Acct411 Audit Midterm

During the audit of internal controls integrated with the audit of the financial statements, the auditor discovered a material weakness in internal control. The auditor most likely will express a(n) A. Adverse opinion on internal control. B. Qualified opinion on internal control. C. Unmodified opinion on internal control. D. Disclaimer of opinion on internal control.

A. Adverse opinion on internal control.

What are the components of RMM? A. Inherent Risk * Control risk B. Inherent Risk * Detection Risk C. Control Risk * Detection Risk D. Audit Risk * Detection Risk

A. Inherent Risk * Control risk

The auditor identifies 3 deficiencies and 2 significant deficiencies. Which type of audit opinion will the auditor issue for the ICFR audit? A.Unqualified B.Qualified C.Adverse D.Disclaimer

A.Unqualified

Which of the following professional services is considered an attest engagement? A. A consulting service engagement to provide computer advice to a client. B. An engagement to report on compliance with statutory requirements. C. An income tax engagement to prepare federal and state tax returns. D. The compilation of an engagement to provide a peer review for another CPA firm.

B. An engagement to report on compliance with statutory requirements. In an attest engagement, a practitioner issues an examination, a review, or an agreed-upon procedures report on subject matter (or an assertion about subject matter) that is the responsibility of another party (AT-C 105). Thus, attest engagements are not limited to traditional financial statement audits. For example, attest services may extend to management's compliance with specified requirements or the effectiveness of internal control over compliance.

Who has ultimate responsibility for the audit? A. Audit Team (collectively) B. Audit Partner C. Quality Control Partner D. Office Managing Partner E. National Office

B. Audit Partner

Concerned about minimizing taxes...which assertion is highest risk for revenues? A.Existence B.Completeness C.Rights & Obligations D.Valuation

B.Completeness

The risk that the auditor draws a sample that is not representative of the population is ___ A.Non-Sampling Risk B.Sampling Risk C.Inherent Risk D.Confirmation Risk

B.Sampling Risk

Which of the following will you use to determine whether accounts are "significant"? A.Materiality B.Tolerable Misstatement C.de Minimus D.Professional Skepticism

B.Tolerable Misstatement

In auditing accounts payable, an auditor's procedures most likely will focus primarily on the relevant assertion about A. Existence. B. Classification and understandability. C. Completeness. D. Valuation and allocation.

C. Completeness.

In performing an attest engagement, a CPA most likely A. Supplies litigation support services. B. Assesses the risks of material misstatement. C. Expresses an opinion or conclusion about a written assertion. D. Provides management consulting advice.

C. Expresses an opinion or conclusion about a written assertion. A practitioner performs attest engagements in accordance with the clarified Statements on Standards for Attestation Engagements. In an attest engagement, a practitioner issues an examination, review, or agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. The report on an examination expresses an opinion on whether (1) the subject matter is in accordance with (or based on) the criteria or (2) the assertion is fairly stated in all material respects. The report on a review expresses a conclusion about whether material modifications should be made to (1) the subject matter for it to be in accordance with the criteria or (2) the assertion is fairly stated in all material respects. The report on an agreed-upon procedures engagement lists the procedures performed and the findings.

Which of the following on its own would be most likely to cause a partner to consider not accepting the client? A. You will have to start the audit after year-end B. You have never before audited a client in that industry C. You will not be able to get adequate resources to interpret financial records kept in a different language, or to go observe assets in the foreign location, before the audit deadline D. The background check reveals that the CFO has a $1 million mortgage on his house

C. You will not be able to get adequate resources to interpret financial records kept in a different language, or to go observe assets in the foreign location, before the audit deadline

How long should audit documentation be kept in the audit files? A.At least 5 years B.Until PCAOB inspection of the audit C.At least 7 years D.At least 10 yearsE.Indefinitely

C.At least 7 years

Which form of evidence would be higher quality? A.Bank statements obtained from the client B.Confirmations to customers C.Auditor personally inspecting PP&E D.Inquiries with Bob, Warehouse Manager

C.Auditor personally inspecting PP&E

The auditor watches the Controller as he completes his monthly journal entry review process. The auditor is performing: A.Inquiry B.Inspection C.Observation D.Reperformance

C.Observation

The auditor wants to test Tone at the Top. The auditor knows that this is a very important entity-level (financial statement level) control. Which of the following should the auditor use?A.Analytical Procedures B.Inquiry C.Observation D.Reperformance

C.Observation (and inquiry)

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the A. Cash receipts journal with the sales journal. B. Sales journal with the cash receipts journal. C. Source documents with the accounting records. D. Accounting records with the source documents.

D. Accounting records with the source documents.

Control activities constitute one of the five components of internal control described in the COSO model. Control activities do not encompass A. Performance reviews. B. Information processing. C. Physical controls. D. An internal auditing function.

D. An internal auditing function.

Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include A. Schedules that support the current year's adjusting entries. B. Prior years' accounts receivable confirmations that were classified as exceptions. C. Documentation indicating that the audit work was adequately planned and supervised. D. Analyses of capital stock and other owners' equity accounts.

