audit exam 2

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Reviewing confirmations of loans receivable and payable for indications of guarantees.

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.

Which of the following is a preventive control?

Separation of duties between the payroll and personnel departments.

Which of the following is correct regarding including client data in audit documentation for an issuer?

There is no specific requirement to include client data in auditing documentation.

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be

$2,000

Which of the following statements correctly defines the term reasonable assurance?

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

Which of the following conditions necessitates a larger sample size?

A low level of tolerable misstatement (performance materiality).

According to standards of the Public Company Accounting Oversight Board (PCAOB), what is the general definition of a control deficiency?

A situation where the design or operation of an internal control does not allow employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis

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.

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

All of the choices are correct.

Fraud risk factors are events or conditions that indicate which of the following?

All of the choices are correct.

Embezzlement is a type of fraud that involves

An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

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

Overproduction by the manufacturing plant.

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.

Which of the following would occur during the planning stage of Audit Data Analytics?

Auditor must determine the nature, timing, and extent of the work that will be completed as part of the ADA.

Which of the following is true about electronic cash confirmations obtained through Confirmation (Confirmation.com)?

Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process.

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.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the

Authorization of transactions from the custody of related assets.

Analytical procedures are generally used to produce evidence from:

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

Which of the following is least indicative of fraudulent activity?

Bank reconciliation has no outstanding checks or deposits older than 15 days.

Auditing standards do not require auditors of financial statements to:

Report all errors and frauds found to police authorities.

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.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:

Cash disbursements

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.

Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud?

Consulting service expense.

Which of the following components of internal control would be considered the foundation for the other components?

Control environment

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

Existence

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement 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.

In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the:

Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

The best way to enact a broad fraud prevention program is to

Establish a corporate culture conducive to ethical behavior in the workplace.

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.

As part of risk assessment procedures for an audit of a nonissuer, an auditor would most likely perform which of the following procedures concerning related party transactions?

Evaluate the entity's procedures for identifying related party transactions.

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

Financial reporting.

Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true?

I, II, and III are fraud risk factors.

Select the proper order in performing Audit Data Analytics: Evaluate the results and conclude on whether the purpose and specific objectives of performing the ADA have been achieved Consider the relevance and reliability of the data used Plan the ADA Perform the ADA Access and prepare the data for purposes of the ADA

III, V, II, IV, I

n planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to:

Identify the types of potential misstatements that could occur.

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

Inherent risk and control risk.

For which of the following audit tests would an auditor most likely use attribute sampling?

Inspecting employee time cards for proper approval by supervisors

A material weakness is a situation in which

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

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:

It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.

An auditor is confirming accounts receivable using positive confirmations. The auditor decides to leave the accounts receivable amount blank rather than stating the amount owed. The auditor should be aware that the blank form may be less efficient because:

More nonresponses are likely to occur.

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.

Tests of controls in a GAAS audit are required for

Obtaining evidence about the operating effectiveness of client control activities.

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 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.

Which of the following major stages of the audit is most closely related to variables sampling?

Performing substantive procedures.

A reason to believe that a fraud has occurred is called

Predication.

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.

According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:

Prosecute suspected criminal violations by registered public accounting firms

In a fraud examination, original documents must be protected from damage and tampering to

Protect the chain of custody.

An independent auditor is currently attempting to gain evidence about a reporting company's accounts receivable. According to the records, the company is owed $760 by Arnold Alexander Wilson. Which of the following is true?

Subsequent payment of the account after the end of the year can be used as evidence that the balance is properly stated at the balance sheet date

Which of the following applications of sampling to test controls is most appropriate?

Testing a sample of customer orders for evidence of credit approval.

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.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions?

The company always estimates the inventory but never takes a complete physical count.

When auditing with "fraud awareness," auditors should especially notice and review employee activities under which of these conditions?

The company always estimates the inventory but never takes a complete physical count.

The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, because:

The confirmation form also seeks information about indebtedness to the bank

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

The control environment.

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.

Which of the following factors would an auditor most likely consider in evaluating the control environment for an audit client?

The ethical values demonstrated by management.

When making a decision about the dollar amount in an account balance based on a sample, the audit team considers the risk of incorrect acceptance to be more serious than the risk of incorrect rejection because

The incorrect acceptance decision impairs the effectiveness of the audit.

Which of these arrangements of duties could most likely lead to an embezzlement or theft?

The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?

The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.

One of the typical characteristics of management fraud is:

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

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 objective of performing analytical procedures in planning an audit is to identify the existence of:

Unusual transactions and events.

Which of the following cash transfers results in a misstatement of cash at December 31, 2021?

b.

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.

The first step of planning an ADA is:

determine the overall purpose and specific objectives of the ADA.

When documenting an Audit Data Analytic (ADA), an experienced auditor with no prior connection to the engagement should be able to understand all these elements of the ADA except:

the software used in performing the ADA.