Auditing Chp 4-6 Study Guide

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An audit plan of substantive procedures for cash would not include A. request a cutoff bank statement be mailed to the client. B. request client to prepare bank reconciliations. C. prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. D. obtain a written client representation concerning compensating balance agreements.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if A. the results of alternative procedures that were performed compensate for the omission. B. the auditor's assessed level of detection risk is low. C. the omission is documented in a communication with the audit committee. D. no individual investment is material to the financial statements taken as a whole.

Which of the following should be performed by the persons opening the mail and recording payments? A. Restrictive endorsement on all checks B. Entering of payment information into customer accounts C. The preparation of the deposit slip and the delivery of the checks to the bank D. The segregation of all payments made on accounts listed as past due

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? A. A large number of bearer bonds on hand B. A large number of inventory items with low sales prices C. A large number of transactions processed in a short period of time D. A large number of fixed assets with easily identifiable serial numbers

Which of the following would be consistent with an employee taking cash receipts from customers on account? A. The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account. B. The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account. C. Total cash receipts from customers for the month are less than credit sales for the month. D. Total cash receipts from customers for the month are greater than credit sales for the month.

6) Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? A) A large number of bearer bonds on hand. B) A large number of inventory items with low sales prices. C) A large number of transactions processed in a short period of time. D) A large number of fixed assets with easily identifiable serial numbers.

A) A large number of bearer bonds on hand

20) Which of the following statements concerning noncompliance by clients is correct? A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is that same as that for errors and frauds

6) 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: A) an error in recording amortization of the excess of the investor's cost over the investment's underlying book value. B) the investee's decision to reduce cash dividends declared per share of its common stock. C) an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities. D) a substantial fluctuation in the price of the investee's common stock on a national stock exchange.

A) An error in recording amortization of the excess of the investors cost over the investments underlying book value

30) The acceptable level of detection risk is inversely related to the: A) assurance provided by substantive tests. B) risk of misapplying audit procedures. C) preliminary judgment about materiality levels. D) risk of failing to discover material misstatements.

A) Assurance provided by the substantive tests

22) The probability that an audit team will give an inappropriate opinion on financial statements best describes: A) audit risk. B) inherent risk. C) control risk. D) detection risk.

A) Audit risk

21) Which of the following statements best describes auditors' responsibility to detect errors and frauds? A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements. B) Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. C) Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. D) Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements

8) Which of the following analytical procedures most likely would be used during the planning stage of an audit? A) Comparing current-year to prior-year sales volumes. B) Reading the financial statements and notes and considering the adequacy of evidence. C) Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year's ratio. D) Reading the letter from the client's attorney and considering the threat of litigation.

A) Comparing current-year to prior-year sales volumes

15) According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include: A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. C) considering the qualitative materiality of known and suspected noncompliance. D) obtaining written management representations concerning the absence of violations of laws and regulations.

A) Designing audit procedures to detect noncompliance in the absence of specific information brought to the auditor's attention

24) If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? A) Detection risk will decrease. B) Inherent risk will increase. C) Audit risk will decrease. D) Detection risk will increase.

A) Detection risk will decrease

35) Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected? A) Direct effect noncompliance: Reasonable: Indirect effect noncompliance: None. B) Direct effect noncompliance: Reasonable: Indirect effect noncompliance: Reasonable. C) Direct effect noncompliance: Limited: Indirect effect noncompliance: None. D) Direct effect noncompliance: Limited: Indirect effect noncompliance: Reasonable.

A) Direct effect noncompliance: Reasonable, Indirect effect noncompliance: None

34) When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to: A) evaluate the effect on the financial statements. B) determine the reliability of management's representations. C) consider whether other similar acts may have occurred. D) recommend remedial actions to the audit committee.

A) Evaluate the effect on financial statements

49) 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: A) extent of substantive tests of details. B) level of inherent risk. C) extent of tests of controls. D) level of detection risk.

A) Extent of substantive test of details

37) In the planning stage, analytical procedures are used to: A) identify potential problem areas. B) provide direct evidence about the balances in accounts. C) determine the mathematical correctness of the financial statements. D) perform all of these.

A) Identify potential problem areas

41) If an auditor encounters significant risks at the client, the auditor should do all of the following except: A) inform the SEC. B) perform extended procedures. C) include more experienced auditors on the engagement. D) perform tests closer to year end.

A) Inform the SEC

13) An audit plan of substantive procedures for cash would not include: A) request a cutoff bank statement be mailed to the client. B) request client to prepare bank reconciliations. C) prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. D) obtain a written client representation concerning compensating balance agreements.

A) Request a cutoff bank statement be mailed to the client

31) Which of the following should be performed by the persons opening the mail and recording payments? A) Restrictive endorsement on all checks. B) Entering of payment information into customer accounts. C) The preparation of the deposit slip and the delivery of the checks to the bank. D) The segregation of all payments made on accounts listed as past due.

A) Restrictive endorsements on all checks

8) An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if: A) the results of alternative procedures that were performed compensate for the omission. B) the auditor's assessed level of detection risk is low. C) the omission is documented in a communication with the audit committee. D) no individual investment is material to the financial statements taken as a whole.

A) The results of alternative procedures that were performed compensate for the omission

12) Which of the following would be consistent with an employee taking cash receipts from customers on account? A) The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account. B) The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account. C) Total cash receipts from customers for the month are less than credit sales for the month. D) Total cash receipts from customers for the month are greater than credit sales for the month.

A) The total of the accounts receivable subsidiary ledger balance is less than the accounts recoverable control account

59) Auditors use brainstorming: A) to heighten the audit team's awareness of fraud potential. B) to heighten management's awareness of fraud potential. C) to determine detection risk. D) to set materiality.

A) To heighten the audit team's awareness of fraud potential

A proof of cash A. is required by GAAS. B. can be used to test the transactions process. C. is most helpful when control risk for cash is low. D. always detects lapping.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if A. the illegal act is a violation of generally accepted accounting principles. B. the client does not take the remedial action that the auditor considers necessary. C. the illegal act was committed during a prior year that was not audited. D. the auditor has already assessed control risk at the maximum level.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by A. confirmation and observation. B. observation and inquiry. C. analytical procedures and confirmation. D. inquiry and analytical procedures.

