ACCT 400-Auditing Midterm

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An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that 1. the client recently tightened its credit-granting policies. 2. employees have stolen inventory just before year-end. 3. fictitious credit sales have been recorded during the year. 4. an employee has been lapping receivables in both years.

When determining the auditor's or management's responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect? 1. The auditor is not responsible for preventing noncompliance with laws and regulations. 2. Management and those charged with governance are responsible for ensuring that the company's operations are conducted in accordance with all applicable laws and regulations. 3. The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations. 4. The auditor is expected to detect the client's noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself.

Which of the following is considered an assurance engagement? 1. Bookkeeping 2. Preparation 3. Compilation 4. Audit

There are eight parts of the planning phase of an audit. Which parts involve the evaluation of risk? (Select all that apply.) 1. Accept client and perform initial audit planning 2. Understand the client's business and industry 3. Perform preliminary analytical procedures 4. Set preliminary judgement of materiality and performance materiality 5. Identify significant risks due to fraud or error 6. Assess inherent risk 7. Understand internal control and assess control risk 8. Finalize overall audit strategy and audit plan

5. 6. 7.

Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud? 1. Unusual discrepancies exist between the entity's records and confirmation replies. 2. Monthly bank reconciliations usually include several in-transit items. 3. Clerical errors are listed on a computer-generated exception report. 4. Property and equipment are usually sold at a loss before being fully depreciated.

A client decides not to record an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation? 1. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. 2. The financial statements do not conform with generally accepted accounting principles (GAAP). 3. The financial statements contain unadjusted misstatements that should result in a qualified opinion. 4. The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.

A successor would most likely make specific inquiries of the predecessor auditor regarding 1. disagreements with management as to auditing procedures. 2. specialized accounting principles of the client's industry. 3. the uncertainty inherent in applying sampling procedures. 4. the competency of the client's internal audit staff.

A successor auditor's inquiries of the predecessor auditor should include questions regarding 1. communications to management and those charged with governance regarding significant deficiencies in internal control. 2. the number of engagement personnel the predecessor assigned to the engagement. 3. the assessment of the objectivity of the client's internal audit function. 4. the response rate for confirmations of accounts receivable.

Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the 1. auditing procedures followed and the testing performed in obtaining audit evidence. 2. auditor's comments concerning the efficiency and competence of client management personnel. 3. evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. 4. copies of those client records examined by the auditor during the course of the engagement.

Analytical procedures used in planning an audit should focus on identifying 1. areas that may represent specific risks relevant to the audit. 2. material weaknesses in internal control. 3. the predictability of financial data from individual transactions. 4. the various assertions that are embodied in the financial statements.

An auditor's decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the 1. relative effectiveness and efficiency of the tests. 2. timing of tests performed after the balance sheet date. 3. auditor's familiarity with industry trends. 4. availability of data aggregated at a high level.

Describe the liquidity activity ratios and explain why these ratios are useful to auditors. 1. Liquidity activity ratios, such as accounts receivable turnover, days to collect receivables, inventory turnover, and days to sell inventory, provide information about how long it takes a company to convert less-liquid current assets into cash. Auditors often use trends in these ratios from period-to-period to assess collectibility of receivables or potential obsolescence of inventory. 2. Liquidity activity ratios, such as earnings per share, gross profit percentage, and return on assets, provide information about a company's ability to generate cash for payment of obligations, expansion, and dividends. Auditors calculate these ratios to provide further insight into operations. 3. Liquidity activity ratios, such as debt to equity and times interest earned provide information about a company's long-run solvency and its ability to raise capital for expansion, as well as its ability to make principal and interest payments. Auditors find this ratio especially useful for assessing misstatements in sales, cost of goods sold, accounts receivable, and inventory. 4. Liquidity activity ratios, such as profit margin, cash ratio, and current ratio provide a measure of the overall profitability of a company. These ratios enable auditors to assess potential misstatements in operating expenses and related balance sheet accounts.

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate 1. $10,000. 2. $15,000. 3. $20,000. 4. $30,000.

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on 1. substantive tests. 2. internal control. 3. tests of controls. 4. statistical analysis.

The date of the CPA's opinion on the financial statements of the client should be the date of the 1. completion of all important audit procedures. 2. closing of the client's books. 3. finalization of the terms of the audit engagement. 4. submission of the report to the client.

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

When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether 1. the engagement should be accepted. 2. the predecessor's work should be used. 3. in the predecessor's opinion, internal control of the company has been satisfactory. 4. the company follows the policy of rotating its auditors.

Which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions? 1. Independence 2. Competence 3. Due professional care 4. Complex body of knowledge

Which of the following circumstances would most likely cause an auditor to suspect that there are material misstatements in an entity's financial statements? 1. The auditor identifies an inappropriate valuation method that is widely applied by the entity. 2. The entity's management strictly enforces its integrity and ethical values. 3. Management outsources the internal audit function to another CPA firm. 4. Monthly bank reconciliations ordinarily include several outstanding checks.

Which of the following engagements is most likely to be considered an operational audit? 1. The auditor evaluates the organization's efficiency in processing payments. 2. The auditor examines information presented in an entity's financial statements to determine whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. 3. The auditor determines whether the organization is following provisions of laws and regulations. 4. The auditor assists the client in preparation of financial statements.

Which of the following is least likely to be included in the auditor's engagement letter? 1. Details about the preliminary audit strategy 2. Overview of the objectives of the engagement 3. Description of the level of assurance obtained when conducting the audit 4. Statement that management is responsible for the financial statements

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

Which of the following statements reflects an auditor's responsibility for detecting fraud? 1. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. 2. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. 3. An auditor should plan the audit to detect fraud caused by departures from GAAP. 4. An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection.

An auditor will most likely review an entity's periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management's assertion about classes of transactions of 1. occurrence. 2. completeness. 3. accuracy. 4. classification.

Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, as well as 1. accuracy. 2. adherence to specific rules or procedures. 3. evaluation. 4. internal control.

In the audit of accounts payable, an auditor's procedures will most likely focus primarily on management's assertion about account balances of 1. existence. 2. completeness. 3. valuation and allocation. 4. classification and understandability.

Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide 1. a means of assurance that internal accounting controls are functioning as planned. 2. a measure of management performance in meeting organizational goals. 3. the results of internal examinations of financial and accounting matters to a company's top-level management. 4. aid to the independent auditor, who is conducting the audit of the financial statements.

Substantive analytical procedures are most likely to be used to test which of the following accounts? 1. Accounts payable 2. Interest income 3. Treasury stock 4. Cash

The auditor's report contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences 1. assume responsibility for the other auditor. 2. indicate a division of responsibility. 3. are an improper form of reporting. 4. require a departure from an unmodified opinion.

