Audit Exam 2
The risk of material misstatement is also referred to as ________ risk because it stems from decisions made by the entity.
client
The first phase of the audit process that relates to audit planning is ______.
client acceptance and continuance
Which of the following is an example of fraudulent financial reporting?
company management falsifies the inventory count, thereby overstating ending inventory and understanding cost of sales
Perhaps the most commonly used analytical procedure is ______.
comparison of current-year financial information with comparable prior periods
If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors':
competence and objectivity
Whether all transactions and events that occurred during the period have been recorded relates to the ______ assertion.
completeness
Which of the following is not a factor that auditors should consider when evaluating the reliability of the internal audit function?
composition
Audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper form or by electronic or other medium is called a(n) ________.
confirmation
If the results of audit tests indicate a significant risk of fraud, the auditor should ______.
consider withdrawing from the engagement
An auditor may not accept a prospective client because the ______.
*client refuses to allow contact with the predecessor auditor *entity has unusual business risks
In relying on a specialist, the auditor should evaluate the specialist's ______.
*competence *objectivity *inputs used
The functions of audit documentation are to ______.
-aid in the planning, performance, and supervision of the audit -provide principal support that the audit was conducted in accordance with GAAS -provide the basis for the review of the quality work
Internal performance measures include ______.
both financial and non financial indicators
Which of these statements concerning illegal acts by clients is correct?
an auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud
Which of the following is a misappropriation of assets?
an employee of a consumer electronics store steals 12 CD players
When the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented ______.
fairly
True or false: Auditing standards dictate how audit documentation should be organized.
false
True or false: Inspecting tangible assets provides significant assurance for the rights and obligations assertion.
false
True or false: The auditor is concerned with the completeness assertion because failure of this assertion always leads to an overstatement of income.
false
True or false: The auditor is required to obtain corroborative evidence for planned analytical procedures.
false
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.
detection
a necessary substantive audit procedure is omitted
detection risk
When planning an audit, an auditor should:
determine overall materiality for audit purposes
During the initial planning phase of an audit, a CPA most likely would:
discuss the timing of the audit procedures with the entity's management
The arrangements reached between the auditor and the entity are formalized in a(n) ________ ________.
engagement letter
Substantive tests of transactions test for _______ or _______ in individual transactions.
errors ; fraud
The primary distinction between _________ and _________ is whether the misstatement was intentional or unintentional.
errors and fraud
The risk of material misstatement refers to misstatements caused by _________ or __________.
errors or fraud
The quality of an expectation is referred to as the ________ of the expectation.
precision
Searching for large and unusual items in the accounting records and reviewing transactions for errors are examples of
scanning
True or false: Audit evidence includes information developed by the auditor that permits him or her to reach conclusions through valid reasoning.
true
True or false: Detection risk has an inverse relationship to inherent and control risk.
true
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
understanding as to the reasons for the change of auditors
Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?
whether management has any knowledge of fraud that has been perpetrated on or within the entity
Audit documentation is referred to as _________ _________ or the audit file.
working papers
Public accounting firms should ______.
periodically evaluate whether to continue their relationship with current clients
Financial statement level risks are __________ risks in that they apply to multiple components of the financial statements.
pervasive
Auditors should attempt to identify all related parties during the ______ phase of the audit.
planning
When a client has multiple locations, the auditor determines which locations or business units to audit and the extent of audit procedures to be performed during the ______ process.
planning
The primary concern of ______ is simply whether the relationship used to test the assertion makes sense.
plausibility
Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client, who is also a public company. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. Determine the amount of overall materiality for the audit based on these preliminary amounts.
$287,000 Q1 = 1,200,000 Q2 = 1,500,000 Q3 = (1,500,000 x 90%) = 1,350,000 Q4 = (1,350,000 x 1.25) = 1,687,500 Total = 5,737,500 x 5% = 287,000
A public accounting firm may disassociate itself from an auditing client due to ______.
*accounting issues *auditing issues *dispute over fees
The terms of the audit engagement should include ______.
*auditor's responsibilities *the objectives of the engagement *limitations of the engagement *management's responsibilities
Which of the following statements are correct?
*audits must be completed in a reasonable length of time at reasonable cost *overall financial statement materiality serves as a safety net *the lower the tolerable misstatement, the more extensive the required audit testing
The nature and extent of planning activities that are necessary depend on the ______ the entity.
