Audit 2
General business sources ______ only relate to an industry and exclude individual companies can relate to an industry or individual company only relate to an individual company and exclude industry publications
Can relate to an industry or individual company
Existence is riskier than completeness for:
Cash (C - cash C- completeness)
Question an auditor asks when assessing _____ risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"
Control
The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk. detection inherent control
Control
Question an auditor asks when assessing ________ risk is, "what is the audit client doing when misstatement occur?" Are proper system in place to prevent or detect misstatement
Control Risks
Another name for employee fraud, embezzlement, and larceny is
Defalcation
Auditing standards use the term ______ to refer to misappropriation of assets. larceny error embezzlement defalcation
Defalcation
The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk. detection control inherent
Detection
Using the audit risk model, the auditor must adjust _____ risk for significant accounts and relevant disclosures.
Detection
Auditors can and do influence the level of:
Detection Risk only
___________ is calculated and derived from other risks and is the amount of risk the auditor can allow
Detection risk
Auditors can and do influence the level of both detection and control risk control, detection and inherent risk both detection and inherent risk detection risk only
Detection risk only
__________ is the risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is
Detection risk.
An auditor should consider the laws and regulations that are typically known by auditors to have a potentially material effect on the financial statements for _____-_____ noncompliance.
Direct-effect
Regardless of when analytical procedures are performed, testing is concluded by ______. comparing expectations with recorded amounts investigating significant differences documenting team findings defining a significant difference developing an expectation
Documenting team findings
A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called _____ or defalcation.
Embezzlement
A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called
Embezzlement or Defalcation
Employee fraud can be classified as either _____ or _____
Embezzlement or larceny
Misappropriating funds or other property from one's boss in the definition of
Employee Fraud
Misappropriating funds or other property from one's boss in the definition of _____ _____ (2 words)
Employee fraud
An unintentional misstatement or financial statement omission is referred to as a(n) ______. error embezzlement defalcation larceny
Error
A misstatement in the financial statements may be caused by a(n) _____ or _____
Error or fraud
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as___________
Risk of material misstatement.
A company's failure to provide minutes of the meetings of directors and committees of the board of directors is a significant _____ _____ that could result in the public accounting firm's disclaiming an opinion on the financial statements. (2 words)
Scope limitation
Analytical procedures used when planning an audit should concentrate on signs of accounts and relationships that may represent specific potential problems and risks in the __________
financial statements.
The audit team's first concern is the effect of the noncompliance on the _______________
financial statements.
Interviewing the entity's management, internal auditors, directors, audit committee and other employees
-provides information on personnel competence and integrity -is a required audit procedure -helps bring auditors up to date on business and industry changes
General business sources include:
-registration statements and 10-K filings -specialized trade magazines and journals -business newspapers
Finding out a client is planning to acquire another company
-results in additional risks for the auditor -is a component of understanding the nature of the company
Control risk slightly below the maximum is 0.60 -0.95 and the maximum control risk is ______
1.0
All companies trading on the stock exchanges are required to have a(n) ____________ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management
Audit Committee
The probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated is the definition of
Audit Risk
The audit strategy memorandum becomes the basis for preparing the ______. engagement plan audit risk model audit plan audit team
Audit plan
The audit strategy is a result of the ______. resources available engagement plan audit plan audit risk model
Audit risk model
____________ is is not created by the auditors and is the susceptibility of the account to misstatement
inherent risk
The formula for the audit risk model is ______.
inherent risk × control risk × detection risk
The formula for the audit risk model is ______. inherent risk × control risk × detection risk detection risk - (inherent risk + control risk) inherent risk + control risk + detection risk (inherent risk + control risk) - detection risk
inherent risk × control risk × detection risk
A _________ is never recorded, so this type of investigation is generally difficult.
"dangling credit"
The theory of the __________is an asset amount that is investigated and found to be false or questionable.
