8.1 to 8.2 and 3.6 to 3.7 Gleim Review for Exam 2

The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor's attention is that A. Noncompliance is perpetrated by management override of the information and communication component of internal control. B. Noncompliance by clients often relates to operating aspects rather than accounting aspects. C. The information and communication component of the client's internal control may be so effective that the auditor performs only minimal substantive testing. D. Noncompliance may be attributed to the only person in the client's organization with access to both assets and the accounting records.

B. Noncompliance by clients often relates to operating aspects rather than accounting aspects.

An audit in accordance with GAAS is most likely to include comprehensive audit procedures designed to detect material noncompliance by the client relating to A. Environmental laws. B. Tax laws. C. Antitrust laws. D. Insider trading rules.

B. Tax laws.

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? A. The auditor should fully investigate other transactions related to this manager to determine if fraud exists. B. The auditor should bring the transaction to the attention of an appropriate level of management. C. The auditor should report this finding to those charged with governance. D. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.

B. The auditor should bring the transaction to the attention of an appropriate level of management.

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud? A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion. B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. C. The factors considered in assessing the risk of material misstatement indicated an increased risk of intentional misstatements, but only a low risk of errors in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.

Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor's concern about the risk of material misstatements due to fraud is least likely to be increased if management A. Consists of many individuals that make operating and financing decisions. B. Commits to unduly aggressive forecasts. C. Has an excessive interest in increasing the entity's stock price through use of unduly aggressive accounting practices. D. Is interested in inappropriate means of minimizing reported earnings for tax-motivated reasons.

A. Consists of many individuals that make operating and financing decisions.

Which action regarding fraud is an activity related to performance of risk assessment procedures? A. Discussions among the engagement team members regarding the risks of material misstatement due to fraud. B. Document the results of procedures used to address the risk of fraud. C. Consider the characteristics of journal entries, particularly those made near year end. D. Consider whether estimates prepared and recorded by management could indicate a bias in reporting.

A. Discussions among the engagement team members regarding the risks of material misstatement due to fraud.

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for A. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. B. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements. C. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations. D. Ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements.

A. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

The auditor should perform tests of controls when the auditor's assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when A. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level. B. Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to support the assertion being evaluated. C. The auditor is not able to obtain an understanding of internal controls. D. The owner-manager performs virtually all the functions of internal control.

A. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A. A high turnover of senior management. B. A lack of independent checks. C. A strained relationship between management and the predecessor auditor. D. An inability to generate cash flow from operations.

B. A lack of independent checks.

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk? A. The audit committee. B. An appropriate level of management. C. The client's legal counsel. D. The client's internal auditor.

B. An appropriate level of management.

An auditor's consideration of the risk of material misstatement due to fraud and the results of audit tests indicate a significant risk of fraud. The auditor should A. Express either a qualified or an adverse opinion. B. Consider withdrawing from the engagement and communicating the reasons for withdrawal to those charged with governance. C. Express only an adverse opinion because of the strong possibility of fraud. D. Inform proper authorities outside the entity.

B. Consider withdrawing from the engagement and communicating the reasons for withdrawal to those charged with governance.

If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warrant withdrawing from the engagement, the auditor would likely A. Notify all parties who may rely upon the company's financial statements of the company's illegal act. B. Consult with legal counsel as to what other action, if any, should be taken. C. Return all incriminating evidence and working papers to the client's audit committee for follow-up. D. Contact the successor auditor to make the successor aware of the possible consequences of relying on management's representations.

B. Consult with legal counsel as to what other action, if any, should be taken.

Which of the following circumstances most likely will cause an auditor to suspect that material misstatements exist in a client's financial statements? A. The assumptions used in developing the prior year's accounting estimates have changed. B. Differences between reconciliations of control accounts and subsidiary records are not investigated. C. Negative confirmation requests yield fewer responses than in the prior year's audit. D. Management consults with another CPA firm about complex accounting matters.

