Audit HW 5

The major reason an independent auditor gathers audit evidence is to 1. form an opinion on the financial statements. 2. detect fraud. 3. evaluate management. 4. assess control risk.

1. form an opinion on the financial statements.

Because of the risk of material​ misstatement, an audit should be planned and performed with an attitude of 1. professional skepticism. 2. independent integrity. 3. objective judgment. 4. impartial conservatism.

1. professional skepticism.

Which of the following best describes the reason why an independent auditor reports on financial​ statements? 1. A misappropriation of assets may​ exist, and it is more likely to be detected by independent auditors. 2. Different interests may exist between the company preparing the statements and the persons using the statements. 3. A misstatement of account balances may exist and is generally corrected as the result of the independent​ auditor's work. 4. Poorly designed internal controls may be in existence.

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

What assurance does the auditor provide that errors and fraud that are material to the financial statements will be​ detected? Errors/Fraud 1. Reasonable/Limited 2. Reasonable/Reasonable 3. Limited/Negative 4. Limited/Limited

2. Reasonable/Reasonable

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? 1. The factors considered in assessing control risk indicated an increased risk of intentional​ misstatements, but only a low risk of unintentional misstatements. 2. An audit is designed to provide reasonable assurance of detecting material​ errors, but there is no similar responsibility concerning fraud. 3. Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion. 4. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

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

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the​ following, if​ material, is a fraud as defined in auditing​ standards? 1. Clerical mistakes in the accounting data underlying the financial statements. 2. Misinterpretation of facts that existed when the financial statements were prepared. 3. Mistakes in the application of accounting principles. 4. Misappropriation of an asset or groups of assets.

4. Misappropriation of an asset or groups of assets.

Which of the following is an accurate statement about professional​ skepticism? A. Professional skepticism involves a critical assessment of the evidence. B. It is easy for auditors to understand that their clients may try to deceive them throughout the audit process. C. Professional skepticism is easy to implement in practice. D. Professional skepticism is only necessary for the audits of public companies.

A. Professional skepticism involves a critical assessment of the evidence.

The following are selected portions of the report of management from a published annual report. ............. Requirement a. What are the purposes of the two parts of the report of​ management? The purpose of the first part of the report of management is for management to _________ internal control over financial reporting. The second part of the report states​ management's responsibility for the __________________. Requirement b. What is the​ auditor's responsibility related to the report of​ management? The​ auditor's responsibility is to _____________ the presentation of the financial statements and _________________ financial reporting.

A. The purpose of the first part of the report of management is for management to state its responsibilities for internal control over financial reporting. The second part of the report states​ management's responsibility for the fair presentation of the financial statements. B. The​ auditor's responsibility is to express an opinion on the fairness of the presentation of the financial statements and to express an opinion on the effectiveness of internal control over financial reporting.

What is misappropriation of​ assets? A. The theft of assets by employees. B. The unintentional misstatement of financial information by management which results in the misstatement of financial statements. C. Failure to comply with applicable laws and regulations. D. The intentional misstatement of financial information by management or a theft of assets by​ management, which is covered up by misstating financial statements.

A. The theft of assets by employees.

What are the advantages of dividing the audit into different​ cycles? ​(Select all that​ apply.) A. To divide the audit into more manageable parts. B. To be able to easily list the audit cycles not finalized if the financials are issued prior to the completion of the audit. C. To keep closely related parts of the audit together. D. To ensure the auditors communicate what cycle they are in to the client. E. To assign tasks to different members of the audit team.

A. To divide the audit into more manageable parts. C. To keep closely related parts of the audit together. E. To assign tasks to different members of the audit team.

The most important general ledger account included in and affecting several cycles is the A. cash account. B. income tax expense and liability accounts. C. inventory account. D. retained earnings account.

A. cash account.

What are the responsibilities of the independent auditor in the audit of financial​ statements? Discuss​ fully, but in this part do not include fraud in the discussion. The responsibilities of the independent auditor in the audit of financial statements include the​ following: ​(Select all that​ apply.) A. exercise informed judgment during the selection of procedures used in the audit and in arriving at an opinion B. express an opinion on the financial statements C. have the abilities expected of a qualified person in the auditing profession. D. conduct an audit that conforms to auditing standards

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

In certifying their annual financial​ statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of A. the Securities Exchange Act of 1934. B. the​ Sarbanes-Oxley Act. C. GAAP. D. GAAS.

A. the Securities Exchange Act of 1934.

Distinguish between the terms errors and fraud. What is the​ auditor's responsibility for finding​ each?

An error is an unintentional misstatement of the financial statements. Fraud represents an intentional misstatement. The auditor is responsible for obtaining reasonable assurance that material misstatements in the financial statements are​ detected, whether those misstatements are due to errors or fraud.