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

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? 1. The entity's management places no emphasis on meeting publicized earnings projections. 2. Significant differences between the physical inventory count and the accounting records are not investigated. 3. Monthly bank reconciliations ordinarily include several large outstanding checks. 4. Cash transactions are electronically processed and recorded, leaving no paper audit trail.

Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? 1. Have separate warehouse space for the more valuable items, with sequentially numbered tags. 2. Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records. 3. Require an authorized officer's signature on all requisitions for the more valuable items. 4. Have an independent auditing firm examine and report on management's assertion about the design and operating effectiveness of the control activities relevant to inventory.

Which of the following is the auditor least likely to consider when developing the overall audit strategy? 1. The economic conditions affecting the industry in which the company operates 2. Evaluation of accounts receivable confirmations 3. Complexity of the company's operations 4. Preliminary judgment about materiality

Which of the following procedures would a CPA least likely perform during the planning stage of the audit? 1. Determine the timing of testing 2. Perform inquiries of outside legal counsel regarding pending litigation 3. Take a tour of the client's facilities 4. Determine the effect of information technology on the audit

Which of the following professional services is an attestation engagement? 1. A consulting service engagement to provide computer-processing advice to a client. 2. An engagement to report on compliance with statutory requirements. 3. An income tax engagement to prepare federal and state tax returns. 4. The preparation of financial statements from a client's financial records.

Which of the following would not be considered to be an analytical procedure? 1. Computing accounts receivable turnover by dividing credit sales by the average net receivables. 2. Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics. 3. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. 4. Developing the expected current year sales based on the sales trend of the prior five years.

An auditor reviews aged accounts receivable to assess likelihood of collection to support management's assertion about account balances of 1. existence. 2. completeness. 3. valuation and allocation. 4. rights and obligations.

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

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? 1. Modern Home purchased expensive new equipment in the current year. 2. The furniture industry has experienced an overall increase in demand. 3. Modern Home recently engaged in a complex derivative transaction. 4. Modern Home experienced an increase in working capital.

If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first 1. consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management. 2. request that management investigate to determine whether fraud has actually occurred. 3. make the investigation necessary to determine whether fraud has actually occurred. 4. consider whether fraud was the result of a failure by employees to comply with existing controls

In a financial statement audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free of material misstatement in order to express an opinion. In order to obtain reasonable assurance, the auditor must 1. have prior experience in the industry in which the audit client operates. 2. examine all documents available that support the financial statements. 3. obtain sufficient audit evidence. 4. test controls around significant transaction cycles.

In the financial statement audit of a nonpublic company, the auditor decides to perform tests of the controls related to the occurrence of sales transactions. Which of the following best explains why the auditor decided to test these controls? 1. The auditor wants to obtain an understanding of the design of the internal controls. 2. In a nonissuer financial statement audit, the auditor is required to test the operating effectiveness of internal controls. 3. Control risk is assessed at below the maximum. 4. The auditor wants to obtain an understanding of the implementation of the internal controls.

Tests of controls are most likely to be omitted when 1. an account balance reflects many transactions. 2. the auditor wishes to increase the acceptable level of detection risk. 3. the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient. 4. control risk is assessed at less than the maximum.

The auditor's responsibility regarding material misstatements caused by fraud is 1. less than the auditor's responsibility regarding material misstatements caused by error. 2. greater than the auditor's responsibility regarding material misstatements caused by error. 3. the same as the auditor's responsibility regarding material misstatements caused by error. 4. either less than or greater than the auditor's responsibility regarding material misstatements caused by error, depending on the circumstances.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? 1. It is difficult to prepare financial statements that fairly present a company's financial position, operations, and cash flows without the expertise of an independent auditor. 2. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. 3. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. 4. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship of the affairs of the business.

Which of the following situations has the best chance of being detected when a CPA compares 2016 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent? 1. An increase in property tax rates has not been recognized in the company's 2016 accrual. 2. The cashier began lapping accounts receivable in 2016. 3. The company changed its capitalization policy for small tools in 2016. 4. Because of worsening economic conditions, the 2016 provision for uncollectible accounts was inadequate.

Which of the following will most likely indicate the existence of related parties? 1. An unexplained increase in gross margin 2. Failing to correct deficiencies in the client's internal control 3. Borrowing money at a rate significantly below the market rate 4. Writing down obsolete inventory prior to year end

While auditing a client's accounting estimates used for their specific elements and accounts, the auditor has certain responsibilities. Which of the following is not a required audit procedure that the auditor would perform when evaluating a client's accounting estimate? 1. Verify that all material accounting estimates have been developed. 2. Ensure that the accounting estimates used are properly disclosed in accordance with GAAP. 3. Determine if the accounting estimates used are consistent with those of the client's primary competitors. 4. Evaluate the degree of uncertainty that is associated with the client's accounting estimates.

While performing a preliminary assessment for a new client audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with management, the auditor concludes that the company's operational staff is too lean and that internal controls in several operational functions may be currently insufficient to accommodate this rapid growth. About which of the following fraud risk factors related to the client would the auditor have the greatest concern? 1. Rationalization/attitude 2. Inadequate organizational structure 3. Opportunity 4. Incentives/pressures

Which of the following characteristics is most likely to heighten an auditor's concern about the risk of material misstatements due to fraud in an entity's financial statements? 1. Employees who handle cash receipts are not bonded. 2. Internal auditors have direct access to the board of directors and the entity's management. 3. The board of directors is active in overseeing the entity's financial reporting policies. 4. The entity's industry is experiencing declining customer demand.

A conceptually logical approach to the auditor's evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. What should be the order in which these four steps are performed? 1. I, II, III, and IV 2. III, IV, I, and II 3. I, III, IV, and II 4. IV, I, III, and II

An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n) 1. unmodified opinion with explanatory paragraph. 2. qualified opinion. 3. qualified opinion with explanatory paragraph regarding consistency. 4. unmodified opinion.

Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor? 1. Understating the cash receipts journal 2. Overstating the accounts receivable control account 3. Overstating the accounts receivable subsidiary records 4. Understating the sales journal

During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be 1. a client-owned record of conclusions reached by the auditors who performed the engagement. 2. a record to be used as a basis for the following year's engagement. 3. evidence supporting financial statements. 4. support for the auditor's representations as to compliance with auditing standards.

If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the 1. name of the other auditor. 2. nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work. 3. reasons for being unwilling to assume responsibility for the other auditor's work. 4. portion of the financial statements audited by the other auditor.

