ACC-491 Chapter 5

All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded under the _____ assertion.

completeness

Inherent risk and control risk are the two components of the risk of

material misstatement

Without regard to the effect of controls, ______ assertions are those that have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.

relevant

True or false: An important component of applying professional skepticism is awareness of the possibility that information received may be biased, or outright incorrect.

true

Overvaluing information that comes to one's mind quickly is ______ bias.

availability

Audit evidence in paper or electronic form that is obtained through inspection of records is referred to as

documentary evidence

Test of controls are designed to test the operating _____ of controls in preventing or detecting material misstatements.

effectiveness

The reliability of customer sales invoices created by the client and held internally depends on the ______.

effectiveness of internal control

Inherent risk is generally highest for _____ transactions because they involve management judgments or assumptions.

estimation

Inherent risk may be high for _____ transactions because they are not part of the normal flow of transactions and specialized skills may be needed to perform the activity.

nonroutine

Which of the following relates to the assertion being addressed?

relevance

These transactions generally have the highest level of inherent risk.

Estimation

The use of statistical models to quantify the auditors' expectation about a financial statement amount or ratio is called

regression analysis

Auditors gather evidence to restrict this risk to the appropriate level.

detection

Sufficiency relates to the quantity and _____ relates to the quality of audit evidence needed.

appropriate

The term _____ risk refers to the possibility that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

audit

The working papers for a particular engagement are included in the

audit file

Management makes assertions for financial statements regarding all of the following except ______.

fairness of the audit opinion

The possibility of material misstatement of an assertion before consideration of the client's internal control is called

inherent risk

The risk that a material misstatement could occur in a relevant assertion and not be detected on a timely basis by the client's internal control is called

inherent risk

These components of audit risk exist for a client even if an audit is not performed.

inherent risk and control risk

A reasonableness test differs from regression analysis in that a reasonableness test:

is less formal

When obtaining audit evidence, inquiries of knowledgeable persons ______.

may be oral or written and may result in oral or written replies

Control risk is a function of ______.

operating effectiveness of internal control design effectiveness of internal control

Maintaining a questioning mind, being alert to conditions that may indicate possible misstatements due to fraud or error, and critically assessing audit evidence are components of

professional skepticism

In performing audit procedures, without regard to the effect of controls, ______ assertions are those that have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.

relevant

Sufficient audit evidence is affected by ______.

risk of misstatement and reliability of evidence

These transactions involve activities that occur only periodically, such as taking physical inventories or calculating depreciation expense.

routine

These transactions involve recurring financial statement activities recorded in the accounting records in the normal course of business restricting inherent risk.

routine

Detection risk is restricted through the performance of ______.

substantive procedures

Management makes financial statement assertions related to ______.

classes of transactions and events account balances presentation and disclosure

These transactions involve activities that occur only periodically, such as taking physical inventories or calculating depreciation expense.

nonroutine

The audit risk model is: AR = ______.

IR x CR x DR

Identify the components of the risk of material misstatement.

Inherent risk Control risk

The nature of _____ transactions restricts inherent risk, although controls must be implemented to assure proper recording.

Routine

Factors that affect inherent risk include the nature of the ______.

account client's environment client

The audit risk model is a function of ______ risk.

detection inherent control

Audit evidence is ordinarily more reliable when it is ______.

obtained directly by the auditors provided by original documents generated through a system of effective internal controls

Which of the following relates to the circumstances in which evidence is obtained?

reliability

Match the assertion with its definition: 1. Existence or occurence 2. Rights and Obligations 3. Completeness 4. Cutoff 5. Valuation, allocation, or accuracy 6. Presentation and disclosure

1. Assets, liabilities, and equity interests exist and recorded transactions and events have occurred. 2. Company holds rights to the assets, and liabilities are the obligations of the company. 3. All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded 4. Transactions and events have been recorded in the correct accounting period. 5. All transactions, assets, liabilities, and equity interests are included in the financial statements at proper amounts. 6. Accounts are described and classified in accordance with GAAP and financial statement notes are complete, appropriate, and clearly expressed