An auditor would least likely initiate a discussion with a client's audit committee concerning A. the methods used to account for significant unusual transactions. B. the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. C. indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. D. disagreements with management as to accounting principles that were resolved during the current year's audit.

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the A. check register for the last month is reviewed. B. cutoff bank statement is reconciled. C. bank confirmation is reviewed. D. search for unrecorded liabilities is performed.

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by A. comparing the amount written on the check face to the amount written in the cash disbursements journal. B. comparing the magnetic imprint of the amount paid to the amount written on the check face. C. examining the endorsement on the back of the check. D. comparing the check number on the face of the check to the check number in the cash disbursements journal.

Narbona, CPA is reviewing controls over cash received through a bank night depository. Which controls would she find most important? A. Responsibilities are rotated for processing night depository receipts among employees of the various departments. B. Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. C. Vacations are required for all employees engaged in night depository activities. D. All deposit tickets related to night deposits are numbered.

The mail which includes payments should be opened by two people. This control is called A. separation of duties. B. joint custody. C. anti-collusion. D. lapping.

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the A. cutoff bank statement. B. general ledger. C. bank confirmation. D. year-end bank statement.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A. supported by a vendor's invoice. B. stamped "paid" by the check signer. C. prenumbered and accounted for. D. approved for authorized purchases.

Which of the following is not considered one of the three factors increasing the probability of fraud? A. Motive B. Lack of training C. Opportunity D. Rationalization

Which of the following management policies would increase the probability of fraud in a company? A. Diversifying authority throughout divisions and subsidiaries in the organization B. Measuring performance and awarding bonuses based on short-term operating results C. Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work D. Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts

Which of the following sets of information does an auditor usually confirm on one form? A. Accounts payable and purchase commitments B. Cash in bank and collateral for loans C. Inventory on consignment and contingent liabilities D. Accounts receivable and accrued interest receivable

28) A proof of cash: A) is required by GAAS. B) can be used to test the transactions process. C) is most helpful when control risk for cash is low. D) always detects lapping.

B) Can be used to test the transaction process

18) Which of the following sets of information does an auditor usually confirm on one form? A) Accounts payable and purchase commitments. B) Cash in bank and collateral for loans. C) Inventory on consignment and contingent liabilities. D) Accounts receivable and accrued interest receivable.

B) Cash in bank and collateral for loans

42) Horizontal analysis refers to: A) the trend of income from year to year of persons suspected of fraud. B) changes of financial statement numbers and ratios across several years. C) financial statement amounts expressed each year as a proportion of a base amount. D) the change in a suspect's net worth from the beginning to the end of a period.

B) Changes of financial statement numbers and ratios across several years

33) An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: A) the noncompliance is a violation of generally accepted accounting principles. B) the client does not take the remedial action that the auditor considers necessary. C) the illegal act was committed during a prior year that was not audited. D) the auditor has already assessed control risk at the maximum level.

B) Client does not take the remedial action that the auditor considers necessary

11) If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by: A) comparing the amount written on the check face to the amount written in the cash disbursements journal. B) comparing the magnetic imprint of the amount paid to the amount written on the check face. C) examining the endorsement on the back of the check. D) comparing the check number on the face of the check to the check number in the cash disbursements journal.

B) Comparing the magnetic imprint of the amount paid to the amount written on the check face

19) An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the: A) check register for the last month is reviewed. B) cutoff bank statement is reconciled. C) bank confirmation is reviewed. D) search for unrecorded liabilities is performed.

B) Cutoff bank statement is reconciled

29) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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: A) decrease substantive testing. B) decrease detection risk. C) increase inherent risk. D) increase materiality levels.

B) Decrease detection risk

26) Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important? A) Responsibilities are rotated for processing night depository receipts among employees of the various departments. B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. C) Vacations are required for all employees engaged in night depository activities. D) All deposit tickets related to night deposits are numbered.

B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is complete

3) External auditors are responsible: A) for authenticating documents. B) for reporting immaterial frauds to a level of management at least one level above the people involved. C) for finding all intentional misstatements concealed by collusion. D) for reporting all frauds to outside agencies or parties.

B) For reporting immaterial frauds to a level of management at least one level above the people involved

16) To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: A) cutoff bank statement. B) general ledger. C) bank confirmation. D) year-end bank statement.

B) General ledger

12) Inherent risk and control risk differ from detection risk in which of the following ways? A) Inherent risk and control risk are calculated by the client. B) Inherent risk and control risk exist independently of the audit. C) Inherent risk and control risk are controlled by the auditor. D) Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

B) Inherent risk and control risk exist independently of the audit

33) The mail which includes payments should be opened by two people. This control is called: A) separation of duties. B) joint custody. C) anti-collusion. D) lapping.

B) Joint custody

9) Which of the following is not considered one of the three factors increasing the probability of fraud? A) Motive. B) Lack of training. C) Opportunity. D) Rationalization.

B) Lack of training

57) Managing business risk is the responsibility of: A) the auditors. B) management. C) the SEC. D) the PCAOB.

B) Management

1) The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on: A) employee misappropriation of assets. B) management fraud. C) client fraud on customers. D) employee embezzlement.

B) Management fraud

3) Which of the following management policies would increase the probability of fraud in a company? A) Diversifying authority throughout divisions and subsidiaries in the organization. B) Measuring performance and awarding bonuses based on short-term operating results. C) Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.

B) Measuring performance and awarding bonuses nased on short-term operating results.

20) An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by: A) confirmation and observation. B) observation and inquiry. C) analytical procedures and confirmation. D) inquiry and analytical procedures.

B) Observation and inquiry

38) Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should: A) consider the matter a scope limitation. B) perform additional audit procedures to investigate the matter further. C) intensify the audit with the expectation of detecting management fraud. D) withdraw from the engagement.

B) Perform additional audit procedures to investigate the matter further

14) If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? A) Payroll. B) Revenue. C) Purchasing. D) Inventory.

B) Revenue

36) Generally accepted auditing standards states that analytical procedures: A) should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. C) should be applied in the planning stage and can be applied as a substantive test and in the final review stage. D) should be applied in the final review stage, and can be applied as a substantive test and in the planning stage.

B) Should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit

21) To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is: A) supported by a vendor's invoice. B) stamped "paid" by the check signer. C) prenumbered and accounted for. D) approved for authorized purchases.