B. Differences between reconciliations of control accounts and subsidiary records are not investigated.

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that A. Tests of controls may fail to identify controls relevant to assertions. B. Material misstatements may exist in the financial statements. C. Specified controls requiring segregation of duties may be circumvented by collusion. D. Entity policies may be overridden by senior management.

B. Material misstatements may exist in the financial statements.

An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Confirmation and observation. B. Observation and inquiry. C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.

B. Observation and inquiry.

The auditor should perform tests of controls when the auditor's risk assessment includes an expectation A. Of a low level of inherent risk. B. Of the operating effectiveness of internal control. C. That the controls are not suitably designed. D. That the controls are not being applied.

B. Of the operating effectiveness of internal control

To test the effectiveness of controls, 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.

B. Reperformance and observation.

Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor most likely should A. Perform additional audit procedures to establish that fraud has occurred. B. Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion. C. Confer with the client about the additional audit procedures necessary to establish that fraud has occurred. D. Notify the proper external authorities.

B. Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.

In a financial statement audit, A. Regular audit procedures can reasonably be expected to detect all acts of noncompliance with laws and regulations. B. The auditor should contact enforcement agencies when an act of noncompliance with laws and regulations is discovered. C. The auditor should inquire of management about violations of laws and regulations as well as inspect correspondence with regulatory authorities. D. Violations of laws having indirect effects on the financial statements are not of interest to the auditor.

B. The auditor should contact enforcement agencies when an act of noncompliance with laws and regulations is discovered.

In performing tests of controls, the auditor will normally find that A. The level of inherent risk is directly proportional to the rate of error. B. The rate of deviations in the sample exceeds the rate of error in the accounting records. C. The rate of error in the sample exceeds the rate of deviations. D. All unexamined items result in errors in the accounting records.

B. The rate of deviations in the sample exceeds the rate of error in the accounting records.

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud? A. Property and equipment are usually sold at a loss before being fully depreciated. B. Unusual discrepancies between the entity's records and confirmation replies. C. Monthly bank reconciliations usually include several in-transit items. D. Clerical errors are listed on a computer-generated exception report.

B. Unusual discrepancies between the entity's records and confirmation replies.

Tests of controls are concerned primarily with each of the following questions except A. How were the controls applied? B. Were the controls approved by the board of directors? C. Were the necessary controls consistently performed? D. By whom were the controls applied?

B. Were the controls approved by the board of directors?

The auditor's responsibility for the detection of noncompliance with laws and regulations is greatest for laws and regulations that have A. An indirect effect on financial statement amounts. B. A direct effect on the financial statements that is either material or immaterial. C. A direct effect on the determination of material amounts and disclosures in the financial statements. D. All of the answers are correct.

C. A direct effect on the determination of material amounts and disclosures in the financial statements.

Tests of controls in a financial statement audit are least likely to be omitted with regard to A. Accounts believed to be subject to ineffective controls. B. Accounts representing few transactions. C. Accounts representing many transactions. D. Subsequent events.

C. Accounts representing many transactions.

How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement? A. By obtaining a management representation letter. B. By performing analytical procedures, but not substantive procedures, at period end. C. By assigning more experienced staff or those with specialized skills to high-risk areas. D. By performing tests of controls at interim-and period-end dates.

C. By assigning more experienced staff or those with specialized skills to high-risk areas.

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? A. Report the matters to regulatory authorities. B. Consider the fraud a scope limitation and disclaim an opinion. C. Communicate the matter to those charged with governance. D. Immediately withdraw from the engagement.

C. Communicate the matter to those charged with governance.

Which of the following procedures is not used in tests of controls over purchases? A. Examine vouchers and supporting documents for authorization. B. Trace vouchers to entries in the vouchers register. C. Confirm inventory held in public warehouses. D. Reperform calculations on some supporting documentation.