In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels? 1. The materiality level was established based on preliminary financial statement amounts that differ significantly from actual amounts. 2. The client disposed of a major portion of the client's business. 3. Significant new contractual arrangements draw attention to a particular aspect of a client's business that is separately disclosed in the financial statements. 4. The client released third-quarter results before the SEC-prescribed deadline.

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 mindset that the audit team should maintain during this discussion? 1. Presumptive 2. Judgmental 3. Criticizing 4. Questioning

The primary objective of performing tests of controls is to obtain 1. sufficient appropriate audit evidence to afford a reasonable basis for the auditor's opinion, without the need for additional evidence. 2. knowledge and understanding of the client's prescribed procedures and methods. 3. assurances that informative disclosures in the financial statements are reasonably adequate. 4. a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year.

To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing? 1. Substantive tests of transactions 2. Tests of trends and ratios 3. Tests of details of balances 4. Tests of controls

When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n) 1. unmodified opinion. 2. adverse opinion. 3. qualified opinion only. 4. unmodified opinion with explanatory paragraph.

Which of the following best describes the operational audit? 1. It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company. 2. It concentrates on implementing financial and accounting control in a newly organized company. 3. It focuses on verifying the fair presentation of a company's results of operations. 4. It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.

Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement? 1. The firm will have to hire a specialist in one audit area. 2. The client's financial reporting system has been in place for 10 years. 3. Staff will need to be rescheduled to cover this new client. 4. There will be a client-imposed scope limitation.

Which of the following is least likely to suggest to an auditor that the client's management may have overridden internal control? 1. There have been two new controllers this year. 2. There are numerous delays in preparing timely internal financial reports. 3. Management does not correct internal control weaknesses that it knows about. 4. Differences are always disclosed on a computer exception report.

Which of the following is not a primary purpose of audit documentation? 1. To assist in preparation of the audit report. 2. To coordinate the audit. 3. To provide evidence of the audit work performed. 4. To support the financial statements.

Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards? 1. A title that emphasizes the report is from an independent auditor. 2. The city and state of the audit firm issuing the report. 3. A statement explaining management's responsibilities for the financial statements. 4. The signature of the engagement partner.

Which of the following procedures would a CPA most likely perform during the planning stage of the audit? 1. Evaluate the reasonableness of management's allowance for doubtful accounts. 2. Confirm a sample of accounts receivable. 3. Evaluate the significance of uncorrected misstatements. 4. Determine areas where there is a higher risk of material misstatement.

Which one of the following is a true statement about the required fraud risk assessment discussion? 1. The discussion should involve all members who participate on the audit team, including the engagement partner. 2. The fraud risk assessment discussion should occur during the overall review stage of the audit. 3. The discussion about the susceptibility of the entity's financial statements to material misstatement must be held separately from the discussion about the susceptibility of the entity's financial statements to fraud. 4. The discussion should include consideration of the risk of management override of controls.

Which one of the following statements is correct concerning the concept of materiality? 1. Materiality is determined by reference to guidelines established by the AICPA. 2. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. 3. Materiality depends on the nature of an item rather than the dollar amount. 4. Materiality is a matter of professional judgment.

Auditors need an understanding of the client's business and industry because A. the nature of the business and industry affect business risk and the risk of material misstatements in the financial statements. B. it helps the auditor understand why the client wants or needs and audit. C. it creates a good relationship with the client. D. the analytical procedures are one of the eight types of evidence use throughout the audit. E. it helps keeping the audit costs reasonable.

An acquisition of a fixed-asset repair by a construction company is recorded on the wrong date. Which transaction-related audit objective has been violated? A. Timing. B. Completeness. C. Accuracy. D. Cutoff.

Identify the four parts of the Uniform CPA Examination. A.Regulation B. Auditing and Attestation C. Management Consultation D. Section 404 of the Sarbanes-Oxley Act E. Financial Accounting and Reporting F. Tax Services G. Business Environment and Concepts H. Operational Audit

A. B. E. G.

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

Explain how materiality differs for failure to follow GAAP and for lack of independence. A. Materiality for lack of independence in audit reporting is easiest to define. If the auditor lacks independence as defined by the AICPA Code of Professional Conduct, it is always considered highly material and therefore a disclaimer of opinion is always necessary. That is, either the CPA is independent or not independent. For failure to follow GAAP, there are three levels of materiality: immaterial, material, and highly material. B. Materiality for lack of independence in audit reporting is hardest to define. If the auditor lacks independence as defined by the AICPA Code of Professional Conduct, there are three levels of materiality: immaterial, material, and highly material. For failure to follow GAAP, the level of materiality does not matter and therefore a disclaimer of opinion is always necessary. C. For materiality for lack of independence, if the auditor lacks independence as defined by the AICPA Code of Professional Conduct, it is always considered highly material and therefore a disclaimer of opinion is always necessary. For failure to follow GAAP, there are two levels of materiality: material and highly material. Therefore only a qualified opinion is necessary. D. None of the above.

Explain why inherent risk is set audit objectives for segments rather than for the overall audit. A. Inherent risk is set for audit objectives for segments rather than for the overall audit because misstatements occur at the objective level within a segment. By identifying expectations of misstatements in segments, the auditor is thereby able to modify audit evidence by searching for misstatements in those segments. B. Inherent risk is set for audit objectives for segments rather than for the overall audit because it is more efficient and saves the client money. By identifying the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls, the auditor is thereby able to modify the audit report. C. Inherent risk is set for audit objectives for segments rather than for the overall audit because the auditor cannot rely on the internal controls. By identifying how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and issued an unqualified audit opinion, the auditor will be able to reissue a new audit report. D. Inherent risk is set for audit objectives for segments rather than for the overall audit because it lowers the auditor's engagement risk. By identifying the risk that audit evidence for a segment will detect misstatements exceeding a tolerable amount, should such misstatements exist, the auditor is thereby able to modify audit report.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? A. The same eight parts are found in a qualified opinion report as in a standard unmodified opinion audit report. There are also often one or more additional paragraphs explaining reasons for the qualifications, in addition to the term "except for" being added to the opinion paragraph. B. Everything is the same for both a qualified opinion report and a standard unmodified opinion audit report except the date of the audit report for a qualified report is the last day of audit fieldwork. C. Everything is the same for both a qualified opinion report and a standard unmodified opinion audit report except the auditor does not need to include the list of internal controls for a standard unmodified opinion audit report. D. The same eight parts are found in a qualified opinion report as in a standard unmodified opinion audit report. There is one additional paragraph detailing the lack of internal controls for a qualified report.