D. Analyses of capital stock and other owners' equity accounts.

An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are acceptable ways to address this, except: A. Reduce materiality. B. Increase inherent risk. C. Decrease detection risk. D. Increase audit risk. (would decrease AR if moving to public)

D. Increase audit risk. (would decrease AR if moving to public)

The audit working paper that reflects the major components of an amount reported in the financial statements is the A. Interbank transfer schedule. B. Carryforward schedule. C. Supporting schedule. D. Lead schedule.

D. Lead schedule.

The primary reason for an audit by an independent, external audit firm is to A. Satisfy governmental regulatory requirements. B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. C. Relieve management of responsibility for the financial statements. D. Provide increased assurance to users as to the fairness of the financial statements.

D. Provide increased assurance to users as to the fairness of the financial statements.

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered? A. Textbooks and periodicals related to the industry. B. AICPA Audit and Accounting Guides. C. Financial statements of other entities in the industry. D. Results of performing substantive procedures.

D. Results of performing substantive procedures.

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

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

The auditor conducts walkthroughs of the revenue process. The auditor does this in order to: A.Lower control risk B.Increase detection risk C.Lower audit risk D.Obtain an understanding of internal controls

D.Obtain an understanding of internal controls

The auditor is auditing a control that is high risk (relates to material transaction, high volume/complexity, etc.). The auditor will most likely do as much of this type of testing as possible: A.Inquiry B.Inspection C.Observation D.Reperformance E.Confirmation

D.Reperformance

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory... A.Existence B.Completeness C.Rights & Obligations D.Valuation E.Presentation & Disclosure

D.Valuation

Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as A. Audit risk. B. Detection risk. C. Sampling risk. D. Inherent risk.

D. Inherent risk.

Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of prenumbered client purchase orders filed in the vouchers payable department. C. Analytical procedures performed by the auditor on the entity's trial balance. D. Inspection of bank statements obtained directly from the client's financial institution.

D. Inspection of bank statements obtained directly from the client's financial institution.

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

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

For which of the following can an internal auditor assist the auditor (select all that apply)? A.Creating a spreadsheet to track internal control questionnaire responses B.Selecting a sample of items for testing C.Following a checklist provided by the external auditor for testing controls D.Testing whether the accounting manager did a good enough job reviewing journal entries

A.Creating a spreadsheet to track internal control questionnaire responses C.Following a checklist provided by the external auditor for testing controls

Which types of procedures would be used for testing design effectiveness (select all that apply)?A.Inquiry B.Observation C.Inspection D.Analytical Procedures

A.Inquiry B.Observation C.Inspection

The internal auditor should be objective (independent). How does the external auditor know if this true? A.Look at the organization chart B.Ask the internal auditor if he is independent C.Send confirmation letters to the internal auditors asking if they are independent D.Ask the board of directors to have the internal auditors report directly to the external auditor

A.Look at the organization chart

Which of the following is the auditor likely to do first? A.Verify independence B.Conduct risk assessment analytics C.Select sample sizes for control testing D.Test operating effectiveness

A.Verify independence (in order of a,b,c,d)

When an entity moves into a significant new line of business, all of the following increase except: A. Inherent risk. B. Acceptable audit risk. (set at beginning and never changes in one engagement) C. Risk of material misstatement. D. Audit testing (quality or quantity).

B. Acceptable audit risk. (set at beginning and never changes in one engagement)

It is important for the auditor to consider the competence of the audit client's employees, because their competence bears directly and importantly upon the A. Relationship of the costs of internal control and its benefits. B. Achievement of the objectives of internal control. C. Comparison of recorded accountability with assets. D. Timing of the tests to be performed.

B. Achievement of the objectives of internal control.

An auditor is deciding whether the company has sufficient controls in place for the Reporting Objective. Which of the following is true (select all that apply)? A.The company must have controls in place for all 5 Components (but not every Principle) B.The company must have controls in place for all 5 Components & all 17 Principles C.The company is only required to have controls in place for the majority of the Components & Principles D.If the company has a control failure in one Component, controls in another Component can compensate for that failure if done at a precise enough level (e.g., internal audit department is strong)

B.The company must have controls in place for all 5 Components & all 17 Principles

Which of the following best describes the concept of audit risk? A.The risk of the auditor being sued because of association with an auditee. B.The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated. C.The overall risk that a material misstatement exists in the financial statements. D.The risk that auditors use audit procedures that are inappropriate.

B.The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.

Which of the following are considered control environment factors? Detection Risk Human Resources Policies and Practices A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes

Which of the following statements would least likely appear in an auditor's engagement letter? A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. B. Management is responsible for making all financial records and related information available to us. C. Our engagement is subject to the risk that material fraud or errors, if they exist, will not be detected. D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.

D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.

Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A. Journalize entries and prepare financial statements. B. Record cash receipts and cash disbursements. C. Establish internal control and authorize transactions. D. Perpetrate and conceal fraud and error.

D. Perpetrate and conceal fraud and error.

Which of the following is true? A.As RMM is assessed as higher/lower, the level of inherent risk should be changed accordingly. B.As RMM is assessed as higher/lower, the level of completeness risk should be changed accordingly. C.After testing internal controls, the auditor can re-assess control risk. D.After testing internal controls, the auditor should re-assess acceptable audit risk.

D.After testing internal controls, the auditor should re-assess acceptable audit risk.

