Auditing Chapter Question Reviews

The American Institute of Certified Public Accountants (AICPA) defines "objectivity" as a state of mind, a quality that imposes all of the following obligations

1. Free of conflicts of interest 2. Intellectual honesty 3. Impartiality

What are examples of a qualitative factor that the auditor should consider when determining overall planning materiality?

1. Management's ability to meet earnings expectations 2. The company's ability to maintain earnings growth

Compute the estimated population deviation rate for the following scenario: The auditor tests an account balance that totals $450,000. In doing so, his sample consists of 30 items whose balances total $195,000 and he finds $22,900 in misstatements.

11.74% The estimated population deviation rate is equal to the sample deviation rate which is computed as $22,900 misstatements / $195,000 total sample balances = 0.1174 (11.74%).

A population has 6,000 items. The auditor has determined that she needs to test 20 of these items to have a large enough sample size to draw her conclusions. Which of the following represents the interval that would be used in systematic random sampling when selecting items to include in the sample?

300 The interval would be 300. This is obtained by dividing the total population size by the number of items to be sampled (6,000 total population items / 20 sampled items = 300).

PCAOB standards require that the auditor compile a completed set of audit documentation within _________ days following the report release date.

45 **** PCAOB standards allow the auditor 45 days to compile a completed set of audit documentation following the report release date. Both ASB and IAASB allow the auditor 60 days following the report release date

Compute the estimated population deviation rate for the following scenario: The auditor tests a sample of 37 instances of a control functioning out of a population of 3,500. She finds that the control failed to function properly in 2 cases.

5.4% The estimated population deviation rate is equal to the sample deviation rate which is computed as 2/37=.054 (5.4%).

PCAOB standards require that the auditor retain audit documentation for _______ years from the report release date, while ASB and IAASB standards require audit documentation to be retained for _______ years from the report release date.

7 & 5 **** PCAOB standards require that documentation be retained for 7 years following the report release date, while ASB and IAASB standards require that documentation be retained for 5 years.

In every annual and quarterly filing, management has to state to the public that they evaluated effectiveness of the company's internal controls within __________ prior to the report issued to the public.

90-days In every annual and quarterly filing, management has to state to the public that they evaluated effectiveness of the company's internal controls within 90 days prior to the report issued to the public

The following is a distinguishing factor of attest services:

A written report is issued The assurance is provided on a subject matter that is someone else's responsibility; Attest services involve a written report being issued regarding a subject matter that is the responsibility of someone else

According to AICPA (2008) guidance, which of the following is the most important analytical procedure step for an auditor to complete?

According to AICPA (2008) guidance, the most important analytical procedure step for auditors to complete is to effectively set an expectation for the client's reported number.

If the auditor believes the client's internal controls are not effective, she should issue which type of audit opinion?

Adverse - The auditor should issue an adverse opinion on internal controls if she believes the controls are not effective.

AS 7 requires engagement quality control reviews to be conducted and overseen by a concurring partner on which of the following engagements?

All audits of public companies only - AS 7 applies only to audits of public companies, and thus requires engagement quality control reviews to be conducted only for public companies

Which of the following is most likely to result in a contingent liability disclosure as a footnote to the financial statements?

An impending safety recall following a federal safety regulator's adverse report on a vehicle manufactured by your audit client **** Three of the answers represent known liabilities; the impending safety recall represents an event that is at least reasonably likely. At a minimum, the client should disclose the contingency as a footnote to the financial statements.

Which of the following is the correct sequence with regards to the auditor's reliance on the client's internal controls?

Assess design and implementation of controls, decision to rely on controls, testing controls **** The auditor first assesses the quality of the design and implementation of controls, then makes a decision to rely on controls. After deciding to rely on controls, the auditor will test the controls.

Which of the following risks does the auditor have control over? (i.e. which do they have control over changing its value?)

Audit Risk & Detection Risk - The auditor sets audit risk based on what risk they can tolerate as well as based on engagement risk. The auditor assesses engagement risk, but they do not have any control over it. They similarly assess inherent and control risk, but do not have any control over those risks. The auditor does have control over detection risk as he or she modifies audit procedures in response to the risk of material misstatement.

The following is true regarding the relationship of assurance, attest, and audit services?

Audit and attest services are a subset of assurance services

Which auditing firms are subject to PCAOB inspections?

Auditing firms auditing one or more issuers - Auditing firms that are registered with the PCAOB are subject to inspections. Since all auditing firms that audit one ore more issuers are required to register with the PCAOB, firms auditing one or more issuers are subject to PCAOB inspections

Which auditing firms are subject to annual PCAOB inspections?

Auditing firms registered with the PCAOB and audit 100 or more public issuers are subject to annual inspections

Auditing standards require that auditors employ analytical procedures at which of the following stages?

Both the planning and final review phases **** Auditing standards require auditors to employ analytical procedures during the Planning and Review phases of the audit. Although many auditors use analytical procedures during the Fieldwork phase, it is not required.

Rapelje Sporting Goods sold a trampoline for $475 cash on January 3, 2014. The trampoline had cost Rapelje $300. If Rapelje records the transaction using incorrect accounts, which transaction-level assertion would be violated?

Classification - In this scenario, the classification assertion has been violated because this transaction used the wrong accounts

Rapelje Sporting Goods has been sued by one of its customers for allegedly selling a defective trampoline that caused injury. The best available independent estimates indicate there is a probable loss of $520,000. Assume that the appropriate treatment is to disclose the event in a footnote. If the company discloses the event but employs complex legal jargon when discussing the event which presentation and disclosure-level assertion would be violated?

Classification and understandability - In this scenario, the company may be trying to confuse those who read about the issue; therefore, Rapelje is violating the understandability assertion in this disclosure.

Which of the following management assertions is the auditor most likely to be concerned about with respect to a client's liability accounts?

Completeness - Although the other assertions may also be important, auditors are generally most concerned that management has completely recorded all of its liabilities on the financial statements (i.e., completeness assertion)

Rapelje Sporting Goods alleges to have $410,000, net of allowance for doubtful accounts, in its accounts receivable account; this balance is made up of 270 total customers. If Rapelje's true balance is $420,000 and the understated balance is due to the exclusion of a customer's balance, which balance-level assertion would be violated?

Completeness - In this scenario, the completeness assertion has been violated because there is a customer balance that should be included on the books that has not been (i.e., it exists but is not included so the books are not complete)

Rapelje Sporting Goods sold a trampoline for $475 cash on January 3, 2014. The trampoline had cost Rapelje $300. If Rapelje failed to record the transaction, which transaction-level assertion would be violated?

Completeness - In this scenario, the completeness assertion has been violated because there is a transaction that did occur that has not been recorded

Costlow Corporation has been sued by one of its customers for allegedly selling a defective riding lawnmower that caused injury. The best available independent estimates indicate there is a probable loss that is estimated to be $5.2 million. Assume that the appropriate treatment is to recognize the expense and liability in the financial statements. If the company fails to record the liability and expense, which management assertion would be violated?

Completeness - The fact that the company failed to record a liability/expense that should have been recorded suggests that the completeness assertion by management is not correct

Which of the following risks does the auditor assess rather than set? (i.e. which risk do they not have control over changing its value?)

Control Risk - The auditor assesses inherent and control risk, but she does not have any control over those risks. The auditor establishes an acceptable level of audit risk on an engagement and controls detection risk as she modifies audit procedures in response to the risk of material misstatement

What are the key components of internal control

Control environment, monitoring, control activities

A corporate buyer purchases supplies for the company from Supplier A at a price slightly higher than he would pay at Supplier B because Supplier A gives the buyer season tickets to the LA Lakers games. This is an example of

Corruption - This is a type of corruption. Corruption is defined as a type of fraud where an employee misuses his or her position or influence to gain personal benefit. Corruption is often seen as a type of asset misappropriation fraud since the employee is misusing company assets, however the better answer here is corruption

describes what is meant by the term 'covered member'

Covered members are individuals or entities that are required to comply with the AICPA's independence rules. Note also, that covered members' immediate family members must also comply with AICPA independence rules

Background checks of upper management typically focus on which of the following

Criminal background - Personal debt - Risky behaviors

West Buy Electronics alleges to have sold an LED TV for $1,475 on account on December 30, 2013. The television had cost West Buy $900. If West Buy actually sold this television on January 2, 2014 (and instead recorded the sale in 2013), which transaction-level management assertion would be violated?

Cutoff - In this scenario, the cutoff assertion has been violated because the transaction is not recorded in the appropriate period

Which document contains general overview of the agreement between the client and the auditor, including the scope of the engagement, expectations of management and the auditor, and the general nature of work to be performed and deliverable to be produced?

Engagement Letter - The engagement letter contains a general overview of the agreement between the client and the auditor, and it establishes expectations of both parties in an engagement

Auditors are responsible for obtaining reasonable assurance that the financial statements are free of material misstatements caused by

Error or fraud - Auditors are responsible for obtaining reasonable assurance that the financial statements are free of material misstatements caused by error or fraud

Aggregated data used in a substantive analytical procedure usually provides stronger evidence to the auditor than disaggregated data. (T/F)

False

If the auditor determines that substantial doubt exists about the client's ability to continue as a going concern, standards require that the auditor obtain information about client's legal counsel and their prediction of whether the company will go bankrupt (T/F)

False **** AU 570.02 indicates that the auditor "should obtain information about management's plans that are intended to mitigate the adverse effects of such conditions or events." Auditors are not required to obtain information about the client's legal counsel, nor are they required to seek legal counsel's opinion regarding whether the company will go bankrupt.

The auditor has a responsibility to actively search for subsequent events up until the date when the financial statements are released to the public. (T/F)

False **** After the audit report is complete the auditor is responsible to monitor for any activities that may change previous information, but are not required to actively search.

The auditor is required to provide the same level of assurance for management's disclosure and analysis (MD&A) as for the financial statements. (T/F)

False **** Although the auditor reviews the MD&A section to ensure statements made by management are generally consistent with the audited information, the auditor does not provide the same level of assurance for MD&A as he does for the financial statements.

Analytical procedures are evaluations that center exclusively on financial information. (T/F)

False **** Analytical procedures are evaluations that can center on financial or non-financial information.

Analytical procedures are evaluations that center exclusively on non-financial information. (T/F)

False **** Analytical procedures are evaluations that can center on financial or non-financial information.

