Audit Exam 2

Murphy & Johnson is a privately owned manufacturer of small motors for lawnmowers, tractors, and snowmobiles. The components of its financial statements are (1) income before taxes = $21 million, (2) total assets = $550 million, and (3) total revenues = $775 million. Murphy & Johnson's CPA firm uses the normal percentage (rule of thumb) for income before taxes for a public company for determining overall materiality. Assume further that the auditor's firm provides guidance that tolerable misstatement will be set 50% of overall materiality. (1) determine overall materiality (2) determine tolerable misstatement (3) During the course of the audit, Murphy & Johnson's CPA firm detected two misstatements that aggregated to an overstatement of income of $1.25 million. What should the auditor do next? The error is not material. The client doesn not need to do anything. The error is not material. The Auditor should include the immaterial error on the Passed Adjustments Schedule (PAJE) to consider with other immaterial errors found in other sections of the audit. The error is material. The client can either record a journal entry to fix the issue or they can accept a qualified or adverse audit opinion depending on the pervasiveness of the error in the financial statements. Explanation

1) 1,050,000 5%*21 million 2) 525,000 1,050,000*50% for overall materiality 3) The error is material, because the overstatement of 1.25 million is over the tolerable misstatement

Delta Investments provides a group of mutual funds for investors. The components of its financial statements are (1) income before taxes = $40 million, (2) total assets = $3.5 billion, and (3) total revenues = $900 million. Delta Investments' CPA firm uses the percentage applicable on total (net) assets for determining overall materiality, and has assessed overall audit risk for this audit as low. Assume further that the auditor's firm provides guidance that tolerable misstatement will be set 50% of overall materiality. (1) determine overall materiality (2) determine tolerable misstatement (3) evaluate the audit findings: During the course of the audit, Delta's CPA firm detected two misstatements that aggregated to an overstatement of income of $5.75 million. What should the auditor do next? The error is not material. The client doesn not need to do anything. The error is not material. The Auditor should include the immaterial error on the Passed Adjustments Schedule (PAJE) to consider with other immaterial errors found in other sections of the audit. The error is material. The client can either record a journal entry to fix the issue or they can accept a qualified or adverse audit opinion depending on the pervasiveness of the error in the financial statements.

1) 70,000,000 3,500,000,000* 2% range of materiality 2) 35,000,000 70,000,000*50% of misstatement 3) The error is not material because the 5.75 overstatement is less than the tolerable misstatement

Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client, who is also a public company. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. Required: Determine the amount of overall materiality for the audit based on these preliminary amounts. Use the common rule of thumb for public companies noted in the textbook for your %. Round to nearest thousandth.

287,000

Section 404 of the Sarbanes-Oxley Act includes which of the following? Multiple Choice A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls. Specific guidance on what constitutes adequate internal control. A requirement that management of a publicly traded company issues an assessment of internal control that covers the entire year. A requirement that management of a publicly traded company issues an assessment regarding the efficiency of internal control for the year.

A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls.

When an entity moves into a significant new line of business, all of the following increase except: Multiple Choice entity business risk. risk of material misstatement. acceptable audit risk. client risk.

Acceptable Audit Risk

In assessing whether to accept a client for an audit engagement, a CPA should consider: Multiple Choice the current financial health of the prospective client. All of these choices are correct. the integrity of management. the CPA's overall engagement risk.

All of these choices are correct.

Which of the following statements is not correct about materiality? Multiple Choice Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

Which of the following statements is not correct about materiality? Multiple Choice The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements? Multiple Choice An illegal payment to a foreign official that was not recorded. A piece of obsolete office equipment that was not retired. A petty cash fund disbursement that was not properly authorized. An uncollectible account receivable that was not written-off.

An illegal payment to a foreign official that was not recorded.

A high detection risk strategy includes all of the following except: Multiple Choice Interim testing. Reduced testing of transactions. Heavy reliance on analytical procedures as substantive procedures. Audit work only completed at year-end.

Audit work only completed at year-end.

