Audit Chapter 4
The primary distinction between and is whether the misstatement was intentional or unintentional. (Enter only one word per blank.)
Blank 1: errors or error Blank 2: fraud
Being the low-cost or high-quality provider of a product are examples of business . (Enter only one word per blank.)
Blank 1: strategies or strategy
An auditor tests an invoice for services provided and determines that the amount charged is incorrect. This is an example of a ______ misstatement. Multiple choice question. projected judgmental factual
factual
If inherent and control risks are high, in order to achieve the planned level of audit risk, the auditor will ______ level of detection risk. Multiple choice question. require an higher set a lower
set a lower
True or false: At the completion of the audit, the actual or achieved level of audit risk is known with certainty by the auditor. True false question. True False
False
Misstatements due to error or fraud include ______. Multiple select question. omission of an amount inaccurate data processing disclosures presented in accordance with GAAP incorrect accounting estimates
omission of an amount inaccurate data processing incorrect accounting estimates
Under which of the following circumstances may auditors have a duty to disclose fraud to an outside entity? Multiple select question. In response to a subpoena. To comply with legal and regulatory requirements. To a predecessor auditor when the predecessor makes inquiries of the successor auditor about the client. To a governmental funding agency.
In response to a subpoena. To comply with legal and regulatory requirements. To a governmental funding agency.
Who addresses business risks by implementing a risk assessment process? Multiple choice question. The audit committee The board of directors Auditors Management
Management
To obtain information about an entity and its environment, auditors may make inquires of ______. Multiple select question. in-house legal counsel marketing and sales personnel board of directors Internal auditors industry competitors
in-house legal counsel marketing and sales personnel board of directors Internal auditors
The formula for the audit risk model is ______. Multiple choice question. AR = RMM x DR AR = RMM x IR AR = CR x DR AR = IR x DR
AR = RMM x DR
The risk that a material account or disclosure assertion will not be prevented, detected or corrected on a timely basis by the entity's internal control is risk. (Enter only one word per blank.)
Blank 1: control
True or false: Consideration of audit risk at the financial statement level is referred to by the term assertion.
False
Which of the following areas require documentation related to the auditor's risk assessment and response? Multiple select question. Nature, timing and extent of procedures performed to identify risks. Evaluation of management's response to identified risk. Communication about error and fraud made to management and others. Discussion among the engagement team. Auditor education and training related to risk assessment.
Nature, timing and extent of procedures performed to identify risks. Evaluation of management's response to identified risk. Communication about error and fraud made to management and others. Discussion among the engagement team.
An auditor makes inquiries of an entity's customers and discovers the customers received large quantities of unordered products just before year-end. This is an indicator of ______. Multiple choice question. understated revenues overstated liabilities understated liabilities overstated revenues
overstated revenues
Unintentional misstatements of amounts or disclosures in financial statements are referred to as . (Enter only one word per blank.)
Blank 1: errors or error
The formula auditors use to determine the appropriate level of detection risk is ______. Multiple choice question. AR = DR × CR AR = RMM × IR DR = AR ÷ RMM DR = CR ÷ AR
DR = AR ÷ RMM
Auditors should perform audits to reduce ______ risk to a sufficiently low level before expressing an opinion on the financial statements. Multiple choice question. business audit inherent control
audit
Many public accounting firms find it appropriate to use ______ in the audit risk model. Multiple choice question. percentages qualitative terms specified dollar amounts
qualitative terms
If an entity's response to identified risks is adequate, the risk of material misstatement may be ______. Multiple choice question. eliminated increased reduced
reduced
Evaluations of financial information made through the study of plausible relationships among both financial and non-financial data are referred to as . (Enter only one word per blank.)
Blank 1: analytical Blank 2: procedures
Consideration of audit risk at the account balance and disclosure levels is known by the term . (Enter only one word per blank.)
Blank 1: assertion
The audit team is required to hold discussions, referred to as , about the entity's financial statements' susceptibility to fraud. (Enter only one word per blank.)
Blank 1: brainstorming Blank 2: sessions
Incentive, opportunity and rationalization are three conditions that are sometimes referred to as the Blank 1Blank 1 fraud , Correct Unavailable Blank 2Blank 2 a , Incorrect Unavailable triangle. (Enter only one word per blank.)