B) Stamped "paid" by the check signer

23) An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: A) the illegal act is a violation of generally accepted accounting principles. B) the client does not take the remedial action that the auditor considers necessary. C) the illegal act was committed during a prior year that was not audited. D) the auditor has already assessed control risk at the maximum level.

B) The client does not take remedial action that the auditor considers necessary

4) Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? A) The exchange of property for similar property in a nonmonetary transaction. B) The discovery of unexplained payments made to government employees. C) The presence of several difficult-to-audit transactions affecting expense accounts. D) The failure to develop adequate procedures that detect unauthorized purchases.

B) The discovery of unexplained payments made to government employees

24) An auditor would least likely initiate a discussion with a client's audit committee concerning: A) the methods used to account for significant unusual transactions. B) the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. C) indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. D) disagreements with management as to accounting principles that were resolved during the current year's audit.

B) The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated

45) The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as: A) horizontal analysis. B) vertical analysis. C) net worth analysis. D) expenditure analysis.

B) Vertical analysis

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? A. Observation and inspection of records B. Confirmation and reperformance C. Inquiry and inspection of records D. Analytical procedures and reperformance

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called A. PayChex. B. Pay-As-You-Go. C. Positive Pay. D. Pay Master.

Each of the following is a type of known misstatement, except A. an inaccuracy in processing data. B. the misapplication of accounting principles. C. differences between management and the auditor's judgment regarding estimates. D. a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? A. Motive B. Opportunity C. Capability D. Liquidity

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be A. psychotic. B. egocentric. C. ideological. D. economic.

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent A. theft. B. irregular endorsement. C. replacement or substitution of stolen assets. D. deposits in transit.

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements? A. Send positive confirmations on recorded customer accounts receivable balances. B. Perform physical observation and test count during the client's inventory taking. C. Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. D. Conduct interviews with the client's sales billing personnel to learn about sales recording control activities.

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is A. examination of the company's escrow account. B. interview with the company's treasurer and cash manager. C. preparation and review of standard bank confirmation inquiries. D. analytical computations comparing current cash in the bank with previous accounting periods.

17) Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of: A) the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit. B) a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit. C) a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit. D) controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.

C) A cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.

39) For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. A) As a substantive test: Yes, In the final review stage: Yes. B) As a substantive test: Yes, In the final review stage: No. C) As a substantive test: No, In the final review stage: Yes. D) As a substantive test: No, In the final review stage: No.

C) As a substantive test: No, In the final review stage: Yes

34) Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? A) Motive. B) Opportunity. C) Capability. D) Liquidity.

C) Capability

7) A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Reviews Clerk 1 Review vendor invoices for proper signature approval. Clerk 2 Enters vendor invoice into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to accounts payable ledger for payment and mails checks. Treasurer Review the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls? A) Clerk 1 opens all of the incoming mail. B) Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. C) Clerk 3 mails the checks and remittances after they have been signed. D) The treasurer uses a stamp for signing checks.

C) Clerk 3 mails the checks and remittances after they have been signed

5) Each of the following is a type of known misstatement, except: A) an inaccuracy in processing data. B) the misapplication of accounting principles. C) differences between management and the auditor's judgment regarding estimates. D) a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

C) Differences between management and the auditor's judgement regarding estimates

43) Analytical procedures used in planning an audit should focus on: A) reducing the scope of tests of controls and substantive tests. B) providing assurance that potential material misstatements will be identified. C) enhancing the auditor's understanding of the client's business. D) assessing the adequacy of the available evidential matter.

C) Enhancing the auditor's understanding of the client's business

27) The risk of material misstatement differs from detection risk in that it: A) arises from the misapplication of audit procedures. B) may be assessed in either quantitative or non-quantitative terms. C) exists independently of the financial statement audit. D) can be changed at the auditor's discretion.

C) Exist independently of the financial statement audit

16) Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? A) Unfavorable industry conditions. B) Lack of working capital. C) High liquidity. D) Slow customer collections.

C) High liquidity

47) Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to: A) identify the appropriate schedules to be prepared by the client. B) identify the types of errors or frauds that can occur in transactions. C) identify unusual conditions that deserve additional audit effort. D) determine the existence of unrecorded liabilities or overstated assets.

C) Identify unusual conditions that deserve additional audit effort

2) When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be: A) psychotic. B) egocentric. C) ideological. D) economic.

C) Ideological

25) If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A) income would be overstated. B) income would be understated. C) income would not be misstated. D) accounts receivable would be understated.

C) Income would not be misstated

55) Which of the following is an acceptable response to fraud risks related to sales that were identified in an audit? A) Exercise professional skepticism when performing sales testing. B) Increase the assessment of control risk for sales. C) Increase the assessment of detection risk for sales. D) Perform additional substantive sales procedures on a surprise basis.

C) Increase the assessment of detection risk for sales

4) An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? A) Observation and inspection of records. B) Confirmation and reperformance. C) Inquiry and inspection of records. D) Analytical procedures and reperformance.

C) Inquiry and inspection of records

2) Management fraud generally refers to: A) unintentional mistakes. B) noncompliance. C) intentional distortions of financial statements. D) violations of GAAS.

C) Intentional distortions of financial statements

46) Which of the following accounts tends to be most predictable for purposes of analytical procedures? A) Accounts receivable. B) Travel and entertainment expense. C) Interest expense. D) Income taxes payable.

C) Interest expense

10) Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements? A) Send positive confirmations on recorded customer accounts receivable balances. B) Perform physical observation and test count during the client's inventory taking. C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. D) Conduct interviews with the client's sales billing personnel to learn about sales recording control activities.

C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

5) Analytical procedures are most appropriate when testing which of the following types of transactions? A) Payroll and benefit liabilities. B) Acquisitions and disposals of fixed assets. C) Operating expense transactions. D) Long-term debt transactions.

C) Operating expense transactions

32) At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called: A) PayChex. B) Pay-As-You-Go. C) Positive Pay. D) Pay Master.

C) Positive Pay

27) Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is: A) examination of the company's escrow account. B) interview with the company's treasurer and cash manager. C) preparation and review of standard bank confirmation inquiries. D) analytical computations comparing current cash in the bank with previous accounting periods.

