audit chapter 3
What is the first stage in audit risk assessment? A. Identification of accounts and related assertions most at risk of material misstatement, referred to as inherent risk B. Performance of audit procedures to identify transactions and accounts where the risk of material misstatement is lowest C. Test the existence assertion of recorded inventory D. Determination of the effectiveness of the client's system of internal controls
A. Identification of accounts and related assertions most at risk of material misstatement, referred to as inherent risk
Which term means that (or is defined as): auditors should maintain a questioning mind and thoroughly investigate all evidence presented by the client? A. Professional skepticism B. Audit risk C. Audit responsibility D. Audit Assertion
A. Professional skepticism
Which of the following denotes information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment? A. Quantitative materiality B. Qualitative materiality C. Professional materiality D. Professional judgement
A. Quantitative materiality
Which of the following is an example of an incentive or pressure that increases the risk of fraud? A. The client operates in a highly competitive industry B. The number of job offers that the company makes per year C. The due date of employee contracts D. The amount of stock options for lower-level managers
A. The client operates in a highly competitive industry
An audit strategy is developed at the ________ level. A. account or assertion B. disclosure or materiality C. financial statement D. materiality or assertion
A. account or assertion
An example of misappropriation of assets is _______. A. employees remaining on the payroll after ceasing employment B. improper asset valuation C. fictitious sales D. unrecorded liabilities
A. employees remaining on the payroll after ceasing employment
Auditors may decide to perform some tests of controls or not perform any tests of controls, if inherent risk is assessed as ________. A. moderate or low B. high or moderate C. unusually high D. None of these options are correct.
A. moderate or low
Which of the following heavily influences the process of determining an audit strategy for an account or assertion? A. The risk of material misstatement B. Materiality C. Professional skepticism D. All of these options are correct.
D. All of these options are correct.
Where does the responsibility for preventing and detecting fraud rest? A. With client management and those charged with governance B. With the auditors C. Solely with the CEO D. Solely with the CFO
A. With client management and those charged with governance
Which of the following is an impediment to the application of professional skepticism? A. Workload of the auditors B. Lack of confidence in management C. A trend to keep audit costs high D. A sole focus on the audit engagement and no other services
A. Workload of the auditors
The assessed level of inherent and control risk for each assertion will _______. A. guide auditors in developing their audit strategy to gather appropriate audit evidence B. guarantee the effectiveness of the client's system of internal controls C. eliminate the risk of material misstatement for each account D. eliminate the need for professional skepticism
A. guide auditors in developing their audit strategy to gather appropriate audit evidence
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "extent" of audit procedures is best defined as _______. A. how much testing will be done B. what type of procedure will be used C. the reliability and relevance of evidence obtained in the audit D. when the procedure will be performed
A. how much testing will be done
If results from the tests of controls show the internal control is effective at preventing and/or detecting material misstatements, auditors will conclude that control risk is ______ and overall risk of material misstatement (RMM) is ______. A. low; low B. high; high C. high; low D. low; high
A. low; low
The general type of fraud that involves some form of theft is typically known as _______. A. misappropriation of assets B. improper asset valuation C. fictitious sales D. unrecorded liabilities
A. misappropriation of assets
Auditors can control detection risk by _______. A. planning to perform more or less detailed audit procedures B. planning to perform more or less audit procedures on controls C. designing internal controls for the client D. designing the software processes that the client uses to process accounting information
A. planning to perform more or less detailed audit procedures
The purpose of Alert No. 10 from the PCAOB is to _______. A. remind auditors of the requirement to appropriately apply professional skepticism throughout the audit, as well as various judgments about certain situations B. present the new auditing standard C. present a listing of which registered accounting firms failed to exercise professional skepticism D. present a detailed report listing the client companies that need more scrutinizing by audit firms regarding fraud red flags
A. remind auditors of the requirement to appropriately apply professional skepticism throughout the audit, as well as various judgments about certain situations
Developing an audit strategy is typically accomplished in the _______. A. risk assessment phase B. risk response phase C. reporting phase D. audit strategy phase
A. risk assessment phase
The determination of when audit procedures will be performed is primarily dependent upon _______. A. the effectiveness of the client's controls B. the effectiveness of the client's human resources manager C. the audit fee D. the effectiveness of client's cloud functionality
A. the effectiveness of the client's controls
The requirement that the auditor have access to all information needed to perform the audit is stated in ________. A. the engagement letter B. substantive procedures C. an audit strategy D. AU-C 300 Planning an Audit
A. the engagement letter
Detection of fraud refers to _______. A. the use of controls and procedures aimed at uncovering a fraud should one occur B. the use of controls and procedures aimed at avoiding a fraud C. auditors who assess fraud risk factors D. incentives to commit fraud
A. the use of controls and procedures aimed at uncovering a fraud should one occur
What are the benefits of considering management assertions in the audit process? A. Assertions help guide the procedures conducted by auditors. B. Assertions guarantee that fraud will be found. C. It is possible to eliminate audit risk when assertions are used. D. Assertions eliminate the risk that inventory will be stolen.