Which of the following is an example of fraudulent financial reporting? Multiple Choice An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit? Multiple Choice Reading "conflict-of-interest" statements obtained by the client from its management. Scanning accounting records for large transactions at or just prior to the end of the period under audit. Reading minutes of the Board of Directors meetings for authorization or discussion of material transactions. Confirming purchases and sales transactions with the vendors and/or customers involved.

Confirming purchases and sales transactions with the vendors and/or customers involved.

Which of the following controls would most likely be tested during an interim period? Multiple Choice Controls over the period-end financial reporting process. Controls over transactions that involve a high degree of subjectivity. Controls that operate on a continuous basis. Controls over nonroutine transactions.

Controls that operate on a continuous basis.

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? Multiple Choice The period-end financial reporting process. Controls to monitor results of operations. Management's risk assessment process. Controls to monitor the inventory taking process.

Controls to monitor the inventory taking process.

According to PCAOB AS 5 addressing Internal Controls deficiencies, a deficiency in ______ exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. Multiple Choice Efficiency Design Operation Effectiveness

Design

Audit evidence concerning proper segregation of duties ordinarily is best obtained by Multiple Choice Preparation of a flowchart of duties performed by available personnel. Inquiring whether control activities operated consistently throughout the period. Reviewing job descriptions prepared by the Personnel Department. Direct personal observation of the employees who apply the control activities.

Direct personal observation of the employees who apply the control activities.

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the: Multiple Choice level of detection risk. extent of tests of controls. level of inherent risk. extent of substantive tests.

Extent of Substantive Tests

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the Multiple Choice Extent of tests of details. Level of inherent risk. Extent of tests of controls. Level of detection risk.

Extent of tests of details.

According to AU-C 265 and PCAOB AS 1305 (Formerly AS 5), the three categories of deficiencies in internal control are: Control Deficiency, Significant Weakness, Material Deficiency. True or False?

False

Which of the following is correct concerning required auditor communications about fraud? Multiple Choice Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist? Multiple Choice When a line manager rather than a lower-level employee commits the fraudulent act. When the fraud results from misappropriation of assets rather than fraudulent financial reporting. In response to inquiries from a successor auditor. When the amount is material.

In response to inquiries from a successor auditor.

A substantive strategy differs from a reliance strategy in that a substantive strategy includes Multiple Choice Increased implementation of detailed tests of transactions and balances. Extra tests of controls. Increased emphasis on verbal representations from management. Setting control risk at a minimum level.

Increased implementation of detailed tests of transactions and balances.

The risk of material misstatement includes which of the following? Multiple Choice Nonsampling risk Detection risk Audit risk Inherent risk

Inherent Risk

Risk of material misstatement refers to a combination of which two components of the audit risk model? Multiple Choice Audit risk and control risk. Audit risk and inherent risk. Inherent risk and control risk. Control risk and detection risk.

Inherent Risk and Control Risk

After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that Multiple Choice The available evidential matter obtained through tests of controls would not support an increased level of control risk. A reduction in the assessed level of control risk is justified for certain financial statement assertions. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures. The assessed level of inherent risk exceeded the assessed level of control risk.

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

The CPA firm of Quigley & Associates uses a qualitative approach to implementing the audit risk model. Audit risk is categorized using two terms: very low and low. The risk of material misstatement and detection risk are categorized using three terms: low, moderate, and high. Calculate detection risk for each of the following hypothetical clients.

Moderate, Low, High, Low

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements? Multiple Choice Vouching a sample of transactions directly related to the controls. Scanning the journals produced by the internal control system. Performing analytical procedures using data aggregated at a high level. Observing the entity's personnel applying the controls.

Observing the entity's personnel applying the controls.

In all accounting systems, a variety of controls must be designed to accomplish the organization's control objectives. Internal controls vary significantly between organizations--depending on attributes like organization size, nature of operations, and objectives. In all systems, however, a variety of controls needs to be designed to accomplish the organization's objectives. Controls are classified as preventive, detective, or corrective. Bank Reconciliation Maintaining backups of data segregation of duties

Preventative: segregation of duties Detective: Bank reconciliation Corrective: maintaining backups of data

Walkthroughs usually involve all of the following audit procedures except: Multiple Choice Reperformance. Inquiry. Observation. Inspection.