"dangling debit"
Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include
-overstating assets and understating liabilities - omitting important information from disclosures
Which of the following statements regarding audit risks are correct
- audit risk should bet an appropriately low level - the focus on evaluating audit risk on the relevant assertions identified
Investigating significant differences at the preliminary stage
- can be used to plan additional audit work - may be considered attention directing - help auditors identify risks as an aid in preparing the audit plan
Factors related to the susceptibility of accounts to misstatement or fraud include:
- liquidity - complexity
Items that must be documented in the working papers during the risk assessment process include:
- other conditions causing auditors to plan additional procedures - discussion with engagement personnel - significant decisions during discussion
Items that must be documented in the working papers during the risk assessment process include:
- results of audit procedures, particularly regarding management override -specific risks identified and audit team responses -procedures to identify and assess risks
In establishing the overall audit strategy, the auditor should take into account the:
-auditor's evaluation of risk assessment -results of preliminary engagement activities -significant factors in directing engagement team activitie -reporting objectives of the engagement
In the audit risk model
-detection risk is based on the desired level of audit risk and assessed levels of inherent and control risks - AR = IR * CR * DR
Issues of particular importance in times of economic distress include:
-fair value measurements -inventory -revenue recognition -goodwill impairment
If the potential for fraud is high, auditors should:
-include more experience team members -examine more transactions -use less predictable audit procedures -perform extended procedures
Knowing industry characteristics
-includes knowledge of the client's competition -relates to differences in production and marketing activities
Inherent Risks
-is not created by the auditors -is the susceptibility of the account to misstatement
Fraud Risk:
-is not specifically mentioned in the audit risk model -must be considered on each audit engagement
Auditors are responsible for:
-looking for indications of systematic bias -monitoring differences between estimates and audit evidence
Noncompliance or suspected noncompliance
-may require discussion with the client's legal council -must always be responded to by the auditors
A company's performance measures
-might indicate qualitative factors to consider when determining materiality -identify what managers deem is key indicators of company performance
Audit risk is evaluated at both the overall financial statement level and for each significant _____ and _____
Account & Disclosure
Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of _____ _____ (2 words)
Accounting estimates
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
Accounts receivable.
when auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary
Analytical Procedures
When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary _____ _____ (2 words)
Analytical procedure
___________ incorporate information from a variety of sources such as relationships among current financial balances and prior balances, forecasts, and nonfinancial data.
Analytical procedures
_____________ can be used when planning the audit, when performing substantive procedures during an audit, and as a method of overall review at the end of an audit.
Analytical procedures
Analytical procedures are required:
At the end and beginning of the audit
All companies trading on the stock exchanges are required to have a(n) _____ _____ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management (2 words)
Audit Committee
Fraud risk ______. may or may not be ignored depending on the assessment of inherent and control risks can never be ignored can only be ignored with continuing audit clients
Can never be ignored
Which of the following statements regarding audit risk are correct? (Select all that apply) The auditing professional has an official standard regarding acceptable level of audit risk. Audit risk is generally only evaluated at the overall financial statement level. Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.
Audit risk should be at an appropriately low level. The focus on evaluating audit risk is on the relevant assertions identified.
The audit plan includes a description of the _____ _____ memorandum. (2 words)
Audit strategy
the nature, timing and extent of resources needed to perform the engagement should be outlined in the audit
Audit strategy
__________ places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms. Most firms use low, moderate and high, but these all represent a range of numbers.
Audit theory
Which of the following statements are correct? (Select all that apply) If an auditor becomes aware of an illegal act procedures must be performed to determine if one occurred. Auditors are not expected to know all relevant laws and regulations affecting their clients. Auditors are not required to provide assurance about indirect-effect noncompliance.
Auditors are not expected to know all relevant laws and regulations affecting their clients. Auditors are not required to provide assurance about indirect-effect noncompliance.
__________ that contain difficult estimates to audit are very challenging to auditors
Balances
Which of the following statements are true regarding assessing the risk of fraud? (Select all that apply) The easiest way to look for omission of liabilities is the "dangling credit". Balances that contain difficult estimates to audit are very challenging for auditors. Some fraudulent accounting entries only affect one account or place in the financial statements. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.
Balances that contain difficult estimates to audit are very challenging for auditors. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.