Which is true about control risk?A.Control risk and detection risk combine to make RMM. B.Control risk should be assessed as "low" before the audit begins. C.Control risk always decreases if the auditor chooses to test internal controls. D.Control risk is the risk that if a material misstatement were to arise, the controls would fail to detect or prevent it.

D.Control risk is the risk that if a material misstatement were to arise, the controls would fail to detect or prevent it.

Some account balances, such as pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as: A.Audit risk. B.Detection risk. C.Sampling risk. D.Inherent risk.

D.Inherent risk.

Which form of evidence would be lowest quality? A.Bank statements obtained from the client B.Confirmations to customers C.Auditor personally inspecting PP&E D.Inquiries with Bob, Warehouse Manager

D.Inquiries with Bob, Warehouse Manager

Assurance services differ from consulting services in that assurance services: 1. Focus on Providing Advice 2. Involve Monitoring of One Party by Another A. Yes Yes B. Yes No C. No Yes D. No No

Yes, Focus on Providing Advice No, DON'T Involve Monitoring of One Party by Another

Which of the following most likely occurs first? A.Assess inherent risk B.Test operating effectiveness C.Do walkthroughs D.Design substantive procedures

1. Assess inherent risk 2. Do walkthroughs 3. Test operating effectiveness 4. Design substantive procedures

Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk Detection Risk Inherent Risk A. Yes Yes Yes B. No Yes Yes C. Yes Yes No D. Yes No Yes

A. Yes Yes Yes

The external auditor has completed all tests of design effectiveness and operating effectiveness and identified no problems. This relates to the evaluation of : A.Control Risk B.Control Environment C.Monitoring Activities D.Control Activities

A.Control Risk

In an audit of internal controls the auditor is more worried about The Risk of Assessing ___ A.Control Risk too Low B.Control Risk too High C.Detection Risk too Low D.Audit Risk too Low

A.Control Risk too Low

The Chief Technology Officer reviews all programming changes related to a report only used by the financial analyst for location-level sales and cost of sales by product. The analyst uses this to identify significant waste. The CTO's review relates to which Objective in COSO? A.Operations B.Reporting C.Compliance D.Completeness

A.Operations

If the auditor needs lower detection risk, she will likely do all of the following except: A.Rely more heavily on inquiries B.Increase sample sizes C.Test more at year end D.N/A - all of the above are appropriate ways to achieve lower detection risk

A.Rely more heavily on inquiries

Which of the following would be a reason to select the lower end of the materiality range? A.You have identified higher overall risks B.You have identified lower overall risks C.Net income has experienced a lot of volatility D.Total revenues has experienced a lot of volatility

A.You have identified higher overall risks

Which of the following is true about the quality of evidence? A.External (obtained directly) < External (obtained from client) B.Confirmations > Inspecting journal entries C.Internal (strong controls) < Internal (weak controls) D.Inspecting bank statements > Inspecting fixed assets

B.Confirmations > Inspecting journal entries

Which of the following documentation is not required for an audit in accordance with auditing standards? A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives. B. An indication that the accounting records agree or reconcile with the financial statements. C. A client letter that details the auditor's planned field work. D. The basis for the auditor's conclusions about the assessed risks of material misstatement.

C. A client letter that details the auditor's planned field work.

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

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

Analytical procedures used as risk assessment procedures should A. Focus on forming an overall conclusion. B. Provide a basis for the opinion. C. Address the risk of material misstatement of revenue due to fraudulent financial reporting. D. Assist in evaluating controls.

C. Address the risk of material misstatement of revenue due to fraudulent financial reporting.

The Chief Technology Officer reviews all programming changes related to a report only used by the financial analyst for location-level sales and cost of sales by product. The analyst uses this to identify significant waste. The CTO's review relates to which Component in COSO? A.Control Environment B.Risk Assessment C.Control Activities D.Information & Communication E.Monitoring Activities

C.Control Activities

The Controller reviews the staff accountant's journal entries and posts them to the general ledger after the review. This control relates to which Component in the COSO Framework?A.Control Environment B.Risk Assessment C.Control Activities D.Information & Communication E.Monitoring Activities

C.Control Activities

The auditor identifies 3 deficiencies and 2 significant deficiencies. Which type of audit opinion will the auditor issue for the financial statements? A.The same as the ICFR opinion B.Depends on whether the auditor identifies material weaknesses C.Depends on whether the auditor finds a material misstatement and whether the client agrees to correct those misstatements

C.Depends on whether the auditor finds a material misstatement and whether the client agrees to correct those misstatements

As detection risk increases, the auditor will: A.Lower inherent risk B.Lower audit risk C.Do more testing in the interim D.Pull higher sample sizes

C.Do more testing in the interim

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

C.Financial statement assertions

The auditor has completed all walkthroughs and found no problems with design effectiveness. The auditor has no other planned procedures for internal controls. The auditor should: A.Lower control risk B.Lower audit risk C.Keep control risk at the maximum D.Keep audit risk at the maximum

C.Keep control risk at the maximum

What do auditors typically use to link the audit work performed to the final audited financial statements? A.General Ledger B.Trial Balance C.Lead Sheets D.Individual workpapers

C.Lead Sheets

In a financial statement audit, inherent risk is _____? A. The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee. B. The risk that the internal control system will not detect a material misstatement of a financial statement assertion. C. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. D. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

D. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

You've chosen total revenues as your materiality benchmark. What % will you not consider (you can select more than one)? A.0.5% B.1.0% C.2.0% D.5.0% E.10.0%

D.5.0% E.10.0%

The auditor is using 'inspection' to test operating effectiveness. Which of the following is the auditor most likely doing? A.Comparing balances from the supporting documentation to the GL balances B.Ensuring that all reconciling items have been identified C.Recalculating the amounts in the invoice D.Looking for evidence that the journal entry was reviewed, and ensuring that the reviewer had the proper authority

D.Looking for evidence that the journal entry was reviewed, and ensuring that the reviewer had the proper authority

Which of the following is not a common benchmark for materiality (you can select more than one)? A.Total Revenues B.Total Assets C.Net Income before taxes D.Net Loss

D.Net Loss

Which type of audit procedure provides the strongest evidence about operating effectiveness?A.Inquiry B.Observation C.Reperformance D.Confirmation

C.Reperformance

Which of the following statements concerning noncompliance with laws and regulations by clients is correct? A. An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements. B. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance with laws and regulations having any effect on the financial statements. C. Whether an act constitutes noncompliance with laws and regulations is a matter of auditor judgment. D. An auditor has no responsibility to detect noncompliance with laws and regulations that has an effect on the financial statements.

A. An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.

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

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

The acceptable level of detection risk is inversely related to the A. Assurance provided by substantive procedures. B. Risk of misapplying auditing procedures. C. Preliminary judgment about materiality levels. D. Risk of failing to discover material misstatements.

A. Assurance provided by substantive procedures.

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

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

Who establishes generally accepted auditing standards? A. Auditing Standards Board and the Public Company Accounting Oversight Board. B. Financial Accounting Standards Board and the Governmental Accounting Standards Board. C. State Boards of Accountancy. D. Securities and Exchange Commission.

A. Auditing Standards Board and the Public Company Accounting Oversight Board.

Which of the following is the authoritative body designated to promulgate attestation standards? A. Auditing Standards Board. B. Governmental Accounting Standards Board. C. Financial Accounting Standards Board. D. Government Accountability Office.

A. Auditing Standards Board. Statements on Standards for Attestation Engagements are issued by the Auditing Standards Board, Accounting and Review Services Committee, and the Management Consulting Services Executive Committee. The Council of the AICPA granted these bodies, which issue SASs, SSARSs, and SSCSs, respectively, the authority to interpret the Compliance with Standards Rule. The attestation standards are issued under that authority.

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? A. Auditor judgment. B. Materiality. C. Audit risk. D. Reasonable assurance.

A. Auditor judgment.

An auditor's audit documentation will least likely show how the A. Client's schedules were prepared. B. Engagement was planned. C. Understanding of the client's internal control was obtained and the risks of material misstatement were assessed. D. Significant issues were resolved.

A. Client's schedules were prepared.

Which of the following presents an opportunity for fraud (you may select more than one)? A. Collusion B. Management estimates C. Old IT system D. Spouse just lost his job E. Company is in need of financing

A. Collusion B. Management estimates C. Old IT system

If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors' A. Competence and objectivity. B. Efficiency and experience. C. Independence and review skills. D. Training and supervisory skills.

A. Competence and objectivity.

Which of the following is an auditor required to do on every audit? A. Consider the risk of material misstatement due to fraud B. Consider the risk of immaterial illegal acts C. Send confirmations to board members D. Count inventory on the balance sheet date

A. Consider the risk of material misstatement due to fraud

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

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

Internal auditing can affect the scope of the external auditor's audit of financial statements by A. Decreasing the external auditor's need to perform detailed tests. B. Allowing the external auditor to limit his or her audit to substantive testing. C. Limiting direct testing by the external auditor to assertions not directly tested by internal auditing. D. Eliminating the need to be on hand during the physical count of inventory.

A. Decreasing the external auditor's need to perform detailed tests.

Standardized working papers are often used, chiefly because they allow audit documentation to be prepared more A. Efficiently. B. Professionally. C. Neatly. D. Accurately.

A. Efficiently.

An auditor knows that she needs to decrease detection risk to respond to the assessed RMM. How might she do this? A. Increase the quantity or quality of audit testing (do more to decrease DR) B. Increase control risk C. Increase inherent risk D. Decrease the quantity or quality of audit testing

A. Increase the quantity or quality of audit testing (do more to decrease DR)

An auditor strives to achieve independence in appearance to A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the generally accepted accounting principles. D. Maintain an unbiased mental attitude.

A. Maintain public confidence in the profession.

Which of the following is an example of an incentive or pressure to commit fraud (you may choose more than one)? A. Management forecast B. Debt covenants C. Collusion D. Lack of Segregation of Duties E. Sick family member in need of financial assistance

A. Management forecast B. Debt covenants E. Sick family member in need of financial assistance

Internal controls are designed to provide reasonable assurance that A. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties. B. Management's plans have not been circumvented by worker collusion. C. The internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently. D. Management's planning, organizing, and directing processes are properly evaluated.

A. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the A. Meter department records to the billing (sales) register. B. Billing (sales) register to the meter department records. C. Accounts receivable ledger to the billing (sales) register. D. Billing (sales) register to the accounts receivable ledger.