Reperformance.

Which of the following arranges the general types of audit tests in the order they are normally performed in an audit? Multiple Choice Substantive procedures, tests of controls, and risk assessment procedures. Risk assessment procedures, substantive procedures, and tests of controls. Risk assessment procedures, tests of controls, and substantive procedures. Substantive procedures, risk assessment procedures, and tests of controls.

Risk assessment procedures, tests of controls, and substantive procedures.

In a properly designed internal control system, the same employee may be permitted to Multiple Choice Receive and deposit checks and also approve write-offs of customer accounts. Approve vouchers for payment and also sign checks. Reconcile the bank statements and also receive and deposit cash. Sign checks and also cancel supporting documents.

Sign checks and also cancel supporting documents.

Which of the following statements concerning control deficiencies is true? Multiple Choice The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. All significant deficiencies are material weaknesses. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB. All control deficiencies are significant deficiencies.

The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? Multiple Choice The auditor should provide recommendations for improving internal control in the audit report. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. Management should identify material weaknesses in its report.

The auditor should provide recommendations for improving internal control in the audit report.

Which of the following would an auditor most likely use in determining the auditor's overall materiality? The anticipated sample size for planned substantive procedures. The entity's annualized interim (i.e. quarterly) financial statements. The results of the internal control questionnaire. The contents of the management representation letter.

The entity's annualized interim (i.e. quarterly) financial statements.

Which of the following would an auditor most likely use in determining overall materiality when planning the audit? Multiple Choice The anticipated sample size of the planned substantive tests. The entity's income before taxes for the period-to-date (e.g., 6 months). The results of tests of controls. The contents of the engagement letter.

The entity's income before taxes for the period-to-date (e.g., 6 months).

Monitoring is a major component of the COSO Internal Control—Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? Multiple Choice Monitoring can be an ongoing process. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. The independent auditor can serve as part of the entity's control environment and continuous monitoring. Monitoring can be conducted as a separate evaluation.

The independent auditor can serve as part of the entity's control environment and continuous monitoring.

Which of the following is not a concern as to whether a misstatement is qualitatively material? Multiple Choice The misstatement hides a failure to meet analysts' expectations. The misstatement is less than 5% of pretax income. The misstatement increases management's compensation. The misstatement changes a small amount of profit to a small reported loss.

The misstatement is less than 5% of pretax income.

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that Multiple Choice Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

The main goal of auditing internal control is Multiple Choice To allow the auditor to fix any internal control deficiencies. To form an opinion on the ability of internal controls to prevent fraud. To assure management that internal control is preventing all material misstatements on the financial statements. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? Multiple Choice Whether management has any knowledge of fraud that has been perpetrated on or within the entity. Whether management has ever intentionally violated the securities laws. Management's attitudes toward regulatory authorities. Management's attitude about hiring ethical employees.

Whether management has any knowledge of fraud that has been perpetrated on or within the entity.

A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is: Multiple Choice a probable deficiency. a material weakness. a significant deficiency an insignificant deficiency.

a significant deficiency

You are the audit manager for Ken-Ron Enterprises. Your firm has been the entity's auditor for 15 years. Your firm normally uses a range of 3% to 5% of income before taxes to calculate overall materiality and 50-75% of overall materiality to calculate tolerable misstatement. Ken-Ron has reported the following financial statement data (in millions) for the last four years: 2018201720162015Income Before Taxes$105*$584$520$453Total Assets$23,422$16,137$13,239$11,966Total Revenues$20,272$13,289$9,189$8,984 *Note that the significant decline in income before taxes in 2018 is due to a large nonrecurring charge. a. If you planned on using income before taxes as the benchmark to compute overall materiality and tolerable misstatement, how would you compute those amounts for 2018 given the significant change in income before taxes in 2018? (check all that apply): Normalize earnings by taking the average of 2015 - 2017 when income before taxes was stable Use a more stable base like Total Assets. Use a more stable base like Total Revenues. b. Which of the options in item a. above is the most stable, and therfore the most appropriate base to use in this scenario? c. Using the most appropriate base you determined in item b. above, determine overall materiality. Make your calculations by utilizing the low end of the range for that specific base as noted in Table 3-5 of the textbook, which is the range that your firm's guidance provides. d. Assume that during the course of the 2018 audit you discovered misstatements totaling $50 million (approximately 50% of the 2018 income before taxes of $105 million). What is your next course of action as the auditor based on your calculations in item c above? (check all that apply) The error is not material. The client does not need to do anything. The error is not material. The Auditor should include the immaterial error on the Passed Adjustments Schedule (PAJE) to consider with other immaterial errors found in other sections of the audit. The error is material. The client can either record a journal entry to fix the issue or they can accept a qualified or adverse audit opinion depending on the pervasiveness of the error in the financial statements.