Blank 1: fraud Blank 2: risk
When auditing a public company, the auditor is generally responsible to disclose fraud to the ______. Multiple select question. internal auditors SEC audit committee senior management
audit committee senior management
The risk that the auditor is exposed to financial loss or damage to their professional reputation in connection with the audited financial statements is known as ______. Multiple choice question. audit risk risk of material misstatement business risk engagement risk
engagement risk
The greater the incentive or pressure, the more likely an individual will be able to ______. Multiple choice question. rationalize the acceptability of committing fraud resist the temptation to commit a dishonest act have an opportunity to commit fraud
rationalize the acceptability of committing fraud
Which of the following statements are correct? Multiple select question. A deviation in the entity's performance measures may indicate a risk of misstatement in the related financial information. Internal performance measures provide information about progress towards meeting entity objectives. Comparing an entity's performance with competitors is an example of an external performance measure. Auditors must consider the reliability of internal performance measures before using them for purposes of the audit.
A deviation in the entity's performance measures may indicate a risk of misstatement in the related financial information. Internal performance measures provide information about progress towards meeting entity objectives. Auditors must consider the reliability of internal performance measures before using them for purposes of the audit.
True or false: Professional skepticism is not a way to reduce judgment errors. True false question. True False
False
If the auditor assesses the level of audit risk as being less than or equal to the level of audit risk, an unqualified report can be issued. (Enter only one word per blank.)
Blank 1: achieved or actual Blank 2: planned
The risk of material misstatement is also referred to as risk because it stems from decisions made by the entity. (Enter only one word per blank.)
Blank 1: client
Although some control can be exercised through the careful acceptance and continuance of clients, risk cannot be directly controlled by the auditor. (Enter only one word per blank.)
Blank 1: engagement
The risk of material misstatement refers to misstatements caused by or . (Enter only one word per blank.)
Blank 1: errors or error Blank 2: fraud
misstatements about which there is no doubt are called misstatements. (Enter only one word per blank.)
Blank 1: factual
An intentional act involving the use of deception that results in an misstatement in the financial statements is referred to as . (Enter only one word per blank.)
Blank 1: fraud
At the assertion level, audit risk consists of risk, risk and risk. (Enter only one word per blank.)
Blank 1: inherent Blank 2: control Blank 3: detection
True or false: Observation and inspection audit procedures should be limited to current activities performed inside the organization without considering outside sources. True false question. True False
False
When an auditor has discovered fraud, ______. Multiple choice question. it must be immediately reported to the SEC if the entity is registered a duty to disclose outside the entity exists in some circumstances he or she may only communicate it to parties within the entity
a duty to disclose outside the entity exists in some circumstances
If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______. Multiple select question. adverse disclaimer of opinion modified unqualified qualified
adverse modified qualified
Auditors assess the risk of material misstatement at the ______ level. Multiple choice question. financial statement assertion materiality disclosure
assertion
If an auditor has determined that material misstatements were or may have been the result of fraud and is unable to determine if the effect is material, the auditor should ______. Multiple select question. withdraw from the engagement immediately increase the amount of audit fees charged for the engagement attempt to obtain evidence in order to determine whether material fraud has occurred and its effect suggest that the appropriate level of management consult with legal counsel consider the implications for other aspects of the audit
attempt to obtain evidence in order to determine whether material fraud has occurred and its effect suggest that the appropriate level of management consult with legal counsel consider the implications for other aspects of the audit
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is known as ______ risk.