A. Assertions help guide the procedures conducted by auditors.
How are components of the audit risk model rearranged to solve for detection risk? A. DR = AR ÷ RMM B. DR = AR + RMM C. DR = AR - RMM D. DR = AR x RMM
A. DR = AR ÷ RMM
Which of the following is NOT an element of a firms' quality control system that can help ensure the appropriate application of professional skepticism? A. Heavy workload B. Firm culture C. Professional competence and assigning personnel to engagement teams D. Documentation
A. Heavy workload
In the context of identifying fraud, which of the following describes theft of inventory by employees or others? A. Misappropriation of assets B. Fraudulent financial reporting C. A loss that is not the result of fraud D. Cooking the books
A. Misappropriation of assets
What audit procedures are designed to detect material misstatements at the assertion level? A. Substantive procedures B. Tests of control C. Fraudulent financial reporting D. Misappropriation of assets
A. Substantive procedures
Identification of risk factors is typically associated with what phase of the audit? A. The risk assessment phase B. The risk response phase C. The reporting phase D. The audit strategy phase
A. The risk assessment phase
Which of the following is/are the primary means of communication for gathering information while assessing management integrity? A. communication with the previous auditor, only B. communication with client personnel and with the client's industry peers, only C. communication with the client's industry peers, only D. communication with the client personnel, the client's industry peers and the previous auditor
D. communication with the client personnel, the client's industry peers and the previous auditor
Auditors want a low audit risk of 5% and a low detection risk of 5%. In order to achieve this, what will inherent risk and control risk have to be? A. 100% for both B. 1% for inherent risk and 100% for control risk C. 1% for both D. The risks cannot be determined because there is not enough information.
A. 100% for both
A majority of companies in the Eilifsen and Messier (2015) study used _____________ percent of income before taxes to determine planning materiality. A. 5 B. 10 C. 15 D. 2
A. 5
Substantive procedures are also known as _______. A. tests of details B. tests of controls C. tests of complex transactions D. risk assessment
A. tests of details
A significant risk is an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration. Which of the following would be classified as a significant risk? A. A risk related to a significant economic or accounting development. B. A risk related to transactions for a simple operating lease, like you sign when you rent an apartment. C. A risk that does not involve a related party transaction. D. A risk related to a transaction that involves a recording error, but was not intentional, like a fraud.
A. A risk related to a significant economic or accounting development.
What is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated? A. Audit risk B. Risk response C. Risk assessment D. Risk reporting
A. Audit risk
The general type of fraud that involves intentionally misstating items or omitting important facts from the financial statements is typically known as _______. A. fraudulent financial reporting B. writing checks to fictitious vendors C. using company cars for personal use D. theft of inventory by employees
A. fraudulent financial reporting
Timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses are examples of ________. A. fraudulent financial reporting B. misappropriation of assets C. performance materiality D. professional skepticism
A. fraudulent financial reporting
A team of auditors is gathering less evidence than is necessary, or evidence that is the easiest to obtain, rather than obtain evidence that is the most reliable and relevant. Such a lack of professional skepticism could be indicative of the team's ______. A. workload B. culture C. size D. monitoring
A. workload
What are tests of controls? A. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. B. Audit procedures designed for the determining the amount of time spent testing the client's internal controls and conducting detailed testing of transactions and account balances. C. Audit controls for developing an audit plan that details the nature, extent, and timing of audit procedures to be performed. D. Audit timelines of when audit activities occur for the audit of a client that uses a calendar year-end.
A. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
What are the primary procedures auditors use in the fraud risk assessment process? A. Brainstorming B. Accuracy checking C. Documentation D. Flowcharting
A. Brainstorming
The application of human bias toward client preferences can impede professional skepticism. Which of the following is an example of human bias at work in the audit? A. Evaluating audit evidence consistent with client preferences B. No overt emphasis on selling additional services to the client C. No overt emphasis on keeping audit costs low D. Gathering complex evidence that is the most reliable and relevant
A. Evaluating audit evidence consistent with client preferences
Which of the following is a red flag of fraud? A. High turnover of key employees B. High inventory turnover rate C. High current ratios D. High quick ratios
A. High turnover of key employees
What type of direct inquiry does an auditor make of the audit committee regarding the potential for fraud? A. The auditor inquires about the audit committee's role in preventing and detecting fraud. B. The auditor inquires about the audit committee's role to communicate with vendors. C. The auditor inquires about the audit committee's role in the auditor brainstorming session. D. The auditor inquires about the audit committee's role in determining performance materiality for the audit.
