executive management.

Which of the following procedures would least likely be included to test management's assertion of valuation, allocation, and accuracy?

Observation.

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must

Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. Explanation: When an auditor plans to reduce control risk below the maximum and rely on controls to reduce substantive testing, they must make sure that the controls have been designed and are operating effectively in order to feel comfortable relying on such controls. The auditor cannot take the client's word that the controls are operating effectively. Rather, they must test the controls.

Tests of controls in a GAAS audit are required for

Obtaining evidence about the operating effectiveness of client control activities.

Which of the following would probably not be considered an indication of a material weakness?

Overproduction by the manufacturing plant. Explanation: This indicates a possible material weakness.

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. Correct Explanation: This is a specific procedural response mentioned in audit standards.

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing. Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control activity. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a list of receipts should still be made when the mail is opened.

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks?

Prepare a schedule of the bank transfers. Kiting involves a mismatching of dates of recording cash transactions around year-end, and the schedule of bank transfers is designed to show all the relevant dates so the auditor can see that the entries were made in the proper periods.

When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements?

Prepare auditing working papers that document the auditor's understanding of the company's internal control.

On receiving a client's bank cutoff statement, an auditor most likely would trace

Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

On receiving a client's bank cutoff statement, an auditor most likely would trace:

Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:

Provide a visual depiction of client's activities.

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over?

Purchase orders. Explanation: Nobody at Lake was reviewing purchase orders to notice the delivery and payment by another party (Budd's relative's store). This deviation caused no direct loss to Lake, but it is a misuse of Lake's pricing agreements with its vendors and puts Lake at risk.

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.

Which of the following should be performed by the persons opening the mail and recording payments?

Restrictive endorsement on all checks

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. Explanation: This is the definition of the risk of material misstatement.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to:

Sales invoices with shipping documents and customer sales invoices. The accounts receivable debits are supposed to represent sales that have been ordered by customers and actually shipped to them.

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

Scanning the minutes for significant transactions with members of the board of directors. Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.

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 Technical details of the audit process are not contained in the engagement letter.

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. Explanation: This is a detective control.

Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of an entity's internal control?

Successful re-performance of the control activity.

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Testing the operating effectiveness of the relevant controls would not be efficient.

Which of the following represents an inherent limitation of internal controls?

The CEO can request a check with no purchase order.

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result?

The auditor may reduce the amount of substantive procedures performed.

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery?

The auditor should bring the transaction to the attention of an appropriate level of management.

When auditing Vandalay Jewelry, 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 auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions. Correct Explanation The auditors' report should mention the specialist only if Vandalay does not agree with the specialist's findings, resulting in an opinion other than unqualified.

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?

The cashier posts the receipts to the accounts receivable subsidiary ledger cards. Explanation The individual responsible for receiving the remittances is often responsible for endorsing the checks. Both activities would qualify as "custody" activities. So, this response is incorrect.

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 Explanation If the client made several large adjustments at year-end (a red flag), extended procedures would be considered necessary to ensure that fraud was not taking place.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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

The control environment. Explanation The control environment is the most important fundamental component.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

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. By their very nature, derivative transactions are designed to be used as hedges for exposure on existing contracts are quite complex. The accounting rules that provide the basis for GAAP in this area are also complex. As a result of this complexity, the inherent risk of material misstatement is higher.

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.

Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase?

The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment.

In order for the auditor to decide to perform tests of controls, which of the following relationships should exist?

The tolerable rate of deviation should exceed the expected population deviation rate.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct?

The violation of the code of ethics by senior management. Explanation The violation of the code of ethics by senior management would reduce the effectiveness of the code of ethics because the tone at the top would send the wrong message to employees that the code of ethics was not important.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct?

The violation of the code of ethics by senior management. The violation of the code of ethics by senior management would reduce the effectiveness of the code of ethics because the tone at the top would send the wrong message to employees that the code of ethics was not important.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct?

The violation of the code of ethics by senior management.Correct Explanation A hot line that allowed employees to report ethical violations would increase the effectiveness of the code of ethics.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

There are unusual discrepancies between the entity's records and confirmation replies.

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.

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. Explanation: This is a major risk factor and is likely to be enough for an auditor to not accept an audit engagement. Why is there a scope limitation required? Is the potential client trying to hide a material fact (or a material misstatement) from the auditor? Given that there is a scope limitation, the auditor would have to think long and hard about whether to accept the engagement.

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.

Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?

To serve as a basis for constructive suggestions.

A C corporation on a fiscal year is required to file it tax return on or before the 15th day of the 4th month following the close of its fiscal year.

True

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 year-end testing.