If the difference between the client's reported number and the auditor's expectation is more than the predetermined acceptable deviation amount, the auditor would conclude that there is evidence that the client's reported balance is fairly stated. (T/F)

False **** Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide evidence that the client's reported balance is fairly stated. If this difference is more than the predetermined acceptable deviation, the auditor would need to investigate further and determine potential causes for this significant difference.

If the difference between the client's reported number and the auditor's expectation is less than the predetermined acceptable deviation amount, the auditor would conclude that there is not evidence that the client's reported balance is fairly stated. (T/F)

False **** Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide evidence that the client's reported balance is fairly stated. Unless the auditor has additional information that comes to light suggesting otherwise, there would not be a need to investigate differences that are less than the acceptable deviation amount.

The auditor sends a letter to a member of the internal audit staff of their client asking them to confirm information not previously provided to the auditor. This is an example of an external confirmation. (T/F)

False **** As the name indicates, external confirmations are confirmation requests sent to a third party outside of the entity. Since the internal audit staff works for the client, this does not meet the definition of an external confirmation.

The auditor sends a letter to a member of the internal audit staff of their client asking them to confirm information previously provided to the auditor. This is an example of an external confirmation. (T/F)

False **** As the name indicates, external confirmations are confirmation requests sent to a third party outside of the entity. Since the internal audit staff works for the client, this does not meet the definition of an external confirmation.

Auditing standards require that one out of every five audit engagements be reviewed to ensure the quality and appropriateness of the audit process and the auditor's opinion. (T/F)

False **** Auditing standards require that a quality control review be performed for each audit engagement.

Auditing standards require that at least one audit engagement each year be reviewed by an engagement quality reviewer to ensure the quality and appropriateness of the audit process and the auditor's opinion (T/F)

False **** Auditing standards require that each engagement be reviewed for these reasons, not just one per year.

In seeking to maintain control over the confirmation process, the auditor should always prepare each confirmation request.

False **** It is common practice for the client's employees to prepare confirmation requests. However, the auditor should select the customers whose balances will be confirmed and should verify that the information on the confirmation requests matches with the information in the client's records.

The auditor has the primary responsibility to inform third parties if subsequently discovered facts compel management to revise the financial statements in a material manner. (T/F)

False **** Management has the primary responsibility for the financial statements and for informing known users of the financial statements regarding any material changes the occur after the statements have been issued.

If the auditor does not receive a confirmation letter from a client customer after requesting a response, she can call the customer and obtain an oral confirmation in place of a written confirmation. (T/F)

False **** Oral responses are not appropriate for obtaining confirmation of accounts receivable balances. A phone call may be appropriate to encourage a written response, but the auditor cannot rely on an oral confirmation only.

If the auditor does not receive a confirmation letter from a client customer after requesting a response, she can call the customer to follow up on the confirmation. (T/F)

False **** Oral responses are not appropriate for obtaining confirmation of accounts receivable balances. However, a phone call may be appropriate to encourage a written response.

PCAOB standards require that the auditor retain audit documentation for 5 years from the report release date, while ASB and IAASB standards require audit documentation to be retained for 7 years from the report release date. (T/F)

False **** PCAOB standards require that documentation be retained for 7 years following the report release date, while ASB and IAASB standards require that documentation be retained for 5 years.

The negative form of audit confirmations provides the auditor with the strongest form of audit evidence. (T/F)

False **** Positive confirmations provide the auditor with the strongest form audit evidence since negative confirmations assume that an unreturned confirmation means that the confirming party agrees with the information on the confirmation request, which is not generally a good assumption.

Auditing standards explicitly require that the auditor obtain relevant, disconfirming evidence as a basis for forming his or her opinion. (T/F)

False **** Standards require auditors to obtain sufficient, appropriate evidence to support their opinion.

The acceptable deviation used by the auditor is usually higher than the materiality threshold for the account balance being tested. (T/F)

False **** The acceptable deviation used by the auditor is usually higher than the materiality threshold for the account balance being tested.

In order for the auditor to be able to use negative confirmations instead of positive confirmations, the client's total accounts receivable balance must be immaterial. (T/F)

False **** The accounts receivable being material or not is a factor that helps determine whether confirmations are necessary or not, it is not a factor to consider in deciding whether to use positive or negative confirmations.

The auditor is not required to report critical accounting estimates made by management to the independent audit committee. (T/F)

False **** The auditor is required to report critical accounting estimates made by management to the audit committee.

When an auditor sends confirmation requests to a client's customers, he is primarily testing the completeness assertion.

False **** The existence assertion is the primary assertion tested by an accounts receivable confirmation.

An audit engagement quality control reviewer can be any senior member as long as they are from a different auditing firm. (T/F)

False **** The quality control reviewer cannot have served on the audit team during the past two years and must possess appropriate client- and industry-specific knowledge to be an appropriate reviewer. However, they do not need to be from a different firm.

Generally speaking, a for-profit company would not want to be labeled as a "going concern." (T/F)

False **** The term "going concern" relates to an entity's ability to continue operating in future periods. Unless evidence indicates otherwise, most companies are assumed to be going concerns.

Omitted audit procedures are those audit procedures that were not performed because the auditor felt they were not necessary. (T/F)

False **** This is false. Omitted audit procedures are those procedures which were considered necessary, but were not performed.

Management's refusal to allow the auditor to confirm accounts receivables is in all cases a scope limitation requiring withdrawal from the audit engagement. (T/F)

False **** This is not always true. Management may have legitimate reasons for not wanting the auditor to confirm receivables with their clients. The auditor should carefully review the reasoning for management's refusal to allow them to confirm receivables.

If the difference between the auditor's estimate and the reported balance is less than the tolerable difference identified by the auditor, the auditor should always conclude that the account balance is fairly stated. (T/F)

False **** This is not necessarily true. The auditor should evaluate the quality of the analytical procedure. Assuming a strong analytical procedure has been used, and other sources of audit evidence provide consistent findings, the auditor would likely conclude that the account balance is fairly stated.

If the difference between the auditor's estimate and the reported balance is greater than the tolerable difference identified by the auditor, the auditor should always conclude that the account balance is NOT fairly stated. (T/F)

False **** This is not necessarily true. The auditor should next determine possible explanations as to why the difference is greater than the tolerable difference. Some of these explanations may include the fact that the procedure was a weak procedure. The auditor should obtain corroborating evidence before concluding that the balance is not fairly stated.

Under AICPA rules, auditors are not allowed to delete or modify any documentation following the completion of audit documentation. (T/F)

False **** This statement is false. AICPA rules allow the auditor to modify existing documentation with appropriate records indicating the reasons for the change, the date of the change, and the individual making the change.

Auditors should document evidence that supports their final decision regarding the fair presentation of the financial statements, but are not required to document evidence that contradicts their final decision. (T/F)

False **** This statement is false. Auditors should document both supporting evidence as well as any evidence that they found that contradicted their ultimate decision along with how they resolved the conflict between the two sets of evidence.

U.S., but not international, standards require that auditors consider whether confirmations should be used as substantive audit procedures. (T/F)

False **** This statement is false. Both U.S. and international standards have this requirement.

When an auditor performs an analytical procedure on the revenue account, it will always be the same quality as long as they follow the steps outlined in this topic. (T/F)

False **** This statement is false. Even if the auditor follows the steps outlined in this topic, they need also to consider other factors such as the quality of the data they used in their test. These factors can also impact the reliability of the evidence obtained from analytical procedures.

If an auditor identifies a contingent liability, the client is required to include the liability and associated expense on the financial statements. (T/F)

False **** This statement is false. If a contingent liability is not BOTH probable and reasonably estimable, then the client is not required to include the liability and associated expense on the financial statements.

Many banks have begun requiring that paper-based confirmations be used in place of electronic confirmations. (T/F)

False **** This statement is false. Many banks and other entities have begun refusing to respond to paper-based confirmations, demanding that the auditor use electronic confirmations.

The primary source of review of audit documentation comes from inside of the auditing firm, with little review occurring from outside of the firm. (T/F)

False **** This statement is false. Most auditing firms have many layers of review within the firm to ensure accuracy, adequacy, professionalism, and compliance with regulation and firm policy. In addition, firms face review from outside of the firm via PCAOB inspections, AICPA peer review programs, subsequent auditors working on the client's audit, etc.

The auditor is NOT required to document their discussion regarding the susceptibility of the financial statements to material misstatements since this is not a required audit procedure. (T/F)

False **** This statement is false. The auditor is required to document this discussion, and this is a required step in the audit process.

When an auditor performs an analytical procedure on the revenue account, it will always be the same quality since it comes from the same source. (T/F)

False **** This statement is false. The auditor needs to consider factors such as the quality of the data they used in their test. These factors can also impact the reliability of the evidence obtained from analytical procedures.

The auditor is not required to communicate to the audit committee any instances where the auditor or management sought help from a specialist consultant. (T/F)

False **** This statement is false. The auditor should disclose instances where a specialist was engaged.

The form of audit documentation is fixed and is not dependent on the nature or the type of audit test performed. (T/F)

False **** This statement is false. The form of audit documentation is dependent on the nature and type of audit test performed.

The auditor should always use aggregated data when performing substantive analytical procedures since it generally provides higher quality evidence to the auditor. (T/F)

False **** This statement is false. The level of aggregation of the data used by the auditor depends on the level of reliance the auditor intends to place on the procedure. In addition, aggregated data does not generally provide higher quality evidence than disaggregated data.

U.S. auditing standards require the use of external confirmations for accounts receivables without exception. (T/F)

False **** This statement is false. There are three conditions that would allow the auditors to determine not to use confirmations for accounts receivables balances.

Type II subsequent events require an adjustment to the financial statements to reflect the effects of the event. (T/F)

False **** This statement is false. Type I subsequent events require adjustments, Type II events typically require disclosure, not adjustments.

Type II subsequent events require an adjustment to the financial statements to reflect the effects of the event. (T/F)

False **** This statement is false. Type II subsequent events require disclosure (i.e., footnote discussion accompanying the financial statements) rather than an adjustment to the actual financial statements.

One benefit of audit documentation is to provide a defense to the auditor in lawsuits where it is alleged that the auditor did not comply with GAAP. (T/F)

False **** This statement is false. When an auditor is sued for negligence, their audit documentation can provide evidence that their work was performed in compliance with GAAS, not GAAP.

The primary source of review of audit documentation comes from outside of the auditing firm, with little review occurring from within the firm itself. (T/F)

False **** This statement is false. While there are many sources of potential review of audit work outside of the firm, most auditing firms have many layers of review within the firm to ensure accuracy, adequacy, professionalism, and compliance with regulation and firm policy.

