ACCT415 Test 2

three main techniques used to manipulate revenue.

Three main techniques use to manipulate revenue​ include: (1) recording of fictitious​ revenue; (2) premature revenue recognition including techniques such as​ bill-and-hold sales and channel​ stuffing; and​ (3) manipulation of adjustments to revenue such as sales returns and allowance and other contra account

An auditor embracing the responsibility during the audit of maintaining a questioning mind and critically evaluating evidence significantly reduces the likelihood of audit failure throughout the audit

True

Auditors should obtain copies of the​ client's code of ethics and minutes of the meetings of the board of directors to aid in their understanding of the​ company's management and governance structure

True

List the four major evidence decisions that must be made on every audit

When to perform the procedures, what sample size to select for a given procedure, which items to select from the population, which audit procedures to use

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

Significant differences between the physical inventory count and the accounting records are not investigated.

· Which of the following is the primary basis used to decide materiality for a​ profit-oriented entity?

net income before tax

· The permanent files included as part of audit documentation do not normally include

o A copy of the current and prior years auit programs

Identify the eight major steps in planning audits

o Accept client and perform initial audit planning o Understand the clients business industry o Perform preliminary analytical procedures o Set preliminary judgement o Identify significant risks o Assess inherent riks o Understand internal control and assess control risk o Finalize overall audit strategy and audit plan

Which of the following is not a factor that relates to opportunities to misappropriate assets

o Adverse relationships between management and employees

· Which type of supporting schedule is designed to show the activity in a general ledger account during the entire period under​ audit?

o Analysis

· Evidence is usually more persuasive for balance sheet accounts when it is obtained

o As close to the balance sheet as possible

· When the auditor is attempting to determine the extent to which external users rely on clients financial statements, the may consider several factors except for

o Assessment of detection risk

When considering the risk of misstatement due to fraud

o Auditing standards outline procedures the auditor should perform to obtain information from management about their consideration of fraud

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial​ statements

o Auditors believe that reasonable assurance is sufficient in the vast majority of cases

· The auditor uses knowledge gained from the understanding of the client's business and industry to assess

o Client business risk

· When dealing with fraudulent financial reporting risk for accounts payable

o Companies have used fictitious reductions to accounts payable to overstate net income

· In what order should the following steps​ occur? A. Set preliminary judgment of materiality and performance materiality. B. Understand the​ client's business and industry. C. Perform preliminary analytical procedures. D. Accept the client and perform initial audit planning.

o D, B, C, A

· Which of the following would not increase the risk of material misstatement at the overall financial statement level

o Effective oversight by the board of directors

· A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the

o Engagement letter

· One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for

o Engangement objectives yes; engagement limitations yes

· Auditors are not allowed to make inquires of employees who are not considered management such as marketing or sales personnel

o False

· In comparing management fraud with employee​ fraud, the​ auditor's risk of failing to discover the fraud is

o Greater for management fraud because of the managements ability to override existing internal controls

· The preliminary audit strategy

o Guides the development of the audit plan

· Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that

o Have to make significant judgements for accounting estimates

· Research indicates that the most effective way to prevent and deter fraud is to

o Implement programs and controls that are based on core values embraced by the company

Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce flucutations in earnings

o Income smoothing

Six characteristics that determine reliability of evidence

o Independence of a provider o Effectiveness of clients internal controls o Auditors direct knowledge o Qualifications o Degree of objectivity o Timeliness

· When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by​ 50% from the previous year to the year currently under audit. The auditor should

o Investigate the possibility that the client may have made an error in their cost of goods sold computation

· Which is ususally included in the engangement letter

o List of audit procedures to be used in inventory observations no, the auditors assessment of audit risk no

_______ materiality is materiality for segments of the audit

o Performance

· Which of the following would not be classified as an analytical procedure

o Reconciling fixed asset dispositions with the fixed asset ledger

Which of the following management assertions is not associated with the classes of transactions and events

o Rights and obligations

Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to​ evidence?

o Sample size yes ; timing of audit procedures yes

· Which items affect the sufficiency of evidence when choosing a sample

o Selecting items with a high likelihood of misstatement yes ; the randomness of the items selection no

· When dealing with revenue frauds,

o Side agreements can modify the terms of the sales transactions and should be analyzed carefully

· Certifying their annual financial​ statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of

o The Securities Exchange Act of 1934

· Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet​ accounts?

o The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.