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 _____ level of assurance.​ Accordingly, financial statement users should have a ______ degree of confidence in the financial statements.​ However, reasonable assurance is not​ a/an ______ level of​ assurance, and there is at least some risk that the audited financial statements may include __________.

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.

Explain the concept of professional skepticism and identify its two elements. Auditing standards ________ that the audit be planned and performed with an attitude of professional skepticism in ________ aspects of the​ engagement, recognizing the possibility that ________________ could exist ___________ of the​ auditor's prior experience with the integrity and honesty of client management and those charged with governance.

Auditing standards require that the audit be planned and performed with an attitude of professional skepticism in all aspects of the​ engagement, recognizing the possibility that a material misstatement could exist regardless of the​ auditor's prior experience with the integrity and honesty of client management and those charged with governance.

What are the responsibilities of the independent auditor for the detection of fraud involving misappropriation of assets and fraudulent financial​ reporting? Discuss​ fully, including your assessment of whether the​ auditor's responsibility for the detection of fraud is appropriate. Auditors are responsible for obtaining reasonable assurance that ________ misstatements included in the financial statements are​ detected, whether those misstatements are ____________. Professional standards acknowledge that it is often more difficult to detect fraud than errors because management or employees perpetrating the fraud ______________. That difficulty does not change the​ auditor's responsibility to ___________. Auditors are required to _________ assess the risk of material misstatement due to fraud and should consider that assessment in designing the _________ to be performed. The auditor may also uncover circumstances during the audit that may cause suspicions of fraudulent financial reporting. When such circumstances are​ uncovered, the auditor must __________________. Adequate _________ should be the principal means of thwarting and detecting misappropriation of assets. The auditor normally assesses the likelihood of material misappropriation of assets as a part of understanding the​ entity's _______________ and assessing ___________. Audit evidence should be ________ when the auditor finds an absence of adequate __________ or failure to follow prescribed​ procedures, if he or she believes _____________ fraud could result.

Auditors are responsible for obtaining reasonable assurance that material misstatements included in the financial statements are​ detected, whether those misstatements are due to error or fraud. Professional standards acknowledge that it is often more difficult to detect fraud than errors because management or employees perpetrating the fraud attempt to conceal the fraud. That difficulty does not change the​ auditor's responsibility to properly plan and perform the audit. Auditors are required to specifically assess the risk of material misstatement due to fraud and should consider that assessment in designing the audit procedures to be performed. The auditor may also uncover circumstances during the audit that may cause suspicions of fraudulent financial reporting. When such circumstances are​ uncovered, the auditor must evaluate their implications and consider the need to modify audit evidence. Adequate internal control should be the principal means of thwarting and detecting misappropriation of assets. The auditor normally assesses the likelihood of material misappropriation of assets as a part of understanding the​ entity's internal control and assessing control risk. Audit evidence should be expanded when the auditor finds an absence of adequate internal control or failure to follow prescribed​ procedures, if he or she believes a material fraud could result.

Explain what is meant by the term acceptable audit risk. A. Acceptable audit risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable​ amount, should such misstatements exist. B. 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. C. Acceptable audit risk is a measure of the​ auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. D. Acceptable audit risk is a measure of the​ auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the​ client's internal controls.

B. 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.

Which of the following is a correct​ relationship? A. Acceptable audit risk and planned detection risk have an inverse relationship. B. Planned detection risk and inherent risk have an inverse relationship. C. Control risk and planned detection risk have a direct relationship. D. All of the above are correct relationships.

B. Planned detection risk and inherent risk have an inverse relationship.

Identify the two elements of professional skepticism. A. ​(1) Suspension of judgment and​ (2) Interpersonal understanding B. ​(1) A questioning mind and​ (2) A critical assessment of audit evidence C. ​(1) A critical assessment of audit evidence and​ (2) Autonomy D. ​(1) A questioning mind and​ (2) Suspension of judgment

B. ​(1) A questioning mind and​ (2) A critical assessment of audit evidence

Identify the accounts in the trial balance that are likely to be included in each transaction cycle. Some accounts will be included in more than one cycle. Cycle: Sales and collection Balance sheet accounts: Income statement accounts:

Balance sheet accounts: Accounts receivable Allowance for doubtful accounts Cash Notes receivable - trade Income statement accounts: Bad debt expense Sales

Identify the accounts in the trial balance that are likely to be included in each transaction cycle. Some accounts will be included in more than one cycle. Cycle: Payroll and personnel Balance sheet accounts: Income statement accounts:

Balance sheet accounts: Cash Accrued sales salaries Income statement accounts: Sales salaries expense Salaries, office and general