audit
An active role in the oversight of the assessment of the risk of fraud should be assumed by the ______. Multiple choice question. board of directors audit committee external auditors internal auditors
audit committee
If the results of audit tests indicate a significant risk of fraud, the auditor should ______. Multiple choice question. immediately issue an adverse audit opinion consider withdrawing from the engagement discuss the matter and approach to future investigation with senior management
consider withdrawing from the engagement
Steps auditors perform as part of the fraud risk assessment process include ______. Multiple select question. consideration of unusual or unexpected relationships identification and assessment of control risk factors inquiries of the audit committee about their views on the risks of fraud team member discussions regarding the risk of material misstatement
consideration of unusual or unexpected relationships inquiries of the audit committee about their views on the risks of fraud team member discussions regarding the risk of material misstatement
The risk that a misstatement could occur in an assertion and would not be prevented, or detected and corrected, on a timely basis by the entity's internal control is known as ______ risk. Multiple choice question. detection audit control inherent
control
Attitudes/rationalizations that may suggest misappropriation of assets include ______. Multiple select question. failure to correct known internal control deficiencies changes in behavior of lifestyle the susceptibility of assets to misappropriation disregard for the need to reduce misappropriation risk
failure to correct known internal control deficiencies changes in behavior of lifestyle disregard for the need to reduce misappropriation risk
Items that may result in significant risks include ______. Multiple select question. entity specific issues industry specific issues assertions identified with fraud risk factors choice of depreciation method revenue recognition
industry specific issues assertions identified with fraud risk factors revenue recognition
The auditor should ______. Multiple select question. inquire about management's knowledge of fraud within the entity not consider inquiries from third parties when assessing risk of fraud within the entity make inquiries of the internal audit function to assess their risk of fraud. make direct inquiries of the audit committee when assessing risk of fraud
inquire about management's knowledge of fraud within the entity make inquiries of the internal audit function to assess their risk of fraud. make direct inquiries of the audit committee when assessing risk of fraud
The use of the audit risk model ______. Multiple select question. involves considerable auditor judgment assists the auditor in determining the scope of audit procedures is based on specific guidance provided by auditing standards
involves considerable auditor judgment assists the auditor in determining the scope of audit procedures
If the achieved level of audit risk is greater than the planned level, auditor options include ______. Multiple select question. issuing an unqualified audit opinion modifying the audit opinion performing additional audit work
modifying the audit opinion performing additional audit work
When compared to a high level of detection risk, a low level of detection risk implies that the investigation of an account will be ______ thorough. Multiple choice question. more less
more
An auditor uses the misstatements identified in an audit sample to estimate the misstatements in the entire population. This is an example of a ______ misstatement. Multiple choice question. factual projected judgmental
projected
Observation and inspection audit procedures include ______. Multiple select question. tracking historical stock prices of the entity reading management reports tracing transactions through the information system visits to the entity's premises and plant facilities
reading management reports tracing transactions through the information system visits to the entity's premises and plant facilities
Which of the following statements are correct? Multiple select question. An auditor may unknowingly rely on fraudulent audit evidence. Most fraudulent financial reporting involves management override of controls. Honest individuals cannot be pressured into committing fraud. Withholding evidence or misrepresenting information may conceal fraud.
An auditor may unknowingly rely on fraudulent audit evidence. Most fraudulent financial reporting involves management override of controls. Withholding evidence or misrepresenting information may conceal fraud.
The auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary . (Enter only one word per blank.)
Blank 1: analytical Blank 2: procedures
Misstatements arising from the misappropriation of assets is sometimes referred to as . (Enter only one word per blank.)
Blank 1: defalcation
The effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the risk. (Enter only one word per blank.)
Blank 1: detection
Standards require extensive of the auditor's risk assessment procedures and audit responses to identified risks. (Enter only one word per blank.)
Blank 1: documentation
The susceptibility of a material account or disclosure assertion to a misstatement due to fraud or error, before considerations of any related controls is risk. (Enter only one word per blank.)
Blank 1: inherent
The entity's policies and procedures designed to provide reasonable assurance about the achievement of the entity's objectives is labeled . (Enter only one word per blank.)
Blank 1: internal Blank 2: control
An active and qualified board of directors, proper authorization of transactions and procedures to ensure assets exist are all examples that may be part of an entity's . (Enter only one word per blank.)
Blank 1: internal Blank 2: control or controls
When an auditor considers management's selection of an accounting policy to be inappropriate, a(n) misstatement arises. (Enter only one word per blank.)
Blank 1: judgmental
If an entity's response to identified risks are inadequate, the auditor's assessment of the risk of may increase. (Enter only one word per blank.)
Blank 1: material Blank 2: misstatement
The combination of inherent risk and control risk is referred to in auditing standards as the risk of . (Enter only one word per blank.)
Blank 1: material Blank 2: misstatement
Audit evidence is subject to human error which is referred to as risk. (Enter only one word per blank.)
Blank 1: nonsampling
Market-share growth and excellent service and reputation are examples of business . (Enter only one word per blank.)
Blank 1: objectives
Financial statement level risks are risks in that they apply to multiple components of the financial statements. (Enter only one word per blank.)