White-collar crimes may ______ the organization. be perpetrated by or upon only be perpetrated by only be perpetrated upon
Be perpetrated by or upon
When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts. either before or after after before
Before
When completing analytical procedures, an auditor should define a significant difference _________ comparing expectations with recorded amounts
Before
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential" has or may have occurred, the auditors must inform the
Board of Directors
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, the auditors must inform the ______. CFO and CEO audit committee board of directors SEC
Board of directors
On every audit engagement, the risk assessment process includes required _____ sessions in which critical audit areas are discussed.
Brainstorming
sks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called _____ risks.
Business
When thinking about each of the relevant financial statement assertions, the auditor should focus on what ______. is being done right can go wrong dollar amount is considered significant
Can go wrong
According to auditing standards, an "auditors responsibility to detect and report misstatements from illegal acts that have a direct and material effect on the determination of financial statement amounts is the same as that for misstatement caused by ______. error or fraud indirect-effect noncompliance direct-effect noncompliance
Error or fraud
If the potential for fraud is high, auditors should perform _____ _____, including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points. (2 words)
Extended procedures
_______ refers to the number of tests performed. Eg: the larger number of accounts receivable confirmations that are mailed to customers, the greater the chance of finding errors and fraud, and therefore, the lower the detection risk.
Extent
True or False: A well planned and carefully performed audit can virtually eliminate audit risk
False
True or false: A company's failure to provide minutes is not considered a significant scope limitation
False
True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.
False
According to professional auditing standards, which of the following is NOT a type of audit risk? inherent fraud detection control
Fraud
By definition _____ risks are significant risks.
Fraud
The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe and act on it is the definition of
Fraud
the act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe an act on it is the definition of
Fraud
Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their _____ _____ assessment. (2 words)
Fraud Risk
Management fraud is something referred to as
Fraudulent Financial Reporting
Auditors have a responsibility to detect ______. only fraud that involves management all fraudulent activity regardless of if it affects the financial statements fraudulent activity that results in materially misstated financial statements
Fraudulent activity that results in materially misstated financial statements
Intentional misstatements in financial statements to deceive financial statement users is the definition of _____ _____ _____ (3 words)
Fraudulent financial reporting
Management fraud is sometimes referred to as _____ _____ _____ (3 words)
Fraudulent financial reporting
Credit risk must be assessed and _____ if material misstatement is NOT likely to be detected by client's internal controls
High
IF the calculated acceptable level of detection risk is _______, that means auditors could use less effective testing, and ________ means auditors need more effective testing
High; low
For Timing, _________ detection risk allowed means that testing can be performed at interim and _________ detection risk allowed means testing is performed at the end of the year.
Higher; lower
A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______. noted in the working papers but not reported to anyone outside the audit team reported in notes to the financial statements ignored reported to management above the level of the people involved
Reported to management above the level of the people involved
Which of the following statements are true? (Select all that apply) When a court issues a subpoena, an auditor can refuse to respond on the basis of audit-client privilege. If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. Under SEC rules, limited disclosures to outside agencies of frauds and clients' noncompliance are permitted. Auditors are normally required to keep client information confidential.
If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. Auditors are normally required to keep client information confidential.
Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance? (Select all that apply) If the audit firm resigns or is fired When the auditor is a successor auditor When answering a subpoena
If the audit firm resigns or is fired When answering a subpoena
A violation of equal employment opportunities is an example of ________ ________ non compliance
Indirect - Effect
A violation of equal employment opportunities is an example of _____-_____ noncompliance.
Indirect-effect
The basis for executing an appropriate response to identified risks is ______ risk assessment. inherent detection control fraud
Inherent
The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is _____ risk.
Inherent
When performing risk assessment procedures, the first step auditors often take it to assess _____ risk for each relevant assertion related to each of the significant accounts and disclosures identified on an audit engagement.
Inherent
The components of the risk of material misstatement (RMM) are ______ risk and _____ risk.
Inherent & Control Risk
The basis for executing an appropriate response to identified risk is ____________ risk assessment
Inherent Risks
The risk of material misstatement is composed of which audit risk components?
Inherent risk and control risk.