· When determining​ materiality,

o The application of guidelines requires considerable professional judgement

· Two overriding considerations affect the many ways an auditor can accumulate​ evidence: 1. Sufficient appropriate evidence must be accumulated to meet the​ auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized. In evaluating these considerations

o The first is more important than the second

· Which of the following is not a risk factor that the auditor should take into account when considering the possibility of misappropriation of assets at an audit client

o The presence of inventory items which are large in size and low in value

· Which is usually included in the engagement letter

o The projected type of opinion no; names of the client personnel responsible for supplying the auditor with information no

· Auditors may idenfity conditions during fieldwork that change or support a judgement about initial assessment of fraud risks. Which of the following is not a condition which should alert an audior that the initial assessment should be changed?

o The subsidiary ledger agrees with the general ledger

· The predecessor auditor is required to respond to the request of the successor auditor for​ information, but the response can be limited to stating that no information will be provided when

o There are actual or potential legal problems between the client and the predecessor

· Which of the following is not a weakness of using industry averages for​ auditing

o They can be helpful in identifying potential misstatement

Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts

o True

The auditor's preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users

o True

· Information and idea exchange sessions by the audit team are required by current auditing standards

o True

· The auditor must perform substantive tests related to assertiosn demmed to have significant risks

o True

· The risk of matieral misstatement is the risk that financial statements contain a material misstatement due to fraud or error prior to the audit

o True

· Which of the following would most likely not be classified as a related-party transaction?

o an advance of one week's salary to an employee

· When evaluating the audit findings, the auditor should be satisfied that the

o estimate of the total known and likely misstatements is less than a material amount.

· When the auditor identifies or suspects noncompliance with laws and regulations, the auditor

o may disclaim an opinion on the basis of scope limitations if he or she is precluded by management from obtaining sufficient appropriate evidence.

· Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because

o of the lack of independence between the parties.

· When dealing with materiality

o the auditor must bring any material misstatements to the client's attention.

· When allocating materiality, most practitioners choose to allocate to

o the balance sheet accounts because most audits focus on the balance sheet.

· Audit documentation of the evidence gathered by the auditor should meet which of the following​ criteria?

o the content is sufficient to provide support for the​ auditor's opinion, including the​ auditor's representation as to compliance with auditing standards.

· Auditors are​ ________ to document the known and likely misstatements in the financial statements under audit.

required

· After deciding on the sample size for a particular audit​ procedure, the auditor has a choice of several different methods to select the specific population items to test.

true

· An audit program is the list of audit procedures for an audit area or an entire auditing

true

· Client business risk includes the auditor identifying declines in economic conditions that adversely affect both sales and the collectability of accounts receivable

true

The major reason an independent auditor gathers audit evidence is to

form an opinion on the financial statements

What is misappropriation of​ assets

The theft of assets by employees

Describe two of those six elements.

(1) Questioning mindset​ - a disposition to inquiry with some sense of​ doubt; (2) Interpersonal understanding​ - recognition that​ people's motivations and perceptions can lead them to provide biased or misleading information.

Select several types of information typically included in a permanent file.​

*Analyses from previous years of accounts that have continuing importance *Information related to understanding internal controls and assessing control risk *Articles of incorporation *Results of previous years analytical procedures, such as various ration and percentages compiled by the auditors

Next explain each term in the model.

*Control risk is a measure of the​ auditor's assessment of the risk that a material misstatement could occur in an assertion and not be​ prevented, or detected and​ corrected, on a timely basis by the​ client's internal controls. *Inherent risk is a measure of the​ auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control. *Planned detection risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements that could be​ material, should such misstatements exist. *Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued.

Does setting materiality at a lower level result in collecting more or less audit evidence

Setting materiality at a lower level results in collecting more audit evidence.

Does setting materiality at a lower level result in collecting more or less audit evidence

Setting materiality at a lower level results in collecting more audit evidence.

