Chapter 6

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

An overly complex organizational structure involving unusual lines of authority.

Which of the following is an example of fraudulent financial reporting?

Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

Completeness.

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:

Consider the likelihood that the risks could result in material misstatements.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

Extreme degree of competition within the industry.

Which of the following is correct concerning requirements about auditor communications about fraud?

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

To best test existence, an auditor would sample from the:

General ledger to source documents.

Which of the following is correct concerning the PCAOB's concept of a significant account?

In deciding whether an account is a significant account one does not consider the effect of internal control.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?

Inability to generate positive cash flows from operations, while reporting large increases in earnings.

Individuals who commit fraud are ordinarily able to rationalize the act and also have an:

Incentive &Opportunity

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?

Increase the assessed level of detection risk.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

Inherent risk.

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

Integrity of management.

Which of the following situations would most likely require special audit planning by the auditors?

Inventory is comprised of precious stones.

Which of the following conditions identified during the audit increases the risk of employee fraud?

Inventory items of small size, but high value.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Which of the following matters is generally included in an auditor's engagement letter?

Limitations of the engagement.

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

Management's disregard for internal control.

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

Negative cash flows from investing.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should:

Obtain a knowledge of matters that relate to the nature of the entity's business.

To test for unsupported entries in the journals, the direction of audit testing should be to the:

Original source documents.

Which measure of materiality (or both) considers quantitative considerations?

Planning & Evaluation

Which of the following is not one of the assertions made by management about an account balance?

Relevance

Tests for unrecorded assets typically involve tracing from:

Source documents to recorded journal entries.

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement?

Substantive Tests of Details & Substantive Analytical Procedures

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on:

Substantive procedures.

Which of the following statements is correct regarding the auditor's determination of materiality?

The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

When a company has changed auditors, according to the Professional Standards:

The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?

The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

Understanding as to the reasons for the change of auditors.