Identify the accounts in the trial balance that are likely to be included in each transaction cycle. Some accounts will be included in more than one cycle. Cycle: Acquisition and payment Balance sheet accounts: Income statement accounts:

Balance sheet accounts: Cash Inventory Prepaid insurance Furnityre and equipment Accounts payable Accumulated depreciation - furniture and equipment Income tax payable Property tax payable Income statement accounts: Advertising expense Depreciation expense - furniture and equipemtn Income tax expense Insurance expense Property tax expense Rent expense Telecommunications expense Purchases

Identify the accounts in the trial balance that are likely to be included in each transaction cycle. Some accounts will be included in more than one cycle. Cycle: Capital acquisition and repayment Balance sheet accounts: Income statement accounts:

Balance sheet accounts: Cash Notes payable Loans payable Accrued interest expense Retained earnings Common stock Income statement accounts: Interest expense

Identify the accounts in the trial balance that are likely to be included in each transaction cycle. Some accounts will be included in more than one cycle. Cycle: Inventory and warehousing Balance sheet accounts: Income statement accounts:

Balance sheet accounts: Inventory Income statement accounts: Purchases

When using the cycle approach to segmenting the​ audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that A. the transactions are related to financing a company rather than to its operations. B. most capital acquisition and repayment cycle accounts involve few​ transactions, but each is often highly material and therefore should be audited extensively. C. Both A and B are correct. D. Neither A nor B is correct.

C. Both A and B are correct.

Describe what is meant by the cycle approach to auditing. A. The cycle approach requires the auditor to list each account on the balance sheet and determine the order of importance. This becomes a cycle approach the auditors follow during the audit. B. The cycle apprach requires an audit of each account on the​ financials, starting with sales on the income statement and finishing with​ stockholders' equity on the balance sheet. C. The cycle approach is a method of dividing the audit such that closely related types of transactions and account balances are included in the same cycle. D. The cycle approach is the way an auditor controls what part of the audit they currently are in. Each audit procedure for an audit is given a cycle of procedures that must be followed prior to the start of the next cycle.

C. The cycle approach is a method of dividing the audit such that closely related types of transactions and account balances are included in the same cycle.

Fraudulent financial reporting is most likely to be committed by​ whom? A. outside members of the​ company's board of directors B. the​ company's auditors C. company management D. line employees of the company

C. company management

If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient​ evidence, the auditor A. should notify regulators of the circumstances. B. should request an increase in audit fees so that more resources can be used to conduct the audit. C. has the responsibility of notifying financial statement users through the​ auditor's report. D. should withdraw from the engagement.

C. has the responsibility of notifying financial statement users through the​ auditor's report.

What is its relevance to evidence​ accumulation? A. Acceptable audit risk has no effect on planned evidence accumulation. B. Acceptable audit risk cannot be determined until sufficient evidence has been accumulated. C. Acceptable audit risk has a complementary relationship to evidence. If acceptable audit risk is​ reduced, planned evidence should decrease. D. Acceptable audit risk has an inverse relationship to evidence. If acceptable audit risk is​ reduced, planned evidence should increase.

D. Acceptable audit risk has an inverse relationship to evidence. If acceptable audit risk is​ reduced, planned evidence should increase.

What is fraudulent financial​ reporting? A. Failure to comply with applicable laws and regulations. B. The theft of assets by employees. C. The unintentional misstatement of financial information by management which results in the misstatement of financial statements. D. The intentional misstatement of financial information by management or a theft of assets by​ management, which is covered up by misstating financial statements.

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

The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be A. the date the financial statements are given to the Board of Directors. B. the date of the financial statements. C. 60 days after the date of the financial statements as required by the SEC. D. the date the auditor completed the auditing procedures in the field.

D. the date the auditor completed the auditing procedures in the field.

Which of the following would most likely be deemed a direct effect illegal​ act? A. violation of federal employment laws B. violation of civil rights laws C. violation of federal environmental regulations D. violation of federal income tax laws

D. violation of federal income tax laws

Distinguish between​ management's and the​ auditor's responsibility for the financial statements being audited. A. It is​ management's responsibility to maintain adequate internal control and make fair representations in the financial statements. The​ auditor's responsibility is to report the findings of the audit in the​ auditor's report. B. It is​ management's responsibility to hire the CPA firm. The​ auditor's responsibility is to adopt sound accounting policies and to prepare the financial statements accordingly. C. It is​ management's responsibility to adopt sound accounting policies. The​ auditor's responsibility is to conduct an audit of the financial statements in accordance with accounting standards. D. It is​ management's responsibility to perform an internal audit of their statements prior to the external audit. The​ auditor's responsibility is to maintain adequate internal control and make fair representations in the financial statements. E. Both A and C F. None of the above

E. Both A and C

In the​ auditor's responsibilities paragraph of the audit report issued for financial statements of a nonpublic​ company, the auditor expresses an opinion about the internal controls of the company. T/F

False

The auditors determine which disclosures must be presented in the financial statements. T/F

False

Explain why inherent risk is set for audit objectives for segments rather than for the overall audit.