The auditor must only select the right population from which to draw a sample; she does not need to perform audit procedures to ensure that the population is complete (T/F).

False This is false. If the population is not complete, the auditor may draw erroneous conclusions. For example, if all fraudulent transactions are excluded from the population, the auditor would never include those fraudulent transactions in their sample and would therefore not identify the fraud. Therefore, the auditor must perform procedures to ensure the population is complete prior to drawing a sample from it.

Non-sampling risk comes from the sample drawn not reflecting the true population. (T/F)

False This is false. Non-sampling risk refers to the risk of erroneous conclusions being reached for reasons not related to sampling risk. Sampling risk relates to whether or not the sample is representative of the population

Sample size and sampling risk are positively related. (T/F)

False This is false. Sample size and sampling risk are negatively related. In other words, as the sample size increases, sampling risk decreases.

The population from which the auditor draws the sample is the same for the existence assertion for receivables and the completeness assertion for receivables. (T/F)

False This is false. The auditor would draw from two different populations to test these two different assertions.

An auditor estimates that the population deviation rate is 3.2% for a population with an account balance of $850,000. The tolerable misstatement for this account is $28,000 and the expected misstatement is $12,000. After considering sampling risk, the auditor would most likely conclude that this account balance is fairly stated. (T/F)

False This is false. The projected error is $27,200 (3.2% x $850,000) which is well above the expected misstatement of $12,000 and just shy of the tolerable misstatement of $28,000. While the auditor normally compares the projected misstatement to tolerable misstatement to determine whether it is fairly stated, they must also factor in sampling risk. Since projected misstatement is so close to tolerable misstatement, there is little room for sampling risk and as such the auditor would most likely be hesitant to conclude that the account is fairly stated.

After testing a sample drawn from a population, the auditor estimates that the population deviation rate is 4.3% for a population with an account balance of $960,000. The tolerable misstatement for this account is $39,000 and the expected misstatement is $23,000. After considering sampling risk, the auditor would most likely conclude that this account balance is fairly stated

False This is false. The projected error is $41,280 which is well above the expected misstatement of $23,000 and above the tolerable misstatement of $39,000. As a result, the auditor would conclude that the account is materially misstated.

When testing the accounts receivable balance using confirmations with customers, the sampling unit would be the total accounts receivable balance. (T/F)

False This is false. The sampling unit would be the customer balance, the invoices that make up the balance, or when using monetary unit sampling the sampling unit would be each individual dollar that makes up the balance.

The size of the population generally has a significant impact on sample size since the larger the population is the larger the sample will need to be. (T/F)

False This is false. The size of the population generally has little or no impact on sample size unless the population is small.

An auditor selects all invoices during the month of December (the final month of the client's fiscal year) for testing. This is an example of haphazard sampling. (T/F)

False This is false. This selection is a form of block selection. Haphazard sampling approximates a random sample except that no formal random sampling tool is used. *** Note: Block Sampling is a subset of Haphazard sampling.

Tolerable misstatement and expected misstatement have the same directional effect on sample size (T/F)

False This is false; the two have opposing influences on sample size. As tolerable misstatement decreases, or expected misstatement increases, sample size increases. In other words, as tolerable misstatement and expected misstatement get close together (either by expected misstatement increasing or tolerable misstatement decreasing), the auditor needs a larger sample size

The audit objective for substantive tests of details is usually to ensure proper management integrity (T/F)

False This statement is false. The audit objective for substantive tests of details is usually to test the reasonableness of management assertions related to the financial statement accounts. ** note the question asks about management integrity, not management assertions.

The materiality threshold for a sampling procedure does not need to be included in the audit documentation. (T/F)

False This statement is false. The auditor is required to document "the amount below which misstatements would be regarded as immaterial." This is the same thing as the materiality threshold.

The audit objective for substantive tests of details is generally to provide evidence that the control is in place and functioning properly. (T/F)

False This statement is false; it defines the audit objective for tests of controls.

One downside to statistical sampling as compared to non-statistical sampling is that statistical sampling does not provide for methods for controlling for sampling risk. (T/F)

False This statement is not true. Statistical sampling provides for methods for controlling for sampling risk, but non-statistical sampling does not.

If the auditor's expectation is close to the client's reported number, she should conclude that she has formed a precise expectation. (T/F)

False **** A precise expectation is achieved when the auditor has formed an expectation that is close to what the client should be reporting, even if this is not close to the number that the client is reporting.

Auditing standards require that the audit partner in charge brainstorm alone about how the client's financial statements might be susceptible to fraud and how management could perpetrate and conceal fraud. (T/F)

False - Auditing standards require that all key members of an audit team participate in the brainstorming session. Key personnel is generally interpreted as meaning most members of the engagement team (e.g., the partner in charge, senior manager, manager, seniors, etc.)

Auditors are anxious to accept any new client since it increases their firm's income (T/F)

False - Auditors are careful in accepting clients since accepting a client that is dishonest increases the likelihood that the client will lose reputation or will suffer financial losses through lawsuits

Auditors need to be independent in fact, but they are not required to be independent in appearance when conducting the audit (T/F)

False - Auditors need to be independent in appearance as well as independent in fact when conducting the audit

Audits of financial statements provide absolute assurance that the financial statements are free of material misstatements (T/F)

False - Audits of financial statements provide reasonable, but not absolute, assurance that the financial statements are free of material misstatement

Each of the Big 4 use the Limited Liability Company (LLC) form of business organization (T/F)

False - Each of the Big 4 use the Limited Liability Partnership (LLP) form of business organization.

A CPA was engaged to complete the financial statement audit for a small privately-held company. Two months into their work, the auditor was dismissed from service and paid for the work up to that point. The client requested that all client-produced documents be returned to the client without delay. The auditor, being busy with other matters, failed to return the documents to the client. This is not an example of an act discreditable to the profession because the auditor has responsibilities to current clients before taking care of former clients (T/F)

False - Failure to return client-provided documents to the client at their request is an example of an act discreditable to the profession

Audit partners in the U.S. can serve a particular client for no more than 7 years consecutively (T/F)

False - Knowing that the auditor will be evaluating the financial statements will cause management to be more careful in preparing them, reducing the likelihood of both intentional and unintentional misstatements. In addition, auditors frequently find material misstatements in the course of the audit which can then be corrected by management.

A significant deficiency is more serious than a material weakness (T/F)

False - Material weaknesses are more serious than significant deficiencies

The PCAOB and IAASB have been actively working toward converging their auditing standards (T/F)

False - The ASB and IAASB have been working to converge standards. The PCAOB has not worked to converge standards with either of the other two standard-setting bodies

SAS standards are issued by the IAASB (T/F)

False - The Auditing Standards Board of the AICPA issues SAS auditing standards.

Generally Accepted Auditing Standards of the PCAOB are broken into the following three categories: Fieldwork, General, and Independence (T/F)

False - The PCAOB's 10 GAAS are broken into the following three categories: Fieldwork, General, and Reporting Standards

Auditing standards are static with no real need to evolve and change (T/F)

False - The auditing environment is dynamic with constant evolving issues which require auditing standards to evolve over time to meet present day challenges.

In order to properly exercise professional skepticism, the auditor should assume that management is not telling the truth and should treat them and the information they provide as if it were fraudulent (T/F)

False - The auditor does not automatically assume that management is committing fraud, nor should he treat management as if they were committing fraud. The auditor should not, however, treat information as if it were completely accurate but should verify the information provided to them by management

Auditors are never justified in violating the client confidentiality rule (T/F)

False - The auditor may need to violate the client confidentiality rule in order to comply with a valid subpoena or when laws or regulations require the disclosure of client information

The materiality threshold used for the audit of financial statements is different from the materiality threshold used for determining whether a control deficiency is a material weakness or a significant deficiency. (T/F)

False - The auditor uses the same materiality threshold for these two purposes

An audit client is permitted to hire their former auditor to work in a key position (such as the controller or CFO position) at their company immediately following an audit engagement

False - The client can hire their former auditor to work in these positions, but there is a one-year cooling off period before the individual can occupy one of those positions

The best definition of materiality is that an item is material if the client thinks it is important (T/F)

False - The concept of materiality relates to whether users of the financial statements believe it is important/significant enough to impact their judgments

An auditor has a reputation of providing unqualified audit opinions to their clients and uses this fact to solicit new clients. This is not a violation of the code of professional conduct because it is true (T/F)

False - This is a violation of the code of professional conduct's prohibition against false, misleading, or deceptive advertising. Specifically, this form of advertising creates false or unjustified expectations for favorable results in the audit

The FASB issues auditing standards for audits of non-public companies in the U.S. (T/F)

False - This statement is false. The ASB issues auditing standards for audits of nonpublic companies in the U.S.

Auditing standards allow the engagement partner assigned to a particular client to oversee the performance of the quality control review at the conclusion of the audit (T/F)

False - This statement is false. The quality control review must be performed and overseen by those who are independent of the audit engagement team

An unqualified (unmodified) audit opinion is a negative opinion regarding the financial statements indicating that the financial statements are not fairly stated. (T/F)

False - An unqualified (unmodified) audit opinion is positive in nature indicating that the auditor can state that they believe the financial statements are fairly stated without qualification

Smaller clients are generally less likely to have fraud risks than larger clients (T/F)

False - As reported in the COSO 2010 fraud study cited in this topic, smaller companies are more likely to have increased fraud risks

The private portion of PCAOB inspection reports are never made available to the public (T/F)

False - Audit firms are given 12 months to rectify and address specific issues identified in the public portions of PCAOB inspections. If the firm does not remedy the defects within the 12 months, the private portion of the report is made public by the PCAOB

Key members of the audit team are required to participate in a brainstorming session as part of the planning phase of the audit. This brainstorming session is designed to identify possible unintentional misstatements (i.e., errors) that could be present in the financial statements. (T/F)

False - Auditing standards require the brainstorming session to identify possible ways in which management may be intentionally manipulating the financial statements (i.e., fraudulent financial reporting).