Identify the management assertion and presentation and disclosure-related audit objective for the specific presentation and disclosure-related audit objective: Read the fixed asset footnote disclosure to determine that the types of fixed assets, depreciation methods and useful lives are clearly disclosed. A. The management assertion and the general presentation and disclosure-related audit objective are both classification and understandability. B. The management assertion and the general presentation and disclosure-related audit objective are both occurrence and rights and obligations. C. The management assertion and the general presentation and disclosure-related audit objective are both accuracy and valuation. D. The management assertion and the general presentation and disclosure-related audit objective are both completeness.

Select the choice that best describes the responsibilities of the successor auditors when a company is changing auditors. A. The successor auditor is required by auditing standards to communicate with the predecessor auditor. B. The successor auditor is required by auditing standards to communicate with the company's bank. C. The successor auditor is required by accounting standards to review the company's tax returns for the previous five years. D. The successor auditor is required by accounting standards to hire an professional investigator to obtain information about the reputation and background of key members of management.

State the effect on the financial statements (overstatement or understatement) of a violation of each in the audit of accounts receivable. A. In the audit of accounts receivable, a nonexistent account receivable will lead to an overstatement of the accounts receivable balance. A violation of completeness occurs when a failure to include a customer's account balance will lead to an understatement of the accounts receivable balance. B. A violation of the existence objective when auditing the accounts receivable balance occurs when the account receivable lists fictitious amounts from a customer and are posted to the account, leading to an overstatement. A violation of the completeness objective when auditing the accounts receivable balance occurs when the receivables are not listed on the financials separated into short- and long-term accounts, leading to an over- and understatement in the account listings. C. In the audit of accounts receivable, a violation of the existence objective occurs when amounts are not booked to the account, creating an understatement. A violation of completeness occurs when the account receivable balance is overstated due to fictitious amounts from a customer. D. A violation of the existence objective occurs when auditing the accounts receivable balance is a failure to include a customer's account receivable balance which will lead to an understatement of the accounts receivable balance. A violation of the completeness objective when auditing the accounts receivable balance occurs when fictitious amounts from a customer are posted to the account, leading to an overstatement.

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

What is the primary purpose of analytical procedures performed during the completion phase of the audit? A. Analytical procedures are required during the completion phase as a final review for material misstatements or financial problems. B. Analytical procedures are required during the completion phase to assist the auditor in understanding the client's business and industry and to assist in determining the nature, extent, and timing of work to be performed. C. Analytical procedures are required during the completion phase to reduce or eliminate detailed substantive tests. D. Both A and B E. Both B and C F. None of the above

What is the relationship between materiality and the phrase obtain reasonable assurance used in the auditor's report? A. "Obtain reasonable assurance," as used in the audit report, means that the auditor does not guarantee or ensure the fair presentation of the financial statements. There is some risk that the financial statements contain a material misstatement. B. "Obtain reasonable assurance," as used in the audit report, means that the preliminary judgment about materiality amount was so low that there is no risk that the financial statements contain a material misstatement. C. "Obtain reasonable assurance," as used in the audit report, is intended to inform users that the auditor's responsibility is limited to material financial information. D. "Obtain reasonable assurance," as used in the audit report, means that the auditor does guarantee and ensure the fair presentation of the financial statements. There is no risk that the financial statements contain a material misstatement.

When should the auditor include an explanatory paragraph in an unmodified opinion audit report? A. The auditor should include an explanatory paragraph in an unmodified opinion audit report when the audit is completed with satisfactory results and the financial statements are fairly presented, but the auditor believes it is important to draw the reader's attention to certain matters or the auditor is required to provide additional information. B. The auditor should include an explanatory paragraph in an unmodified opinion audit report when the auditor is not independent but the audit was completed with satisfactory results and the financial statements are fairly presented, C. The auditor should include an explanatory paragraph in an unmodified opinion audit report when the audit is completed with satisfactory results and the financial statements are fairly presented, and the auditor feels that no additonal diclosure is necessary. D. The auditor should include an explanatory paragraph in an unmodified opinion audit report when the audit is completed with unsatisfactory results and the financial statements are not fairly presented, and the auditor believes it is important to draw the reader's attention the matters concerning the auditor.

Which transaction-related audit objective has been violated if the acquisition had been capitalized as a fixed asset rather than expensed? A. Classification. B. Accuracy. C. Posting and summarization. D. Completeness.

Describe the types of procedures auditors perform as part of their risk assessment procedures. (Select all that apply.) A. Other risk assessment procedures: The auditor may perform other procedures to assist in the auditor's assessment of the risk of material misstatement. B. Inquiries of management and others within the entity: Because management and others, including those charged with governance and internal audit, have important information to assist the auditor in identifying risks of material misstatements, the auditor will make a number of inquiries of these individuals to understand the entity and its environment, including internal control, and to ask them about their assessments of the risks of material misstatements. C. Discussion among engagement team members: Auditing standards require the engagement partner and other key engagement team members to discuss the susceptibility of the client's financial statements to material misstatement. This includes explicit discussion about the susceptibility of the client's financial statements to fraud, in addition to their susceptibility of material misstatement due to errors. D. Test of details: Test that the company has title to all the assets reported on the balance sheet and confirm that non of the assets are pledged as collateral. E. Observation and inspection: Auditors observe the entity's operations and they inspect documents, such as the organization's strategic plan, business model, and its organizational structure to increase the auditor's understanding of how the business is structured and how it organizes key business functions and leaders in the oversight of day-to-day operations. F. Analytical procedures: Auditors are required to perform preliminary analytical procedures as part of audit planning to better understand the entity and to assess client business risks.

A. B. C. E. F.

Next explain each term in the AUDIT RISK model. (Select the four choices that apply.) A. Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. B. Control risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. C. Planned detection risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. D. Control risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls. E. Acceptable audit risk is a measure of how the auditor's willingness to allow that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. F. Planned detection risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. G. Inherent risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls. H. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.

A. C. D. H.

Identify the eight major steps in planning audits. A. Set preliminary judgment of materiality and performance materiality B. Prepare the financial statements C. Identifying related parties D. Comparing client data with the industry data E. Accept client and perform initial planning F. Perform preliminary analytical procedures G. Assess inherent risk H. Understand the client's business and industry I. Keeping the audit costs reasonable J. Understand internal control and assess control risk K. Finalize overall audit strategy and audit plan L. Determine if fraud had occurred during the year M. Identify significant risks due to fraud or error

A. E. F. G. H. J. K. M.

Under what circumstances can the audit files be used by other people? (Select all that apply.) A. They can be released to another CPA firm without the client's permission if they are being reviewed as a part of a voluntary peer review program under AICPA, state CPA society, or state Board of Accountancy authorization. B. They can be used by the client if the auditor wants to release them after a careful consideration of whether there might be confidential information in them. C. The audit files can be sold or released to other users if the auditor obtains permission from the client. D. They can be released to another CPA firm without the client's permission if they are being audited by a different CPA firm in the following year. E. The audit files can be sold or released to other users without the client's permission as long as it is done in good faith. F. The audit files can be subpoenaed by a court and thereby become the property of the court.