C) Preparation and review of standard bank confirmation inquiries

23) Inherent risk is the: A) probability that some accounts are more susceptible to misstatement than others. B) probability that the client's internal control policies and procedures will fail to detect material misstatements. C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D) probability that the auditor may not detect material misstatements in the financial statements.

C) Probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements

10) Which of the following would not be considered an analytical procedure? A) Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. B) Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. C) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. D) Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.

C) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics

32) When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the: A) liquidity of the account. B) degree of management estimation involved in determining the proper account balance. C) related internal control policies and procedures. D) complexity of calculations involved.

C) Related internal control policies and procedures

29) When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent: A) theft. B) irregular endorsement. C) replacement or substitution of stolen assets. D) deposits in transit.

C) Replacement or substitution of stolen assets

58) Auditors would use the enterprise risk model: A) to reduce the client's business risk. B) to determine detection risk. C) to evaluate management's risk assessment. D) to monitor client risk.

C) To evaluate management's risk assessment

56) If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk: A) would most likely change from 10% to 5%. B) would most likely change from 20% to 40%. C) would most likely change from 30% to 15%. D) would be unchanged, because the auditor has control over detection risk. E) cannot be determined because inherent risk is not given.

C) Would most likely change from 30% to 15%

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using A. employee fidelity bonds. B. independently prepared mailroom prelists. C. daily check summaries. D. a bank lockbox system.

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? A. Adequate internal control B. Inadequate internal control because mailroom employees should not have access to cash C. Inadequate internal control because treasury employees should prepare the deposit slip D. Inadequate internal control because of a lack of separation of duties

Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to A. provide the data necessary to prepare a proof of cash. B. request that a cutoff bank statement and related checks be sent to the audit. C. detect questionable bank activities that may otherwise not be discovered. D. seek information about contingent liabilities and security agreements.

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud? A. Intentional deception B. Taking unfair or dishonest advantage of other people C. Perpetration for the benefit or detriment of the organization D. Negligence on the part of executive management

In the audit of cash the auditor obtains a bank cutoff statement primarily to A. identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. B. obtain sufficient information to reconcile the client's bank account as of year-end. C. obtain direct confirmation of the client's bank balances as of year-end. D. test the propriety of items appearing on the client's year-end bank reconciliation.

17) An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: A) employee fidelity bonds. B) independently prepared mailroom prelists. C) daily check summaries. D) a bank lockbox system.

D) A bank lockbox system

18) An auditor assesses the risk of material misstatement because it: A) is relevant to the auditor's understanding of the control environment. B) provides assurance that the auditor's overall materiality levels are appropriate. C) indicates to the auditor where inherent risk may be the greatest. D) affects the level of detection risk that the auditor may accept.

D) Affects the level of detection risk that the auditor may accept

40) Which of the following would not likely be found in the minutes of the board of directors? A) Amount of dividends declared. B) Approval to pledge assets as security for debts. C) Authorization of officers' salaries. D) Approval of a new desktop computer for the controller.

D) Approval of a new desktop computer for the controller

54) The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the: A) nature of substantive tests to more effective procedures. B) timing of substantive tests, such as performing them at year-end rather than at an interim date. C) extent of substantive tests, such as using larger sample sizes. D) assurances provided by substantive tests to a lower level.

D) Assurances provided by substantive tests to a lower level

31) The existence of audit risk is recognized by the statement in the auditor's standard report that the: A) auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. B) financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. C) audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

D) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements

44) Sources of financial and nonfinancial data do not include: A) financial account information for comparable prior periods. B) nonfinancial information such as physical production statistics. C) company budgets and forecasts. D) Bureau of Labor statistics.

D) Bureau of labor statistics

48) Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"? A) Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. B) Conduct a discussion by the audit team of the risks of material misstatement due to fraud. C) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. D) Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

D) Conduct inquiries of shareholders as to their views about the risk of fraud and their knowledge of any fraud or suspected fraud

28) The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is: A) audit risk. B) inherent risk. C) control risk. D) detection risk.

D) Detection risk

26) An audit team uses the assessed risk of material misstatement to: A) evaluate the effectiveness of the entity's internal control policies and activities. B) identify transactions and account balances where inherent risk is at the maximum. C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D) determine the acceptable level of detection risk for financial statement assertions.

D) Determine the acceptable level of detection risk for financial statement assertions

50) What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected? A) Errors: Limited, Frauds: Negative, Direct effect noncompliance: Limited. B) Errors: Limited, Frauds: Limited, Direct effect noncompliance: Reasonable. C) Errors: Reasonable, Frauds: Limited, Direct effect noncompliance: Limited. D) Errors: Reasonable, Frauds: Reasonable, Direct effect noncompliance: Reasonable.

D) Errors: Reasonable, Frauds: Reasonable, Direct effect noncompliance: Reasonable

53) Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: A) elements of audit risk whereas detection risk is not. B) changed at the auditor's discretion whereas detection risk is not. C) considered at the individual account-balance level whereas detection risk is not. D) functions of the client and its environment whereas detection risk is not.

D) Functions of the client and its environment whereas detection risk is not

30) As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? A) Adequate internal control. B) Inadequate internal control because mailroom employees should not have access to cash. C) Inadequate internal control because treasury employees should prepare the deposit slip. D) Inadequate internal control because of a lack of separation of duties.

D) Inadequate internal control because of a lack of separation of duties

22) In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud? A) Intentional deception. B) Taking unfair or dishonest advantage of other people. C) Perpetration for the benefit or detriment of the organization. D) Negligence on the part of executive management.

D) Negligence on the part of executive management

51) Experience has shown that the many large fraudulent transactions can be found in: A) systematic processing of large volumes of day-to-day ordinary transactions. B) payroll fraudsters' mistakes in using unissued Social Security numbers. C) petty cash embezzlements. D) non-routine, nonsystematic journal entries.

D) Non-routine, nonsystematic journal entries

7) 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 mind-set that the audit team should maintain during this discussion? A) Presumptive. B) Judgmental. C) Criticizing. D) Questioning.

D) Questioning

15) Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to: A) provide the data necessary to prepare a proof of cash. B) request that a cutoff bank statement and related checks be sent to the audit. C) detect questionable bank activities that may otherwise not be discovered. D) seek information about contingent liabilities and security agreements.