A. The auditor inquires about the audit committee's role in preventing and detecting fraud.
What two factors lead to the development of an overall strategy? A. The auditor's determination of materiality and audit risk B. The auditor's determination of inherent risk and control risk C. The auditor's determination of the risk of material misstatement and professional skepticism D. The auditor's determination of performance materiality and fraud risk
A. The auditor's determination of materiality and audit risk
The PCAOB periodically issues Staff Audit Practice Alerts, and these _______. A. are meant to provide guidance in the application of the standards B. have the full weight of any audit standard C. are FASB standards D. are IRS regulations
A. are meant to provide guidance in the application of the standards
In the substantive approach, if there is no internal control in place, the auditors _______. A. assess RMM as high since both inherent and control risk are high B. assess inherent and detective risk as high C. assess control and detective risk as high D. issue a qualified opinion
A. assess RMM as high since both inherent and control risk are high
An engagement letter is like a(an) _______. A. contract B. audit report C. job application D. note payable
A. contract
Substantive procedures are designed to _______. A. detect material misstatements at the assertion level B. evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level C. determine the quantity of audit procedures to be performed D. determine when the audit procedures will be performed
A. detect material misstatements at the assertion level
If inherent risk is determined to be high for an account or assertion, the next step is to _______. A. determine if an internal control is in place to mitigate the risk of a material misstatement B. determine if professional skepticism is being used C. determine whether management is aware of the risk D. perform less extensive detailed substantive tests
A. determine if an internal control is in place to mitigate the risk of a material misstatement
The process used when developing an audit strategy at the account or assertion level begins with identifying inherent risks at the account or assertion level. The second step is to _______. A. determine whether an internal control can mitigate the risk factor B. increase the extent of detailed substantive procedures performed at year-end C. perform less extensive detailed substantive procedures at interim D. determine whether insurance can be purchased to eliminate internal controls
A. determine whether an internal control can mitigate the risk factor
Timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses is an example of _______. A. fraudulent financial reporting B. performance materiality C. planning materiality D. balance sheet benchmarks
A. fraudulent financial reporting
The risk of material misstatement is a function of _______. A. inherent risk and control risk B. control risk and deterrent risk C. inherent risk and deterrent risk D. inherent risk and deterrent risk
A. inherent risk and control risk
In an audit strategy, the first step is to identify ________ risks during the ________ phase. A. inherent; risk assessment B. detection; risk response C. significant; reporting D. control; risk response
A. inherent; risk assessment
Tests of controls are also known as _______. A. internal controls testing B. substantive control testing C. tests of details D. material misstatement testing
A. internal controls testing
The auditor brainstorming session serves as an opportunity for _______. A. more senior members of the audit team to share important information about the client with new members of the audit team B. the audit team to share stories about other clients C. the audit team to relax and not worry about documentation D. partners to impress staff members within the accounting firm
A. more senior members of the audit team to share important information about the client with new members of the audit team
If RMM is low, auditors are much more likely to perform substantive procedures for balance sheet accounts ______. A. one or two months prior to year-end B. one or two months after year-end C. at year-end D. None of these answer choices are correct.
A. one or two months prior to year-end
The risk response phase involves the _______. A. performance of detailed tests of controls and substantive testing B. evaluation of the results of the detailed testing C. performing of a risk and materiality assessment D. development of an audit strategy
A. performance of detailed tests of controls and substantive testing
In the substantive approach, if there is an internal control in place, the auditors may _______. A. test the effectiveness of the internal control B. issue a qualified opinion C. assess all procedures in the audit as having high audit risk D. withdraw from the audit
A. test the effectiveness of the internal control
Prevention of fraud refers to _______. A. the use of controls and procedures aimed at avoiding a fraud B. the use of controls and procedures aimed at uncovering a fraud should one occur C. auditors who assess fraud risk factors D. incentives to commit fraud
A. the use of controls and procedures aimed at avoiding a fraud
A detection risk of 1.5 or 150% means _______. A. there would be a 150% risk that the auditors' procedures will not be effective in detecting a material misstatement B. auditors will need to undertake 1.5 times the audit procedures planned in the initial stages of the audit C. there would be a 150% risk that the auditors' procedures will be effective in detecting a material misstatement D. auditors will perform extensive detailed testing of related account balances and use larger sample sizes because a 1.5 detection risk is a low detection risk
A. there would be a 150% risk that the auditors' procedures will not be effective in detecting a material misstatement
In a general timeline of when audit activities occur for the audit of a client that uses a calendar year-end, the period referred to as "interim" is typically during the latter part of the ________. A. third quarter and into the fourth quarter B. second quarter and into the third quarter C. first quarter and into the second quarter D. first quarter through fourth quarter
A. third quarter and into the fourth quarter
An example of fraudulent financial reporting is _______. A. timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses B. writing checks to fictitious vendors C. using company cars for personal use D. theft of inventory by employees
A. timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses
A pressure on auditors to maintain good client relationships to ensure future audit engagements leads to a change in thinking that could _________. A. weaken professional skepticism B. strengthen tests of controls C. reduce significant risk D. increase quantitative materiality
A. weaken professional skepticism
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "nature" of audit procedures is best defined as _______. A. what type of procedure will be used B. the reliability and relevance of evidence obtained in the audit C. when the procedure will be performed D. how much testing will be done
A. what type of procedure will be used
In accounting, "year-end" is typically the period _______. A. when the client's accounting year has substantially finished, and the account balances reflect the totals for the entire year under audit B. that is 4-6 weeks after the auditors leave the client's location C. during the latter part of the third quarter and into the fourth quarter D. when most of the audit planning and risk assessment occur
A. when the client's accounting year has substantially finished, and the account balances reflect the totals for the entire year under audit
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "timing" of audit procedures is best defined as _______. A. when the procedure will be performed B. how much testing will be done C. what type of procedure will be used D. the reliability and relevance of evidence obtained in the audit
A. when the procedure will be performed
Suppose auditors assess inherent risk and control risk as low, 25% and 8% respectively. If auditors want to keep audit risk relatively low at 5%, then what is detection risk? A. 2.50 or 250% B. .02 or 2% C. .05 or 5% D. 2.00 or 200%
A. 2.50 or 250%
Which of the following is most likely an example of an opportunity that increases the risk that a fraud may have been perpetrated? A. A high volume of transactions close to year-end B. A high turnover of clerical staff C. A high reliance on simple accounting transactions D. A high amount of depreciation expense
A. A high volume of transactions close to year-end
Which of the following is not a fraud risk factor? A. Amount of ethics training provided by the company B. An incentive or pressure to commit fraud C. An opportunity to commit fraud D. Rationalization to justify fraudulent actions
A. Amount of ethics training provided by the company
In the context of an auditor's attitude, what basic assumption does maintaining professional skepticism entail? A. The client management is not always honest. B. The client management is not always dishonest. C. The client management is always dishonest. D. The client management is always honest.