*complexity of *size of *auditor's previous experience with
Generally, the three preliminary engagement activities are ______
*determining the audit engagement team requirements *establishing an understanding with the entity *ensuring the audit team and firm are in compliance with ethical and independence requirements
Which of the following statements are correct?
*dual-purpose tests can improve audit efficiency *tests of control check the operating effectiveness of controls *substantive tests of transactions are concerned with monetary misstatements
Steps that should be performed as part of audit planning activities include ______.
*establish materiality *consider violations of laws and regulations *assess business risk
Factors that would cause the auditor to use a lower percentage for tolerable misstatement include a ______.
*history of material weaknesses in internal control *high risk of misstatement within the account balance
Engagement team members performing supervisory activities should ______.
*inform engagement team members of their responsibilities *review the work of engagement team members
Traditionally, value added services have included ______.
*internal reporting processes *system design and integration *tax planning
If the auditor determines that the work of the internal audit function (IAF) can be used for purposes of the audit, the auditor must evaluate the ______.
*level of competence of the IAF *quality control approach of the IAF *application by the IAF of a systematic and disciplined approach
In deciding the appropriate percentage to apply to a selected materiality benchmark, the auditor would choose a lower percentage within the range for qualitative factors such as ______.
*material misstatement in prior years *high risk of fraud *the entity is close to violating a covenant in a loan agreement
In documenting the overall audit strategy and audit plan, auditors should document the ______.
*nature of audit tests *timing of audit tests *extent of audit tests
When net income is fluctuating, the auditor should consider basing materiality on ______.
*normalized earning for the past three years *a benchmark other than net income
Examples of tests of controls include ______.
*observation of the application of specific controls *inspecting documents, reports and electronic files *inquiries of management, supervisory and staff personnel *re-performance of the application of the control
When an auditor becomes aware of a possible illegal act, the auditor should ______.
*obtain an understanding of the nature of the act *evaluate its effect on the financial statements *discuss the matter with the appropriate level of management
Factors that should be considered in the determination of staffing requirements for an audit include ______.
*personnel availability *timing of the work *engagement complexity *engagement size
Risk assessment procedures include ______.
*preliminary analytical procedures *inquiries of management and others *observation and inspection
According to ASB standards, when assessing materiality, users are assumed to ______.
*recognize uncertainties inherent in the measurement of amounts based on estimates *make appropriate economic decisions on the basis of the financial statements *understand financial statements are prepared and audited to levels of materiality
During the documenting stage, the auditor ______.
*records how the entity is managing its risks *complies his or her knowledge about the entity's business objectives and strategies *ensures that the identified risks have been addressed
Select all of the following that are functions of the audit committee:
*selection of the independent auditor, discussion of the audit fee with the auditor, and review of the auditor's engagement letter *review of the independent auditor's overall audit plan (scope, purpose, and general audit procedures) *review of the annual financial statements before submission to the full board of directors for approval *review of the results of the auditor's examination including experiences, restrictions, cooperation received, findings, and recommendations. matters that the auditor believes should be brought to the attention of the directors or shareholders should be considered *review of the independent auditor's evaluation of the company's internal control systems *review of the company's accounting, financial, and operating controls *review of the reports of internal audit staff *review of the interim financial reports to shareholders before the board of directors approves them
An auditor's independence would be considered impaired if the ______.
*spouse of the auditor is an accounting supervisor of the entity *client owes money to the auditor that has the characteristics of a loan
The categories of substantive procedures are ______
*test of details *substantive analytical procedures
Tests of details are usually categorized into ______.
*tests of details of account balances and disclosures *substantive test of transactions
In establishing an understanding about the terms of the engagement with potential clients, ______ should be discussed.
*the engagement letter *the role of the client's audit committee *using the work of internal auditors
The engagement partner and manager review the work of engagement team members to evaluate which of the following?
*the work was performed and documented *the objectives of the procedures were achieved *the results of the work support the conclusions reached
When an auditor becomes aware of significant illegal acts, the auditor should make sure that ______ (is) are adequately informed.
*those charged with governance *the audit committee
An employee may be motivated to misappropriate assets due to ______.
-an adverse relationship with the employer -inadequate internal controls over assets -the susceptibility of assets to misappropriation
The audit documentation needs to be organized so that ______ can find the audit evidence that supports each financial statement account.
-any member of the audit team -reviewers
Confirmations ______.
-are used extensively on audits -provide reliable evidence for the existence assertion -may provide evidence about the completeness assertion
Identify the three steps involved in the auditor's use of the audit risk model at the assertion level.