C. Confirm inventory held in public warehouses.

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should A. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unmodified opinion, require disclosure. B. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes. C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client. D. Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

When an auditor becomes aware of a possible act of noncompliance with laws or regulations, the auditor should obtain an understanding of the nature of the act to A. Consider whether other similar acts have occurred. B. Recommend remedial actions to those charged with governance. C. Evaluate the effect on the financial statements. D. Determine the reliability of management's representations.

C. Evaluate the effect on the financial statements.

The risks of material misstatement (RMMs) should be assessed in terms of A. Specific controls. B. Types of potential fraud. C. Financial statement assertions. D. Control environment factors.

C. Financial statement assertions.

Which of the following is a step in an auditor's decision to rely on internal controls? 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 fraud and error. C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.

During the annual audit of Ajax Corp., an issuer, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past 7 years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the A. Letter of audit inquiry to the client's attorney. B. Prior years' audit plans. C. Management representation letter. D. Preliminary judgment about materiality levels.

C. Management representation letter.

Which of the following is considered a fraudulent activity? A. A mistake in gathering or processing accounting data from which financial statements are prepared. B. An incorrect accounting estimate arising from oversight or misinterpretation of facts. C. Misappropriation of assets. D. A mistake in the application of accounting principles relating to amount, classification, manner of presentation, or disclosure.

C. Misappropriation of assets.

Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Objective judgment. B. Integrity. C. Professional skepticism. D. Impartial conservatism.

C. Professional skepticism.

Which of the following statements about the auditor's response to assessed risks of material misstatement in a financial statement audit is true? A. Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls. B. When the risks of material misstatement are high, an auditor should reduce the amount of substantive testing. C. Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes. D. When assessing the risks of material misstatement, an auditor should not consider evidence obtained in prior audits about the operation of controls.

C. Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? A. Substantive procedures and analytical procedures. B. Substantive analytical procedures and tests of controls. C. Tests of controls and tests of details. D. Tests of details and substantive procedures.

C. Tests of controls and tests of details.

Which of the following is a true statement about an auditor's responsibility regarding consideration of fraud in a financial statement audit? A. The auditor should consider the client's internal control and plan and perform the audit to provide absolute assurance of detecting all material misstatements. B. The auditor should assess the risk that errors may cause the financial statements to contain any misstatements and determine whether the necessary controls are prescribed and are being followed satisfactorily. C. The auditor should consider the types of misstatements that could occur and perform tests on 100% of the information subject to misstatement. D. The auditor should assess the risks of material misstatement due to fraud.

D. The auditor should assess the risks of material misstatement due to fraud.

Based on an understanding of internal control completed at an interim date, the auditor assessed the risks of material misstatement at the relevant assertion level and performed interim substantive procedures. The records will most likely be tested again at year end if A. Tests of controls were not performed by the internal auditor during the remaining period. B. Internal control provides a basis for limiting the extent of substantive testing. C. The auditor used nonstatistical sampling during the interim period testing of controls. D. The remaining period is long.

D. The remaining period is long.

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? A. Management fails to modify prescribed internal controls for changes in information technology. B. Internal control activities requiring segregation of duties are rarely monitored by management. C. Management is dominated by one person who is also the majority shareholder. D. There is a substantial risk of intentional misapplication of accounting principles.

D. There is a substantial risk of intentional misapplication of accounting principles.

In planning an audit, an auditor should document in the working papers the auditor's risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present? A. A copy of the report of the risk factor to the company's legal counsel. B. Discussion of the risk factor with the client. C. Investigation of the risk factor. D. Those risk factors identified.

D. Those risk factors identified.

Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements? A. Management places little emphasis on meeting earnings projections of external parties. B. The board of directors oversees the financial reporting process and internal control. C. Control deficiencies previously communicated to management are not corrected. D. Transactions selected for testing are not supported by proper documentation.