A. The client management is not always honest.
The factor that influences client acceptance and retention decisions with respect to whether the accounting firm has the expertise to perform the services requested by the client is known as: A. competence issues. B. independence issues. C. integrity of management. D. special circumstances and unusual risk.
A. competence issues.
Holding everything else constant, as the auditor's evaluation of materiality_______, the auditor is looking to obtain a more precise conclusion about the financial statements. The _______precision of the audit will cause the auditor to perform more extensive audit procedures. A. decreases, increased B. increases, decreased C. increases, increased D. decreases, decreased
A. decreases, increased
When considering clients like Boeing, inventory will most likely be the largest current asset and prepaid expenses will be one of the smallest. As a result, the auditors should plan to _______. A. devote more audit time to the inventory account than the prepaid expenses account B. devote more audit time to prepaid expenses to the inventory account C. use more complex audit tests for inventory and more simple audit tests for prepaid expenses D. observe more material misstatements in prepaid expenses due to timing differences as compared to the inventory account
A. devote more audit time to the inventory account than the prepaid expenses account
The final phase of the audit involves _______. A. drawing conclusions based upon the evidence gathered and arriving at an opinion about the fair presentation of the financial statements B. detailed testing of internal controls, transactions, account balances, and disclosures the auditors have determined to be at high risk of material misstatement C. planning the audit by assessing risk to reduce audit risk to an acceptably low level D. gaining an understanding of the client and identifying factors that may impact the risk of a material misstatement occurring in the financial statements
A. drawing conclusions based upon the evidence gathered and arriving at an opinion about the fair presentation of the financial statements
The new auditor should communicate with the previous auditor in order to _______. A. gain an understanding about the reasons for the change of auditors B. get all the passwords and logins to the client software C. get the previous auditor's work papers D. serve them with an official change of auditor notice
A. gain an understanding about the reasons for the change of auditors
The second stage in audit risk assessment is to _______. A. gain an understanding of the client's system of internal controls B. prevent fraud C. use subjective measurement in financial statements D. focus on the significant transactions outside of the client's normal course of business
A. gain an understanding of the client's system of internal controls
From a definitional perspective, information is considered material if it _______. A. impacts the decision-making process of users of the financial statements B. is diverse in nature C. only includes qualitative evidence D. includes income statement benchmarks
A. impacts the decision-making process of users of the financial statements
In order to maintain professional skepticism, an auditor must also maintain _______. A. independence from management B. support of management's questionable assumptions C. situational reliability D. support of questionable financial disclosures
A. independence from management
The auditor can set detection risk as high if _________. A. inherent risk and control risk are low B. inherent risk and control risk are high C. inherent risk is low and control risk is high D. inherent risk is high and control risk is low
A. inherent risk and control risk are low
The risk assessment process is a(an) _______. A. iterative process B. one-time process C. concluding process D. infrequent process
A. iterative process
If auditors determine a higher planning materiality level, they will plan to gather _______ extensive audit evidence. A. less B. more C. a greater proportion of D. complex
A. less
Total equity may be more reliable of a benchmark for determining planning materiality when a company is experiencing a _______. A. loss or very poor operating results B. high number of operating lease contracts C. large amount of property, plant, and equipment purchases significant volume of sales.