Because fraud is more difficult to detect, the auditor is not under the same responsibility for detecting material misstatements caused by client fraud as he is for detecting material misstatements caused by error (T/F)

False - Auditing standards state: "An auditor conducting an audit in accordance with GAAS is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error." (AU-C 240.05)Thus, regardless of whether the error is due to error or fraud, the auditor is responsible for obtaining reasonable assurance regarding the fair presentation of the financial statements

Auditors have a professional responsibility to determine whether or not their client has complied with all laws and regulations, regardless of whether or not the noncompliance impacts the financial statements. (T/F)

False - Auditors are not responsible to evaluate their client's compliance with all laws and regulations. However, if they determine that a client has not complied with a law or regulation, they should determine if and how the noncompliance impacts the financial statements. In some cases, the auditor has a responsibility to report illegal acts to others outside of the client organization

It is considered an invasion of privacy and a violation of ethical standards for the auditor to perform background checks of key employees at the client in order to identify fraud risk factors (T/F)

False - Auditors routinely perform background checks of key members of management and the board of directors to look for things such as criminal background, personal debts or pressures to maintain an extravagant lifestyle, and other indicators that incentives or the ability to rationalize may be present.

When auditing financial statements, auditors seek to identify all misstatements in the financial statements, regardless of size. (T/F)

False - Auditors seek to identify only material misstatements. While they may identify misstatements that are not material in nature, they do not design their audit procedures to identify non-material misstatements

One example of a compilation service performed by a CPA is for the CPA to provide bookkeeping services to the client (T/F)

False - Compilation services include using the client's data to prepare, or compile, financial statements. The auditor does not perform ongoing bookkeeping, they simply compile the client-recorded data into financial statements

Incoming (i.e., new) auditors should contact the prior year's auditor without informing the client in order to inquire about management integrity, potential disagreements with management, and other sensitive issues that could influence the incoming auditor's decision of whether or not to accept the client (T/F)

False - Contacting the predecessor auditor is required under GAAS. However, the current (successor) auditor should obtain management's permission before contacting the prior auditor

Making the audit as efficient as possible generally improves the effectiveness of the

False - Efficiency and effectiveness of the audit are typically at odds with one another. Effectiveness requires high levels of resources of time and effort while efficiency involves reducing the amount of resources devoted to the audit

Independence in mental attitude is among the 10 GAAS that falls under the Fieldwork Standards category (T/F)

False - Independence in mental attitude is one of the 10 GAAS that falls under the general standards category

If there were no way to gain assurance regarding the accuracy of financial statement information provided by management, investors would typically assume it was high quality. (T/F)

False - Investors would typically assume average quality if they could not gain assurance regarding the accuracy of financial information.

Audit efficiency and audit effectiveness are usually positively correlated. In other words, as an audit becomes more effective it also becomes more efficient. (T/F)

False - Often, audit efficiency and effectiveness are negatively correlated meaning that in order to increase one, the other usually decreases. For example, to get a more effective audit more audit work may need to be completed which reduces the efficiency

PCAOB inspectors are practicing public accountants who volunteer to perform inspections periodically

False - PCAOB inspectors are full-time employees of the PCAOB

Because related party transactions occur between a company and a "preferred" second party, GAAP does not require a company to record and report the specifics of related party transactions to the public (T/F)

False - Related party transactions should be recorded and reported in the same manner as any other transactions. In fact, GAAP requires that additional disclosures be made to inform financial statement users regarding the nature and extent of related party transactions

The AICPA has congressional authority to set auditing standards in the U.S. (T/F)

False - The SEC has congressional authority, not the AICPA

During the time an auditor is performing an audit of a client who builds commercial buildings, a friend indicates that his company is in need of a new commercial building. The auditor refers his friend to his audit client for the construction service, indicating that the client is a reputable builder. The friend and the client contract to have the building built by the audit client. The auditor has violated the code of professional conduct in this scenario (T/F)

False - The auditor can refer his client's services, but cannot receive a referral fee or commission for this recommendation

If a different audit firm audited a client's financial statements in the prior year, the incoming auditor has to perform his own audit of last year's financial statements in order to be assured that the current year's beginning balances are accurate (T/F)

False - The auditor has a responsibility to perform audit procedures (e.g., contact predecessor auditor) to obtain assurance regarding the beginning balances, but the auditor does not have to perform a full audit of the prior year's financial statements.

The engagement letter should include a copy of the audit program outlining how the auditor intends to perform the audit (T/F)

False - The engagement letter contains general overview of the agreement between the client and the auditor, but the auditor does not generally share the audit program with the client

The main difference between an error or fraud is who caused the misstatement

False - The main difference between error or fraud is the intent to deceive. Errors are unintentional while fraud is intentional

The term 'assertion' refers to the process of testing internal controls in an audit (T/F)

False - The term 'assertion' refers to implicit or explicit claims made by management in the preparation of the financial statements

The Code of Professional Conduct from the AICPA includes principles to guide the auditor in carrying out his or her professional responsibilities, but does not include detailed rules (T/F)

False - This is a false, the Code of Professional Conduct includes both principles and detailed rules

An auditor assesses management's compliance with a federal regulation and reports the results to interested users through a written report. This is an example of an audit service. (T/F)

False - This is an example of an attest service not an audit service. Remember, audit services are limited to economic actions and events. Federal regulations are often not economic in nature.

AICPA peer review policies require that the largest audit firms be inspected annually (T/F)

False - This is false. The AICPA requires a peer review every three years

The external auditor has an IT department that helps the audit client design their accounting information system to make sure that financial information is recorded properly. The auditor believes that doing so will help improve the quality of information for investors. This service is permissible while maintaining the auditor's independence (T/F)

False - This service is expressly prohibited by the Sarbanes-Oxley Act of 2002 which prohibits 'financial information systems design and implementation' services

An auditor contracts with a client to perform the audit engagement for $6,000, but complications arising during the audit cause the auditor to perform more work than necessary. The auditor renegotiates with the client so that the total payment is $7,500. This is an example of a contingent fee that would be prohibited by the code of professional conduct (T/F)

False - This statement is false, and is a common practice. The payment in this example is not dependent on the outcome of the audit, rather it is dependent on the amount of work necessary to perform a quality audit.

Although auditors can assess detection risk, they can not influence it by modifying the nature, extent or timing of audit procedures or through overall responses. (T/F)

False - This statement is false. Auditors can influence/adjust detection risk by changing the nature, extent, and timing of audit procedures or by making overall responses to identified risks (e.g., personnel changes).

In order to maximize long-term profitability, audit firms generally seek to engage every client that becomes available (T/F)

False - This statement is false. Because engagement risk is a significant factor, audit firms use a systematic process to selectively choose which clients to engage with

Spending the time and money to provide high quality information to the public benefits the investors, but not the company providing the information (T/F)

False - This statement is false. High quality information benefits the public because it helps them make better investment decisions. But it also benefits the company by reducing its cost of capital due to lower risk premiums charged by investors and lenders.

When deciding on which benchmark to use for determining overall planning materiality, the auditor should not be influenced by which line items users pay close attention to (T/F)

False - This statement is false. The auditor generally selects a materiality benchmark that is relevant to financial statement users

The engagement partner is one who has no engagement responsibilities with the client other than to review the work performed by the engagement team (T/F)

False - This statement is false; it describes the concurring partner's role

The AICPA peer review program is an optional quality control mechanism for audit firms using AICPA auditing standards (T/F)

False - This statement is false; the AICPA peer review program is mandatory for firms using the AICPA's auditing standards

Audit Risk refers to the amount that could reasonably be expected to influence the economic decisions of users made on the basis of the financial statement

False - This statement is false; the definition provided is for materiality. Audit Risk is the likelihood that the auditor will provide an unqualified (i.e., clean) audit opinion on a set of financial statements that are, in fact, materially misstated

When auditing financial statements, auditors seek to identify all material misstatements in the financial statements (T/F)

False - This statement is true, auditors seek to identify only material misstatements. While they may identify misstatements that are not material in nature, they do not design their audit procedures to identify non-material misstatements.

PCAOB standards require auditing firms to establish formal systems of quality controls, but AICPA standards are silent on this issue (T/F)

False - both AICPA and PCAOB standards require that audit firms establish formal systems of quality control to ensure an acceptable level of audit quality.

Using the COSO internal control framework as a benchmark for quality is mandatory for the audit of internal control over financial reporting. (T/F)

False -- This statement is not true. Auditors use as a benchmark whichever internal control framework that was used by the client. The company is free to adopt any high quality framework.

A senior-level manager insists that the accounting manager over accounts receivables adjust the estimate for allowance for doubtful accounts to be more liberal (i.e., fewer people will default on their receivables). The senior-level manager knows that the revised estimates are inaccurate, but he insists on the change because it will increase the company's net income for the quarter to a point where he will receive a bonus. This scenario describes an example of:

Financial statement fraud - This is an example of fraudulent financial reporting because it is an intentional manipulation of the financial statements to include a material misstatement

COSO was originally founded by ______ organizations, including the AICPA.

Five - *** COSO was originally founded by five organizations, all of which are still involved with COSO. 1. American Accounting Association (AAA) - accounting academics 2. American institute of Certified Public Accountants (AICP) - external auditors 3. Financial Executives International (FEI) - Upper financial management 4. The Institute of Internal Auditors (IIA) - Internal auditors 5. Institute of Management Accountants (IMA) - corporate accountants

Of the three main categories of occupational fraud, which has the distinction of being (1) the least common and (2) the most costly?

Fraudulent financial reporting - Fraudulent financial reporting is the least common of the three major categories of occupational fraud, but - on average - it is the most costly/damaging type of occupational fraud

The American Institute of Certified Public Accountants (AICPA) defines "objectivity" as a state of mind, a quality that imposes all of the following obligations:

Free of conflicts of interest; Intellectual honesty; Impartiality

Which of the following is the "established criteria" against which the financial statements in the United States are evaluated?

GAAP - iGAAP is the established criteria used in the U.S. for an audit of financial statements. The COSO framework would be the established criteria used for an audit of internal controls over financial reporting

Independence in mental attitude is among the 10 GAAS that falls under which of the following three categories?

General Standards - Independence in mental attitude is one of the 10 GAAS that falls under the general standards category.

Which of the following best describes what is meant by professional skepticism?

Having a questioning mind without accusing others of wrongdoing - Professional skepticism includes having a questioning mind without accusing others of wrongdoing. It is similar to the concept used by Ronald Reagan to "Trust, but verify."

ISA auditing standards are issued by which standard setter?

IAASB Note that standards set by IAASB are designated with the ISA label

Which of the following are examples of an assurance service?

IT system implementations; Evaluation of client's IT systems and reporting on the findings to the public; Evaluating and reporting on a client's internal controls

If the client and auditor agree that a contingent liability resulting from a shareholder lawsuit is probable and a damage amount is reasonably estimable, what is the most appropriate management action that the auditor would support?

Include a liability and a charge to income on the financial statements to recognize the contingent liability **** If a liability is probable and the loss is reasonably estimable, GAAP requires the company to recognize the liability in the financial statements.

