Audit - Chap 3 & 4
Which of the following relationships between types of analytical procedures and sources of information are most logical?
(Type of Analytical Procedure) Comparison of current account balances with expected balances (Source of Information) Company's budgets and forecasts
The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?
0.10.
Generally accepted auditing standards require that auditors always prepare and use:
A written audit plan.
Analytical procedures used when planning an audit should concentrate on:
Accounts and relationships that can represent specific potential problems and risks in the financial statements.
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
Accounts receivable.
Prior to accepting a new audit engagement, a public accounting firm should: A-Attempt to contact the predecessor auditors. B-Evaluate the integrity of management. C-Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement. D-All of the choices are correct.
All of the choices are correct.
When initiating communications with predecessor auditors, prospective auditors should expect: A-To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. B-To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. C-To obtain copies of some or all of the predecessor auditors' audit documentation. D- All of the choices are correct.
All of the choices are correct.
Analytical procedures can be used in which of the following ways? A-As a means of overall review near the end of the audit. B-As "attention-directing" methods when planning an audit at the beginning. C-As substantive audit procedures to obtain evidence during an audit. D-All of the choices are correct. Correct
All of the choices are correct. Correct
The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:
Allow the internal auditor to perform certain tests of internal controls.
Which of the following communications is most likely to be written before the balance-sheet date?
An engagement letter.
An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:
An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.
Compare financial information to industry statistics.
Analytical procedures
Compare financial information with that of prior periods.
Analytical procedures
A list of audit procedures.
Audit plan
The probability that an auditor will give an inappropriate opinion on financial statements
Audit risk
Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?
Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.
Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?
Being able to decide early what type of audit opinion to issue.
The probability that material misstatements have occurred in transactions entering the accounting system.
Inherent risk
The risk of material misstatement is composed of which audit risk components?
Inherent risk and control risk.
Analytical procedures are generally used to produce evidence from:
Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.
An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?
Schedules and analyses to be prepared by the client's employees.
When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report?
The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions.
Successor auditors need to communicate with predecessor auditors ______ accepting the engagement.
before
Analytical procedures at the end of the audit help confirm the ____ reached
conclusions
Inventory can be observed as it is ______ by client personnel.
counted
which contain information that is relevant to supporting the current year's audit
current files
Shopping for accounting principles is ______by Sarbanes-Oxley.
discouraged
Often, analytical procedures are considered the most____ procedures for a strong understanding of the client an its business
efficient
Unintentional omissions of amounts or disclosures is considered a(n) ________.
error
Mistakes in data processing can easily result in _______.
errors
Financial statements can be misstated due to errors, ______, or noncompliance with laws or regulations.
fraud
In _______, the financial statements are intentionally misleading.
fraud
Communication between predecessor and successor auditors aids in evaluating the ______ of management.
integrity
type fraud
intentional act
Analytical procedures are the primary way to test data _______.
interrelationships
The primary source of evidence about pending litigation is the attorney ______.
letter
Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.
numbered
which contain information that is relevant for many years' audits for the client
permanent files
Part of performing analytical procedures involve considering ____
ratios
The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.
smaller
Auditors may use audit ______ to test clerical accuracy.
software
Analytical procedures can also be used as ____ procedures in testing
substantive
first--an error--is deemed
unintentional
The revenue cycle of a company generally includes which accounts?
Cash, accounts receivable, and sales.
If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to:
Change from 0.25 to 0.1.
Which of the following procedures would a CPA most likely perform in planning a financial statement audit?
Compare financial information with nonfinancial operating data.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
An audit committee is:
Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.
Direct correspondence with independent parties.
Confirmation
Obtain accounts receivable confirmations.
Confirmation
Obtain client's lawyer's letter.
Confirmation
The probability that the client's internal control policies and procedures will fail to detect material misstatements if they have entered the accounting system.
Control risk
Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the:
Current file audit documentation.
Audit planning memorandum
Current year file
Bank confirmations
Current year file
Engagement letter
Current year file
Schedule for current year depreciation calculation
Current year file
When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will:
Decrease.
______is another term for misappropriation of assets.
Defalcation
The probability that audit procedures will fail to produce evidence of material misstatements.
Detection risk
The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:
Detection risk.
Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
Detection.
Scan expense accounts for credit entries.
Document inspection (scanning)
Scan payroll check lists for unusually large checks.
Document inspection (scanning)
Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger.
Document inspection (tracing)
Find brokers' invoices and canceled checks showing agreement with record amounts for securities investments.
Document inspection (vouching)
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as:
Risk of material misstatement.
Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?