Blank 1: pervasive
An objective of brainstorming with the audit team is emphasizing the importance of maintaining throughout the audit regarding the potential for material misstatement due to fraud. (Enter only one word per blank.)
Blank 1: professional Blank 2: skepticism
The auditor's best estimate of misstatements in populations are called misstatements. (Enter only one word per blank.)
Blank 1: projected
Industry, and other factors are relevant to the auditor's understanding of an entity. (Enter only one word per blank.)
Blank 1: regulatory Blank 2: external or outside
To help understand the entity and identify the risks of material misstatements, the auditor should consider , and other external factors. (Enter only one word per blank.)
Blank 1: regulatory Blank 2: industry
Which of the following conditions are generally present when material misstatements due to fraud occur? Multiple select question. Rationalization Greed Incentive Opportunity Optimism Integrity
Rationalization Incentive Opportunity
Identify the three steps involved in the auditor's use of the audit risk model at the assertion level. Multiple select question. Setting a planned level of audit risk. Solving the audit risk equation for the appropriate level of detection risk. Assessing the risk of material misstatement. Assessing the risk of immaterial misstatement. Setting a controlled level of audit risk.
Setting a planned level of audit risk. Solving the audit risk equation for the appropriate level of detection risk. Assessing the risk of material misstatement.
Which of the following statements are correct? Multiple select question. All audit team members should be included in the fraud brainstorming session. The audit team is encouraged but not required to hold discussions about the entity's financial statements' susceptibility to fraud. The engagement partner or manager should communicate the potential for misstatements from fraud to the audit team. The fraud discussion can be part of the discussion of understanding the entity and its environment.
The engagement partner or manager should communicate the potential for misstatements from fraud to the audit team. The fraud discussion can be part of the discussion of understanding the entity and its environment.
Which of the following statements is correct? Multiple choice question. To obtain information about an entity's compliance with laws and regulations, the auditor should consult with his or her own legal counsel. Employees not directly responsible for financial reporting should not provide audit information to the auditor. Those charged with governance of the entity may be useful in providing information to the auditor.
Those charged with governance of the entity may be useful in providing information to the auditor.
True or false: Inquiries of others outside the entity may provide information that assists the auditor in uncovering fraud. True false question. True False
True
True or false: Detection risk has an inverse relationship to inherent and control risk. True False
True Reason: If inherent and control risk are high, the auditor will accept a lower level of detection risk.
Whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ______. Multiple choice question. chief executive officer audit committee director of internal audit SEC
audit committee
Internal performance measures include ______. Multiple choice question. both financial and nonfinancial indicators nonfinancial indicators only financial indicators only
both financial and nonfinancial indicators
The risk that the relevant assertions related to the account balances or disclosures contain misstatements that could be material to the financial statements consists of ______ and _____ risk. Multiple select question. control detection inherent audit
control inherent
Internally generated performance measures include ______. Multiple select question. departmental performance reports budgets comparisons to industry competitors variance analysis financial analysis by credit rating agencies
departmental performance reports budgets comparisons to industry competitors variance analysis
Understanding and assessing the effectiveness of an entity's internal control assists the auditor in ______. Multiple select question. designing appropriate audit procedures identifying types of potential misstatements recognizing factors that affect the risks of material misstatements assessing the reasonableness of an entity's strategy
designing appropriate audit procedures identifying types of potential misstatements recognizing factors that affect the risks of material misstatements
The auditor can manipulate ______ risk by changing the scope of the auditor's test procedures. Multiple choice question. business audit control detection
detection
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists exists is known as ______ risk. Multiple choice question. acceptable inherent detection control
detection
Risk factors relating to opportunities to report fraudulently include ______. Multiple select question. significant declines in customer demand financial numbers based on subjective judgments or uncertainties complex or unstable organizational structure communication of inappropriate values or ethical standards significant related party transactions
financial numbers based on subjective judgments or uncertainties complex or unstable organizational structure significant related party transactions
To understand the nature of the entity, auditors should obtain information about the entity's: ______. Multiple select question. financing and financing activities financial reporting investments market and competitors business operations
financing and financing activities financial reporting investments business operations
When both audit risk and the risk of material misstatement are low, detection risk will be ______. Multiple choice question. moderate high low
high
Risk factors relating to incentives/pressures to report fraudulently include ______. Multiple select question. high degree of competition or market saturation known history to violations of security laws and regulations significant related party transactions need to obtain debt or equity financing profitability expectations of external parties