D) Seek information about contingent liabilities and security agreements.

14) In the audit of cash the auditor obtains a bank cutoff statement primarily to: A) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. B) obtain sufficient information to reconcile the client's bank account as of year-end. C) obtain direct confirmation of the client's bank balances as of year-end. D) test the propriety of items appearing on the client's year-end bank reconciliation.

D) Test the propriety of items appearing on the client's year-end bank reconciliation.

9) In auditing related party transactions, an auditor ordinarily places primary emphasis on: A) the probability that related party transactions will recur. B) confirming the existence of the related parties. C) verifying the valuation of the related party transactions. D) the adequacy of the disclosure of the related party transactions.

D) The adequacy of the disclosure of the related party transactions

52) Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting? A) Paper copies of paid invoices and cancelled checks are microfiched and then destroyed. B) The controller requires that you schedule any audit inquiries for after lunch each day, not in the morning. C) The petty cash fund custodian never takes a vacation. D) The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance.

D) The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance

11) While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue? A) There is a broad indication of misappropriation of assets. B) There is an indication of theft of the entity's assets. C) There is an indication of embezzling receipts. D) There is a broad indication of financial reporting fraud.

D) There is a broad indication of financial reporting fraud

60) The purpose of an audit strategy is: A) to provide a defense against litigation. B) to gain an understanding of the client. C) to comply with securities law. D) to set the scope, timing, and direction for auditing each relevant assertion.

D) To set the scope, timing and direction for auditing each relevant assertion

13) While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? A) Move detailed analytical procedures from year end to interim. B) Increase the dollar threshold of vouching customer invoices. C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. D) Use more experienced audit team members to perform year-end testing.

D) Use more experienced audit team members to perform year-end testing

19) When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely: A) perform extended audit procedures. B) consult with fraud examiners. C) report directly to the Securities and Exchange Commission within one day. D) withdraw from the engagement.

D) Withdraw from the engagement

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should A. investigate fully to determine the total amount of the misappropriation. B. determine which accounts are affected and the amount by which they are overstated or understated. C. determine the methods by which the misappropriation was carried out. D. identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. E. all of these.

Which of the following statements is correct with respect to the elements of the "fraud triangle"? A. Motive is a cause that pressures people into action. B. Opportunity refers to a situation that allows someone with motive to carry out fraud. C. A lack of integrity describes a person who does not stick to the social or organizational ethical code. D. Fraud is most common when these three factors exist together. E. All of these statements are correct.

1) When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should: A) investigate fully to determine the total amount of the misappropriation. B) determine which accounts are affected and the amount by which they are overstated or understated. C) determine the methods by which the misappropriation was carried out. D) identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. E) all of these.

E) All of these

25) Which of the following statements is correct with respect to the elements of the "fraud triangle"? A) Motive is a cause that pressures people into action. B) Opportunity refers to a situation that allows someone with motive to carry out fraud. C) A lack of integrity describes a person who does not stick to the social or organizational ethical code. D) Fraud is most common when these three factors exist together. E) All of these statements are correct.

E) All of these statements are correct

1. An audit team's responsibility would not include A. designing client's internal controls. B. documentation of understanding of a client's internal controls. C. communicating internal control deficiencies. D. assessing the effectiveness a client's internal controls.

13. Which of the following is a definition of control risk? A. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. B. The risk that the auditor will not detect a material misstatement. C. The risk that the auditor's assessment of internal controls will be at less than the maximum level. D. The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures.

21. Which of the following statements best describes auditors' responsibility to detect errors and frauds? A. Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements. B. Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. C. Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. D. Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

22. The probability that an audit team will give an inappropriate opinion on financial statements best describes A. audit risk. B. inherent risk. C. control risk. D. detection risk.

23. After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the A. additional evidence to support a further reduction in control risk was not cost beneficial. B. assessed level of inherent risk exceeded the assessed level of control risk. C. internal control structure was properly designed and justifiably may be relied on. D. evidence obtainable through tests of controls would not support an increased level of control risk.

24. If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? A. Detection risk will decrease. B. Inherent risk will increase. C. Audit risk will decrease. D. Detection risk will increase.

29. Which of the following is not an input control activity? A. Reasonableness tests B. Record counts C. Financial totals D. Hash totals

30. The acceptable level of detection risk is inversely related to the A. assurance provided by substantive tests. B. risk of misapplying audit procedures. C. preliminary judgment about materiality levels. D. risk of failing to discover material misstatements.

31. Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control? A. To serve as a basis for constructive suggestions B. To plan subsequent substantive tests C. To identify types of possible misstatements that may occur D. To consider factors that may affect the risk of material misstatement

32. Tracing bills of lading to sales invoices provides evidence that A. shipments to customers were invoiced. B. shipments to customers were recorded as sales. C. recorded sales were shipped. D. invoiced sales were recorded as sales.

33. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if A. the noncompliance is a violation of generally accepted accounting principles. B. the client does not take the remedial action that the auditor considers necessary. C. the illegal act was committed during a prior year that was not audited. D. the auditor has already assessed control risk at the maximum level.

35. Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected? A. Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None B. Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable C. Direct effect noncompliance: Limited; Indirect effect noncompliance: None D. Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable

37. In the planning stage, analytical procedures are used to A. identify potential problem areas. B. provide direct evidence about the balances in accounts. C. determine the mathematical correctness of the financial statements. D. all of these.

39. When the audit team increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the audit team would most likely increase the A. extent of substantive tests of details. B. level of inherent risk. C. extent of tests of controls. D. level of detection risk.

4. When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? A. Test the operating effectiveness of such controls in the current audit. B. Document that reliance and proceed with the original audit strategy. C. Inquire of management as to the effectiveness of the controls. D. Report the reliance in the report on internal controls.

40. In computer systems, the information technology general controls (ITGC) would not include A. processing control activities. B. separation of various computer system functions. C. appropriate documentation of the data processing system. D. control over physical access to computer hardware.

41. If an auditor encounters significant risks at the client the auditor should do all of the following except A. inform the SEC. B. perform extended procedures. C. include more experienced auditors on the engagement. D. perform tests closer to year end.

49. 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 A. extent of substantive tests of details. B. level of inherent risk. C. extent of tests of controls. D. level of detection risk.

49. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls? A. Incompatible duties B. Management override C. Mistakes in judgment D. Collusion among employees

51. The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with A. knowledge necessary for audit planning. B. evidential matter to use in assessing inherent risk. C. a basis for modifying tests of controls. D. an evaluation of the consistency of application of management's policies.

53. After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that A. it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. B. additional evidence to support a further reduction in control risk is not available. C. an increase in the assessed level of control risk is justified for certain financial statement assertions. D. there were many internal control weaknesses that could allow errors to enter the accounting system.

54. In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards, an auditor is required to A. document the auditor's understanding of the entity's internal control. B. search for significant deficiencies in the operation of the internal controls. C. perform tests of controls to evaluate the effectiveness of the entity's accounting system. D. determine whether control activities are operating effectively to prevent or detect material misstatements.

57. A report on internal control effectiveness by the management team of public companies is required by A. the Sarbanes-Oxley Act of 2002. B. the PCAOB. C. the AICPA. D. the auditors.

59. Auditors use brainstorming A. to heighten the audit team's awareness of fraud potential. B. to heighten management's awareness of fraud potential. C. to determine detection risk. D. to set materiality.

6. 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 A. an error in recording amortization of the excess of the investor's cost over the investment's underlying book value. B. the investee's decision to reduce cash dividends declared per share of its common stock. C. an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities. D. a substantial fluctuation in the price of the investee's common stock on a national stock exchange.

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include A. designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. B. performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. C. considering the qualitative materiality of known and suspected noncompliance. D. obtaining written management representations concerning the absence of violations of laws and regulations.

Which of the following analytical procedures most likely would be used during the planning stage of an audit? A. Comparing current-year to prior-year sales volumes B. Reading the financial statements and notes and considering the adequacy of evidence C. Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year's ratio D. Reading the letter from the client's attorney and considering the threat of litigation

Which of the following statements concerning noncompliance by clients is correct? A. An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. B. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. C. An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. D. An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

1. The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on A. employee misappropriation of assets. B. management fraud. C. client fraud on customers. D. employee embezzlement.

12. Inherent risk and control risk differ from detection risk in which of the following ways? A. Inherent risk and control risk are calculated by the client. B. Inherent risk and control risk exist independently of the audit. C. Inherent risk and control risk are controlled by the auditor. D. Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

14. If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? A. Payroll B. Revenue C. Purchasing D. Inventory

15. Which of the following statements is correct regarding internal control? A. A well-designed internal control environment ensures the achievement of an entity's control objectives. B. An inherent limitation to internal control is the fact that controls can be circumvented by management override. C. A well-designed and operated internal control environment should detect collusion perpetrated by two people. D. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

27. Control strengths and weaknesses should be documented in audit documentation, sometimes called A. questionnaires, narratives, and flowcharts. B. bridge working papers. C. communications of significant deficiencies. D. internal control letters.

29. Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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 A. decrease substantive testing. B. decrease detection risk. C. increase inherent risk. D. increase materiality levels.

3. A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as A. management assertions. B. the control environment. C. control risk assessment. D. functional responsibilities.

3. External auditors are responsible A. for authenticating documents. B. for reporting immaterial frauds to a level of management at least one level above the people involved. C. for finding all intentional misstatements concealed by collusion. D. for reporting all frauds to outside agencies or parties.

36. Generally accepted auditing standards states that analytical procedures A. should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B. should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. C. should be applied in the planning stage and can be applied as a substantive test and in the final review stage. D. should be applied in the final review stage, and can be applied as a substantive test and in the planning stage.

37. If auditors assess control risk at the maximum level, they will tend to A. perform a great deal of additional tests of controls. B. perform a great deal of substantive testing during the audit. C. perform substantive tests at an interim date. D. perform more audit procedures using internal evidence.

38. Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should A. consider the matter a scope limitation. B. perform additional audit procedures to investigate the matter further. C. intensify the audit with the expectation of detecting management fraud. D. withdraw from the engagement.

4. Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? A. The exchange of property for similar property in a nonmonetary transaction B. The discovery of unexplained payments made to government employees C. The presence of several difficult-to-audit transactions affecting expense accounts D. The failure to develop adequate procedures that detect unauthorized purchases

42. Horizontal analysis refers to A. the trend of income from year to year of persons suspected of fraud. B. changes of financial statement numbers and ratios across several years. C. financial statement amounts expressed each year as a proportion of a base amount. D. the change in a suspect's net worth from the beginning to the end of a period.

44. Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the descriptions below best expresses the minimum amount of work permitted by GAAS for nonpublic companies? A. Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances. B. Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances. C. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment. D. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances, since zero control risk means that no errors or fraud can reach the accounts.

45. The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as A. horizontal analysis. B. vertical analysis. C. net worth analysis. D. expenditure analysis.

46. In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity A. reflects management's philosophy and operating style. B. affects management's financial statement assertions. C. provides adequate safeguards over access to assets. D. enhances management's decision making processes.

5. An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? A. Matching purchase orders to accounts payable B. Verifying that approved spending limits are not exceeded C. Tracing sales orders to the revenue account D. Reviewing minutes of board meeting

55. In testing control activities, an auditor ordinarily selects from a variety of techniques, including A. inquiry and analytical procedures. B. reperformance and observation. C. comparison and confirmation. D. inspection and verification.

57. Managing Business Risk is the responsibility of A. the auditors. B. management. C. the SEC. D. the PCAOB.

59. Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls? A. Evaluation of the auditing environment B. Testing of low risk internal control activities C. All testing of the operating effectiveness of internal control activities D. As providing the principle evidence for the external auditors' opinion

7. Which of the following outcomes is a likely benefit of information technology used for internal control? A. Processing of unusual or nonrecurring transactions B. Enhanced timeliness of information C. Potential loss of data D. Recording of unauthorized transactions

9. Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? A. The industry and the business and regulatory environments in which the client operates B. The degree to which information technology is used in the accounting function C. The relationship between management, the board of directors, and external stakeholders D. The degree to which the auditor intends to use internal audit personnel to perform substantive tests

10. Which of the following would not be considered an analytical procedure? A. Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages B. Developing the current year's expected net sales based on the sales trend of similar entities within the same industry C. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics D. Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget

11. Each of the following types of controls is considered to be an entity-level control, except those A. relating to the control environment. B. pertaining to the company's risk assessment process. C. regarding the company's annual stockholder meeting. D. addressing policies over significant risk management practices.