Describe the types of overall responses by auditors to address fraud risk.

*Design and perform audit procedures to address fraud risks *Place greater emphasis on managemetns choice of accounting principles with special attention given to those that involve subjective measurements or complex *Assign more experienced personnel to the engagement *Discuss the auditor findings about fraud risk with management obtain managements view *Consider whether antifraud programs and control mitigate the identified risks of material misstatement due to fraud

There are eight parts of the planning phase of an audit. Which parts involve the evaluation of​ risk?

*Identify significant risks due to fraud or error *Assess inherent risk *Understanding internal control and assess control

Describe the types of procedures that constitute risk assessment procedures.

*Inquires of management and others within the entity *Discussion among engagement team members *Analytical prodcedures *Observation and inspection

When can the audit files be used by other people

*The audit files can be subpeonenaed by a court, the audit files can be sold or released to other uses if the auditor obtains permission from the client, the can be released to another CPA firm without the client's permission if the are being reviewed as part of a voluntary peer review program under AICPA, they can be used by the client if the auditor wants to release them after careful consideration

Explain why the auditor can be persuaded only with a reasonable level of​ assurance, rather than​ convinced, that the financial statements are correct. ​

*The cost of accumulating evidence. It would be extremely costly for the auditor to gather enough evidence to be completely convinced. *Evidence is normally not sufficiently reliable to enable the auditor to be completely convinced. For​ example, confirmations from customers may come back with erroneous​ information, which is the fault of the customer rather than the client.

Provide two examples of factors that might increase the risk of material misstatement at the overall financial statement level.

*significant changes in the industry *declining economic conditions

The risk of material misstatement exists at two​ levels:

*the assertion level for classes of transactions, account balances, and presentation and disclosures. *the overall financial statement level.

Identify the four phases of the audit.

1) Plan and design an audit​ approach, (2) perform tests of controls and substantive tests of​ transactions, (3) perform substantive analytical procedures and tests of details of​ balances, and​ (4) complete the audit and issue an audit report

What are the three conditions of fraud often referred to as​ "the fraud​ triangle?"

1)Incentives/Pressures,​ (2)opportunities, and (3) attitudes/rationalization.

According to PCAOB audit​ standards, audit documentation must be retained for

7 years

Next explain the causes of a decreased planned detection risk.

A decrease in planned detection risk is caused by a decrease in acceptable audit risk or an increase in control risk or inherent risk.

Begin by choosing the option that best describes what is meant by an audit program for accounts receivable.

A list of audit procedures that will be used to audit accounts receivable for a given client

Distinguish between the terms performance materiality and preliminary judgment about materiality

A preliminary judgment about materiality is set for the financial statements as a whole. Performance materiality is the maximum amount of misstatement that would be considered material for an individual account balance.

· The five steps in applying materiality are listed below in random order. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be

3,4,2

What are the responsibilities of the independent auditor in the audit of financial​ statements

A. exercise informed judgment during the selection of procedures used in the audit and in arriving at an opinion Your answer is correct. B. conduct an audit that conforms to auditing standards Your answer is correct. C. have the abilities expected of a qualified person in the auditing profession. Your answer is correct. D. express an opinion on the financial statements

What should the audit team consider in its planning discussion about fraud​ risks?

A. How management could perpetrate and conceal fraudulent financial reporting. Your answer is correct. B. How the auditor might respond to the susceptibility of material misstatements due to fraud. Your answer is correct. C. How assets of the entity could be misappropriated. Your answer is correct. D. Any conflict of interest that audit employees have with employees in the accounting departments of the client. E. How and where the audit team believes the​ entity's financial statements might be susceptible to material misstatement due to​ fraud, looking at external and internal factors.

What do auditing standards require the auditor to consider when assessing the risk of material misstatements in​ revenue?

A. Revenue and related accounts receivable and cash accounts are especially susceptible to manipulation and theft.​ Therefore, auditors should evaluate the types of revenue and revenue​ transactions, and the assertions related to these​ transactions, which may increase fraud risk. Your answer is correct. B. Research finds that a majority of financial statement fraud instances involve revenues and accounts receivable. As a result of the frequency of financial reporting frauds involving revenue​ recognition, auditing standards require the auditor to presume fraud risk is present in revenue recognition in all audits.