high degree of competition or market saturation need to obtain debt or equity financing profitability expectations of external parties
Steps auditors perform as part of the fraud risk assessment process include ______. Multiple select question. identification and assessment of fraud risk factors brainstorming sessions with the internal auditors understanding the entity's period-end closing process inquiries of management about their views on the risks of fraud
identification and assessment of fraud risk factors understanding the entity's period-end closing process inquiries of management about their views on the risks of fraud
In order to respond to pervasive risks, auditors may ______. Multiple select question. incorporate an element of unpredictability in the audit procedures report directly to the board of directors about the pervasive risks identified assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud increase the amount of audit fees charged for the audit services performed evaluate whether the selection and application of accounting policies by the entity may create a material misstatement
incorporate an element of unpredictability in the audit procedures assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud evaluate whether the selection and application of accounting policies by the entity may create a material misstatement
The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material is known as ______ risk. Multiple choice question. inherent business control detection
inherent
Auditors should ask the ______ about its assessment of the risk of fraud, including whether management has satisfactorily responded to internal audit findings during the year. Multiple choice question. internal audit function audit committee board of directors chief financial officer's team
internal audit function
Business risk ______. Multiple select question. is a broader concept than the risk of material misstatement has the potential to affect financial statements in the future only can adversely affect an entity's ability to execute its strategies must be identified and responded to by the auditors
is a broader concept than the risk of material misstatement can adversely affect an entity's ability to execute its strategies
An auditor determines that the percentage of allowance for bad debts set by management is unreasonably low based on past experience. This is an example of a ______ misstatement. Multiple choice question. judgmental factual projected
judgmental
Auditing standards state that audit risk must be reduced to at least a ______ level. Multiple choice question. very low moderate low high
low
The responsibility to identify, control and mitigate business risks that may affect the entity's ability to achieve its objectives rests with the ______. Multiple choice question. internal auditors board of directors management external auditors
management
The auditor should obtain information about the conduct of operations, joint ventures, planned acquisitions, and major subsidiaries as part of learning about the ______. Multiple choice question. nature of the entity industry, regulatory and other external factors entity's internal control objectives, strategies and related business risks
nature of the entity
The PCAOB states that, as a part of understanding the entity, auditors should consider ______. Multiple select question. observing earnings calls conducted by management obtaining an understanding of compensation arrangements with lower-level employees and trade unions reading public information about the effectiveness of the company's internal control over financial reporting
observing earnings calls conducted by management reading public information about the effectiveness of the company's internal control over financial reporting
The PCAOB states that, as a part of understanding the entity, auditors should consider ______. Multiple select question. obtaining an understanding of compensation arrangements with senior management obtaining information about significant unusual developments regarding trading activity in the company's securities performing a study of government policies that impact the entity Reason: This is part of understanding the regulatory environment but not a PCAOB recommendation. reading relevant public information about the company
obtaining an understanding of compensation arrangements with senior management obtaining information about significant unusual developments regarding trading activity in the company's securities reading relevant public information about the company
Items that may result in significant risks include ______. Multiple select question. the application of new accounting standards highly complex transactions assertions identified with control risk factors Reason: Assertions identified with fraud risk, not control risk factors. significant accounting estimates and judgments routine or systematically processed transactions
the application of new accounting standards highly complex transactions significant accounting estimates and judgments
An employee may be motivated to misappropriate assets due to ______. Multiple select question. the susceptibility of assets to misappropriation an adverse relationship with the employer inadequate internal controls over assets financial obligations of the employer
the susceptibility of assets to misappropriation an adverse relationship with the employer inadequate internal controls over assets
If the uncorrected total misstatements identified during the audit process do not cause the financial statements to be materially misstated, auditors should issue a(n) ______ opinion. Multiple choice question. qualified opinion unqualified modified adverse
unqualified
Examples of misappropriation of assets include ______. Multiple select question. using an entity's assets for personal use stealing physical assets and intellectual property the incorrect use of an accounting estimate. purposely misstating account balances embezzling cash received
using an entity's assets for personal use stealing physical assets and intellectual property embezzling cash received