A. loss or very poor operating results
The determination of performance materiality is _________________and involves the exercise of professional judgment. A. not a simple mechanical calculation B. a simple mechanical calculation C. a simple manual calculation D. a mechanical calculation that includes solving for derivatives
A. not a simple mechanical calculation
As per the appendix to AU-C 210, Terms of Engagement, a typical engagement letter for a private company client begins with a paragraph on the ________. A. objective and scope of the audit B. responsibilities of the auditor C. responsibilities of management D. fee arrangements and billings
A. objective and scope of the audit
The auditor may spend more time testing the existence assertion of recorded inventory in all of the following EXCEPT _______. A. office supply stores B. jewelry stores C. the Apple store that sell iPhones and iPads D. exclusive sunglass stores (e.g., selling Oakley and Ray Ban sunglasses)
A. office supply stores
A(an)______________ is an amount set by the auditor that is less than planning materiality and is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure. A. performance materiality B. quantitative materiality C. qualitative materiality D. auditing standard
A. performance materiality
Information is considered quantitatively material if it exceeds the magnitude of an auditor's _______ materiality assessment. A. planning B. performance C. qualitative D. quantitative
A. planning
AU-C 300 Planning an Audit and AS 2101 Audit Planning primarily requires auditors to _______. A. plan the audit by assessing risk to reduce audit risk to an acceptably low level B. perform tests of the system of internal control, or tests of account balances, transactions, or disclosures C. make decisions about the extent and timing of detailed testing of account balances and transactions D. rely on the client's system of internal controls
A. plan the audit by assessing risk to reduce audit risk to an acceptably low level
Auditors make preliminary risk assessments while _______. A. planning the audit B. drawing conclusions about client controls, transactions, and account balances C. planning to rely on the client's system of internal controls D. testing the account balances and transactions
A. planning the audit
The use of performance materiality should reduce the ________________ and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole. A. probability that the sum of immaterial B. sum of the probabilities of material C. difference between the material D. the product of probabilities for material
A. probability that the sum of immaterial
Misstatements that impact a user's decision-making process for a reason other than its magnitude constitute ________ materiality. A. qualitative B. quantitative C. performance D. All of these answer choices are correct
A. qualitative
In an analysis by Eilifsen and Messier (2015), of the eight largest U. S. public accounting firms in the study, _______ firms revealed that they use "income before income taxes" as the primary benchmark for determining planning materiality. A. seven B. six C. five D. four
A. seven
If new information comes to light that would cause the auditor to establish a different level of planning materiality, then the auditor _______. A. should examine the information and make adjustments to materiality as needed B. issue a qualified opinion as part of the audit report C. follow the auditing standards that recommend an appropriate percentage of total assets as a benchmark for planning materiality for all companies D. have management of the company select the appropriate benchmark for planning materiality
A. should examine the information and make adjustments to materiality as needed
The audit risk model can also be used for quantitative analysis in which all risks are stated as a percentage ranging from _______. A. 1% to 1% B. 1% to 100% C. 1% to 10% D. 1% to 5%
B. 1% to 100%
During which phase or phases of the audit do auditors adopt the attitude of professional skepticism? A. risk response phase B. reporting phase C. risk assessment phase D. all phases of the audit
D. all phases of the audit
At the assertion level, the risk of material misstatement refers to risks that affect classes of ________. A. account balances, only B. transactions and disclosures, only C. disclosures, only D. transactions, account balances, and disclosures
D. transactions, account balances, and disclosures
Information is considered quantitatively material if it _______. a. exceeds the dollar magnitude of an auditor's planning materiality assessment b. affects a user's decision-making process for a reason other than its dollar magnitude c. indicates the audit client is in danger of breaching a debt covenant d. indicates there is a change in client operations that affects the level of risk faced by the client
a. exceeds the dollar magnitude of an auditor's planning materiality assessment
What is the second phase of the audit? A. The risk response phase B. The reporting phase C. The audit strategy phase D. The risk assessment phase
A. The risk response phase
Which of the following examples most likely is an attitude or rationalization used to justify a fraud? A. An excessive focus on maximization of profits and/or stock price B. An excessive focus on unionization C. An excessive focus on vacation time D. An excessive focus on application of ethical standards
A. An excessive focus on maximization of profits and/or stock price
In an audit situation, which of the following risks can be reduced to zero? A. Detection risk and inherent risk, but not control risk B. Inherent risk, control risk, and detection risk C. Control risk and detection risk, but not inherent risk D. Neither detection risk, inherent risk, nor control risk.
D. Neither detection risk, inherent risk, nor control risk.
What term refers to the determination of the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances? A. Audit strategy B. Risk response C. Reporting D. Risk assessment
A. Audit strategy
What is the first stage of any audit? A. Client acceptance or a continuance decision B. Risk assessment C. Reporting D. Risk response
A. Client acceptance or a continuance decision
Auditors gather information through communication with individuals internal and external to the prospective client. Which of the following would be internal to the client? A. Communication with client personnel B. Communication with third parties C. Communication with the client's industry peers D. Communication with the previous auditor
A. Communication with client personnel
Which of the following would be considered as internal information gathered primarily about the integrity of client management? A. Communication with client personnel B. Communication with the client's bankers and lawyers C. Communication with the client's industry peers D. A review of articles in industry trade journals
A. Communication with client personnel
MNE and Associates is auditing Blanchard Company. MNE has decided to use 5% of income (earnings) before income tax as a benchmark. If income (earnings) before income tax was $33 million, what would be the amount of planning materiality? A. $1.65 million B. $31.43 million C. $660,000 D. $34.65 million
A. $1.65 million
1. In the Eilifsen and Messier (2015) study, the firms that used benchmarks of total assets and total revenues, used what percent of these figures to determine their planning materiality? A. 0.25% to 2.0% B. 2.0% to 2.5% C. 0.25% to 5.0% D. 5.0% to 7.5%
A. 0.25% to 2.0%
Which of the following is true in the case of an auditor communicating with a continuing client in the beginning of a contract? A. A new engagement letter is not needed if the terms of engagement remain unchanged B. No reminder of the engagement terms is needed if no revisions are made to the engagement letter C. No reminder of the engagement terms is needed if a continuance decision is made. D. No engagement letter is needed in all cases of continuance decision.