A. Meter department records to the billing (sales) register.

You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence? A. Notes on discussions with mechanics in the maintenance operation. B. A schedule comparing actual maintenance expenses with budgeted expenses and those of the prior period and disclosing important differences. C. A narrative covering review of user reports on maintenance service. D. An analysis of changes in certain maintenance department ratios.

A. Notes on discussions with mechanics in the maintenance operation.

Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to A. Permit cross-referencing and simplify supervisory review. B. Support the audit report. C. Eliminate the need for follow-up reviews. D. Determine that working papers adequately support findings, conclusions, and reports.

A. Permit cross-referencing and simplify supervisory review.

In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the A. Population. B. Attribute of interest. C. Sample. D. Sampling unit.

A. Population.

Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel? A. Segregation of duties. B. Hiring practices. C. Training programs. D. Performance evaluations.

A. Segregation of duties.

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

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

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures? A. The relationship between financial statement assertions and audit procedures should be one-to-one. B. Audit procedures should be developed in light of financial statement assertions about the financial statement components. C. Selection of tests of financial statement assertions should depend upon the understanding of internal control. D. The auditor should resolve any substantial doubt about any of management's relevant financial statement assertions.

A. The relationship between financial statement assertions and audit procedures should be one-to-one.

The objective of performing analytical procedures in planning an audit is to identify the existence of A. Unusual transactions and events. B. Noncompliance with laws and regulations that went undetected because of internal control deficiency. C. Related party transactions. D. Recorded transactions that were not properly authorized.

A. Unusual transactions and events.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and A. Valuation and allocation. B. Completeness. C. Occurrence. D. Rights and obligations.

A. Valuation and allocation.

For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as Risk Assessment Procedures Substantive Procedures In the Review Stage A. Yes No Yes B. No Yes No C. No No Yes D. Yes Yes No

A. Yes No Yes

Which of the following procedures would a CPA do when conducting a review? (Check all that apply) A. Analytical procedures B. Compilation C. Confirmation D. Inquiry E. Walkthroughs

A. analytical procedures D. inquiry (not confirmation and walkthroughs - only for audit)

Before relying on work done by an internal auditor, the external auditor should (select all that apply): A.Review the internal auditor's documentation B.Review the internal auditor's qualifications (resume, training history, etc.) C.Sign an engagement letter with the internal auditor D.Ensure that the internal auditor reports to the CFO

A.Review the internal auditor's documentation B.Review the internal auditor's qualifications (resume, training history, etc.)

The auditor identifies a material weakness in testing controls. How will this affect detection risk (compared to the substantive strategy)? A.Stays the same B.DR will be lower C.DR will be higher

A.Stays the same (CR max for substantive and stays max if fails tests aka found MW)

The auditor uses the audit procedure of "confirmation". This is related to: A.Substantive procedures B.Tests of operating effectiveness C.Concluding procedures D.Tests of design effectiveness

A.Substantive procedures

Which of the following would be a reason to take a reliance strategy (select all that apply)? A.The client is a large accelerated filer (public company) B.Inherent risk is set lower C.Materiality is high D.Tests of controls should be cheaper than substantive tests

A.The client is a large accelerated filer (public company) D.Tests of controls should be cheaper than substantive tests

In an audit of financial statements, an auditor's primary consideration regarding an internal control is whether the control A. Reflects management's philosophy and operating style. B. Affects management's financial statement assertions. C. Provides adequate safeguards over access to assets. D. Relates to operational objectives.

B. Affects management's financial statement assertions.

Which of the following is required documentation in an audit in accordance with auditing standards? A. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting. B. An audit plan documenting the procedures to be used to reduce audit risk. C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. D. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.

B. An audit plan documenting the procedures to be used to reduce audit risk.

Which of the following statements is true concerning analytical procedures used as risk assessment procedures? A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management. B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level. C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk. D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level.

Audit standards require that the engagement partner A. Examine all available corroborating evidence. B. Be responsible for the assignment of tasks to, and supervision of, assistants. C. Review evidence and audit documentation once the report has been issued. D. Design the audit to detect all instances of noncompliance with laws and regulations having direct effects on the determination of material financial statement amounts and disclosures.

B. Be responsible for the assignment of tasks to, and supervision of, assistants. The engagement partner should take responsibility for the direction, supervision, and performance of the audit engagement in compliance with (1) professional standards, (2) applicable legal and regulatory requirements, and (3) the firm's policies and procedures (AU-C 220).

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about A. Existence. B. Classification and understandability. C. Completeness. D. Valuation and allocation.

B. Classification and understandability.

Notes that are included with financial statements are the responsibility of the A. Securities and Exchange Commission. B. Company's management. C. Independent auditor. D. Internal auditor.

B. Company's management. The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about A. Rights and obligations. B. Completeness. C. Existence. D. Valuation.

B. Completeness.

Which of the following best describe the interrelated components of internal control? A. Organizational structure, management philosophy, and planning. B. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls. C. Risk assessment process, backup facilities, responsibility accounting, and natural laws. D. Assignment of authority and responsibility, management philosophy, and organizational structure.

B. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls.

The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as A. Sampling risk. B. Detection risk. C. Nonsampling risk. D. Inherent risk.

B. Detection risk.

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

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

Which of the following issues related to internal control over financial reporting are required to be communicated in writing to management and those charged with governance? Deficiencies in internal control Significant deficiencies Material weaknesses A. I, II, and III. B. II and III only. C. III only. D. None.