Inherent risk is set for audit objectives for segments rather than for the overall audit because misstatements occur at the objective level within a segment. By identifying expectations of misstatements in​ segments, the auditor is thereby able to modify audit evidence by searching for misstatements in those segments.

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 ______________. In many​ cases, the dollar amounts are often ________​, and thus will have __________ on the fair presentation of financial statements. Fraudulent financial reporting is difficult to uncover because _________________. In many​ cases, the amounts are extremely ________ and _________ the fair presentation of 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.

Identify the cycle to which each of the following general ledger accounts will ordinarily be​ assigned: sales, accounts​ payable, retained​ earnings, accounts​ receivable, inventory, and repairs and maintenance. Account/Cycle: Sales/? Accounts payable/? Retained earnings/? Accounts receivable/? Inventory/? Repairs and maintenance/?

Sales/Sales and collection Accounts payable/Acquisition and payment Retained earnings/Capital acquisition and repayment Accounts receivable/Sales and collection Inventory/Inventory and warehousing Repairs and maintenance/Acquisition and payment

What is the​ auditor's responsibility when noncompliance with laws or regulations is identified or​ suspected?

The auditor should obtain an understanding of the nature and circumstances of the act. Additional information should be​ obtained, and the auditor should discuss the matter with management at a level above those involved with the suspected noncompliance. If​ needed, the auditor should also consider the need to obtain legal advice.

Explain the​ auditor's responsibility to consider compliance with laws and regulations. How does this responsibility differ for laws and regulations that have a direct effect on the financial statements compared to other laws and regulations that do not have a direct​ effect?

The auditor should obtain sufficient appropriate evidence regarding material amounts and disclosures that are directly affected by laws and regulations. For​ example, the auditor should perform tests to identify if there have been any material violations of federal or state tax laws.​ However, the auditor should inquire of management and inspect correspondence with relevant licensing and regulatory agencies to identify noncompliance that may have a material effect on the financial statements.

How will the general ledger accounts in the trial balance most likely differ if the company were a retail store rather than a wholesale​ company? How will they differ for a hospital or a government​ unit? The general ledger accounts are _________ between a retail and a wholesale company _______ there are departments for which there are various categories. There would be ______ differences for a hospital or governmental unit. A governmental unit would use the _________ system and would have entirely different titles.

The general ledger accounts are not likely to differ much between a retail and a wholesale company unless there are departments for which there are various categories. There would be large differences for a hospital or governmental unit. A governmental unit would use the fund accounting system and would have entirely different titles.

State the objective of the audit of financial statements. In general​ terms, how do auditors meet that​ objective? The​ auditor's objective of the audit of the financial statements is the _______________ of the financial​ position, results of​ operations, and cash flows in conformity with applicable accounting standards. The auditor meets that objective by _________________ whether​ management's _____________ regarding the financial statements are fairly stated.

The​ auditor's objective of the audit of the financial statements is the expression of an opinion on the fairness of the financial​ position, results of​ operations, and cash flows in conformity with applicable accounting standards. The auditor meets that objective by accumulating sufficient appropriate evidence to determine whether​ management's assertions regarding the financial statements are fairly stated.

List two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit. For each of the​ characteristics, state two things that the auditor can do to evaluate its significance in the engagement. Two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit are _________________ and __________________. For the first​ characteristic, two things that the auditor can do to evaluate its significance in the engagement are to ____________ and to __________. For the second​ characteristic, two things that the auditor can do to evaluate its significance in the engagement are to ___________ and to __________________.

Two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit are management's characteristics and influence over the control environment and operating characteristics and financial stability. For the first​ characteristic, two things that the auditor can do to evaluate its significance in the engagement are to investigate the past history of the firm and its management and to discuss the possibility of fraudulent financial reporting with the previous auditor and company legal counsel. For the second​ characteristic, two things that the auditor can do to evaluate its significance in the engagement are to perform analytical procedures to evaluate the possibility of business failure and to investigate whether material transactions occur close to year-end.

What is the effect on the amount of evidence the auditor must accumulate when inherent risk is increased from medium to high for an audit​ objective? When inherent risk is increased from medium to​ high, the auditor should ________ the audit evidence accumulated _______________.

When inherent risk is increased from medium to​ high, the auditor should increase the audit evidence accumulated to determine whether the expected misstatement actually occurred.