The key difference between error and fraud is ______. the magnitude of the misstatement who is responsible intent
Intent
There is a(n) ______ relationship between RMM and detection risk. inverse direct
Inverse
If preliminary findings indicate the possibility of fraud, auditors should ______. enlist the cooperation of the Board of Directors involve fraud examination professionals issue a disclaimer of opinion
Involve fraud examination professionals
The auditor's responsibility for detecting indirect-effect noncompliance is ______. limited higher than his or her responsibility for direct-effect noncompliance nonexistent as there is no responsibility the same as the responsibility for direct-effect noncompliance
L
When an employee misappropriates funds or property not entrusted to his or her custody, an act of _____ or simple theft has occurred.
Larceny
When detection risk is high, the auditor requires __________ effective testing than when detection risk is low
Less effective testing
Factors related to the susceptibility of accounts to misstatement or fraud include ______. liquidity organizational structure complexity
Liquidity & complexity
An account or disclosure ______. is only significant if it exceeds the materiality level may be significant even though the balance is below materiality
May be significant even though the balance is below materiality
Company discussion boards ______. can be used as a replacement for discussions with client personnel should not be considered a reliable source of company information may be used by anonymous whistle-blowers
May be used by anonymous whistle-blowers
The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the _____ _____ process and ultimately the audit plan. (2 words)
Risk assessment
Which of the following statements are correct? (Select all that apply) Gaining an understanding of strategies and procedures involves gathering evidence in areas historically addressed by auditors. Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.
Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.
Noncompliance or suspected noncompliance ______. does not have to be responded to if it is "clearly inconsequential" must always be responded to by the auditor
Must always be responded to by the auditor
Fraud risk ______. (Select all that apply) must be considered on each audit engagement is the risk of material error by management when issuing financial statements is not specifically mentioned in the audit risk model
Must be considered on each audit engagement Is not specifically mentioned in the audit risk model
When doing fraud risk assessment, auditors ______. should not presume improper revenue recognition is a risk without cause plan to test for improper revenue recognition without making any assumptions must presume improper revenue recognition is a risk base the assessment of improper revenue recognition of prior audit reports
Must presume improper revenue recognition is a risk
The type and purpose is referred to as the _____ of an audit procedures.
Nature
Errors are ______ considered fraud. always sometimes never
Never
Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______. (Select all that apply) understating expenses and revenues omitting important information from disclosures overstating assets or understating liabilities
Omitting important information from disclosures Overstating assets or understating liabilities
Audit teams are concerned ______. only with fraudulent activity that results in materially misstated financial statements with all material and immaterial frauds with all material fraudulent activities whether or not they affect the financial statements with all fraudulent activities that have any connection to the financial statements
Only with fraudulent activity that results in materially misstated financial statements
Internal control is a set of policies and procedures designed to achieve management objectives in three different categories. Maintaining a good business reputation and increasing market share are objectives of the _____ category.
Operations
Due to the importance of industry characteristics, mos large public accounting firms
Organize their audit staff by industry
An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______. permissible, but rarely done not permissible permissible and often done
Permissible, but rarely done
At the preliminary stage, analytical procedures are _____ tests.
Reasonableness
A higher assessed risk of material misstatement for a relevant assertion being audited _______ detection risks
Reduces
Determining if transactions with them have been properly accounted for and disclosed in the financial statements is the auditor's primary objective in regards to _____ _____ (2 words)
Related parties
Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called _____ _____ (2 words)
Related parties
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion. risky significant relevant material
Relevant
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a __________ assertion
Relevant
Frauds involving senior management or high-level employees ______. should be reported to the audit committee or Board of Directors may be inconsequential, depending on the threshold level always require the auditor to disclaim an opinion
Should be reported to the audit committee or Board of Directors
An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a ______ account or disclosure. material risky relevant significant
Significant
Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called _____ risks.
Significant
Risks that require special audit consideration because of the nature of or likelihood of potential magnitude of misstatement related to the risks are called
Significant Risk
Factors related to the susceptibility of accounts to misstatement or fraud include ______. (Select all that apply) size of account balance the volume of transactions if the account records payables
Size of account balance The volume of transactions
Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, they must ______ inform the SEC. always sometimes never
Sometimes
A well planned and carefully performed audit ______ audit risk. can virtually eliminate still has some
Still has some
The nature, timing, and extent of resources needed to perform the engagement should be outlined in the audit _____
Strategy
Tests of details and analytical procedures which study plausible relationships are the two categories of
Substantive procedures
Auditors are able to reduce detection risk by completing more and stronger ______. substantive tests tests of details
Substantive tests
Which of the following statements regarding audit risk are correct? (Select all that apply) Audit risk is generally only evaluated at the overall financial statement level. The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level. The auditing professional has an official standard regarding acceptable level of audit risk.