-assessing the risk of material misstatement -solving the audit risk equation for the appropriate level of detection risk -setting a planned level of audit risk
The reliability of analytical procedures is a function of the ______.
-availability and reliability of the data used in calculations -precision of the expectation and the rigor of the investigation -plausibility and predictability of the relationship being tested
Business risk ______.
-can adversely affect an entity's ability to execute its strategies -is a broader concept that the risk of material misstatement
Under current auditing standards, management assertions fall into categories of assertions about ______.
-classes of transactions and events and related disclosures for the period audited -account balances and related disclosures at the period end
Steps auditors perform as part of the fraud risk assessment process include ______.
-consideration of unusual or unexpected relationships -team member discussions regarding the risk of material misstatement -inquiries of the audit committee about their view 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
Understanding and assessing the effectiveness of an entity's internal control assists the auditor in ______.
-designing appropriate audit procedures -identifying types of potential misstatements -recognizing factors that affect the risks of material misstatements
Audit documentation should ______.
-enable a knowledgeable reviewer to determine who performed the work -demonstrate how the audit complied with appropriate standards -show that standards of fieldwork have been followed
In order to respond to pervasive risks, auditors may ______.
-evaluate whether the selection and application of accounting policies by the entity may create material misstatement -assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud -incorporate an element of unpredictability in the audit procedures
Which of the following areas require documentation related to the auditor's risk assessment and response?
-evaluation of management's response to identified risk -nature, timing, and extent of procedures performed to identify risks -discussion amount the engagement team -communication about error and fraud made to management and others
Attitudes/rationalizations that may suggest misappropriation of assets include ______.
-failure to correct known internal control deficiencies -changes in behavior of lifestyle -disregard for the need to reduce misappropriation risk
To understand the nature of the entity, auditors should obtain information about the entity's: ______.
-financial reporting -financing and financing activities -business operations -investments
Items that may result in significant risks include ______.
-industry specific issues -revenue recognition -assertions identified with fraud risk factors -significant accounting estimates and judgements -highly complex transactions -the application of new accounting standards
Risk factors relating to attitudes/rationalizations to report fraudulently include ______.
-ineffective communication and enforcement of ethical values -claims against board members alleging fraud -excessive management interest in increasing entity stock prices
The auditor should ______.
-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
Which of these are generally low-reliability types of evidence because they require further corroboration by the auditor?
-inquiry -observation
The use of the audit risk model ______.
-involves considerable auditor judgement -assists the auditor in determining the scope of audit procedures
To obtain information about an entity and its environment, auditors may make inquires of ______.
-marketing and sales personnel -in-house legal counsel -internal auditors -board of directors
Tests of controls ______.
-may allow the auditor to gain a degree of assurance over thousands of transactions -influence the scope of substantive testing
The precision of the expectation ______.
-may lead to a cost-benefit trade-off due to an increase in testing -is a measure of potential effectiveness -is a function of materiality and required detection risk
If the achieved level of audit risk is greater than the planned level, auditor options include ______.
-modifying the audit opinion -performing additional audit work
Which of the following statements are correct?
-most fraudulent financial reporting involves management override of controls -withholding evidence of misrepresenting information may conceal fraud -an auditor may unknowingly rely on fraudulent audit evidence
The current ratio can be distorted by ______.
-old accounts payable -obsolete inventory
Short-term liquidity ratios include the _______ ratio.
-operating cash flow -quick -current
Identify the categories of financial ratios that are used by auditors as analytical procedures.
-profitability -short-term liquidity -activity -coverage
Risk factors relating to incentives/pressures to report fraudulently include ______.
-profitability expectations of external parties -high degree of competition or market saturation -need to obtain debt or equity financing
Inquiry may ______.
-provide corroborative audit evidence -be formal or informal -provide new audit evidence
If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.
-qualified -modified -adverse
Explanations for significant differences observed for substantive analytical procedures must be followed up and resolved through ______.
-quantification -evaluation -corroboration
Which of the following conditions are generally present when material misstatements due to fraud occur?
-rationalization -incentive -opportunity
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 ______.
-suggest that the appropriate level of management consult with legal counsel -attempt to obtain evidence in order to determine whether material fraud has occurred and its effect -consider the implications for other aspects of the audit
Under which of the following circumstances may auditors have a duty to disclose fraud to an outside entity?
-to comply with legal and regulatory requirements -in response to a subpoena -to a governmental funding agency
Examples of misappropriation of assets include ______.
-using an entity's assets for personal use -embezzling cash received -stealing physical assets and intellectual property
Internally generated performance measures include ______.