Which of the following methods might the auditor use to document their discussion regarding the susceptibility of the financial statements to material misstatements?

Include transcripts from their meeting **** Providing the transcript of the meeting is the only method out of these options that provides adequate documentation of this meeting. Indicating that it happened is not enough information.

If management fails to take appropriate steps to inform third parties of subsequently discovered facts that cause a material adjustment of the financial statements, what should the auditor do?

Inform management that the auditor will take steps to inform third parties **** If management does not take appropriate steps to inform third parties, the auditor should inform the client that he will take necessary steps to inform those parties of the material changes to the financial statements and revisions to the auditor's report.

Jon Jones is a partner in the Austin, Texas office of ACE Auditors. He is the manager of that office. Judy South who also works in the Austin, Texas office of the firm is the lead audit partner for the audit of TCE Co. Jon is in no way involved with the audit of TCE Co. Is Jon considered a covered member under AICPA rules?

Jon is a covered member since, as the manager of the office, he is in a position to influence the engagement. He is also considered a covered member since he is a partner in the same office as the lead audit partner on the engagement

The following best describes the type of assurance provided by a CPA when performing a review of financial statements?

Limited assurance - The CPA provides limited assurance on the financial statements when performing a review of financial statements

Materiality is determined by the

Materiality is determined by both the size and nature of the misstatement

An auditor sends a confirmation request to a third party asking them to return the completed form only if they disagree with the stated amount written on the confirmation request. This is an example of which type of audit confirmation?

Negative Confirmation

An auditing firm audits 112 private companies and no public issuers. How often can this firm expect to be the subject of a PCAOB inspection?

Never, they are not subject Because this firm does not audit any public issuers, the firm is not subject to PCAOB inspections. The firm would be subject to the AICPA's peer review inspections once every three years

The external auditor has an IT department that helps the audit client design their accounting information system to make sure that financial information is recorded properly. The auditor believes that doing so will help improve the quality of information for investors. Is this service permissible while maintaining the auditor's independence?

No, this service is not permissible; - This service is expressly prohibited by the Sarbanes-Oxley Act of 2002 which prohibits 'financial information systems design and implementation' services

Three weeks prior to the end of the fiscal year, an uncontrolled wildfire destroys a large stockyard of lumber, equipment, and a significant number of partially-built tract homes for a homebuilder client. Because of a lull in new home construction, the homebuilder was already struggling to earn a profit and pay its bills. The builder does not have fire insurance to cover the losses incurred. Is this a subsequent event? If so, is it a Type I or Type II event?

Not a subsequent event **** Because the event occurs prior to the end of the fiscal year, this is not considered a subsequent event. The effects of the event should be appropriately reflected in the financial statements.

Rapelje Sporting Goods has been sued by one of its customers for allegedly selling a defective trampoline that caused injury. The best available independent estimates indicate there is a probable loss of $520,000. Assume that the appropriate treatment is to disclose the event in a footnote. If this event did in fact occur, but the company chose not to disclose the event which presentation and disclosure-level assertion would be violated?

Occurrence and rights and obligations - In this scenario, the disclosures would be incomplete; therefore, the completeness assertion would be violated.

The primary objectives achieved by a high quality system of internal control are

Operations, reporting, & compliance

Michael Davidson, the auditor of LowBeam Co., has identified a weakness in the client's internal controls that allows upper management to bypass the typical process for entering journal entries into the accounting information system. Which component of the Fraud Diamond should he be most concerned with ?

Opportunity - The auditor should be most concerned with the Opportunity component of the fraud diamond. <Incentive - Opportunity - Rationalization>

Which standard setter issues auditing standards for audits of public companies in the U.S.?

PCAOB - The PCAOB issues auditing standards for audits of public companies in the U.S..

In which stages are analytical procedures required?

Planning and Final review **** Analytical procedures are required at the planning and overall review stages of the engagement.

The concept of planning materiality refers to

Planning materiality relates to the overall materiality for the engagement

An auditor sends a confirmation request to a third party asking them to return the completed form whether they agree or disagree with the stated amount written on the confirmation request. This is an example of which type of audit confirmation?

Positive Confirmation

Type II errors result in which of the following

Reduction in audit effectiveness - Type 2 errors result in a reduction in audit effectiveness. When an auditor concludes that the financial statements are fairly state when, in fact, they are not fairly stated, he risks having an audit failure (i.e., decreased effectiveness).

Type I errors result in which of the following

Reduction in audit efficiency - Type 1 errors result in a reduction in audit efficiency. When an auditor concludes that the financial statements are not fairly state when in fact they are fairly stated, he or she will do more work than is necessary

Which of the following is NOT considered appropriate when auditors use external confirmations?

Requesting that management mail the confirmations that the auditor has prepared **** The auditor should maintain control over sending the requests to the client's customers. They should not allow management to mail the confirmation requests because of the risk that the requests could be tampered with.

The auditing standard requiring the physical inventory count was a result of which of the following frauds?

Requirements for physical inventory count is in response to the McKesson & Robbins fraud

Which of the following audit procedures would be most helpful for identifying subsequent events?

Reviewing minutes from board of directors meetings

Billy Bob's RV Emporium sells campers, trailers, and other recreational vehicles (RVs). Billy Bob participates in a number of consignment agreements to display the newest campers and RVs in his showroom until they are sold. When performing the physical inventory count at the end of the year, Billy Bob's auditor discovers that every model in the showroom is represented on Billy Bob's balance sheet as Inventory. Assuming some of the inventory is on display according to consignment agreements, which management assertion should the auditor be concerned about?

Rights & Obligations - Because Billy Bob does not own the trailers and RVs, he should not list them as inventory on his balance sheet. (The manufacturers should still list the items as inventory on their balance sheet.) Since he doesn't own these assets, the Rights & Obligations assertion is being violated by listing them on the balance sheet. (note the items were on consignment, which means Billy Bob did not own them)

Rapelje Sporting Goods alleges to have $410,000, net of allowance for doubtful accounts, in its accounts receivable account; this balance is made up of 270 total customers. If Rapelje's balance should be $400,000 and the overstated balance is due to inclusion of accounts receivable that the company does not own due to the inclusion of A/R that have been factored (i.e., sold) which balance-level assertion would be violated?

Rights or Obligations - In this scenario, the rights assertion has been violated because Rapelje is including items that it does not own in its A/R balance.

In the market for lemons example relating to automobiles, the only vehicles left in the market are low quality. What causes the decrease in the quality which ultimately leaves only low quality vehicles in the market?

Sellers of high quality vehicles refuse to sell their vehicles at prices below what their vehicle is worth, so they remove them from the market. The average quality of the vehicles continues to drop until only low quality vehicles remain.

A business is formed with the following characteristics: (1) The individual and the business are treated as a single entity. (2) There is no legal liability protection for the business owner; This type of business is most likely

Sole Proprietorship

the following standard-setting bodies have worked to converge their auditing standards with one another?

The ASB and IAASB have been working to converge standards. The PCAOB has not worked to converge standards with either of the other two standard-setting bodies

Which party has the ultimate responsibility to ensure that the auditing firm has the competence, resources, and capability to undertake an audit engagement?

The Auditor - It is the auditor's responsibility to ensure that they have the ability to perform the audit. While the audit committee would evaluate these traits when deciding whether to hire the auditor, it is ultimately up to the auditor themselves to ensure that these traits were present

The PCAOB suggested all of the following ways to improve the application of professional skepticism

The PCAOB suggested that improvements in the application of professional skepticism could come through 1- improvements in quality control, 2- proper tone at the top, 3- proper assignments of personnel to audit engagements, and 4- appropriate audit documentation

laws required public companies to file 10-K's, 10-Q's and 8-K's with the SEC

The Securities Exchange Act of 1934 requires public companies to file these periodic reports with the SEC

For publicly-traded companies, which of the following is charged with overseeing the auditor's role in the financial reporting process?

The audit committee **** The independent audit committee of the board of directors is charged with overseeing the auditor's role in the financial reporting process.

Which of the following is an example of an "overall" response to the risk of material misstatement?

The audit manager increases the level of detail in which she reviews staff-level work - Overall responses involve changing factors such as the supervision, predictability, and assignment of responsibility for the audit. These are different from the responses involving the nature, extent, and timing of audit procedures

If the auditor determines that substantial doubt exists about the entity's ability to continue as a going concern, to whom does the auditor have a responsibility to share his concerns?

The auditor is required to discuss this issue with both management and the audit committee **** The auditor is required to discuss/report his concerns to both management and the audit committee

What is meant by being "objective" as it relates to the financial statement audit?

The auditor is unbiased and fair; Being objective means being impartial or unbiased in thought and action

the following best describes what is meant by the term 'independence in fact'

The auditor is unbiased and impartial in thought as he or she carries out the audit; The term independence in fact refers the auditor's state of mind, including the impartiality when conducting the audit.

Under which of the following circumstances will the auditor properly disclose confidential client information to others outside of the firm?

The disclosure is made to a peer firm that is inspecting the work of the auditor on the engagement; The disclosure is made to a successor auditor reviewing workpapers as part of auditor transition Disclosure of confidential client information is allowable only in a few select cases. Two of these instances are (1) in order to facilitate peer review of audit work, and (2) to facilitate transition to successor auditors

The concept of performance materiality refers to

The overall materiality applied to account balances or classes of transactions - Performance materiality relates to the overall materiality applied to account balances or classes of transactions

What best describes the term 'risk premium'?

The risk premium is the amount charged by an investor or lender that exceeds what they would have charged in the absence of risk. It is essentially like an insurance premium they charge in to help cover any potential loss on their investment.

What are the six principles of the AICPA Code of Professional Conduct

The six principles of professional conduct are: (1) - Responsibilities; (2) - The Public Interest; (3) - Integrity; (4) - Objectivity and Independence; (5) - Due Care; (6) - Scope and Nature of Services

Indicate below whether or not you believe the following situation would be considered a violation of one of the 4 SEC principles for determining auditor independence: The auditor of ADCS Co. has a substantial investment in ADCS's major competitor. Stock returns are such that when ADCS performs well, their competitor's stock price decreases and when ADCS does poorly their competitor's stock price increases

This is a violation of the SEC's principle that the auditor should not have a mutual or conflicting interest with the client. Specifically, the auditor has a conflicting interest meaning that when the client does poorly, the auditor will benefit

Which of the following types of analytical procedures would involve comparing current period revenue to revenues from each of the past three accounting periods to see how this stream of revenues has changed over time?