The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level.
True or false: Audit team brainstorming sessions are a required audit engagement component.
True
True or false: Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.
True
True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when managements' estimates all exhibit conservatism.
True
True or false: The professional statements make clear that risk assessment underlies the entire audit process.
True
True or false: The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement.
True
Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements. one; one two; two one; two two; one
Two; two
Knowing if a client is centralized or decentralized is a component of
Understanding the nature of the company
Knowing if a client is centralized or decentralized is a component of ______. identifying related parties recognizing industry concerns understanding the nature of the company assessing detection risk
Understanding the nature of the company
Most firms express their audit risk ______. using qualitative measures quantitatively (as numbers)
Using qualitative measures
Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called _____ analysis.
Vertical
The misdeeds of people who steal with a pencil or computer terminal are known as _____-_____ crimes.
White-collar
audit risk is evaluated at both the overall financial statement level and for each significant
account and disclosure
Audit risk is evaluated at both the overall financial statement level and for each significant___________ and __________
account; disclosure
Valuation of investment securities, depreciation, and net realizable value of accounts receivable are all examples of
accounting estimates
At the final review stage, ___________ procedures are designed to provide an overall test of reasonableness about the financial statements being reviewed, in light of all available evidence.
analytical review
Analytical procedures are required ______. Multiple select question. at the end of the audit as substantive testing procedures at the beginning of the audit
at the end of the audit at the beginning of the audit
The ___________ needs to be set low or very low
audit risk
__________ should be at an appropriately low level and focus on evaluation of _________ is on the relevant assertions identified
audit risk
The audit strategy is a result of the:
audit risk model
The audit plan includes a description of the _______ memorandum
audit strategy
An _______ contains specifications of procedures the auditors believe appropriate for the financial statements under audit.
audit strategy memorandum
An audit committee is composed of members of a company's _____________ who are not involved in the day-to-day operations of the company.
board of directors
Auditors ______. (Select all that apply) cannot place complete reliance on internal controls to the exclusion of other audit procedures are not permitted to rely exclusively on evidence produced by substantive procedures, even when control risk is high can estimate inherent risk to be zero and omit other evidence-gathering procedures would not seem to exhibit due professional care if the level of audit risk was too high
cannot place complete reliance on internal controls to the exclusion of other audit procedures would not seem to exhibit due professional care if the level of audit risk was too high
Existence is riskier than completeness for ______.
cash
Question an auditor asks when assessing ___________ risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"
control
Question an auditor asks when assessing ___________"What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"
control
The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk.
control
The professional standards break down overall audit risk into
control risk, inherent risk, and detection risk
In the audit risk model, the assessment of inherent risk and _____ risk lead to a determination of _____
control, detection
The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______.
decreases as the RMM increases
The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______. is not dependent on RMM decreases as the RMM increases decreases as the RMM decreases
decreases as the RMM increases
Anther name for employee fraud, embezzlement and larceny
defalcation
In the audit risk model, the assessment of inherent risk and control risk lead to a determination of __________ risk.
detection
In the audit risk model, the assessment of inherent risk and control risk lead to a determination of_________ risk.
detection
The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk.
detection
In the audit risk model ______. (select all that apply) detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk the desired level of audit risk is based on the assessed level of inherent, control and detection risk AR = IR × CR × DR detection risk is considered to be independent of inherent and control risks which are interrelated
detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk AR = IR × CR × DR
Auditors can and do influence the level of ______.
detection risk only
Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) explanation of why improper revenue recognition is a risk discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion
discussions with engagement personnel other conditions causing auditors to plan additional procedures significant decisions during discussion
Regardless of when analytical procedures are performed, testing is concluded by:
documenting team findings
auditors would not seem to exhibit ___________ if the level of audit risk was too high
due professional case
A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called __________ or defalcation
embezzlement
Employee fraud can be classified as either ______ or ______
embezzlement; larceny
According to auditing standards, an "auditors responsibility o detect and report misstatements from illegal acts that have a direct and material effect on the determination of financial statement amounts is the same as that for misstatement caused by:
error or fraud
The level of detection risk is always based on the assessment of ________
inherent and control risk
_________ is due to intent, not error
fraud
The ___________ is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements.