One of the typical characteristics of management fraud is:

Victimization of investors through the use of materially misleading financial statements. Explanation Management fraud principally involves misleading financial statements that might or might not involve illegal acts committed by management to evade laws and regulations.

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:

a bank lockbox system.

Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud? a. Analysis of sales commissions over the most recent five-year period. b. Comparison of sales volume, as determined from recorded revenue amounts, with production capacity. c. Trend analysis of revenues and sales returns by month. d. Comparison of revenue reported by month and by product line for the current and prior years.

a. Analysis of sales commissions over the most recent five-year period.

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the:

additional evidence to support a further reduction in control risk was not cost beneficial.

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity:

affects management's financial statement assertions.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

all goods owned at year-end are included in the inventory balance

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

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

Generally accepted auditing standards states that analytical procedures: a. Should be applied in the final review stage and can be applied as a substantive test and in the planning stage. b. Should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. c. Should be applied in the planning stage and can be applied as a substantive test and in the final review stage.

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

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? a. The auditor should fully investigate other transactions related to this manager to determine if fraud exists. b. The auditor should bring the transaction to the attention of an appropriate level of management. c. The auditor should report this finding to those charged with governance. d. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.

b. The auditor should bring the transaction to the attention of an appropriate level of management.

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? a. The entity's fiscal year ends on June 30. b. The entity enters into significant derivative transactions as hedges. c. The entity's financial statements are generated at an outside service center. d. The entity's financial data is available only in computer-readable form.

b. The entity enters into significant derivative transactions as hedges. By their very nature, derivative transactions are designed to be used as hedges for exposure on existing contracts are quite complex. The accounting rules that provide the basis for GAAP in this area are also complex. As a result of this complexity, the inherent risk of material misstatement is higher.

In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. c. Accounting records to the supporting evidence. d. Supporting documents to the accounting records.

c. Accounting records to the supporting evidence.

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by:

comparing the magnetic imprint of the amount paid to the amount written on the check face.

When assessing internal auditors' objectivity, an independent auditor should:

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

Prior to accepting a new audit engagement, a public accounting firm should: a.Attempt to contact the predecessor auditors. b. Evaluate the integrity of management. c. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement. d. All of the choices are correct.

d. All of the choices are correct Prior to accepting a new audit engagement, an audit firm should "attempt to contact the predecessor auditor," "evaluate the integrity of management," and "assess the firm's resources." So, "all of the choices are correct is the correct response."

19 a. During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result? a. The auditor may reduce the assessment of inherent risk to match the control risk, since they were assessed at the same level during the initial planning. b. The auditor may decrease the allowed level of detection risk. c. The auditor may rely solely on analytical procedures, with no substantive procedures performed. d. The auditor may reduce the amount of substantive procedures performed.

d. The auditor may reduce the amount of substantive procedures performed.

Which of the following factors is most important concerning an auditor's responsibility to detect errors and frauds? a. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles. b. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements. c. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts. d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

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: a. increase inherent risk. b. decrease substantive testing. c. increase materiality levels. d. decrease detection risk.

d. decrease detection risk.

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.

The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to:

determine the nature, timing, and extent of further audit tests to be performed.

Analytical procedures used in planning an audit should focus on

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

An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them.

existence or occurrence

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

exists independently of the financial statement audit.

External auditors are responsible:

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

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the:

general ledger.

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.

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

inform the SEC.

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that:

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

The mail which includes payments should be opened by two people. This control is called:

joint custody.

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when:

no reply to a positive confirmation request is received.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by:

observation and inquiry.

As part of understanding the internal control, an auditor is not required to:

obtain knowledge about the operating effectiveness of the client's internal control activities.

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.

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.

In testing control activities, an auditor ordinarily selects from a variety of techniques, including:

reperformance and observation.

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent:

replacement or substitution of stolen assets.

When obtaining an understanding of an entity's internal control in a financial statement audit at a non-public company, an auditor is not obligated to:

search for significant deficiencies in the operation of the internal control system.

Auditors ordinarily send an electronic confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to:

seek information about contingent liabilities and security agreements

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.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

stamped "paid" by the check signer.

Regardless of the assessed level of control risk, an auditor of a non-public company would perform some:

substantive tests to restrict detection risk for significant transaction classes.

In the audit of cash the auditor obtains a bank cutoff statement primarily to:

test the propriety of items appearing on the client's year-end bank reconciliation.

Auditors should design the written audit plan so that:

the audit procedures selected will achieve specific audit objectives

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.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if:

the results of alternative procedures that were performed compensate for the omission.

Auditors use brainstorming:

to heighten the audit team's awareness of fraud potential.