12. Which of the following is not a component of internal controls? A. Control environment B. Control activities C. Inherent risk D. Monitoring

14. Which of the following should an auditor do when control risk is assessed at the maximum level? A. Perform fewer substantive tests of details B. Perform more tests of controls C. Document the assessment D. Document the control structure more extensively

16. Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? A. Unfavorable industry conditions B. Lack of working capital C. High liquidity D. Slow customer collections

18. Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks? A. The relevant internal control components are not well documented. B. The internal auditor already has tested the relevant controls and found them effective. C. Testing the operating effectiveness of the relevant controls would not be efficient. D. The cost of substantive procedures will exceed the cost of testing the relevant controls.

19. An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? A. The accounting staff neglects the control, due to increased transactions to be processed. B. The technology department writes a program that does not properly implement the control, due to a lack of understanding. C. Two employees, who work in different departments, are circumventing an internal control. D. Someone erroneously disables edit checks in a software program designed to identify control exceptions.

2. Management fraud generally refers to A. unintentional mistakes. B. noncompliance. C. intentional distortions of financial statements. D. violations of GAAS.

23. Inherent risk is the A. probability that some accounts are more susceptible to misstatement than others. B. probability that the client's internal control policies and procedures will fail to detect material misstatements. C. probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D. probability that the auditor may not detect material misstatements in the financial statements.

24. Regardless of the assessed level of control risk, an auditor of a non-public company would perform some A. tests of controls to determine the effectiveness of internal control policies. B. analytical procedures to verify the design of internal control activities. C. substantive tests to restrict detection risk for significant transaction classes. D. dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

25. If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A. income would be overstated. B. income would be understated. C. income would not be misstated. D. accounts receivable would be understated.

25. The "obtaining an understanding" work phase (Phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's A. control environment. B. information and communication system. C. control activity effectiveness. D. monitoring activities.

27. The risk of material misstatement differs from detection risk in that it A. arises from the misapplication of audit procedures. B. may be assessed in either quantitative or non-quantitative terms. C. exists independently of the financial statement audit. D. can be changed at the auditor's discretion.

28. The internal control in small business is highly dependent on the A. separation of functional responsibilities. B. complexity of the client's internal controls. C. owner-manager's competence, as well as his/her ethics and integrity. D. bonding of employees.

32. When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the A. liquidity of the account. B. degree of management estimation involved in determining the proper account balance. C. related internal control policies and procedures. D. complexity of calculations involved.

36. After obtaining an understanding of a client's financial reporting control activities, the auditor would next A. test the client's control activities. B. assess the final control risk. C. document the understanding obtained. D. plan the remainder of the audit work.

38. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the A. factors that raise doubts about the auditability of the financial statements. B. operating effectiveness of internal control policies and procedures. C. risk that material misstatements exist in the financial statements. D. possibility that the nature and extent of substantive tests may be reduced.

39. For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. A. As a substantive test: Yes; In the final review stage: Yes B. As a substantive test: Yes; In the final review stage: No C. As a substantive test: No; In the final review stage: Yes D. As a substantive test: No; In the final review stage: No

41. When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements. A. Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness. B. Determine whether the company's control policies are designed well enough to prevent material misstatements. C. Prepare auditing working papers that document the auditor's understanding of the company's internal control. D. Design procedures to search for significant deficiencies in the actual operation of the company's internal control.

43. Analytical procedures used in planning an audit should focus on A. reducing the scope of tests of controls and substantive tests. B. providing assurance that potential material misstatements will be identified. C. enhancing the auditor's understanding of the client's business. D. assessing the adequacy of the available evidential matter.

46. Which of the following accounts tends to be most predictable for purposes of analytical procedures? A. Accounts receivable B. Travel and entertainment expense C. Interest expense D. Income taxes payable

47. Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to A. identify the appropriate schedules to be prepared by the client. B. identify the types of errors or frauds that can occur in transactions. C. identify unusual conditions that deserve additional audit effort. D. determine the existence of unrecorded liabilities or overstated assets.

47. Which of the following is a step in an auditor's decision to assess control risk at below the maximum? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Perform tests of details of transactions and account balances to identify potential errors and fraud. C. Identify specific internal control policies and activities that are likely to detect or prevent material misstatements. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

48. Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act? A. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. B. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. C. Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. D. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

5. Analytical procedures are most appropriate when testing which of the following types of transactions? A. Payroll and benefit liabilities B. Acquisitions and disposals of fixed assets C. Operating expense transactions D. Long-term debt transactions

52. The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its A. computer-based control activities. B. system of separation of duties. C. control environment. D. safeguards over access to assets.

55. Which of the following is an acceptable response to fraud risks related to sales that were identified in an audit? A. Exercise professional skepticism when performing sales testing. B. Increase the assessment of control risk for sales. C. Increase the assessment of detection risk for sales. D. Perform additional substantive sales procedures on a surprise basis.

56. If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk A. would most likely change from 10% to 5%. B. would most likely change from 20% to 40%. C. would most likely change from 30% to 15%. D. would be unchanged, because the auditor has control over detection risk. E. cannot be determined because inherent risk is not given.

58. Auditors would use the Enterprise Risk Model. A. To reduce the client's business risk B. To determine detection risk C. To evaluate management's risk assessment D. To monitor client risk

8. Which of the following procedures is considered a test of controls? A. An auditor reviews the entity's check register for unrecorded liabilities. B. An auditor evaluates whether a general journal entry was recorded at the proper amount. C. An auditor interviews and observes appropriate personnel to determine segregation of duties. D. An auditor reviews the audit workpapers to ensure proper sign-off.

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of A. the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit. B. a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit. C. a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit. D. controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.

Which of the following client internal control activities is not usually performed in the treasurer's department? A. Verifying the accuracy of checks and vouchers B. Controlling the mailing of checks to vendors C. Approving vendors' invoices for payment D. Canceling payment vouchers when paid

10. Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? A. Require all employees to record arrival and departure by using the time clock. B. Have a payroll clerk recalculate all time cards. C. Require all employees to sign their time cards. D. Require employees to have their direct supervisors approve their time cards.