A. A new engagement letter is not needed if the terms of engagement remain unchanged
AU-C 200.A22, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards states auditors should be skeptical if certain situations arise. Which situation is NOT included in those that AU-C 200.A22 presents? A. A situation indicates that there is the need for fewer audit procedures. B. Audit evidence recently gathered is contradictory to other evidence previously gathered. C. New information brings into question the reliability of client documents or responses to auditor inquiries. D. Conditions are observed that indicate evidence of possible fraud.
A. A situation indicates that there is the need for fewer audit procedures.
The audit risk model is presented as _______. A. AR = f (IR * CR * DR) B. AR = f (IR + CR + DR) C. AR = f (IR + CR - DR) D. AR = f (IR * CR) / DR
A. AR = f (IR * CR * DR)
What is performance materiality? A. Amount or amounts set by the auditors at less than the materiality level for particular classes of transactions, account balances, or disclosures B. Information or misstatements that impact a user's decision-making process for a reason other than its magnitude C. Information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment, which is a percentage of an appropriate benchmark D. None of these options are correct.
A. Amount or amounts set by the auditors at less than the materiality level for particular classes of transactions, account balances, or disclosures
What happens if an independence threat appears to be insurmountable? A. An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client. B. The audit firm should contact the State Board of Accountancy so they can make a press release to discourage other accountants from taking the engagement. C. The audit firm should make certain that safeguards are put in place to limit or remove those threats. D. The audit firm should take the engagement and continue to make certain that safeguards are put in place to limit or remove those threats.
A. An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client.
When the financial statements are materially misstated for a particular client, which of the following will constitute an audit risk? A. An auditor expressing an incorrect audit opinion B. The discontinuance of an internal process from a previous year C. Creditors and investors expressing a favorable opinion D. Some stakeholders not relying on the auditing firm
A. An auditor expressing an incorrect audit opinion
Which of the following was one of the largest accounting firms in the world during the 1990's and early 2000's? A. Arthur Andersen B. Laventhol & Horwath C. Arthur Young & Co D. Supreme, Inc.
A. Arthur Andersen
Which of the following processes is associated with the reporting phase? A. Conclusions are drawn when testing the client's controls. B. Decisions are made about extent and timing of detailed testing of account balances. C. Risk assessment procedures are performed to ensure appropriate attention is paid to transactions. D. Factors are identified that may impact the risk of a material misstatement.
A. Conclusions are drawn when testing the client's controls.
If a company refuses permission to contact its previous audit firm, what should the new auditor do? A. Consider the implications of that refusal when deciding whether to accept the engagement. B. Contact potential third parties to gain information about the client firm. C. Review newspaper and magazine articles about the client. D. Do a background check on the CEO of the company.
A. Consider the implications of that refusal when deciding whether to accept the engagement.
After determining materiality, which of the following is NOT a step for the auditor to follow? A. Determine who is most likely to commit fraud B. Determine the type and extent of risk assessment procedures to be performed C. Identify and assess the risk of material misstatements occurring at the financial statement level and the account balance level D. Begin development of an audit strategy
A. Determine who is most likely to commit fraud
Throughout all phases of the audit, auditors should keep questions in mind when gathering audit evidence. Which is of the following is an example? A. Do we need to perform more audit procedures? B. If management offers to take us to eat lunch during the audit, should we assume this is breakdown in controls? C. Should we assume that client management is dishonest until proven otherwise? D. Should we assume that any information from management and those charged with governance is correct?
A. Do we need to perform more audit procedures?
Which of the following statements is true? A. Inherent risk is the susceptibility of an assertion to material misstatement before consideration of any related controls. B. Inherent risk assessment is affected by internal factors but not external factors. C. It is possible to eliminate audit risk. D. During the risk assessment phase, auditors will perform audit procedures to identify transactions and accounts where the risk of material misstatement is lowest.
A. Inherent risk is the susceptibility of an assertion to material misstatement before consideration of any related controls.
Which of the following would be least likely to help you assess the integrity of management? A. Interviews with human resources about its long-term disability provider. B. Interviews about the reputation of the client, its management, directors, and key stakeholders with the previous auditor. C. Interviews with management about its attitude to risk exposure. D. Interviews with the prior auditor about the client's reasons for switching audit firms, if the company was previously audited.