B. II and III only.

Assurance and advisory services are best described as A. Services designed for the improvement of operations, resulting in better outcomes. B. Independent professional services that improve the quality of information, or its context, for decision makers. C. The assembly of financial statements based on information and assumptions of a responsible party. D. Services designed to express an opinion on historical financial statements based on the results of an audit.

B. Independent professional services that improve the quality of information, or its context, for decision makers.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? A. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. C. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. D. Inspect the open purchase order file for significant commitments that should be considered for disclosure.

B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

The planning (assessed) level of audit risk A. Can be precisely estimated with specific percentages. B. Is set by the audit partner based on professional judgment. C. Can never be known with certainty. D. Is the same for all audit engagements.

B. Is set by the audit partner based on professional judgment.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fraudulent financial reporting when A. External policies established by parties outside the entity affect its accounting practices. B. Management is dominated by one individual who is also a shareholder. C. Internal auditors have direct access to the board of directors and the entity's management. D. The audit committee is active in overseeing the entity's financial reporting policies.

B. Management is dominated by one individual who is also a shareholder.

Users of an issuer's financial statements demand independent audits because A. Users demand assurance that fraud does not exist. B. Management may not be objective in reporting. C. Users expect auditors to correct management errors. D. Management relies on the auditor to improve internal control.

B. Management may not be objective in reporting.

The ultimate purpose of understanding the entity and its environment and assessing the risks of material misstatement is to contribute to the auditor's assessment of the risk that A. Tests of controls may fail to identify procedures relevant to assertions. B. Material misstatements may exist in the financial statements. C. Specified controls requiring segregation of duties may be circumvented by collusion. D. Entity policies may be inappropriately overridden by senior management.

B. Material misstatements may exist in the financial statements.

The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that A. The auditor will reject a correct account balance as incorrect. B. Material misstatements that occur will not be detected by the audit. C. The auditor will apply an inappropriate audit procedure. D. The auditor will apply an inappropriate measure of audit materiality.

B. Material misstatements that occur will not be detected by the audit.

As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from a less effective to a more effective procedure. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of inherent risk to a higher amount.

B. Nature of substantive procedures from a less effective to a more effective procedure.

Which of the following statements about materiality is most likely to be true? A. Materiality requires that relatively more time be directed to those areas that are more susceptible to fraud. B. Performance materiality is less than materiality for the financial statements as a whole. C. Materiality at the assertion level is larger than for the financial statements as a whole. D. Materiality is measured according to specific AICPA standards.

B. Performance materiality is less than materiality for the financial statements as a whole.

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

B. Professional skepticism about the likelihood of fraud.

The primary reason to establish internal control is to A. Safeguard the resources of the organization. B. Provide reasonable assurance that the objectives of the organization are achieved. C. Encourage compliance with organizational objectives. D. Ensure the accuracy, reliability, and timeliness of information.

B. Provide reasonable assurance that the objectives of the organization are achieved.

AU-C 530, Audit Sampling, identifies two general approaches to audit sampling. They are A. Random and nonrandom. B. Statistical and nonstatistical. C. Precision and reliability. D. Risk and nonrisk.

B. Statistical and nonstatistical.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? A. The anticipated sample size of the planned substantive procedures. B. The entity's year-to-date financial results and position. C. The results of the internal control questionnaire. D. The contents of the representation letter.

B. The entity's year-to-date financial results and position.

The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true? A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when, in fact, the financial statements are fairly stated. B. The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditor's belief that the financial statements as a whole are not materially misstated. C. If misstatements are not important individually but are important in the aggregate, the concept of materiality does not apply. D. Material fraud but not material errors cause financial statements to be materially misstated.

B. The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditor's belief that the financial statements as a whole are not materially misstated.

Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.

B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment.

Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables? A. To window-dress the financial statements. B. To avoid paying taxes. C. To meet budgets and forecasts. D. All of the answers are correct.

B. To avoid paying taxes.

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities? A. Unrecorded purchases. B. Unrecorded sales. C. Merchandise purchases being charged to selling and general expense. D. Fictitious sales.

B. Unrecorded sales.

Which of the following would be a reason to take a substantive strategy (select all that apply)?A.The client is a large accelerated filer (public company) B.Inherent risk is set lower C.Materiality is high D.Tests of controls should be cheaper than substantive tests

B.Inherent risk is set lower

The auditor gets a copy of all the journal entries that the Controller reviewed in the month of March. The auditor then follows the same steps that the Controller takes and looks to see if the auditor reaches the same conclusions as the Controller (e.g., finds similar issues, documents in a similar way, etc.). The auditor is performing: A.Inquiry B.Inspection C.Observation D.Reperformance

B.Inspection

The auditor gets a copy of all the journal entries that the Controller reviewed in the month of March. The auditor then looks to see whether the Controller initialed his approval, whether there is evidence of checks for mathematical accuracy, review notes, etc. The auditor is performing: A.Inquiry B.Inspection C.Observation D.Reperformance

B.Inspection

The auditor chooses 'reperformance' for operating effectiveness. Which best describes what the auditor is doing? A.Syncing the client's GL to the auditor's IT software to recalculate all ending balances in the GL B.Obtaining all supporting documentation for the journal entry and doing exactly what the accounting manager would do when reviewing the journal entry C.Recalculating key ratios used in audit planning D.Observing the client doing the job during the walkthrough