11. While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue? A. There is a broad indication of misappropriation of assets. B. There is an indication of theft of the entity's assets. C. There is an indication of embezzling receipts. D. There is a broad indication of financial reporting fraud.

13. While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? A. Move detailed analytical procedures from year end to interim. B. Increase the dollar threshold of vouching customer invoices. C. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. D. Use more experienced audit team members to perform year-end testing.

16. Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? A. Disclosing lack of segregation of duties to the external auditors during the annual review B. Replacing personnel every three or four years C. Requiring accountants to pass a yearly background check D. Allowing for greater management oversight of incompatible activities

19. When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely A. perform extended audit procedures. B. consult with fraud examiners. C. report directly to the Securities and Exchange Commission within one day. D. withdraw from the engagement.

2. The appropriate separation of duties does not include A. authorization to execute transactions. B. recording of transactions. C. custody of assets involved in the transactions. D. data preparation.

20. Which of the following is a factor in the control environment? A. Segregation of duties B. Information processing C. Performance reviews D. Management's philosophy and operating style

21. Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of A. occurrence. B. accuracy. C. valuation or allocation. D. cutoff.

22. Sound internal control can be described as separating all of the following duties and responsibilities except for A. transaction authorization. B. recordkeeping. C. custody of, or direct access to, assets. D. hiring of employees.

26. An audit team uses the assessed risk of material misstatement to A. evaluate the effectiveness of the entity's internal control policies and activities. B. identify transactions and account balances where inherent risk is at the maximum. C. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D. determine the acceptable level of detection risk for financial statement assertions.

26. Which of the following is an Information Technology General Control? A. Check digit B. Run-to-run totals C. Distribution of computerized output D. Separation of duties in the IT department

28. The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is A. audit risk. B. inherent risk. C. control risk. D. detection risk.

30. A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a A. a valid character test. B. missing data test. C. reasonableness test. D. check digit.

31. The existence of audit risk is recognized by the statement in the auditor's standard report that the A. auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. B. financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. C. audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

35. When obtaining an understanding of an entity's internal control in a financial statement audit at a non-public company, an auditor is not obligated to A. determine whether the control activities have been placed in operation. B. perform procedures to understand the design of the internal control system. C. document the understanding of the company's internal control system. D. search for significant deficiencies in the operation of the internal control system.

40. Which of the following would not likely be found in the minutes of the board of directors? A. Amount of dividends declared B. Approval to pledge assets as security for debts C. Authorization of officers' salaries D. Approval of a new desktop computer for the controller

42. Which of the following would most likely be classified as a material weakness? A. Absence of appropriate separation of duties B. Absence of appropriate reviews and approvals of transactions C. Evidence of failure of control activities D. Ineffective oversight of the financial reporting process by the company's audit committee

43. If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application? A. Hours worked B. Total debits and total credits C. Net pay D. Department numbers

44. Sources of financial and nonfinancial data in do not include A. financial account information for comparable prior periods. B. nonfinancial information such as physical production statistics. C. company budgets and forecasts. D. Bureau of Labor statistics.

45. Proper separation of duties reduces the opportunities to allow persons to be in positions to both A. journalize entries and prepare financial statements. B. record cash receipts and cash disbursements. C. establish internal controls and authorize transactions. D. perpetrate a fraud and then conceal it in the books.

48. Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"? A. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. B. Conduct a discussion by the audit team of the risks of material misstatement due to fraud. C. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. D. Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

50. As part of understanding the internal control, an auditor is not required to A. consider factors that affect the risk of material misstatement. B. ascertain whether internal control policies and activities have been placed in operation. C. identify the types of potential misstatements that can occur. D. obtain knowledge about the operating effectiveness of the client's internal control activities.

50. What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected? A. Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited B. Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable C. Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited D. Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable

51. Experience has shown that the many large fraudulent transactions can be found in A. systematic processing of large volumes of day-to-day ordinary transactions. B. payroll fraudsters' mistakes in using unissued Social Security numbers. C. petty cash embezzlements. D. non-routine, nonsystematic journal entries.

52. Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting? A. Paper copies of paid invoices and cancelled checks are microfiched and then destroyed. B. The controller requires that you schedule any audit inquiries for after lunch each day, not in the morning. C. The petty cash fund custodian never takes a vacation. D. The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance.

53. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are A. elements of audit risk whereas detection risk is not. B. changed at the auditor's discretion whereas detection risk is not. C. considered at the individual account-balance level whereas detection risk is not. D. functions of the client and its environment whereas detection risk is not.

54. The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the A. nature of substantive tests to more effective procedures. B. timing of substantive tests, such as performing them at year-end rather than at an interim date. C. extent of substantive tests, such as using larger sample sizes. D. assurances provided by substantive tests to a lower level.

56. Assessing control risk at below the maximum level most likely would involve A. performing more extensive substantive tests with larger sample sizes than originally planned. B. reducing inherent risk for most of the assertions relevant to significant account balances. C. changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end. D. identifying specific internal control activities that are relevant to specific financial statement assertions.

58. Management's report on internal controls must include each of the following except A. a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. B. a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control. C. a statement providing management's assessment of the effectiveness of the company's internal control. D. a statement providing management's evaluation of the company's control environment.

6. Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? A. Distributing paychecks directly to department store employees B. Setting the pay rate for departmental employees C. Hiring employees and authorizing them to be added to payroll D. Approving a summary of hours each employee worked during the pay period

60. The purpose of an audit strategy is A. to provide a defense against litigation. B. to gain an understanding of the client. C. to comply with securities law. D. to set the scope, timing, and direction for auditing each relevant assertion.

7. 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 mind-set that the audit team should maintain during this discussion? A. Presumptive B. Judgmental C. Criticizing D. Questioning

9. In auditing related party transactions, an auditor ordinarily places primary emphasis on A. the probability that related party transactions will recur. B. confirming the existence of the related parties. C. verifying the valuation of the related party transactions. D. the adequacy of the disclosure of the related party transactions.

An auditor assesses the risk of material misstatement because it A. is relevant to the auditor's understanding of the control environment. B. provides assurance that the auditor's overall materiality levels are appropriate. C. indicates to the auditor where inherent risk may be the greatest. D. affects the level of detection risk that the auditor may accept.

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