A. B. C. F.

The characteristics of a confirmation are: (Select all that apply.) A. Written or electronic response B. Receipt, directly by auditor C. From independent third party D. From company personnel E. Requested by the auditor F. Verbal response G. Requested by the company under audit

A. B. C. E.

Identify the reason(s) why the factor you selected in the preceding step is important. (Select all that apply.) A. Multiple product lines and transaction locations. B. Possibly millions of transactions processed daily via sophisticated computerized systems. C. Foreign exchange effects on transactions. D. Owners also managing the daily activities of the company. E. New accounting standards are issued on a regular basis. F. Directors not involved in day-to-day operations or decisions.

A. C.

List the four major evidence decisions that must be made on every audit. A. Which items to select from the population B. Which type of evidence can be physically observed C. Which audit procedures to use D. Where to perform the procedures E. Which type of procedures allow confidentiality to be maintained F. Which evidence is temporary and which is permanent G. When to perform the procedures H. What sample size to select for a given procedure

A. C. G. H.

Explain why the auditor can be persuaded only with a reasonable level of assurance, rather than convinced, that the financial statements are correct. (Select all that apply.) A. Evidence is normally not sufficiently reliable to enable the auditor to be completely convinced. For example, confirmations from customers may come back with erroneous information, which is the fault of the customer rather than the client. B. Even if evidence is not considered highly appropriate or accurate, the auditor may still conclude with a reasonable level of assurance that the financial statements are correct. C. The auditor does not always have sufficient time to inspect the client's documents and records to substantiate the information that is, or should be, included in the financial statements. D. The cost of accumulating evidence. It would be extremely costly for the auditor to gather enough evidence to be completely convinced.

A. D.

What information sources are commonly used by auditors to learn about the client's industry? (Select all that apply.) A. Inquire of management regarding their objectives for the reliability of financial reporting, effectiveness and efficiency of operations, and compliance with laws and regulations; read contracts and other legal documents, such as those for notes and bonds payable, stock options, and pension plans. B. Documenting the client's internal control procedures. C. The generally accepted accounting standards. D. Tour the plant and offices, identify related parties, and inquire of management. E. Read the corporate charter and bylaws, read minutes of board of directors and stockholders, and inquire of management. F. Reviewing the competitor's financial statements from a different industry. G. Read industry trade publications, AICPA Industry Audit Guides, and regulatory requirements. H. Read financial statements, perform ratio analysis, and inquire of management about key performance indicators that management uses to measure progress toward its objectives. I. The engagement letter.

A. D. E. G. H.

Describe how PCAOB assertions and assertions in international and AICPA auditing standards are similar and different. A. The international and AICPA auditing standards describe three categories of management assertions: (1) existence or occurrence; (2) completeness; (3) presentation and disclosure. These assertions are similar to PCAOB assertions, except PCAOB assertions further divide management assertions into five categories: (1) classes of transactions and events for the period under audit; (2) account balances at period end; (3) presentation and disclosure; (4) valuation or allocation; and (5) rights and obligations. B. The PCAOB describes five categories of management assertions: (1) existence or occurrence; (2) completeness; (3) valuation or allocation; (4) rights and obligations; (5) presentation and disclosure. These assertions are similar to international and AICPA auditing standards, except international and AICPA standards further divide management assertions into three categories: (1) classes of transactions and events for the period under audit; (2) account balances at period end; and (3) presentation and disclosure. C. The PCAOB describes four categories of management assertions: (1) existence or occurrence; (2) completeness; (3) valuation or allocation; (4) presentation and disclosure. These assertions are similar to international and AICPA auditing standards, except international and AICPA standards further divide management assertions into four categories: (1) classes of transactions and events for the period under audit; (2) account balances at period end; (3) presentation and disclosure; and (4) rights and obligations. D. The international and AICPA auditing standards describe five categories of management assertions: (1) existence or occurrence; (2) completeness; (3) valuation or allocation; (4) rights and obligations; (5) presentation and disclosure. These assertions are similar to PCAOB assertions, except PCAOB assertions further divide management assertions into three categories: (1) classes of transactions and events for the period under audit; (2) account balances at period end; and (3) presentation and disclosure.

Each of the following multiple choice questions contains possible circumstances required for a standard unmodified opinion audit report to be issued. Please select the correct answer. (There is one circumstance per question.) A. The financial statements are presented in accordance with appropriate accounting standards such as U.S. generally accepted accounting principles or IFRS. Adequate disclosures are not required to be included in the footnotes and other parts of the financial statements. B. The financial statements are presented in accordance with appropriate accounting standards such as U.S. generally accepted accounting principles or IFRS. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. C. The financial statements are presented in accordance with appropriate accounting standards such as U.S. generally accepted auditing standards or IFRS. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. D. The financial statements are presented in accordance with appropriate accounting standards such as U.S. generally accepted auditing standards or IFRS. Adequate disclosures are not required to be included in the footnotes and other parts of the financial statements.

Each of the following multiple choice questions contains possible circumstances required for a standard unmodified opinion audit report to be issued. Please select the correct answer. (There is one circumstance per question.) A.The balance sheet and income statement are included in the financial statements. B. The balance sheet, income statement, statement of retained earnings, and statement of cash flows are included in the financial statements. C. The balance sheet, income statement, and statement of retained earnings are included in the financial statements. D. The balance sheet, income statement, and statement of cash flows are included in the financial statements.

Explain how audit risk and materiality are related and why they need to be considered together in planning an audit. A. Audit risk is the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist. An auditor cannot assess the risk of material misstatement without first deciding the size of misstatements that will be considered material. Materiality and audit risk are considered together in planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures, and evaluating audit findings. B. Audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued. An auditor cannot assess the risk of material misstatement without first deciding the size of misstatements that will be considered material. Materiality and audit risk are considered together in planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures, and evaluating audit findings. C. Audit risk is a measure of the auditor's assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client's internal controls. An auditor cannot assess the risk of material misstatement without first deciding the size of misstatements that will be considered material. Materiality and audit risk are considered together in planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures, and evaluating audit findings. D. Audit risk is a measure of the auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control. An auditor cannot assess the risk of material misstatement without first deciding the size of misstatements that will be considered material. Materiality and audit risk are considered together in planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures, and evaluating audit findings.