Begin by explaining the causes of an increased planned detection risk.

An increase in planned detection risk may be caused by an increase in acceptable audit risk or a decrease in either control risk or inherent risk

Select who is considered the client when auditing public companies.

Audit committee

Who owns audit files

Audit files are owned by the auditor

Why is it important for audit procedures to be carefully​ worded?

Audit procedures must be carefully worded to make sure the instructions are clear since these are the instructions to be followed in accumulating evidence.

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from​ fraud?

Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Discuss the concept of​ "reasonable assurance" and the degree of confidence that financial statement users should have in the financial statements

Auditing standards indicate that reasonable assurance is a high level of assurance.​ Accordingly, financial statement users should have a high degree of confidence in the financial statements.​ However, reasonable assurance is not​ a/an absolute level of​ assurance, and there is at least some risk that the audited financial statements may include material misstatements .

Why is it important to distinguish the​ auditor's assessment of the risk of material misstatement due to fraud from the assessment of the risk of material misstatement due to​ error?

Auditing standards require the auditor to explicitly consider fraud risk because the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting a misstatement due to error. Fraud often involves complex and sophisticated schemes designed by perpetrators to conceal it.​ And, individuals engaged in conducting a fraud often intentionally misrepresent information ​, and they may try to conceal the transaction through collusion with others. As a​ result, explicitly focusing on the risks of material misstatements due to fraud helps the auditor apply professional skepticism as part of the​ auditor's planning procedures.

Auditing standards require that the engagement team members engage in discussion about the risk of material misstatement. Describe the nature of this required discussion and who should be involved.

Auditing standards require the engagement partner and other key engagement team members to discuss the susceptibility of the​ client's financial statements to material misstatement . This discussion provides an opportunity for more experienced team members to share their insights about the entity and its environment ​, including their understanding of internal controls ​, with other members of the team.

Which of the following types of audit evidence is generally the most​ reliable?

Bank confirmation

Select the choice that best describes why​ he/she or they​ is/are considered the client when auditing public companies.

Because the​ Sarbanes-Oxley Act of 2002 explicitly shifts responsibility for hiring and firing of the auditor from management to the audit committee.

______, generally, provide the most reliable evidence

Confirmations

Which of the following best describes the reason why an independent auditor reports on financial​ statements

Different interests may exist between the company preparing the statements and the persons using the statements.

Management makes the following assertions about account balances

Existence, completeness, valuation and allocation, and rights and obligations

Define fraudulent financial reporting and give two examples that illustrate fraudulent financial reporting.

Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Two examples include​ (1) accelerating the timing of recording sales revenue to increased reported sales and​ earnings, and​ (2) recording expenses as fixed assets to increase earnings.

Define the meaning of the term materiality as it is used in accounting and auditing.

Materiality is defined as the magnitude of misstatements that​ individually, or when aggregated with other​ misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements

· Which of the following is an accurate statement regarding the misappropriation of assets

Misappropriation of assets can easily increase in size over time and can lead to significant reputational harm

Discuss the differences between misappropriation of assets and fraudulent financial reporting on the fair presentation of the financial statements.

Misappropriation of assets ordinarily occurs because of inadequate or overridden internal controls In many​ cases, the dollar amounts are often small and thus will have no effect on the fair presentation of financial statements. Fraudulent financial reporting is difficult to uncover because it is possible for management to override internal controls In many​ cases, the amounts are extremely large and may affect the fair presentation of financial statements

What is the relationship between materiality and the phrase obtain reasonable assurance used in the​ auditor's report

Obtain reasonable​ assurance," as used in the audit​ report, means that the auditor does not guarantee or ensure the fair presentation of the financial statements. There is some risk that the financial statements contain a material misstatement

While performing a preliminary assessment for a new client​ audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with​ management, the auditor concludes that the​ company's operational staff is too lean and that internal controls in several operational functions may be currently insufficient to accommodate this rapid growth. About which of the following fraud risk factors related to the client would the auditor have the greatest​ concern?