B.Obtaining all supporting documentation for the journal entry and doing exactly what the accounting manager would do when reviewing the journal entry

The Controller reviews the staff accountant's journal entries and posts them to the general ledger after the review. This control relates to which Objective in the COSO Framework?A.Operations B.Reporting C.Compliance D.Completeness

B.Reporting

The auditor selects 30 random days throughout the year to inspect evidence that the control occurred. The selection process introduces __A.Non-Sampling Risk B.Sampling Risk C.Inherent Risk D.Confirmation Risk

B.Sampling Risk

The auditor uses the audit procedure of "reperformance". This is related to: A.Substantive procedures B.Tests of operating effectiveness C.Concluding procedures D.Tests of design effectiveness

B.Tests of operating effectiveness

Which of the following factors would most likely cause an auditor not to accept a new audit engagement? A. An inadequate understanding of the entity's internal controls. B. The close proximity to the end of the entity's fiscal year. C. Concluding that the entity's management probably lacks integrity. D. An inability to perform preliminary analytical procedures before assessing control risk.

C. Concluding that the entity's management probably lacks integrity.

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the A. Management representation letter. B. Scope paragraph of the auditor's report. C. Engagement letter. D. Introductory paragraph of the auditor's report.

C. Engagement letter.

The objective of analytical procedures performed as risk assessment procedures is to A. Evaluate the adequacy of evidence gathered in response to unusual balances identified during the audit. B. Test individual account balances that depend on accounting estimates. C. Enhance the auditor's understanding of the client's business. D. Identify material weaknesses in internal control.

C. Enhance the auditor's understanding of the client's business.

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

C. Financial statement assertions.

The following are steps in the financial statement audit process: Prepare flowchart Gather exhibits of all documents Interview personnel The most logical sequence of steps is A. I, II, III. B. I, III, II. C. III, II, I. D. II, I, III.

C. III, II, I.

All of the following are examples of substantive tests to verify the valuation of net accounts receivable except the A. Recomputation of the allowance for bad debts. B. Inspection of accounts for current versus noncurrent status in the statement of financial position. C. Inspection of the aging schedule and credit records of past due accounts. D. Comparison of the allowance for bad debts with past records.

C. Inspection of the aging schedule and credit records of past due accounts.

You tested the company's internal controls and decided that they failed your audit tests (so you now have higher Control Risk). Which of the following would be an acceptable response? A. Lower Inherent Risk B. Lower Audit Risk C. Lower Detection Risk D. Lower the quantity or quality of audit procedures

C. Lower Detection Risk

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

C. Misappropriation of assets.

Which of the following misstatements is not related to the completeness assertion for revenue? A. Goods are shipped, but revenue is not recorded B. This year's revenue is recorded next year C. Next year's revenue is recorded this year D. Revenue is not recognized for services that have been performed

C. Next year's revenue is recorded this year

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

C. Professional skepticism.

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded A. Sales. B. Sales discounts. C. Purchases. D. Purchase discounts.

C. Purchases.

Which of the following is an auditor least likely to perform in planning a financial statement audit? A. Coordinating the assistance of entity personnel in data preparation. B. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. C. Selecting a sample of vendors' invoices for comparison with receiving reports. D. Reading the current year's interim financial statements.

C. Selecting a sample of vendors' invoices for comparison with receiving reports. (substantive procedures/tests of details not till later in the audit)

All of the following are inherent risk factors except: A. Highly complex significant transactions. B. Non-routine transactions. C. The accounting manager lacks core competencies to make accounting decisions. (control risk) D. High volume of transactions.

C. The accounting manager lacks core competencies to make accounting decisions. (control risk)

The risk of material misstatement differs from detection risk in that A. RMM arises from the misapplication of auditing procedures. B. RMM may be assessed in either quantitative or qualitative terms. C. The auditor assesses RMM and responds using audit procedures to achieve DR. D. RMM can be changed at the auditor's discretion.

C. The auditor assesses RMM and responds using audit procedures to achieve DR.

Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control? A. The auditor's primary responsibility is the detection of fraud. B. The board of directors is active and independent. C. The cost of internal control should not exceed its benefits. D. Management monitors internal control.

C. The cost of internal control should not exceed its benefits.

The independent auditor should understand the internal audit function as it relates to internal control because A. The audit programs, audit documentation, and reports of internal auditors may often be used as a substitute for the work of the independent auditor's staff. B. The procedures performed by the internal audit staff may eliminate the independent auditor's need for considering internal control. C. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. D. The understanding of the internal audit function is an important substantive test to be performed by the independent auditor.

C. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable? A. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for. B. Receiving the client's mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's invoices. C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. D. Confirming accounts payable balances with known suppliers who have zero balances.

C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

Which of the following is not one of management's assertions A.Valuation B.Rights & Obligations C.Materiality D.Presentation & Disclosure

C.Materiality

Which of the following get communicated in writing to the Audit Committee? (select all that apply) A.The fact that the company has no deficiencies B.Deficiencies (detailed listing) C.Significant Deficiencies D.Material Weaknesses E.Scope Limitations

C.Significant Deficiencies D.Material Weaknesses E.Scope Limitations

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

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

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

D. Board of directors. (audit committee)

During an audit of a company's equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about A. Existence or occurrence. B. Completeness. C. Valuation and allocation. D. Classification and understandability.