fraud brainstorming session`
___________ must be considered on each audit engagement and is not specifically mentioned in the audit risk model
fraud risk
Management fraud is sometimes referred to as _________ and is done by intentional misstatements in financial statements to deceive financial statement users
fraudulent financial reporting
an auditor most likely consider an inherent risk factor in planning an audit is if the entity enters into significant derivative transactions as ___________.
hedges
Investigating significant differences at the preliminary stage ______. (Select all that apply) help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work provides direct evidence about the number in the financial statements may be considered attention directing
help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work may be considered attention directing
Even if they think control risk is _______, auditors often perform some tests of controls.
high
Inherent risk assessed and must be ____ if material misstatement is likely to enter the accounting information system
high
Assess risk of material misstatement at ___________ audit risk by performing extensive substantive tests. The objective is to perform a quality audit and keep audit risk low.
high and achieve an acceptably low
Calculating year-to-year changes in balance sheet and income statement accounts is called
horizontal
Calculating year-to-year changes in balance sheet and income statement accounts is called
horizontal analysis
A company's performance measures ______. (Select all that apply) identify what managers deem as key indicators of company performance related to management compensation help auditors gain a better understanding of their clients might indicate qualitative factors to consider when determining materiality
identify what managers deem as key indicators of company performance might indicate qualitative factors to consider when determining materiality
Auditors perform analytical procedures in the planning stage of an audit for the purpose of ___________ that deserve more auditing effort. This is the "attention‑directing" purpose.
identifying unusual conditions
An audit team's assessment of control risk as low ______. (Select all that apply) implies controls are effective allows auditors to use smaller sample sizes implies controls can definitely be relied on may limit the use of substantive tests of details
implies controls are effective allows auditors to use smaller sample sizes may limit the use of substantive tests of details
Examples of business risks include ______. (Select all that apply) industry developments new products and services inaccurate accounting estimates business expansion
industry developments new products and services business expansion
Auditors cannot place complete reliance on __________ to the exclusion of other audit procedures
internal controls
There is an ____ relationship between risk of material misstatement and detection risk
inverse
Inherent risk ______. (Select all that apply) is not created by the auditors is the susceptibility of the account to misstatement is not related to the nature of the client's business can be controlled by the auditors
is not created by the auditors is the susceptibility of the account to misstatement
Detection risk ______. is the amount of risk the auditor can allow determines the overall level of audit risk is calculated and derived from other risks
is the amount of risk the auditor can allow is calculated and derived from other risks
When an employee misappropriates funds or property not trusted to his or her custody, an act of _________ or simple theft has occurred
larceny
With respect to accounting estimates, auditors are responsible for ______. (Select all that apply) looking for indications of systematic bias monitoring differences between estimates and audit evidence making accounting estimates ensuring that all accounting estimates are conservative
looking for indications of systematic bias monitoring differences between estimates and audit evidence
0.10-0.45 is considered _________ control risk which is Quantitative
low
For Nature, the _________ detection risk allowed, the more effective tests; the ________ detection risk allowed, less effective tests.
lower; higher
Business risk assessment ______. (Select all that apply) makes auditors more knowledgeable about the client's business and environment should focus on gathering evidence in areas historically addressed by auditors is an important component of an audit may involve asking production personnel about labor problems
makes auditors more knowledgeable about the client's business and environment is an important component of an audit may involve asking production personnel about labor problems
The closer the procedures are performed to year-end (balance sheet date) the more effective they are because there is less change of a __________ occurring between the interim conformation date and year end.