a) all apply b) a. Normalize Earnings by taking an average of 2015-2017 income before taxes ($519 million) c) 15,570,000 519,00,000*2% for overall materiality d) The error is material because it is over the tolerable misstatement

SOC 1, Type 2 reports issued by the service organization's auditor typically: Multiple Choice ensure that the entity is billed correctly. ensure that the entity will not have any misstatements in areas related to the service organization's activities. assess whether the service organization's controls are suitably designed and operating effectively. provide reasonable assurance that their financial statements are free of material misstatements.

assess whether the service organization's controls are suitably designed and operating effectively.

If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors': Multiple Choice independence and review skills. efficiency and experience. training and supervisory skills. competence and objectivity.

competence and objectivity.

Which of the following is not an audit procedure that is commonly used in performing tests of controls? Multiple Choice Inquiring. Observing. Confirming. Inspecting.

confirming

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: Multiple Choice decrease amount of substantive testing. decrease detection risk. increase detection risk. increase materiality levels.

decrease detection risk.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a: Multiple Choice significant deficiency. deficiency in operation. material weakness. deficiency in design.

deficiency in operation.

The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as: Multiple Choice inherent risk. detection risk. nonsampling risk. sampling risk.

detection risk

An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except: Multiple Choice fraud risk increases. the risk of misappropriation of assets increases. risk of material misstatement increases. detection risk increases.

detection risk increases.

The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as: Multiple Choice sampling risk. detection risk. nonsampling risk. inherent risk.

detection risk.

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by: Multiple Choice engaging a CPA to perform monthly bookkeeping. direct participation by the owner of the business in the recordkeeping activities of the business. delegation of full, clear-cut responsibility to each employee for the functions assigned to each. employment of temporary personnel to aid in the separation of duties.

direct participation by the owner of the business in the recordkeeping activities of the business

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably: Multiple Choice disclose the fraud to the appropriate level of the client's management. disclose the fraud to appropriate authorities external to the client. discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud. modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements.

disclose the fraud to the appropriate level of the client's management.

During the initial planning phase of an audit, a CPA most likely would: Multiple Choice evaluate the reasonableness of the client's accounting estimates. inquire of the client's attorney as to any unrecorded claims. discuss the timing of the audit procedures with the client's management. identify specific internal control activities that are likely to prevent fraud.

discuss the timing of the audit procedures with the client's management.

During the initial planning phase of an audit, a CPA most likely would: Multiple Choice evaluate the reasonableness of the entity's accounting estimates. identify specific internal control activities that are likely to prevent fraud. inquire of the entity's attorney if it is probable that any unrecorded claims will be asserted. discuss the timing of the audit procedures with the entity's management.

discuss the timing of the audit procedures with the entity's management.

The risk of material misstatement differs from detection risk in that it: Multiple Choice can be changed at the auditor's discretion. exists independently of the actions of the auditor. arises from the misapplication of auditing procedures. may be assessed in either quantitative or qualitative terms.

exists independently of the actions of the auditor.

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited. True or false

false

The auditor is most likely to presume that a high risk of a fraud relating to the misappropriation of assets exists if: Multiple Choice the entity is a multinational company that does business in numerous foreign countries. the entity does business with several related parties. inadequate employee training results in lengthy EDP exception reports each month. inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.

inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.