D. Classification and understandability.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A. Occurrence. B. Rights and obligations. C. Valuation and allocation. D. Completeness.

D. Completeness.

An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for Inventory-Existence likely are true except: A. Fraud risk increases. B. The risk of misappropriation of assets increases. C. Risk of material misstatement increases. D. Detection risk increases. (allowable DR would need to decrease since RMM increased)

D. Detection risk increases. (allowable DR would need to decrease since RMM increased)

Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, i.e., sampling risk, is introduced. An example of sampling risk is A. Projecting the results of sampling beyond the population tested. B. Properly applying an improper audit procedure to sample data. C. Improperly applying a proper audit procedure to sample data. D. Drawing an erroneous conclusion from sample data.

D. Drawing an erroneous conclusion from sample data.

A major reason for establishing an internal audit activity is to A. Relieve overburdened management of the responsibility for establishing effective controls. B. Safeguard resources entrusted to the organization. C. Ensure the reliability and integrity of financial and operational information. D. Evaluate and improve the effectiveness of control processes.

D. Evaluate and improve the effectiveness of control processes.

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

D. I, II, and III.

An auditor most likely obtains an understanding of a new client to A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop an attitude of professional skepticism concerning management's financial statement assertions. C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Identify areas of audit emphasis.

D. Identify areas of audit emphasis.

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Materiality of Misstatements Evaluation of Significant Accounting Estimates A. Yes No B. No Yes C. Yes Yes D. No No

D. No No

The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects A. Statistical risk. B. Sampling risk. C. Audit risk. D. Nonsampling risk.

D. Nonsampling risk.

As part of understanding internal control relevant to the audit of a non issuer, an auditor does not need to A. Consider factors that affect the risks of material misstatement. B. Determine whether controls have been implemented. C. Identify the risks of material misstatement. D. Obtain knowledge about the operating effectiveness of internal control.

D. Obtain knowledge about the operating effectiveness of internal control.

You just started an auditing firm and want to audit publicly traded companies. With whom must you register? A. AICPA B. FASB C. GAO D. PCAOB E. SEC

D. PCAOB

A firm has a(n) "______ control" system in place for client (re-) acceptance. A. Audit B. Internal C. National D. Quality

D. Quality

What level of assurance does an audit provide? A. Absolute B. Disclaimer C. Limited D. Reasonable E. Total

D. Reasonable

In obtaining an understanding of an issuer's internal control, an auditor does all the following except A. Inspect documents. B. Observe employees. C. Perform a walkthrough of the transaction process. D. Send confirmations to customers.

D. Send confirmations to customers.

The proper organizational role of internal auditing is to A. Assist the external auditor to reduce external audit fees. B. Perform studies to assist in the attainment of more efficient operations. C. Serve as the investigative arm of the board. D. Serve as an independent, objective assurance and consulting activity that adds value to operations.

D. Serve as an independent, objective assurance and consulting activity that adds value to operations.

Which of the following most likely is an allowable service that an auditor may provide to a public client? A. Internal audit outsourcing. B. Legal services. C. Management consulting services. D. Tax compliance services.

D. Tax compliance services. The Sarbanes-Oxley Act prohibits audit firms from providing consulting, legal, and internal auditing services to public audit clients. However, the PCAOB may, on a case-by-case basis, create exemptions from the prohibition against providing certain nonaudit services at the time of the audit. Audit firms may provide conventional tax planning and compliance services to public audit clients.

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

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

Which of the following statements about an auditor's communication of internal control related matters identified in an audit of a nonissuer is true? A. The auditor may issue a written report to management and those charged with governance that no significant deficiencies were noted. B. Significant deficiencies or material weaknesses need not be recommunicated each year if the audit committee has acknowledged its understanding of such deficiencies. C. Significant deficiencies or material weaknesses may not be communicated in a document that contains suggestions regarding activities that concern other topics such as business strategies or administrative efficiencies. D. The auditor should communicate significant internal control related matters no later than 60 days after the report release date.

D. The auditor should communicate significant internal control related matters no later than 60 days after the report release date.

Which of the following is a false statement about the relationship of the internal auditor and the scope of the external audit of a company's financial statements? A. The nature, timing, and extent of the external auditor's substantive tests may be affected by the work of the internal auditors. B. The internal auditors may assist the external auditor in performing substantive tests and tests of controls under certain circumstances. C. The external auditor is not required to give consideration to the internal audit function beyond obtaining an understanding sufficient to identify activities relevant to planning the audit. D. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor.

D. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor.

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor would least likely consider information obtained from A. Discussions with management personnel. B. External quality reviews of the internal auditor's activities. C. Previous experience with the internal auditor. D. The results of analytical procedures.

D. The results of analytical procedures.

The auditor decides to take a reliance strategy. Which of the following is true?A.Inherent risk will automatically be set to the maximum B.Control risk will automatically be set to the maximum C.The client is a public company D.The auditor will wait to assess Control Risk until after the auditor has completed testing operating effectiveness

D.The auditor will wait to assess Control Risk until after the auditor has completed testing operating effectiveness