Trend analysis

An audit client can receive an unqualified opinion (i.e., financial statements are materially accurate) and an adverse going concern opinion in the same auditor's report (T/F)

True

An auditor discovers that credit is not always properly approved when selling items to new customers on account. When auditing the accounts receivable balance, this would be considered a deviation in the context of tests of controls (T/F)

True

Audit confirmations involve direct communication with third parties (i.e. outside of the entity) to obtain evidence about an assertion. (T/F)

True

Auditing firms are required to maintain a system of quality control within the firm (T/F)

True

Auditing standards need to evolve and change with the needs present at any given time. (T/F)

True

Auditing standards require that all key members of the audit engagement team participate in a brainstorming session about how the client's financial statements might be susceptible to fraud and how management could perpetrate and conceal fraud (T/F)

True

Auditors are responsible to ensure that management accepts its responsibility for the preparation of the financial statements before accepting an audit engagement (T/F)

True

Auditors must document all misstatements discovered during the audit, whether they were corrected by management or not (T/F)

True

Auditors must document all misstatements discovered during the audit, whether they were corrected by management or not. (T/F)

True

Audits of financial statements provide reasonable assurance that the financial statements are free of material misstatements. (T/F)

True

Disaggregated data used in a substantive analytical procedure usually provides stronger evidence to the auditor than aggregated data. (T/F)

True

Facts that become known to the auditor after the auditor's report has been issued that, had they been known previously, may have caused the auditor to revise his report are known as subsequently discovered facts. (T/F)

True

For risk assessment analytical procedures to be effective at identifying unusual relationships or trends, it is important that the auditor have an understanding of the client's business and its environment. (T/F)

True

GAAP is the 'established criteria' used in the preparation of financial statements in the US. (T/F)

True

If a different auditor audited the financial statements in the prior year, the current auditor should request to review the predecessor auditor's audit documentation as part of ensuring that the opening balances are accurate (T/F)

True

If an auditor discovers an omitted audit procedure after the financial statements have been issued, but determines that additional compensating procedures were performed and sufficient appropriate audit evidence was obtained through those procedures, he may conclude that the omitted procedure does not impair his ability to continue to support the audit opinion. (T/F)

True

In the context of internal controls, a control deviation refers to an instance where the control did not function properly. (T/F)

True

Materiality refers to the amount that could reasonably be expected to influence the economic decisions of users made on the basis of the financial statement (T/F)

True

Monitoring activities can include both separate activities as well as ongoing activities to evaluate the effectiveness of controls. (T/F)

True

One reason the auditor seeks to obtain an understanding of the client is to better assess the risk of material misstatement in the client's financial statements (T/F)

True

Related party transactions have a higher risk of material misstatement than other non-related party transactions (T/F)

True

Sampling risk comes from the drawn sample not reflecting the true population (T/F)

True

Sampling risk refers to the risk that the auditor's conclusions based on sampling are different than their conclusions would be if they were to rely on the entire population. (T/F)

True

Sampling risk relates to the risk that a sample is not representative of the overall population from which it was drawn. (T/F)

True

Statistical sampling techniques require random selection of sampling units to include in the sample. (T/F)

True

SysTrust and WebTrust are types of assurance services aimed at improving the quality of information relating to IT systems and websites. (T/F)

True

The AICPA peer review program requires all audit firms using AICPA auditing standards to receive peer reviews (T/F)

True

The ASB and IAASB have been actively working toward converging their auditing standards (T/F)

True

The McKesson & Robbins fraud led to the auditing standard requiring the confirmation of accounts receivables. (T/F)

True

The SEC has congressional authority to set auditing standards in the U.S. (T/F)

True

The Securities Exchange Act of 1934 requires that the SEC ensure that rigorous auditing standards are set and adhered to. (T/F)

True

The approach for determining performance materiality is very similar to the process for determining overall planning materiality in that the auditor starts with a quantitative calculation and then considers qualitative factors (T/F)

True

The approach to documenting the auditor's understanding of internal control varies depending on the complexity of the system of internal control. (T/F)

True

The audit objective for tests of controls is generally to provide evidence that the control is in place an functioning properly. (T/F)

True

The auditor must communicate ALL deficiencies she discovers; whether deficiencies, significant deficiencies, or material weaknesses; to the client. (T/F)

True

The demonstration of a commitment to professionalism is part of the Public Interest principle of professional conduct (T/F)

True

The form of audit documentation depends on the nature of the type of audit test performed. (T/F)

True

The nature of audit procedures relates to the type or quality of the procedure performed (T/F)

True

The risk premium is the amount charged by an investor or lender that exceeds what they would have charged in the absence of risk. (T/F)

True

When deciding on a sampling unit to use for substantive tests of details by confirmation, the auditor considers both the likelihood of receiving a response to the confirmation requests and the ability to apply alternative procedures in the case of a non-response (T/F)

True

When deciding on a sampling unit to use for substantive tests of details, the auditor considers the likelihood of soliciting a response for confirmations, or the ease of applying alternative procedures in the case of a non-response. (T/F)

True

When deciding on which benchmark to use for determining overall planning materiality, the auditor should consider which line items users pay close attention to. (T/F)

True

ASB and IAASB auditing standards allow the auditor 60 days following the report release date to compile a completed set of audit documentation. (T/F)

True **** ASB and IAASB standards allow the auditor 60 days following the report release date to compile a completed set of audit documentation.

Analytical procedures are evaluations that focus on comparisons of relevant information, whether in the current period or comparing with prior periods. (T/F)

True **** Analytical procedures are evaluations that can focus on comparisons to relevant information, which can include comparisons to industry data, prior periods, budgets, etc. This can include comparisons of data within the same period or comparisons made between two different periods.

If the information obtained through audit confirmations differs from the information reported by management in the financial statements, the auditor should NOT immediately conclude that the financial statements are not fairly stated. (T/F)

True **** Differences between the reported balance and the balance obtained through audit confirmations could indicate timing differences, disputes, or other reasons. The auditor should investigate any differences to determine the reason for the difference.

If an auditor discovers a misstatement that is less than the quantified materiality for an account (i.e., tolerable misstatement), she still needs to make a record of it. (T/F)

True **** Other than misstatements that are "clearly trivial", auditors are required to document and accumulate other misstatements so they can be evaluated at the conclusion of the engagement.

Facts that become known to the auditor after the auditor's report has been issued that, had they been known previously, may have caused the auditor to revise his report are known as subsequently discovered facts. (T/F)

True **** Subsequently discovered facts refer to information discovered after the auditor's report has been issued.

One source an auditor could use to determine potential explanations for the significant differences between the client's reported number(s) and the auditor's expectation is a specialist on the audit engagement team. (T/F)

True **** The auditor can turn to multiple sources to come up with explanations for identified significant differences. While standards suggest going to management, the auditor can also rely on his or her own thoughts, analysis, and experience to generate explanations, or even turn to his or her firm's decision aids or other resources, such as specialists, to generate these explanations.

If subsequently discovered facts cause management to make adjustments to the financial statements to which the auditor has already opined, the auditor should revise her opinion. (T/F)

True **** The auditor should revise her opinion if changes are made to financial statements on which the auditor has already opined

An auditor would have to find evidence to corroborate an explanation for a significant difference whether that explanation was provided by management or generated by the auditor. (T/F)

True **** The auditor will have to find evidence to support any explanation that the auditor wants to conclude explains a significant difference between the client's reported number and the auditor's expectation when performing a substantive analytical procedure.

Analytical procedures can be an effective audit procedure for identifying evidence if a substantial doubt exists about a company's ability to continue as a going concern. (T/F)

True **** The text discusses Risk Assessment Procedures

If the auditor observes a significant difference between the client's reported number and the auditor's expectation, one explanation could be that the client is unaware of a material error in the financial statements. (T/F)

True **** There are numerous potential explanations for significant differences between the client's reported number and the auditor's expectation. Two primary categories would be true business changes (that the auditor may not have been aware of when formulating an expectation for the client's reported result) and material misstatements (due to error or fraud).

Once the auditor feels that he or she has adequate evidence to determine the cause of the difference between the reported amount and the auditor's estimate, he or she is ready to draw a conclusion regarding the results of the analytical procedure. (T/F)

True **** This is the last step in the application of substantive analytical procedures. As such, the auditor should draw a conclusion from the test after they are comfortable with the explanation they have as to why the reported and expected amounts differ.

Management's refusal to allow the auditor to confirm accounts receivables is not always a scope limitation requiring withdrawal from the audit engagement. (T/F)

True **** This is true. Management may have legitimate reasons for not wanting the auditor to confirm receivables with their clients. The auditor should carefully review the reasoning for management's refusal to allow them to confirm receivables.

If differences exist between the reported balance and the balance obtained by the auditor through audit confirmations, the auditor should request an explanation from management and corroborate their explanation with other evidence. (T/F)

True **** This question says you 'should' which makes it seems as if it is a requirement, yet the textbook states you 'may' leaving it more a determination for the auditor.

A 'concurring partner' is a partner in the same firm that reviews the work of the audit team assigned to the audit engagement. (T/F)

True **** This statement is true. A concurring partner comes from within the same audit firm that is conducting the audit.

In addition to providing documentation regarding the factors that support their conclusions, the auditor should document evidence that contradicts their final decision as well as how the auditor resolved the conflict. (T/F)

True **** This statement is true. Auditors should document both supporting evidence as well as any evidence that they found that contradicted their ultimate decision along with how they resolved the conflict between the two sets of evidence.

Audit documentation MUST include the date the work was performed and who reviewed the work. (T/F)

True **** This statement is true. It is necessary to document who performed the work, when they performed it, who reviewed the work, and when it was reviewed.

Retention of a copy of the completed audit program provides evidence that the audit was planned and that the necessary audit steps were performed.(T/F)

True **** This statement is true. The audit program indicates the steps to be taken in the audit. As such, it provides evidence that the audit was properly planned and that it was carried out.

The auditor has a responsibility to actively search for subsequent events up until the date of the auditor's report, but not up through the date the client issues the financial statements. (T/F)

True **** This statement is true. The auditor's responsibility to actively search for subsequent events extends until the auditor's report date (i.e., end of work). Between the auditor's report date and the issue date on the financial statements, the auditor passively searches for subsequent events.

The first step the auditor should take if the balance reported by management differs from the balance obtained through confirmations is to investigate the reason for the difference. (T/F)

True **** This statement is true. The difference can be due to many factors so the auditor should investigate the reason for the difference.