A. Interviews with human resources about its long-term disability provider.
Which of the following is a positive factor influencing client acceptance and retention decisions with respect to the integrity of management? A. Management places a premium on representational faithfulness of accounting information. B. Concerns exist about the integrity of management in business and accounting decisions. C. Management is preoccupied with meeting specific accounting numbers. D. Management integrity in business and accounting decisions seem to be situational and only remedied when noted by the auditors.
A. Management places a premium on representational faithfulness of accounting information.
When is it necessary to send a new engagement letter to a continuing client? A. Only when the terms of the engagement have changed. B. Every year. C. On a quarterly basis. D. Along with the CPA's bill for the first year of services.
A. Only when the terms of the engagement have changed.
Which of the following is an amount set by the auditor that is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure? A. Performance materiality B. Planning materiality C. Overall materiality D. Qualitative materiality
A. Performance materiality
What should auditors aim for when working with audit risk? A. Reducing audit risk to an acceptably low level B. Eliminating audit risk C. Increasing audit risk to an acceptably high level Stabilizing audit risk from year to year in order to eliminate audit procedures
A. Reducing audit risk to an acceptably low level
Which of the following is performed during the risk assessment phase? A. Risk and materiality assessment B. Detailed tests of controls C. Substantive testing of transactions and accounts D. Drawing conclusions based upon the evidence gathered
A. Risk and materiality assessment
Which of the following involves gaining an understanding of the client, identifying risk factors, developing an audit strategy, and setting planning materiality? A. Risk assessment phase B. Risk response phase C. Substantive procedures D. Tests of controls
A. Risk assessment phase
AU-C 200.A22, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards states auditors should be skeptical if which of the following situations arises during the audit? A. Situations that indicate the need for additional audit procedures beyond what is required by generally accepted auditing standards B. An environment of information stability and little change of client documents C. Conditions where gaining evidence of possible fraud is impossible D. Audit evidence recently gathered agrees with other evidence previously gathered
A. Situations that indicate the need for additional audit procedures beyond what is required by generally accepted auditing standards
Which of the following is a negative factor influencing client acceptance and retention with respect to competence issues? A. The audit firm does not have the affiliation with specialists to meet client needs. B. The client has a weak accounting system with few internal controls. C. The audit firm has conflict of interest issues that cannot be resolved prior to client acceptance. D. There are significant regulatory reporting requirements with close monitoring by regulators.
A. The audit firm does not have the affiliation with specialists to meet client needs.
What must happen before planning the audit and implementing the phase of risk assessment? A. The client acceptance or continuation decision has to be made B. The risk response phase has to be completed C. The reporting phase must be undertaken D. The audit strategy must be planned
A. The client acceptance or continuation decision has to be made
Which overview defines audit strategy? A. The determination of the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances. B. Gaining an understanding of the client, including identifying risk factors. C. Performing tests of controls and detailed substantive testing of transactions and accounts. D. Evaluation of results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements.
A. The determination of the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances.
In general, what does detailed testing of account balances provide? A. The evidence needed by auditors to determine if the financial statements are fairly presented B. Information about revising preliminary conclusions drawn during the risk assessment phase C. The exact amount of time spent gathering audit evidence D. A listing of the audit tests performed during all phases
A. The evidence needed by auditors to determine if the financial statements are fairly presented
An evaluation of the results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements is associated with what phase of the audit? A. The reporting phase B. The response phase C. The risk assessment phase The risk of material misstatement phase
A. The reporting phase
What is the last phase of the audit? A. The reporting phase B. The risk response phase C. The audit strategy phase D. The risk assessment phase
A. The reporting phase
Which phase helps improve the efficiency and effectiveness of the audit? A. The risk assessment phase B. The risk response phase C. The reporting phase D. The audit strategy phase
A. The risk assessment phase
Which of the following is not a phase of the audit? A. The risk continuance phase B. The risk assessment phase C. The risk response phase D. The reporting phase
A. The risk continuance phase
What is control risk? A. The risk that a client's internal controls will not prevent or detect a material misstatement on a timely basis. B. The assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration C. An audit risk assessment that involves the identification of accounts and related assertions most at risk of material misstatement D. A risk that management's assertion, or claim, that recorded inventory exists
A. The risk that a client's internal controls will not prevent or detect a material misstatement on a timely basis.
What is audit risk? A. The risk that an auditor expresses an inappropriate audit opinion when financial statements are materially misstated B. The risk that is explicit or implied and made by management regarding the recognition, measurement, presentation and disclosure of items included in the financial statements and notes C. The risk that a client's internal controls will not prevent or detect a material misstatement on a timely basis D. The assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration
A. The risk that an auditor expresses an inappropriate audit opinion when financial statements are materially misstated
Which of the following is a positive factor influencing client acceptance and retention with respect to special circumstances and unusual risks? A. There are minimal regulatory reporting requirements. B. There are significant regulatory reporting requirements with close monitoring by regulators. C. The client voices significant concerns about the scope of audit work. D. The client is experiencing profitability issues, weak cash flows, and is close to violation of debt covenants.