-variance analysis -departmental performance reports -budgets -comparisons to industry competitors
Observation and inspection audit procedures include ______.
-visit's to the entity's premises and plant facilities -tracing transactions through the information system -reading management reports
The CPA firm of Lumley & Lu uses a quantitative approach to implementing the audit risk model. Calculate detection risk for each of the following hypothetical clients. # Audit risk risk of material misstatement 1 5% 20% 2 5% 50% 3 10% 15% 4 10% 40%
1) 25% (5/20) 2) 10% (5/50) 3) 67% (10/15) 4) 25% (10/40)
The CPA firm of Quigley & Associates uses a qualitative approach to implementing the audit risk model. Audit risk is categorized using two terms: very low and low. The risk of material misstatement and detection risk are categorized using three terms: low, moderate, and high. Calculate detection risk for each of the following hypothetical clients. # audit risk risk of material misstatement 1 low moderate 2 very low high 3 low low 4 very low moderate
1) moderate 2) low 3) high 4) low
The Sarbanes-Oxley Act and the PCAOB standards require that audit documentation be retained for _______ years from the date of completion of the engagement.
7
The formula for the audit risk model is ______.
AR = RMM x DR
To effectively help the auditor determine if asset accounts contain material misstatements, ________ ratios may be used.
activity
Auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in ______ material respects.
all
PCAOB standards require that audit documentation contain ______.
all documents that form the basis of the audit
Many public accounting firms adopt a policy of not completing the current audit until ______ fees have been paid.
all of the prior year's
When should the audit committee meet with external auditors to discuss the auditor's responsibilities and significant accounting policies?
before the engagement starts
In practice, auditors commonly set tolerable misstatement for each account at ______.
between 50% and 75% of overall materiality
Based on an understanding of the entity and environment, the auditor identifies those _________ risks that may result in material misstatements.
business
An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the _______ assertion.
cutoff
An auditor examines shipping documents to ensure that no prior period sales have been recorded in the current year to test the _________ assertion.
cutoff
This assertion relates to whether transactions and events have been recorded in the correct accounting period.
cutoff
The effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the ________ risk.
detection
confirmation of receivables by an auditor fails to detect a material misstatement
detection risk
Standards require extensive _______ of the auditor's risk assessment procedures and audit responses to identified risks.
documentation
A written understanding between the auditor and the entity concerning the auditor's responsibility for fraud is usually set forth in a(n):
engagement letter
Serving as a contract, the __________ _________ outlines responsibilities and prevents misunderstandings between the auditor and client.
engagement letter
Overall responsibility for an audit engagement rests with the ______.
engagement partner
Auditor's responsibility for detecting illegal acts having a direct and material effect on the financial statements is the same as that for _______ and _______.
errors ; fraud
Misstatements about which there is no doubt are called ___________ misstatements.
factual
There is a(n) ______ relationship between the sufficiency and appropriateness of audit evidence
inverse
When audit evidence supports __________ _________, the auditor can issue an unqualified report.
management assertions
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
management places substantial emphasis on meeting earnings projections
Many factors, including changes in the business or industry, influence the ________ of relationships among financial and nonfinancial data.
predictability
Ensuring that members of the audit team meet independence requirements generally take place as part of ______.
preliminary engagement activities
The auditor's exercise of professional judgment to review accounting data to identify significant or unusual items to test is referred to as _______.
scanning
Possible causes of significant differences are ______.
-accounting changes -errors -economic conditions -fraud
Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public company ______.
*must have the authority to engage independent counsel to carry out duties as necessary *is directly responsible for the hiring, paying and oversight of the public accounting firm employed by the company *must preapprove all audit and non audit services by the auditors
The PCAOB states that, as a part of understanding the entity, auditors should consider ______.
-reading public information about the effectiveness of the company's internal control over financial reporting -observing earnings calls conducted by management -obtaining information about significant unusual developments regarding trading activity in the company's securities -obtaining an understanding of compensation arrangements with senior management
In evaluating audit evidence, the auditor must ______.
-remain objective -understand the types of evidence available -be unbiased
Which of these processes are generally considered highly reliable because the auditor has direct knowledge about them?
-reperformance of tangible assets -inspection -recalculation
Analytical procedures can be used by auditors to accomplish ______ procedures.
-risk assessment -final analytical -substantive analytical
When auditing a public company, the auditor is generally responsible to disclose fraud to the ______.
-senior management -audit committee
Which of the following statements are correct?