A substantive strategy differs from a reliance strategy in that a substantive strategy includes: Multiple Choice setting control risk at a minimum level increased implementation of detailed tests of transactions and balances. extra tests of controls. increased emphasis on verbal representations from management.

increased implementation of detailed tests of transactions and balances.

A dual-purpose test: Multiple Choice simultaneously tests debits and credits. is a procedure completed by both the internal and external auditors. is useful to both the entity and the auditor. is both a substantive test of transactions and a test of controls.

is both a substantive test of transactions and a test of controls.

Tolerable misstatement is: Multiple Choice materiality for the income statement as a whole. materiality for the balance sheet as a whole. materiality allocated to an assertion. materiality allocated to a specific account.

materiality allocated to a specific account.

Tolerable misstatement is: Multiple Choice materiality for the balance sheet as a whole. the amount of misstatement that management is willing to tolerate in the financial statements. materiality used to establish a scope for the audit procedures for the individual account balance or disclosures. materiality for the income statement as a whole.

materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

In the context of an audit of financial statements, substantive procedures are audit procedures that: Multiple Choice may be eliminated under certain conditions. are primarily designed to discover significant subsequent events. may be either tests of details of transactions, tests of details of account balances, or analytical procedures. will increase proportionately with an increase in the auditor's reliance on internal control.

may be either tests of details of transactions, tests of details of account balances, or analytical procedures.

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by: Multiple Choice confirmation and recomputation. inspection and vouching. reperformance and corroboration. observation and inquiry.

observation and inquiry.

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by: Multiple Choice inspection of a flowchart of duties performed and available personnel. inquiries of employees who apply control activities. inspection of documents prepared by a third party but which contain the initials of those applying entity controls. observation by the auditor of the employees performing control activities.

observation by the auditor of the employees performing control activities.

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor: Multiple Choice realizes that some matters, either individually or in the aggregate, are important, while other matters are not important. assesses the accounting principles used and evaluates the overall financial statement presentation. is responsible for expressing an opinion on the financial statements, which are the responsibility of management. obtains reasonable assurance about whether the financial statements are free of material misstatement.

obtains reasonable assurance about whether the financial statements are free of material misstatement.

An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by: Multiple Choice scanning the general journal for unusual entries. performing a revenue cutoff test at year-end. tracing a sample of journal entries to the general ledger. examining documentary evidence of sales returns and allowances recorded after year-end.

scanning the general journal for unusual entries.

As the acceptable level of detection risk decreases, the assurance directly provided from: Multiple Choice substantive procedures should increase. substantive procedures should decrease. tests of controls should increase.

substantive procedures should increase.

All of the following are inherent risk factors that are pervasive to the financial statements except: Multiple Choice highly complex significant transactions. non-routine transactions. classes of transactions are not processed systematically. supplies inventory is difficult to count.

supplies inventory is difficult to count.

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are: Multiple Choice susceptible to bias. consistent with prior periods. insensitive to variations. similar to industry guidelines.

susceptible to bias

All of the following represent an increased opportunity for management to commit fraud except: Multiple Choice significant related party transactions. the auditor's relationship with management is strained. management is dominated by a single person. the financial statements include highly subjective estimates.

the auditor's relationship with management is strained.

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because: Multiple Choice substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the entity's premises. the records may be accurate even though they are maintained by persons having incompatible functions. many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.

the records may be accurate even though they are maintained by persons having incompatible functions.

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to: Multiple Choice tour the organization's facilities and locations before beginning any audit work. trace a transaction from each major class of transactions from origination through the entity's information system. trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports. trace a transaction from every class of transactions from origination through the entity's information system.

trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: Multiple Choice evaluation of all matters of continuing accounting significance. awareness of the consistency in the application of generally accepted accounting principles between periods. opinion of any subsequent events occurring since the predecessor's audit report was issued. understanding as to the reasons for the change of auditors.

understanding as to the reasons for the change of auditors.

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? Multiple Choice An unqualified report. An adverse report. An exculpatory opinion. A disclaimer of opinion.

unqualified report

vertical analysis

you go account/net sales

horizontal analysis

you go current year-previous year then you go the differnce/previous year