Explain how the increased use of fair value accounting might increase information risk. A. Information risk is the risk that managers will make poor decisions based on industry conditions. Fair value accounting is based on materiality levels during an audit. The materiality levels will usually be based off of industry conditions of similar businesses. Since mangers usually base materiality on industry conditions using faulty information, information risk will increase. B. Information risk is the risk that information upon which a business decision is made is inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value can be estimated using multiple methods with some estimates being more subjective than others. Fair value estimates are made at a point in time, but can also change rapidly, depending on market conditions. All of these factors increase information risk. C. Information risk is the risk where invoices under 10% of sales are not audited. Fair value accounting is often based on performing similar tasks together. This means that not all entries are immediately input into accounting systems, and are sometimes held until the dollar amounts are substantial enough to book. This can cause a lot of smaller balances equal the 10% required limit. All of these factors increase information risk. D. Information risk is a risk where auditors obtain faulty information on a complex transaction a company performs. Fair value accounting is based on similar industry standards. Industries often have the same types of transactions performed during the year due to the similar business natures. Fair value accounting differs depending upon the industry, and the type of transaction; however, it can be subjective which industry standards to follow if the company is in multiple industries. All of these factors increase information risk.

Explain the relationship between acceptable audit risk and the legal liability of auditors. A. When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk should automatically be set to low. The auditor should then be able to rely on the client's personnel in obtaining records and documentations, as well as any schedules the auditor would require to allow for maximum acceptable audit risk. B. When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk would be set lower than when there is little exposure to liability. Even when the auditor believes that there is little exposure to legal liability, there is still a minimum acceptable audit risk that should be met. C. When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk would be set higher than when there is little exposure to liability. Even when the auditor believes that there is little exposure to legal liability, there is still a maximum acceptable audit risk that should be met. D. When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk should automatically be set to high. The auditor should then require more extensive evident, assign more personnel, and/or require more extensive review of audit documentation to allow for minimum acceptable audit risk.

Explain the auditor's responsibility to consider compliance with laws and regulations. How does this responsibility differ for laws and regulations that have a direct effect on the financial statements compared to other laws and regulations that do not have a direct effect? A. The auditor should obtain documentation on the laws and regulations of any material transaction that in in question of compliance of the laws. For example, the auditor should look at material transactions of inventory purchases and ensure proper accounting laws and regulations are being adhered to. However, the auditor should obtain paystubs and federal or state tax returns to ensure adherence to withholding laws and regulations that over time become material in nature. B. The auditor should obtain sufficient appropriate evidence regarding material amounts and disclosures that are directly affected by laws and regulations. For example, the auditor should perform tests to identify if there have been any material violations of federal or state tax laws. However, the auditor should inquire of management and inspect correspondence with relevant licensing and regulatory agencies to identify noncompliance that may have a material effect on the financial statements. C. The auditor's responsibility includes working closely with management by going through every material transaction is in compliance with the applicable laws and regulations. For example, the auditor should obtain a list of material transactions the company performed over the year and perform a random sampling of the list to ensure there have not been a violation to the laws and regulations. If an item is not material in nature, the auditor must only discuss with management the process to journalize the entry. D. The auditor is responsible for obtaining documentation on every law and regulation that the accounting department utilizes in their natural course of business. For example, the auditor should obtain documentation on individual transactions, like asset purchases or building sales. However, the auditor should only obtain documentation on a group of transactions regarding cost of goods sold purchases.

Explain why there is an inverse relationship between planned detection risk and the amount of evidence an auditor collects for a specific audit objective. A. Planned detection risk is the risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct. In order to reduce this risk, the auditor would increase the amount of evidence they collect for a specific audit objective. For example, if the auditor wanted a low level of risk that audit procedures designed to test the existence of inventory fail to detect a material misstatement, they would increase the amount of inventory tested and/or the number of audit procedures performed. B. Planned detection risk is the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist. In order to reduce this risk, the auditor would increase the amount of evidence they collect for a specific audit objective. For example, if the auditor wanted a low level of risk that audit procedures designed to test the existence of inventory fail to detect a material misstatement, they would increase the amount of inventory tested and/or the number of audit procedures performed. C. Planned detection risk is a measure of the auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control. In order to reduce this risk, the auditor would increase the amount of performance materiality and collection of evidence for specific audit objective. For example, if the auditor wanted a low level of risk that audit procedures designed to test the existence of inventory fail to detect a material misstatement, they would increase the amount of inventory tested and/or the number of audit procedures performed. D. Planned detection risk is a measure of the auditor's assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client's internal controls. In order to reduce this risk, the auditor would increase the amount of performance materiality and collection of evidence for specific audit objective. For example, if the auditor wanted a low level of risk that audit procedures designed to test the existence of inventory fail to detect a material misstatement, they would increase the amount of inventory tested and/or the number of audit procedures performed.

Select another change in accounting and business operations over the last decade that has increased the need for independent audits. A. Low transactions amount. B. More complex information systems. C. Low risk financing option. D. Data transmitted electronically.

Select who is considered the client when auditing public companies. A. The president of the company B. The audit committee C. The users of the audited financial statements D. The management of the company

The client changed from FIFO to LIFO inventory valuation in the current year and reflected this change in their financial statements. How should this be reflected in the auditor's report? A. An unmodified opinion audit report with modified wording is required to explain the change in GAAP in the first year in which the change took place. B. A separate explanatory paragraph is required to explain the change in GAAP in the first year in which the change took place. C. A qualified audit report is required if the change is immaterial and is not disclosed in the footnotes of the financial statements. D. Nothing different is required for the change from LIFO to FIFO. A standard unmodified opinion audit report may be issued.

What constitutes a significant risk? A. A measure of the auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control B. An identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. C. A transaction that is unusual, either due to size or nature, and that is infrequent in occurrence. D. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified audit opinion has been issued.

Why are sales, sales returns and allowances, bad debts, cash discounts, accounts receivable, and allowance for uncollectible accounts all included in the same cycle? A. These accounts are all part of the balance sheet and should therefore stay in the same cycle. B. Keeping these accounts in one cycle helps the auditor keep each of these accounts close relationships in mind. C. These accounts should be in the same cycle because there are more transactions in these accounts than any other. D. Both A and B are correct.

Identify the reason(s) why the factor you selected in the preceding step is important. (Select all that apply.) (change in accounting and business operations over the last decade that has increased the need for independent audits.) A. New and changing business relationships lead to innovative accounting and reporting problems. B. Possibly millions of transactions processed daily through online and traditional sales channels. C. Voluminous data requires interpretation. D. Foreign companies are a higher risk investment. E. New financing options available. F. Reductions in the interest rate.