Scanning the minutes for significant transactions with members of the board of directors.
Misstatements can be of two types
first--an error and type--fraud
Study financial information in relation to nonfinancial information.
Analytical procedures
Study predictable financial information patterns (e.g., ratio analysis).
Analytical procedures
compare financial information with budgets and forecasts.
Analytical procedures
Fields, CPA, is lazy and does not like audit jobs in Philadelphia. On the audit of Philly Manufacturing Company, Fields decided to use substantive procedures to audit the year-end balances very thoroughly to the extent that the risk of failing to detect material errors and irregularities should be 0.02 or less. Fields gave no thought to inherent risk and conducted only a very limited review of Philly's internal control system.
Appropriate
It is acceptable under generally accepted auditing standards for an audit team to:
Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.
What is the primary objective of the fraud brainstorming session?
Assess the potential for material misstatement due to fraud.
A primary objective of analytical procedures used in the final review stage of an audit is to:
Assist the auditor in evaluating the overall financial statement presentation.
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:
Evaluate the effect of the noncompliance on the financial statements.
When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?
Evidence of a conservative systematic bias.
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following?
Evidence of a conservative systematic bias.
An auditor's permanent file audit documentation most likely will contain:
Excerpts of the corporate charter and bylaws.
Confirmations of accounts receivable provide evidence primarily about which two assertions?
Existence and rights and obligations
When auditing the existence assertion for an asset, auditors proceed from the:
General ledger back to the supporting original transaction documents.
Which of the following procedures would most likely be performed during planning?
Identifying related parties.
Auditors perform analytical procedures in the planning stage of an audit for the purpose of:
Identifying unusual conditions that deserve more auditing effort.
Documentation prepared by independent parties and sent to the client.
Inquiry
Ask client personnel about accounting events.
Inquiry and written representations
Complete an internal control questionnaire.
Inquiry and written representations
Obtain written client representation letter.
Inquiry and written representations
Verify existence of fixed assets by locating them.
Inspection of tangible assets
Audit procedure that provides compelling evidence of existence.
Inspections of tangible assets
Auditors are not responsible for accounting estimates with respect to:
Making the estimates.
With respect to the concept of materiality, which of the following statements is correct?
Materiality is a matter of professional judgment.
Hill, CPA, has just (November 30) completed an exhaustive study and evaluation of the internal controls of Edward Foods Inc. (fiscal year ending December 31). Hill believes the control risk must be zero because no material errors could possibly slip through the many error-checking procedures and review layers that Edward used.
Not appropriate
Paul, CPA, has participated in the audit of Tordik Cheese Company for five years, first as an assistant accountant and the last two years as the senior accountant. Paul has never seen an accounting adjustment recommended and believes the inherent risk must be zero.
Not appropriate
Observe test counting of client's physical inventory taking.
Observation
Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions?
Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.
Client organizational chart
Permanent file
Prior years' financial statements and audit reports
Permanent file
Royalty agreements
Permanent file
Audit documentation can be classified in two categories
Permanent or Current Year Files
Recompute the client's calculation of depreciation expense.
Recalculation
Analyze valuation of receivables by re-aging them by due date.
Reperformance
Auditing standards do not require auditors of financial statements to:
Report all errors and frauds found to police authorities.
Under the Private Securities Litigation Reform Act, independent auditors are required to first:
Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.
______ may be involved in some testing of calculations.
Specialists
An audit plan contains:
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
An audit strategy memorandum contains:
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
Audit of details of transactions and balances.
Substantive procedures
___________ must ask management to authorize the predecessor auditors to discuss confidential information.
Successor auditors
When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?
The auditors' judgment about their independence with regard to the client.
A cutoff test that relates to plant assets typically affects __________.
The balance sheet
Which of the following circumstances would most likely cause an audit team to perform extended procedures?
The client made several large adjustments at or near year-end.
Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into significant derivative transactions as hedges.
Which of the following is an advantage of computer-assisted audit techniques (CAATs)?
The software can be used for audits of clients that use differing computer equipment and file formats.
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
There will be a client-imposed scope limitation.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They typically use financial and nonfinancial data aggregated at a high level.
Proceeding forward through the accounting and control system from the evidence to the financial statements.
Tracing
Accounts receivable.
Victimization of investors through the use of materially misleading financial statements.
Representation letters are dated as of the date of the ________.
audit report
If predecessor auditors refuse communication, successor auditors _______ accept the engagement.
can
Fair values can be evaluated by comparing to prices on _______ markets.
existing
Audit standards_____ analytical procedures at the planning and concluding stages of the audit
require