U.S. auditing standards require the use of external confirmations for accounts receivables with few exceptions. (T/F)

True **** This statement is true. There are three conditions that would allow the auditors to determine not to use confirmations for accounts receivables balances. 1. The overall account balance is immaterial, 2. External confirmation procedures would be ineffective, or 3. The auditor's assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.

Even if an auditor understands the logic of an explanation provided by management, the auditor must still obtain evidence to corroborate management's explanation for a significant difference. (T/F)

True **** Whether or not management's explanation appears feasible or logical, if the auditor is going to conclude that management's explanation helps explain a significant difference the auditor is required to corroborate (i.e., verify) this explanation.

According to AICPA (2008) guidance, the development of an expectation is the most important step when using analytical procedures. (T/F)

True ***** According to AICPA (2008) guidance, the most important analytical procedure step for auditors to complete is to effectively set an expectation for the client's reported number.

The auditor's audit objectives are set using management assertions related to financial statement accounts. (T/F)

True Although the textbook reading states, audit objectives are set to test management assertions, not based on using them.

Just because the prior year's financial statements have been audited (by another audit firm), the auditor can not assume that the ending balances for that year are accurately reported

True The auditor must obtain evidence that the opening balances (closing balances from last year) are fairly stated if the prior year financial statement were audited by other auditors

The sampling technique to be used in a given scenario is not specified in the auditing standards. (T/F)

True This is true. Auditing standards do not prescribe the specific sampling methods to be used. Auditors exercise professional judgment to determine which sampling method to use.

If the auditor plans to obtain many sources of evidence regarding an assertion for an account balance, he or she would most likely have a higher tolerable deviation rate when testing an internal control for reliance purposes. (T/F)

True This is true. The tolerable deviation rate can be higher for the test of controls because the auditor will also have other sources of evidence to corroborate their conclusions.

Non-sampling risk can be reduced through ongoing employee training, supervision, and review of audit work. (T/F)

True This statement is true. By performing careful training of employees, review, and supervision of audit work the auditor reduces the likelihood that incorrect conclusions are reached.

One benefit to statistical sampling as compared to non-statistical sampling is that statistical sampling provides mathematically-sound methods to control for sampling risk. (T/F)

True This statement is true. One benefit of statistical sampling methods is the ability to statistically determine a sample size to reduce sampling risk to a desired level.

The materiality threshold for a sampling procedure must be included in the audit documentation. (T/F)

True This statement is true. The auditor is required to document "the amount below which misstatements would be regarded as immaterial." This is the same thing as the materiality threshold

The auditor is required to provide a lower level of assurance for management's disclosure and analysis (MD&A) than for the financial statements. (T/F)

True **** Although the auditor reviews the MD&A section to ensure statements made by management are generally consistent with the audited information, the auditor does not provide the same level of assurance for MD&A as he does for the financial statements.

Auditors are not required to determine whether or not their client has complied with all laws and regulations

True - Auditors are not responsible to evaluate their client's compliance with all laws and regulations. However, if they determine that a client has not complied with a law or regulation, they should determine if and how the noncompliance impacts the financial statements. In some cases, the auditor has a responsibility to report illegal acts to others outside of the client organization

As illustrated in the HealthSouth fraud case discussed in this topic, audit failures frequently lead to litigation and reputation losses that are far greater than audit fees received (T/F)

True - Even though audit firms attempt to account for the risk of litigation associated when pricing an audit engagement, the cost of litigation and reputation loss following an audit failure - particularly one due to fraud - is generally far greater than the amount of audit fees received for performing the audit

A CPA was engaged to complete the financial statement audit for a small privately-held company. Two months into her work, the auditor was dismissed from service and paid for the work up to that point. The client requested that all client-produced documents be returned to the client without delay. The auditor, being busy with other matters, failed to return the documents to the client. This is an example of an act discreditable to the profession (T/F)

True - Failure to return client-provided documents to the client at their request is an example of an act discreditable to the profession

Spending the time and money to provide high quality information to the public benefits both investors AND the company providing the information. (T/F)

True - High quality information benefits the public because it helps them make better investment decisions. It benefits the company by reducing its cost of capital due to lower risk premiums charged by investors and lenders.

Auditors provide value to the financial statements through both preventing and detecting material misstatements. (T/F)

True - Knowing that the auditor will be evaluating the financial statements will cause management to be more careful in preparing them, reducing the likelihood of both intentional and unintentional misstatements.

Most audit engagements include only one manager assigned to the audit engagement (T/F)

True - Most engagements include one partner, one manager, one senior, and multiple associates (staff).

During the time an auditor is performing an audit of a client who builds commercial buildings, a friend indicates that they are in need of a new commercial building. The auditor refers his friend to his audit client for the construction service, indicating that they are a reputable builder. The friend and the client contract to have the building built by the audit client and pay the auditor a referral fee for the connection. The auditor has violated the code of professional conduct in this scenario (True/False)

True - The auditor can refer his client's services, but cannot receive a referral fee or commission for this recommendation

In order to properly exercise professional skepticism, the auditor should not assume that management is not telling the truth, but the auditor should validate what management says with supporting documentation (T/F)

True - The auditor does not automatically assume that management is not telling the truth. The auditor should not, however, treat information as if it were completely accurate but should verify the information provided to them by management

An auditor owns 2% of a diversified mutual fund, but the mutual fund invests in one of the auditor's clients. The auditor does not control the investment decisions of the mutual fund. The auditor would be considered independent in this scenario (T/F)

True - The auditor would be considered independent in this scenario since she owns less than 5% of the mutual fund shares, the fund is diversified, and the auditor does not control the investment decisions of the mutual fund

The PCAOB suggested that one way to improve the application of professional skepticism is to set the proper tone at the top of the audit firm organization (T/F)

True - This is a true statement. Setting the proper tone at the top will demonstrate to employees at the lower levels of the organization the expectations of upper management

Management is ultimately responsible for establishing and maintaining internal controls at the company. (T/F)

True - This is one of management's roles and one of the certifications they must make to the public

An auditor performs an audit of American Express. She also has an American Express credit card which regularly carries a balance of $5,000-$8,000 by the payment due date. This is her only credit card. The auditor would be considered independent under AICPA rules (T/F)

True - This is true. Because her balance is less than $10,000 by the payment due date, the auditor would be considered independent under AICPA rules

An auditor contracts with a client to perform the audit engagement for $6,000, but complications arising during the audit cause the auditor to perform more work than necessary. The auditor renegotiates with the client so that the total payment is $7,500. This is an example of a contingent fee that is not prohibited by the code of professional conduct (T/F)

True - This statement is true, and is a common practice. The payment in this example is not dependent on the outcome of the audit, rather it is dependent on the amount of work necessary to perform a quality audit

Statements on Auditing Standards (SAS's) are issued by the AICPA Auditing Standards Board? (T/F)

True - This statement is true. The Auditing Standards Board of the AICPA issue Statements on Auditing Standards (SAS's).

The standards of independence, proficiency and training, and due professional care are included in the general standards category (T/F)

True - This statement is true. These three standards are part of the general standards category.

If the auditor uses a pure substantive approach, he or she will typically not test the client's controls (T/F)

True - This statement is true. Using a pure substantive approach means that the auditor is not going to rely on controls for any evidence. Therefore, the auditor would not test controls

Auditing standards allow the engagement partner assigned to a particular client to delegate the supervision and review of the work performed on the audit (T/F)

True - While engagement partners remain responsible for the outcome of the audit, they are not required to personally supervise or to review all work performed on the audit engagement

Auditors must assess the impact of any noncompliance with laws or regulations on the client's financial statements, however they are not required to determine whether the client has complied with all laws and regulations that are relevant to the client. (T/F)

True - A client's compliance or noncompliance with laws or regulations that are unrelated to the financial statements (such as an EPA or similar regulation) are not in the scope of the audit. However, in some cases the auditor may have a responsibility to report illegal acts by clients

A negligence lawsuit brought against the auditor under The Securities Act of 1933 would result in a higher burden of proof for the auditor than the same lawsuit brought under the Securities Exchange Act of 1934 (T/F)

True - A negligence lawsuit brought against the auditor under the Securities Act of 1933 would result in a higher burden of proof for the auditor than the same lawsuit brought under The Securities Exchange Act of 1934

AS 7 requires engagement quality control reviews to be conducted and overseen by a concurring partner on every public company audit (T/F)

True - AS 7 applies to all audits of public companies and, thus, requires engagement quality control reviews to be conducted on every audit of public companies

Audit procedures performed near year end are generally considered more reliable than procedures performed at interim periods (T/F)

True - Audit procedures performed near year end are typically considered more reliable than procedures performed at interim periods because the year-end procedures include samples from a greater portion of the year

A predecessor auditor requires permission from the client's management prior to responding to inquiries from the incoming auditor regarding the predecessor auditor's experiences in auditing the client (T/F)

True - Auditing standards prescribe that authorization should be obtained from management for the prior auditor "to respond fully to the auditor's inquiries regarding matters that will assist the auditor in determining whether to accept the engagement."

Prior to accepting an audit client, the auditor is required to determine whether the financial statements have been prepared according to an acceptable framework (T/F)

True - Auditing standards require that the auditor determine that "preconditions for an audit" exist prior to accepting an engagement. These preconditions include the fact that the financial statements have been prepared according to an acceptable framework

Auditors are responsible for obtaining reasonable assurance that the financial statements are free of material misstatements, regardless of whether the misstatements were caused by error or fraud (T/F)

True - Auditors are responsible for obtaining reasonable assurance that the financial statements are free of material misstatements caused by error or fraud

The primary distinction between a material error and a material fraud is the intent of the party that created the misstatement (T/F)

True - Material misstatements can occur due to an error/mistake or due to an intentional manipulation of the financial statements (i.e., fraud). The most important distinction between the two is the intent of the party that created the misstatement

The risk premium is the amount charged by an investor or lender that exceeds what they would have charged in the absence of risk. (T/F)

True - The risk premium is the amount charged by an investor or lender that exceeds what they would have charged in the absence of risk. It is essentially like an insurance premium they charge in to help cover any potential loss on their investment

The definition of audit risk is very similar to the definition of a Type II error. Both are defined as the risk that auditors provide an unqualified opinion on financial statements when a material misstatement exists (T/F)

True - These are both similar concepts. Both refer to the auditor providing a clean or unqualified opinion on the financial statements when in fact a material misstatement exists

The Control Environment component of internal control relates to client integrity, proper board oversight and reporting channels, commitment to hiring competent employees, and proper accountability for internal control related actions (T/F)

True - These are each principles outlined in the COSO framework regarding the Control Environment component.