A. There are minimal regulatory reporting requirements.
MNE and Associates used the benchmark of 5% of income (earnings) before income tax and came up with $9.5 million as their planning materiality for Garden, Inc. MNE also determined that planning materiality using a benchmark of 1% total assets resulted in $23 million. How should MNE decide which planning materiality amount to use? A. Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment. B. The auditors would use the largest amount in order to detect larger material misstatements. C. The auditors would use the smaller amount in order to keep with the principle of conservatism. D. The auditors would average the two amounts because the use of two benchmarks provides greater precision.
A. Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment.
When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year? A. When the detection risk is low B. When the inherent risk is low C. When the control risk is low D. When the inherent risk in high
A. When the detection risk is low
Information is considered qualitatively material if it _______. A. affects a user's decision-making process for a reason other than its magnitude B. exceeds the dollar magnitude of an auditor's planning materiality assessment C. can be presented as a percentage of net income D. includes liquidity ratios of interest to bond holders
A. affects a user's decision-making process for a reason other than its magnitude
The auditor's opinion is expressed in the _______. A. audit report B. financial statement footnotes C. retained earnings statement D. risk response phase documentation
A. audit report
An engagement letter is prepared by the _______ and acknowledged by the _______ before the audit begins. A. auditor; client B. client; client C. auditor; state government D. federal government; client
A. auditor; client
The main purpose of an engagement letter is to _______. A. avoid any misunderstandings between the auditor and the client B. advertise the additional services that the CPA firm provides C. present the conclusion of the audit D. request any and all information that the CPA firm might need to complete the audit
A. avoid any misunderstandings between the auditor and the client
An engagement letter is prepared by an auditor and acknowledged by a client _______. A. before the audit begins B. after the audit is completed C. before the client's year-end D. after the interim report is issued
A. before the audit begins
The use of performance materiality should: A. reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole. B. increase the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole. C. reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole. D. increase the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole.
A. reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.
Auditors make decisions about the extent and timing of detailed testing of account balances and transactions during the ________phase of the audit. A. risk response B. audit strategy C. reporting D. risk assessment
A. risk response
Performance of detailed tests of controls and substantive testing is typically accomplished in the ____________ phase of the audit. A. risk response B. audit strategy C. reporting D. risk assessment
A. risk response
Audit risk is best defined as the _______. A. risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated B. application of risk assessment procedures C. element that helps form risk assessment D. risk of noncompliance with laws and regulations
A. risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Martin Inc. is being audited by the firm MNE and Associates. MNE's auditors decide that $100 million is the planning materiality and $50 million is the appropriate performance materiality at the account level. If all of Martin's account balances are below $50 million, the auditors will: A. still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate. B. to perform detailed audit procedures on the accounts because the sum of Martin's accounts is greater than $50 million. C. end audit procedures, both detailed and on controls, because performance materiality has reduced the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole. D. check the auditing standard guidelines for the determination of performance materiality.
A. still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate.
Lower inherent risk traits are found where _______. A. technological developments are a minimal factor in the valuation of the client's assets B. the client's industry is experiencing a period of decline C. the client has insufficient working capital and is at risk of violating loan contracts D. the client's location is at risk of facing natural disasters, such as hurricanes and flooding
A. technological developments are a minimal factor in the valuation of the client's assets
If management is preoccupied with meeting specific accounting numbers, this is a negative factor that should influence client acceptance and retention and is associated with _______. A. the integrity of management B. competence issues within the audit firm C. independence issues within the audit firm D. special circumstances and unusual risks
A. the integrity of management
The engagement letter does NOT include _______. A. the requirement that the auditor have access to all social security numbers of client employees in order to perform background checks B. an explanation of the scope of the audit C. the timing of the completion of various aspects of the audit D. an overview of the client's responsibility for the preparation of the financial statements
A. the requirement that the auditor have access to all social security numbers of client employees in order to perform background checks
What is audit risk? A. the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated B. the risk that an auditor expresses an objectionable audit opinion when the financial statements are materially misstated C. the risk that an auditor expresses an adverse opinion when the financial statements are materially misstated D. the risk that an auditor expresses an incompatible audit opinion when the financial statements are materially misstated
A. the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
In addition to income before income taxes, another acceptable benchmark(s) for private company audits is(are) _______. A. total assets and total revenues B. net income C. income tax rate D. net liabilities
A. total assets and total revenues
Higher inherent risk traits are found where _______. A. transactions or account balances are derived from significant estimates B. transactions or account balances are easily confirmed with reliable sources C. the client's industry is thriving D. the client's location has minimal risk of being affected by a natural disaster
A. transactions or account balances are derived from significant estimates
When classifying risks as being significant, consideration is given to whether the risk involves all the following except involvement of _______. A. very simple transactions B. fraud C. significant third parties D. significant subjectivity in measurement
A. very simple transactions
Which of the following statements are true? A. The auditing standards require specific percentages be applied as benchmarks in setting planning materiality. B. For both private and publicly traded companies, the primary users of financial statements are the stockholders. C. Auditors rely heavily on their professional judgment in setting planning materiality D. Audit firms do not vary in the method they use to set planning materiality in the risk assessment phase.
C. Auditors rely heavily on their professional judgment in setting planning materiality