material misstatement
An account or disclosure
may be significant even though the balance is below materiality
When developing an expectation of an account balance, auditors ______. (Select all that apply) may consider third party information should not consider budgets and forecasts may use vertical and horizontal analysis may consider relevant nonfinancial information
may consider third party information may use vertical and horizontal analysis may consider relevant nonfinancial information
___________ is often referred to as employee fraud. Another name for employee fraud, embezzlement, and larceny is _________
misappropriation of assets; defalcation
0.40-.70 is considered _________ control risk which is Quantitative
moderate
Extent allows __________ for lower detection risk allowed and _________ for higher detection risk allowed
more tests; fewer tests
Noncompliance or suspected noncompliance ______. (Select all that apply) must always be responded to by the auditors may require discussions with the client's legal council always requires financial statement disclosure should always be recorded to the audit committee
must always be responded to by the auditors may require discussions with the client's legal council
When doing fraud risk assessment, auditors
must presume improper revenue recognition is a risk
The __________ of an audit procedure refers to the type of procedure (Eg: observation, recalculation, inquiry), this is where the auditor is considering WHAT to do.
nature
The type and purpose is referred to as the __________ of an audit procedures.
nature
Based on the allowable or planned level of detection risk, auditors modify the _____, the _____, and the _____ of further audit procedures.
nature, timing & extent
Based on the allowable or planned level of detection risk, auditors modify the __________of further audit procedures.
nature, timing and extent
The assessment of inherent risk ______. (select all that apply) does not need to consider the overall materiality level needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure
needs to be evaluated without regards to internal controls needs to occur for each significant financial statement account and disclosure
Due to the importance of industry characteristics, most large public accounting firms ______. assign auditors to audits of many different industries to improve their knowledge organize their audit staff by industry limit their audit engagements to one or two specific industries
organize their audit staff by industry
Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______, understating expenses and overstating revenues, and omitting important information from disclosures
overstating assets or understating liabilities
An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______.
permissible, but rarely done
Auditors are not required to report all finding of errors and frauds to _________
police authorities.
Items that must be documented in the working papers during the risk assessment process include ______. (Select all that apply) procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses communications to the audit team and audit firm partners
procedures to identify and assess risk results of audit procedures, particularly procedures regarding management override specific risks identified and audit team responses
Interviewing the entity's management, internal auditors, directors, audit committee and other employees ______. (Select all that apply) should not be used to build personal working relationships provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes
provides information on personnel competence and integrity is a required audit procedure helps bring auditors up to date on business and industry changes
IF the relevant assertion is risky, or the related controls are poor, auditors would want to ______________ by modifying the nature, time, and extent of further procedures to increase their effectiveness.
reduce detection risk
A higher assessed risk of material misstatement for a relevant assertion being audited ______ detection risk.
reduces
General business sources include ______. (Select all that apply) registration statements and 10-K filings business newspapers company charter and bylaws specialized trade magazines and journals
registration statements and 10-K filings business newspapers specialized trade magazines and journals
An auditor's primary objective in regards to _______________ is to determine if transactions with them have been properly accounted for and disclosed in the financial statements
related parties
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion.
relevant
A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be
reported to management above the level of the people involved
Finding out a client is planning to acquire another company ______. (Select all that apply) results in additional risks for the auditor is a component of understanding the nature of the company is a component of recognizing industry concerns requires the auditor to issue a modified audit opinion
results in additional risks for the auditor is a component of understanding the nature of the company
In establishing the overall audit strategy, the auditor should take into account the ______. (Select all that apply) results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement nature of communication required by company management significant factors in directing engagement team activities
results of preliminary engagement activities auditor's evaluation of risk assessment reporting objectives of the engagement significant factors in directing engagement team activities
Issues of particular importance in times of economic distress include ______. (Select all that apply) revenue recognition inventory goodwill impairment management compensation fair value measurements
revenue recognition inventory goodwill impairment fair value measurements
Frauds involving senior management or high-level employees
should be reported to the audit committee or Board of Directors
An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a ______ account or disclosure.
significant
If the account is not risky and controls are strong, the auditor could employ less effective and less costly __________
substantive audit procedures
Tests of details and analytical procedures which study plausible relationships are the two categories of_______
substantive procedures
_________ refers to WHEN the audit procedures will be completed, this is done when the auditor considers whether to complete the procedures at an interim date or at the balance sheet date.
timing
Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements.
two
Most firms express their audit risk ______.
using qualitative measures
If the audit risk is at .05 that means that on average that five percent of audit opinions would be __________
wrong