An auditor assesses management's compliance with a federal regulation and reports the results to interested users through a written report. This is an example of an attest service. (T/F)

True - This is an example of an attest service

The fact that Mr. Musica knew what the auditors would do during the course of the audit is one of the reasons the McKesson & Robbins fraud was able to be carried out for so long. (T/F)

True - This statement is true. Mr. Musica knew in advance what the auditors would do and was therefore able to avoid detection.

Smaller clients are generally greater fraud risks than larger clients (T/F)

True - This statement is true. This fact was reported in the COSO 2010 fraud study cited in this section of the text

Auditing standards indicate that the auditor should obtain an understanding of the entities' ownership and governance structure as they seek to perform a high quality audit (T/F)

True - This statement is true. Understanding the ownership and governance structure of the client is important to the effective performance of the audit

An audit failure occurs when the auditor reports to the public their opinion that the financial statements are free of material misstatements when the financial statements actually contain a material misstatement. (T/F)

True - this is the definition of an audit failure

Assume that an uncontrolled wildfire destroys a large stockyard of lumber, equipment, and a significant number of partially-built tract homes for a homebuilder client five weeks after year-end but prior to the company issuing its annual financial statements. Assuming the damages are material to the financial statements, what type of event is described and what is the most appropriate course of action?

Type II Subsequent Event; Disclose the damage and losses, but do not adjust the financial statements **** Because the event was not predicted and occurred after year end (but before the financial statements were issued), it is a Type II event requiring disclosure rather than an adjustment to the financial statements. In the event that the event was pervasively material, the client may choose to include pro forma financial statements (i.e., reflecting the losses) in addition to the GAAP-compliant statements (i.e., do not reflect the losses).

Which of the following are indicators of audit quality identified by the IAASB in its "Framework for Audit Quality"?

Understanding their role as an auditor; Exercising professional skepticism; Having experience in auditing a particular client; Having the knowledge necessary to conduct a proper audit

the following are part of the 10 Generally Accepted Auditing Standards

a. Auditor must exercise due professional care in the performance of the audit b. Auditor must obtain an understanding the client's internal controls c. Auditor must state if accounting principles have not been consistently observed

The following are tasks completed during a quality control review of an audit engagement

a. Determine whether information has been communicated to the appropriate parties; b. Determine whether audit documentation is clear and sufficient; c. Review assessments of and judgments related to materiality **** The quality control reviewer does not assume the responsibility of the original audit team. It is the original audit team's responsibility to select an appropriate opinion and to issue the auditor's report.

the following are examples of an assurance service

a. Evaluation of client's IT systems and reporting on the findings to the public b. Evaluating and reporting on a client's internal controls c. Audit of financial statements

The following are appropriate methods for the auditor to document an understanding of the client's controls:

a. Flow Charts b. Written Narratives c. Questionnaires **** Tick marks do not demonstrate an understanding of the client's controls.

Oral responses from confirming parties are appropriate for which purpose?

a. For confirming that proper care was taken when completing the confirmation form; b. For verifying the identity of the confirming party ***** Oral responses are not appropriate for receiving the confirmation of account balances. However, oral responses are appropriate for confirming that proper care was taken when preparing the confirmation form and for verifying the identity of the confirming party.

Which of the following methods provides the highest quality of documentation regarding the audit engagement team's discussion about the susceptibility of the financial statements to material misstatements?

a. Include transcripts from their meeting **** Providing the transcript of the meeting is the only method out of these options that provides adequate documentation of this meeting. Indicating that it happened is not enough information.

the following is considered a best practice when sending confirmation requests

a. Including a self-addressed, stamped envelope with the confirmation request; b. Mailing the confirmation request from a location other than the client's mail room; c. Verifying the existence of the third party and the accuracy of the recorded contact information **** i. The auditor may request a faxed copy in addition to the mailed copy, but a faxed copy in place of a mailed copy is not considered a best practice.

The following audit procedures are appropriate when searching for contingent liabilities:

a. Inquiries of management and other key personnel b. Communication with the client's legal counsel through a letter of inquiry prepared by the client c. Reviewing legal expense accounts and documentation d. Reviewing board minutes and other committee meeting minutes **** the physical inventory count and sampling of sales invoices are common audit procedures used to identify potential contingent liabilities.

The audit engagement quality control review process focuses on each of the following

a. Judgments and risk assessments made during the planning phase b. Assessments of and judgments related to materiality c. Determining whether sufficient appropriate evidence was collected to support the auditor's opinion d. Determine the firm's independence and whether appropriate steps were taken to ensure independence throughout the engagement e. Determine the firm's independence and whether appropriate steps were taken to ensure independence throughout the engagement

Using an electronic confirmation service such as confirmation.com assists the auditor with which of the following issues?

a. Minimizes the likelihood of interception of the confirmation requests; b. Reduces the time it takes to receive confirmation responses; c. Helps verify the authenticity of the respondent **** These types of services do not evaluate the audit evidence for the auditor. However, each of the other benefits listed are correct.

The following are purposes of audit documentation:

a. Provide support for the conclusions reached by the auditor b. Provide evidence that the audit was carried out in accordance with GAAS c. Facilitate the planning, performance, and supervision of the audit engagement d. Serves as the basis for review of the work performed

Which of the following are one of the types of analytical procedures?

a. Ratio Analysis b. Trend Analysis c. Reasonableness Tests d. Regression Analysis **** Each of these is an example of analytical procedures. There are multiple types of analytical procedures. For examples, auditors can make comparisons of financial ratios over time (ratio analysis), comparisons of relevant information across time (trend analysis), statistical analyses (e.g., regression analysis), etc.

Using an electronic confirmation service such as Confirmation.com assists the auditor with each of the following issues:

a. Reduces the time it takes to receive confirmation responses b. Minimizes the likelihood of interception of the confirmation requests c. Helps verify the authenticity of the respondent

Which of the following IS considered appropriate when auditors use external confirmations?

a. Requesting that management provide a listing of all customers with receivables balances ***** The auditor should maintain control over sending the requests to the client's customers. They should not allow management to mail the confirmation requests because of the risk that the requests could be tampered with. They would, however request a listing of customers with receivables balances from the client. The auditor would perform procedures to verify that this listing population is complete.

The McKesson & Robbins fraud led to the addition of the following auditing standards

a. Requirement to confirm accounts receivable b. Requirement to observe the inventory count

Assume an auditor is trying to formulate an expectation for the client's reported warranty liability balance. If the auditor is examining financial relationships, which of the following account balances would likely be useful in formulating an expectation for the client's reported warranty liability balance?

a. Sales Revenue b. Cost of Goods Sold ***** The client's warranty liability will likely be driven, in large part, by the number of products the client sells. Therefore, revenues and cost of goods sold would both be expected to be associated with the client's true warranty liability. In contrast, common stock would not have a clear, expected association with the warranty liability account. Instead, this account would be more helpful to the auditor in the case where the auditor is forming an expectation for the dividend payable account.

The following are potential sources of review of audit documentation:

a. The PCAOB inspection program; b. The AICPA peer review program; c. Concurring partner review **** Other audit clients do not have access to audit documentation since it contains confidential client information.

The following are types of audit documentation that auditors should include in their files:

a. The audit program b. The engagement letter c. Copies of the client's financial statements

The following are examples of a cause of non-sampling risk:

a. The auditor uses an inappropriate audit procedure to test an assertion b. The auditor uses a correct audit procedure, but implements the procedure incorrectly c. The auditor misinterprets audit evidence obtained from a properly-performed audit procedure ***** Whenever sampling techniques are used, the risk exists that the sample may not be representative of the population. If proper procedures are followed in developing the sample, the fact that the sample is not reflective of the population is a function of sampling risk, not non-sampling risk. Non-sampling risk refers to drawing erroneous conclusions for reasons not related to sampling risk.

Which of the following could help explain a significant difference between the client's reported number and the auditor's expectation?

a. The client could have entered into new business transactions that affected the reported number; b. The client could be committing fraud; c. The client could be unaware of a material error in the financial statements **** All three of these may explain significant differences between the client's reported number and the auditor's expectation. There are numerous potential explanations for significant differences between the client's reported number and the auditor's expectation. Two primary categories would be true business changes (that the auditor may not have been aware of when formulating an expectation for the client's reported result) and material misstatements (due to error or fraud).

the following are types of audit documentation that auditors should include in their completed audit files

a. The engagement letter; b. Copies of the client's financial statements; c. The client's trial balance **** Documentation of the audit firm's quality control processes and procedures is not a form of audit documentation.

the following are the indicators of audit quality identified by the IAASB in its "Framework for Audit Quality"

a. Understanding their role as an auditor b. Exercising professional skepticism c. Having experience in auditing a particular client d. Having the knowledge necessary to conduct a proper audit

the following are generally a cause of unintentional misstatements in the financial statements

a. Weak internal controls b. Human judgment errors c. Unqualified client staff

The following ARE considered part of the revenue cycle

i. Cash ii. Sales iii. Accounts Receivable

What are the typical accounting transaction cycles that organizations divide their activities into?

i. Expenditure cycle ii. Payroll cycle iii. Revenue cycle iv. Financing cycle

The following ARE part of primary concerns for revenue cycle audit

i. Receivables may be overstated from failure to write off uncollectible receivables ii. Cash may be overstated due to fictitious cash being reported iii. Sales might be recorded in the wrong accounting period ** Reminder inventory is part of the expenditure cycle **

Items that ARE part of the revenue cycle

i. Receive a customer order ii. Fulfill the customer's order iii. Bill the customer

Which of the following is a key area in which the auditor should seek to obtain an understanding of the audit client?

i. The client's operations ii. The entity's financing iii. The entity's objectives and strategies

Jane Jones, the auditor of Hy Co. has identified a weakness in the client's internal controls that allows upper management to bypass the typical process for entering journal entries into the accounting information system. She should be most concerned with which of the following aspects of the fraud diamond?

opportunity - She should be most concerned with the Opportunity component of the fraud diamond

Which of the following is the first step of the substantive analytical procedures process?

set an acceptable deviation **** Auditors should first set an acceptable deviation amount, and can then use this amount, along with the auditor's expectation, to determine whether there is a significant difference between the client's reported number and the auditor's expectation.

Auditing standards explicitly require that the auditor obtain _________ , _________ evidence as a basis for forming his or her opinion.

sufficient; appropriate **** Standards require auditors to obtain sufficient, appropriate evidence to support their opinion.