B. C.

Identify three or more assurance services that may be provided by public accounting firms or other assurance providers. (Select all that apply.) A. employee retention strategies B. fraud and illegal acts risk assessment C. information on Web site traffic D. bookkeeping services E. assurance on Web site controls F. assurance on corporate responsibility and sustainability

B. C. E. F.

Identify three or more assurance services that are likely to be provided by assurance providers other than public accounting firms. (Select all that apply.) A. audits on internal control over financial reporting B. elevator inspections C. ISO 9000 certifications D. pumps at gasoline stations. E. audits of historical financial statements F. food inspections

B. C. D. F.

Identify three or more assurance services that are likely to be provided only by public accounting firms. (Select all that apply.) A. ISO 9000 certifications B. audits of historical financial statements C. reviews of historical financial statements D. compliance auditing E. assurance on Web site controls F. audits of internal control over financial reporting

B. C. D. F.

Begin by defining the audit risk model. (Abbreviation used: PDR = Planned detection risk; AAR = Acceptable audit risk; IR = Inherent risk; CR = Control risk.) A. IR=CR/AAR x PDR B. CR=PDR/IR x AAR C. PDR=AAR/IR x CR D.AAR=PDR/IR x CR

Define the meaning of the term materiality as it is used in accounting and auditing. A. Materiality is the measure the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal control. B. Materiality is the measure of the auditor's uncertainty about the effectiveness of a client's internal controls and uncertainty about whether the financial statements are fairly stated when the audit is completed. C. Materiality is defined as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements. D. Materiality is the measure of the auditor's assessment of effectiveness of internal controls to prevent or detect material misstatements.

Define what is meant by a management assertion about financial statements. A. Management assertions are objectives that must be met before an auditor can give an opinion and say the financials are complete and accurate. B. Management assertions are the implied representations agreed upon by the auditors or management about the completeness of the financial statements. C. Management assertions are implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements. D. Management assertions are audit procedures agreed upon by the auditors and management that relate to the preparation of the financial statements.

Distinguish between the existence and completeness balance-related audit objectives. A. The existence objective deals with the auditor determining whether transactions are recorded and included in account balances in the proper period. The completeness objective refers to amounts being included in the correct account. B. The existence objective deals with whether the account balances are correct on the financial statements. The completeness objective deals with whether the financial statements are not overstated. C. The existence objective deals with whether amounts included in the financial statements should actually be included. The completeness objective deals with whether all amounts that should be included have actually been included. D. The existence objective refers to amounts being included in the correct amount. The completeness objective deals with whether all amounts included in the financial statements should actually be included in the financials.

Each of the following multiple choice questions contains possible circumstances required for a standard unmodified opinion audit report to be issued. Please select the correct answer. (There is one circumstance per question.) A. Sufficient appropriate evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three general standards have been met. B. Sufficient appropriate evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with audit standards and there is only one circumstance causing a modification of the auditor's opinion. C. Sufficient appropriate evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with audit standards. D. Sufficient appropriate evidence has not been accumulated although the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with audit standards.

Each of the following multiple choice questions contains possible circumstances required for a standard unmodified opinion audit report to be issued. Please select the correct answer. (There is one circumstance per question.) A. The auditor concludes that the overall financial statements are presented fairly, even though applicable accounting standards were not followed in preparing the financial statements. B. There is a circumstance requiring the addition of an explanatory paragraph or modification of the wording of the report. C. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. D. There are less than 3 circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

Explain why materiality is important but difficult to apply in practice. A. Materiality is important because it requires the auditor to exercise considerable professional judgment when applying the application to ensure financial gains. It is difficult to apply because the auditor's judgment is limited to the professional auditing standards guidelines. B. Materiality is important because it sets a standard baseline for financial statements that auditors must adhere to before the audit opinion can be made. It is difficult to apply because the cost versus the benefit of the standard baseline can be extremely difficult to achieve under larger companies. C. Materiality is important because if financial statements are materially misstated, users' decisions may be affected, and thereby cause financial loss to them. It is difficult to apply because there are often many different users of the financial statements. D. Materiality is important because it ensures third parties that every financial statement they review are not misstated. It is difficult to apply because there are often multiple auditors and they set materiality to different amounts depending upon what section of the financial statement they are auditing.

First, select the choice that best describes the need an independent audit satisfies. A. An independent audit ensures financing at the lowest rate. B. An independent audit is a means of satisfying the need for favorable financial ratios. C. An independent audit is a means of satisfying the need for reliable information on the part of the decision makers. D. An independent audit ensures that the projected cash flows is accurate.

Select a change in accounting and business operations over the last decade that has increased the need for independent audits. A. Generally Accepted Accounting Standards. B. Internal auditors are requiring independent audits. C. Increased global activities of many businesses. D. Increase in gas prices.

Select the choice that best describes why he/she or they is/are considered the client when auditing public companies. A. Because the Sarbanes-Oxley Act of 2002 explicitly shifts responsibility for hiring and firing of the auditor from the audit committee to management. B. Because they are qualified to select independent auditors. C. Because the Sarbanes-Oxley Act of 2002 explicitly shifts responsibility for hiring and firing of the auditor from management to the audit committee. D. Because the Sarbanes-Oxley Act of 2002 explicitly shifts responsibility for hiring and firing of the auditor from the audit committee to the president of the company.

The primary evidence the internal revenue agent will use in the audit of the Jones Company's tax return include: A. the chart of incorporation. B. the projected cash flows analysis. C. all available documentation and other information available in Jones' office or from other sources. D. the audited financial statements only.

What is meant by reports involving the use of other auditors? A. The CPA performing the audit needs help and brings another CPA firm in to help. B. The auditing CPA firm is not independent so another firm is brought in to finish the audit. C. Another CPA firm has performed part of the audit. D. The auditing CPA firm has more than one professional working on the audit.

When an auditor discovers more than one condition that requires departure from or modification of the standard unmodified opinion audit report, what should the auditor's report include? A. The report should be modified for each condition, except when there is another auditor involved. B. The report should be modified for each condition, without exception. C. The report should be modified for each condtion, except when one condtion neutralizes another. D. The report should be modified for each condition, except when there is a justified departure from GAAP.

Which types of loans to executives are permitted by the Sarbanes-Oxley Act? A. Public companies can provide personal credit or loans to any director or excecutive officer of the company. B. Banks or other financial institutions are permitted to make normal loans to their directors and officers using a negotiated interest rates between the two parties. C. Banks or other financial institutions are permitted to make normal loans to their directors and officers using market rate, such as residential mortgages. D. Public companies can provide loans to finance personal cars to any director or excecutive officer of the company.

Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios included in publications by Standard and Poor's and compared them with industry standards. For most engagements, the client's business was significantly different from the industry data in the publication and the client automatically explained away any discrepancies by attributing them to the unique nature of its operations. In cases in which the client had more than one branch in different industries, Gordon found the ratio analysis to be no help at all. How can Gordon improve the quality of his analytical procedures? A. The analytical procedures could be done during the testing phase of the audit as part of the auditor's further audit procedures. B. By spending more time documenting the explanation even though the additional cost is not justified. C. In cases where the client has more than one branch in different industries, computing the ratios for each branch and comparing these to the industry ratios. D. Can conclude that the analytical procedures are not relevant for these type of clients. E. Making internal comparisons to ratios of previous years or to budget forecasts.

C. E.

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

C. D. E.

Assume materiality for the financial statements as a whole is $100,000 and performance materiality for accounts receivable is set at $40,000. If the auditor finds one receivable that is overstated by $55,000, what should the auditor do? A. If accounts receivable testing was performed using sampling techniques, the auditor would also project total known misstatements to the population and may perform additional tests depending on the outcome. B. The $55,000 overstatement is an example of a known misstatement. The auditor could request the client make an adjustment to correct the overstatement or make a note of the overstatement for follow-up at a later point in the audit. C. If performance materiality for accounts receivable is $40,000 and the auditor finds a $55,000 overstatement of a receivable balance, the auditor would document the misstatement and evaluate results of the remaining audit procedures in accounts receivable. D. All of the above.

Begin by selecting who owns the audit files. A. Audit files are owned by the Board of Directors of the client. B. Audit files are owned by the successor auditor if different from the current year auditor. C. Audit files are owned by the client. D. Audit files are owned by the auditor.

Explain what is meant by the term acceptable audit risk. A. Acceptable audit risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls. B. Acceptable audit risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. C. Acceptable audit risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. D. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued.

Provide two examples of when an auditor might set a lower level of performance materiality for a particular class of transactions, account balance, or disclosure. A. An auditor might set a lower level of performance materiality for a particular account balance if it is harder to audit and no material misstatements are expected (e.g. payroll expenses) or or if the auditor expects that a misstatement of a lower amount in a particular account or transaction might influence an investor (e.g. disclosure of a related party transaction). This is because performance materiality is inversely related to the amount of evidence an auditor will accumulate. B. An auditor might set a lower level of performance materiality for a particular account balance if it is easy to audit and no misstatements are expected (e.g. payroll expenses) or if the auditor expects that a misstatement of a higher amount in a particular account or transaction might influence an investor (e.g. disclosure of a related party transaction). This is because the level of performance materiality is directly related to the amount of evidence an auditor will accumulate. C. An auditor might set a lower level of performance materiality for a particular account balance if it is harder to audit and many material misstatements are expected (e.g. notes payable), or if the auditor expects that a misstatement of a higher amount in a particular account or transaction might influence an investor (e.g. disclosure of a related party transaction). D. An auditor might set a lower level of performance materiality for a particular account balance if it is easy to audit and no misstatements are expected (e.g. notes payable), or if the auditor expects that a misstatement of a lower amount in a particular account or transaction might influence an investor (e.g. disclosure of a related party transaction).

Select another change in accounting and business operations over the last decade that has increased the need for independent audits. A. Decrease in governmental regulations. B. Historical transactions. C. Intercompany transactions. D. Complex accounting and exchange transactions

Select the choice that best describes the responsibilities of the predecessor auditors when a company is changing auditors. A. The predecessor auditor has no responsibilities towards the company and/or sucessor auditor. B. The predecessor auditor can't share information with the successor auditor due to the confidentiality requirement in the Code of Professional Conduct. C. The predecessor auditor is required by auditing standards to communicate with the successor auditor. D. The predecessor auditor is required to respond to the successor's request for information; however, the response may be limited to stating that no information will be given.

Why is it essential that the auditor not leave questions or exceptions in the audit documentation without an adequate explanation? A. Unanswered questions and exceptions may indicate lack of due care by the auditor. B. The audit files can be subpoenaed by courts as legal evidence. C. Unanswered questions and exceptions may indicate the potential for significant errors or fraud in the financial statements. D. All of the above. E. None of the above.

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

Identify the reason(s) why the factor you selected in the preceding step is important. (Select all that apply.) (change in accounting and business operations over the last decade that has increased the need for independent audits.) A. Less disclosures are required now than was needed a decade ago. B. Owners also managing the daily activities of the company. C. Low risk financing option. D. Changes in taxes regulations. E. Increasing use of derivatives and hedging activities. F. Increasingly complex accounting standards in areas such as revenue recognition.

E. F.

What are they for the audit of Jones Company's financial statements by a CPA firm?

For the audit of Jones Company's financial statements the information is the audited financial statements. The established criteria are the U.S. generally accepted accounting principles or International Financial Reporting Standards.

What are the information and established criteria for the audit of Jones Company's tax return by an internal revenue agent?

The information for Jones Company's tax return is the federal tax returns filed by the company. The established criteria are found in the Internal Revenue Code and all interpretations.

How does the auditor's opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client's control? Under which of these two will the auditor be most likely to issue a disclaimer of opinion? Explain. The auditor will most likely issue a(n) ______ when the client imposes restrictions on the audit. To issue a(n) ______ the scope limitation is so material that the auditor cannot determine if the overall financial statements are fairly presented. This occurs when the client will not permit the auditor to confirm material receivables or physically observe inventories. The auditor will most likely issue a(n) ______ when the scope limitation is beyond the client's control. This can occur when the engagement is not agreed upon until after the client's year-end when it may not be possible to physically observe inventories or confirm receivables.

disclaimer of opinion, disclaimer of opinion qualified opinion,

Auditor's reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the financial statements are ______. Users especially look for any deviation from the wording of the ____ and the reasons and implications of such deviations. Having standard wording _____.

fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. standard unmodified opinion report improves communications for the benefit of users of the auditor's report.

When auditing historical financial statements, an auditor must have a thorough understanding of the client and its environment. This knowledge should include the client's____, _____, and ____. For example, a practitioner performing a consulting engagement to evaluate the efficiency and effectiveness of a client's manufacturing process would likely start with an analysis of_____, including _____.

regulatory and operating environment, business strategies and processes, and measurement indicators. measurement indicators, including ratio analysis

An unmodified opinion audit report with an explanatory paragraph is ______a standard unmodified report. In an unmodified opinion audit report with an explanatory paragraph or modified wording, the auditor _____ the audit or the financial statements. For a qualified report, there is either a _____ or ____. Under either condition, the auditor concludes that the overall financial statements _____fairly presented.

the same as believes it is necessary to provide additional information about scope limitation, a failure to follow generally accepted accounting principles. are

ACCT 400-Auditing Midterm

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