D. Transactions selected for testing are not supported by proper documentation.

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's Understanding of Overall the Entity's Control Responses to Environment Assessed Risks A. Yes No B. No Yes C. Yes Yes D. No No

C. Yes Yes

What is the definition of fraud in an audit of financial statements? A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit. B. The unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. C. An intentional act that results in a material weakness in financial statements that are the subject of an audit. D. Management's inability to design and implement programs and controls to prevent, deter, and detect material misstatements.

A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls? A. Observing an entity's employee prepare the schedule of past due accounts receivable. B. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable. C. Inspecting an entity's analysis of accounts receivable for unusual balances. D. Comparing an entity's uncollectible accounts expense with actual uncollectible accounts receivable.

A. Observing an entity's employee prepare the schedule of past due accounts receivable.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A. The entity's industry is experiencing declining customer demand. B. Employees who handle cash receipts are not bonded. C. Bank reconciliations usually include in-transit deposits. D. Equipment is often sold at a loss before being fully depreciated.

A. The entity's industry is experiencing declining customer demand.

An auditor is least likely to test controls that provide for A. Approval of the purchase and sale of trading securities. B. Classification of revenue and expense transactions by product line. C. Separation of the functions of recording disbursements and reconciling the bank account. D. Comparison of receiving reports and vendors' invoices with purchase orders.

B. Classification of revenue and expense transactions by product line.

Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain noncompliance with laws and regulations to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the noncompliance had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to A. Resign from the audit engagement within 10 business days. B. Deliver a report concerning the noncompliance to the SEC within 1 business day. C. Notify the shareholders that the financial statements are materially misstated. D. Withhold an audit opinion until Supermart takes appropriate remedial action.

B. Deliver a report concerning the noncompliance to the SEC within 1 business day.

Three conditions are generally present in the client's organization when fraud occurs. Those conditions include each of the following except a(n) A. Incentive or pressure to commit fraud. B. Professional skepticism about the likelihood of fraud. C. Opportunity to commit fraud. D. Attitude or rationalization about the act of fraud.

B. Professional skepticism about the likelihood of fraud.

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? A. Observation. B. Inspection. C. Inquiry. D. Reperformance.

B. Inspection.

Which of the following statements reflects an auditor's responsibility for detecting fraud and errors? A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. B. An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework. C. An auditor is not responsible for detecting fraud unless the application of GAAS would result in such detection. D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the A. PCAOB. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Board of directors.

D. Board of directors.

Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether inadequate provisions for the safeguarding of assets have been corrected. D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

The objective of tests of details of transactions performed as tests of controls is to A. Monitor the design and use of entity documents such as prenumbered shipping forms. B. Determine whether internal controls have been implemented. C. Detect material misstatements in the account balances of the financial statements. D. Evaluate whether internal controls operated effectively.

D. Evaluate whether internal controls operated effectively.

Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? To the SEC when the client reports an auditor change To a successor auditor when the successor makes appropriate inquiries To a government funding agency from which the client receives financial assistance A. I and II. B. I and III. C. II and III. D. I, II, and III.

D. I, II, and III.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment A. Must state an overall judgment about whether an identified risk is high, medium, or low. B. Requires an observation that the three fraud conditions are present. C. Follows the auditor's determination that the related controls are operating effectively. D. Is based on evaluating whether the entity's related controls have been suitably designed and implemented.

D. Is based on evaluating whether the entity's related controls have been suitably designed and implemented.

Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer? A. The distinguishing factor between fraud and error is the materiality of the transaction involved. B. An auditor who initially detects fraud ultimately makes the legal determination of whether fraud has actually occurred. C. Fraudulent financial reporting can include the unintentional misstatement of amounts or disclosures in financial statements. D. It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.

D. It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit? A. Reasons for not identifying management override as a fraud risk. B. Reasons for not identifying collusion as a fraud risk. C. Instances of the auditor's exercise of professional skepticism during the consideration of fraud. D. Reasons for not identifying improper revenue recognition as a fraud risk.

D. Reasons for not identifying improper revenue recognition as a fraud risk.