AC 432 ch 3 and 4 Quiz
Whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ______.
audit committee
True or false: Professional skepticism is not a way to reduce judgment errors
false
True or false: The audit team a public accounting firm uses for an engagement does not tend to vary from client to client.
false
True or false: A public accounting firm should investigate a prospective client prior to accepting the engagement.
true
Incentive, opportunity and rationalization are three conditions that are sometimes referred to as the _______ triangle.
fraud risk
Audit evidence is subject to human error which is referred to as ____.
non sampling risk
A significant aspect of most audit engagements is the use of a(n) ______ specialist.
IT
Risk factors relating to attitudes/rationalizations to report fraudulently include ______.
board members alleging fraud excessive management interest in increasing entity stock prices ineffective communication and enforcement of ethical values
Substantive audit procedures that will reduce audit risk to an acceptably low level are designed using the planned level of ____.
detection risk
Auditors should consider laws and regulations that are generally recognized as having ______ effects on the determination of financial statement amounts.
direct and material
The auditor should ______.
make direct inquiries of the audit committee when assessing risk of fraud make inquiries of the internal audit function to assess their risk of fraud. inquire about management's knowledge of fraud within the entity
Public accounting firms should ______.
periodically evaluate whether to continue their relationship with current clients
Factors that should be considered in the determination of staffing requirements for an audit include ______.
personnel availability engagement size timing of the work engagement complexity
Internally generated performance measures include ______.
budgets departmental performance reports comparisons to industry competitors variance analysis
In order to respond to pervasive risks, auditors may ______.
evaluate whether the selection and application of accounting policies by the entity may create a material misstatement incorporate an element of unpredictability in the audit procedures assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud
An auditor tests an invoice for services provided and determines that the amount charged is incorrect. This is an example of a ______ misstatement.
factual
True or false: At the completion of the audit, the actual or achieved level of audit risk is known with certainty by the auditor.
false
To understand the nature of the entity, auditors should obtain information about the entity's: ______.
financing and financing activities investments business operations financial reporting
Who addresses business risks by implementing a risk assessment process?
management
In documenting the overall audit strategy and audit plan, auditors should document the ______.
nature of audit tests extent of audit tests timing of audit tests
Ensuring that members of the audit team meet independence requirements generally take place as part of ______.
preliminary engagement activities
An objective of brainstorming with the audit team is emphasizing the importance of maintaining _____ throughout the audit regarding the potential for material misstatement due to fraud
professional skepticism
An individual or organization possessing expertise in a field other than accounting or auditing whose work is used to assist the auditor in obtaining sufficient, appropriate evidence is defined by auditing standards as a(n) _____ .
auditor's specialist
Traditionally, value added services have included ______.
internal reporting processes system design and integration tax planning
Business risk ______.
is a broader concept than the risk of material misstatement can adversely affect an entity's ability to execute its strategies
The combination of inherent risk and control risk is referred to in auditing standards as the risk of ____.
material misstatement
In relying on a specialist, the auditor should evaluate the specialist's ______.
objectivity, competence, inputs used
Auditors should attempt to identify all related parties during the ______ phase of the audit.
planning
Which of the following areas require documentation related to the auditor's risk assessment and response?
Communication about error and fraud made to management and others. Discussion among the engagement team. Evaluation of management's response to identified risk.
Which of the follow are inquiries that a successor auditor should make to a predecessor auditor?
Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity. Information that might bear on the integrity of management. Disagreements with management about accounting policies, auditing procedures or other similarly significant matters. Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control
The formula auditors use to determine the appropriate level of detection risk is ______.
DR = AR/RMM
Which of the following statements are correct?
Internal performance measures provide information about progress towards meeting entity objectives. A deviation in the entity's performance measures may indicate a risk of misstatement in the related financial information. Auditors must consider the reliability of internal performance measures before using them for purposes of the audit.
Identify the three steps involved in the auditor's use of the audit risk model at the assertion level.
Setting a planned level of audit risk. Assessing the risk of material misstatement. Solving the audit risk equation for the appropriate level of detection risk.