Opportunity

Define the audit risk model and explain each term in the mode

PDR= AAR/ (IR*CR)

Identify the most important factors affecting the preliminary judgment

Qualitative factors affect materiality decisions, benchmarks are needed for evaulating materiality, materiality is relative rather than an absolute concept

Prior​ to, or in conjunction​ with, the​ information-gathering procedures for an​ audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this​ discussion?

Questioning

What are the six elements of professional​ skepticism?

Questioning​ mindset; (2) Suspension of​ judgment; (3) Search for​ knowledge; (4) Interpersonal​ understanding; (5)​ Autonomy; and​ (6) Self-estee

Do you believe the CEO and CFO of a public company perceive an even greater responsibility as a result of the​ Sarbanes-Oxley Act requirement to certify the financial statements submitted to the​ SEC?

Requiring the CEO and CFO of a public company to personally certify and provide assurance on the financial statements and internal controls is likely to result in them taking their responsibility more seriously and taking additional precautions to gain comfort with the fairness of the representations. The​ Sarbanes-Oxley Act can impose criminal penalties, including significant monetary fines or imprisonment for up to 20 years for anyone who knowingly falsely certifies those statements.

Performance materiality and preliminary judgement about materiality and how they relate

The amount of performance materiality for any given segment or account is dependent upon the preliminary judgment about materiality. ​Ordinarily, performance materiality for any given segment or account would have to be lower than the preliminary judgment about materiality. In many​ cases, it will be considerably lower because of the possibility of misstatements in different accounts​ that, in​ total, cannot exceed the preliminary judgment about materiality.

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

The auditor identifies an inappropriate valuation method that is widely applied by the entity.

What is the relationship of the four phases to the objective of the audit of financial​ statements?

The auditor uses these four phases to meet the overall objective of the​ audit, which is to express an opinion on whether the financial statements present​ fairly, in all material​ respects, the financial​ position, results of operations and cash flows in conformity with applicable accounting standards.

Select the choice that best describes the responsibilities of the successor auditors when a company is changing auditors

The successor auditor is required by auditing standards to communicate with the predecessor auditor

Begin by choosing the option that best describes what is meant by an audit procedure.

The detailed instruction that explains the audit evidence to be obtained during the audit.

Which one of the following is a true statement about the required fraud risk assessment​ discussion?

The discussion should include consideration of the risk of management override of controls.

The objective of audit of the financial statements is an expressions of an opinion on

The fairness of the financial statements in all material respects

What is fraudulent financial​ reporting?

The intentional misstatement of financial information by management or a theft of assets by​ management, which is covered up by misstating financial statements.

Begin by selecting the definition of a permanent file

The permanent file contains data of an historical and continuing nature pertinent to the current audit.

Select the choice that best describes the responsibilities of the predecessor auditors when a company is changing auditors.

The predecessor auditor is required to respond to the​ successor's request for​ information; however, the response may be limited to stating that no information will be given

What is meant by setting a preliminary judgment about​ materiality?

The preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users.

· tour of the​ client's facilities provides the auditor an opportunity to

all of the above

One of the characteristics of professional skepticism is​ ________, which is the conviction to decide for​ oneself, rather than accepting the claims of others

autonomy

· Qualitative factors can affect an auditor's assessment of materiality. Which of the following qualitative factors could influence the assessment of materiality? 1. Misstatements that are otherwise immaterial may be material if they affect earnings trend 2. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractural obligations

both 1 and 2

If the auditor decides to reduce acceptable audit risk, planned detection risk

decreases

What are the benefits derived from planning​ audits? ​

helps avoid misunderstandings with the client, helps auditors obtain sufficient appropriate evidence for the circumstances, helps keep audit costs reasonable

An auditor most likely would apply analytical procedures in the overall review stage of an audit to

identify unusual or unexpected balances that were not previously identified.

Because of the risk of material​ misstatement, an audit should be planned and performed with an attitude of

professional skepticism

If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned

true

Describe​ management's responsibility for the financial statements.

​Management's responsibility is to adopt sound accounting​ policies, maintain adequate internal​ control, and make fair representations in the financial statements.