Auditors should perform audits to reduce ______ risk to a sufficiently low level before expressing an opinion on the financial statements.
audit
Materiality is assessed in terms of potential effect of a misstatement on decisions made by ______.
a reasonable user of financial statements
If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.
adverse, modified, qualified
Auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in ______ material respects.
all
Many public accounting firms adopt a policy of not completing the current audit until ______ fees have been paid.
all of the prior year's
When an auditor is asked to accept a new client, ______.
an entity acceptance questionnaire, checklist or memo is generally prepared to document the investigation the auditor must ask permission of the client before contacting the predecessor auditor
The auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary ____.
analytical procedures
Auditors assess the risk of material misstatement at the ______ level.
assertion
When should the evaluation of client continuance take place?
at or near the completion of the audit; when a significant event occurs
Internal performance measures include ______.
both financial and non financial indicators budgets comparisons to industry competitors variance analysis departmental performance reports
The audit team is required to hold discussions, referred to as ______, about the entity's financial statements' susceptibility to fraud.
brainstorming
Based on an understanding of the entity and environment, the auditor identifies those ____ risks that may result in material misstatements.
business
The first phase of the audit process that relates to audit planning is ______.
client acceptance and continuance
An auditor's independence would be considered impaired if the ______.
client owes money to the auditor that has the characteristics of a loan spouse of the auditor is an accounting supervisor for the entity
The risk of material misstatement is also referred to as ____ risk because it stems from decisions made by the entity.
client risk
Risk factors relating to opportunities to report fraudulently include ______.
complex or unstable organizational structure financial numbers based on subjective judgments or uncertainties significant related party transactions
The risk that a misstatement could occur in an assertion and would not be prevented, or detected and corrected, on a timely basis by the entity's internal control is known as ______ risk.
control
Standards require extensive ____ of the auditor's risk assessment procedures and audit responses to identified risks.
documentation
Examples of misappropriation of assets include ______.
embezzling cash received using an entity's assets for personal use stealing physical assets and intellectual property
The arrangements reached between the auditor and the entity are formalized in a(n) ____.
engagement letter
Overall responsibility for an audit engagement rests with the ______.
engagement partner
Unintentional misstatements of amounts or disclosures in financial statements are referred to as ____.
errors
The primary distinction between _____ and ____ is whether the misstatement was intentional or unintentional.
errors and fraud
An intentional act involving the use of deception that results in an misstatement in the financial statements is referred to as ___.
fraud
Information about an auditor's financial or business relationships with the firm's clients is documented by having all personnel complete an annual ____.
independence questionnaire
The susceptibility of a material account or disclosure assertion to a misstatement due to fraud or error, before considerations of any related controls is ____.
inherent risk
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decision of users is overall ____.
materiality
The auditor should obtain information about the conduct of operations, joint ventures, planned acquisitions, and major subsidiaries as part of learning about the ______.
nature of the entity
Risk factors relating to incentives/pressures to report fraudulently include ______.
need to obtain debt or equity financing profitability expectations of external parties high degree of competition or market saturation
Which of the following are factors that auditors should consider when evaluating the reliability of the internal audit function?
objectivity, competence, systematic and disciplined approach
Risk assessment procedures include ______.
observation and inspection preliminary analytical procedures inquiries of management and others
Auditors can reduce audit risk to an acceptably low level by ______.
obtaining an understanding of the entity and its environment.
When a client has multiple locations, the auditor determines which locations or business units to audit and the extent of audit procedures to be performed during the ______ process.
planning
The consideration of materiality is a matter of ______.
professional judgment
During the documenting stage, the auditor ______.
records how the entity is managing its risks ensures that the identified risks have been addressed complies his or her knowledge about the entity's business objectives and strategies
Examples of tests of controls include ______.
reperformance of the application of the control inspecting documents, reports and electronic files observation of the application of specific controls inquiries of management, supervisory and staff personnel
When auditing a public company, the auditor is generally responsible to disclose fraud to the ______.
senior management audit committee
The nature and extent of planning activities that are necessary depend on the ______ the entity
size of, complexity of, auditor's previous experience with
The categories of substantive procedures are ______.
tests of details substantive analytical procedures
The amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is called _____.
tolerable misstatement