-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
Which of the following best describes an audit committee?
An audit committee is a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process
Which of the following best describes why audit committees are formed?
Audit committees are formed to satisfy the shareholders' need for assurance that directors are exercising due care in the performance of their duties
When an auditor considers management's selection of an accounting policy to be inappropriate, a(n) _____________ misstatement arises.
judgemental
The formula auditors use to determine the appropriate level of detection risk is ______.
DR = AR / RMM
True or false: At the completion of the audit, the actual or achieved level of audit risk is known with certainty by the auditor.
False
True or false: Both the PCAOB and ASB follow an auditor perspective in considering what is material.
False
True or false: If current year pretax income is not stable, auditors should not base materiality on an income measure.
False
True or false: Observation and inspection audit procedures should be limited to current activities performed inside the organization without considering outside sources.
False
True or false: Professional skepticism is not a way to reduce judgment errors.
False
True or false: The audit team a public accounting firm uses for an engagement does not tend to vary from client to client.
False
True or false: The extent of effort that goes into evaluating a new client is normally much less than the decision to continue with an existing client.
False
The accuracy assertion is based on ______.
GAAP
Which of the follow is not an inquiry that a successor auditor should make to a predecessor auditor?
The predecessor auditor's fee charged for audit work
Whether transactions and events have been recorded in the proper accounts is the concern of the _________ assertion.
classification
Which of the following statements is correct?
Those charged with governance of the entity may be useful in providing information to the auditor
True or false: A public accounting firm should investigate a prospective client prior to accepting the engagement.
True
True or false: In some cases, fraud may consist of illegal acts.
True
Materiality is assessed in terms of potential effect of a misstatement on decisions made by ______.
a reasonable user of financial statements
When an auditor has discovered fraud, ______.
a duty to disclose outside the entity exists in some circumstances
Checks, invoices, contracts, ledgers, worksheets and spreadsheets are all part of auditing evidence referred to as __________ _________.
accounting records
Whether amounts and other data relating to recorded transactions and events have been recorded appropriately is addressed by the ______ assertions.
accuracy
How effectively the entity's assets are managed is indicated by __________ ratios.
activity
Evaluations of financial information made through the study of plausible relationships among both financial and non-financial data are referred to as _________ _________.
analytical procedures
Evaluations of financial information through analysis of plausible relationships among financial and non-financial data is the meaning of the term _________ _________.
analytical procedures
The auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary
analytical procedures
The investigation, if necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount are part of substantive ________ _________.
analytical procedures
The measure of the quality of audit evidence is referred to as _______.
appropriateness
When the aggregated misstatement are greater than overall materiality the auditor should ______.
ask the entity to adjust the financial statements
Auditors assess the risk of material misstatement at the ______ level.
assertion
Expressed or implied representations by management regarding the recognition, measurement, presentation and disclosure of information in the financial statements and related disclosures are referred to as
assertions
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 ______.
audit committee
Whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ______.
audit committee
The document that outlines the auditor's understanding of the entity and potential risks as well as the strategy to be followed by the auditor is called the _______ ____________.
audit plan
Specific acts performed by the auditor to gather evidence about whether specific assertions are being met are referred to as ________ _________.
audit procedures
The audit procedures that will be conducted by the auditor are contained in the _________ __________.
audit programs
The possibility that an auditor will issue an unqualified opinion on materially misstated financial statement is called ________ _________.
audit risk
The basic framework for the auditor's understanding of audit evidence and its use in supporting the auditor's opinion on the financial statements is (are) ______.
auditing standards
An individual or organization possessing expertise in a field other than accounting or auditing whose work is used to assist the auditor in obtaining sufficient, appropriate evidence is defined by auditing standards as a(n) ________ _________.
auditor's specialist
Threats from significant events that could adversely affect an entity's ability to achieve its objectives and execute its strategies are _______ _______.
business risk
Analytical procedures conducted to provide substantive evidence normally ______ be performed at aggregated levels.
cannot
An example of the ______ assertion is that ordinary repairs to assets are charged to the repairs and maintenance expense account and not capitalized.
classification
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.
control
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.
control
a client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly
control risk
disbursements have occurred without proper approval
control risk
there is inadequate segregation of duties
control risk
For lower-risk, well controlled accounts, the assurance bucket may be filled entirely with tests of _________ and substantive analytical procedures.
controls
In regards to applying the audit testing hierarchy, starting with tests of ____________ is generally more effective and efficient than starting with tests of __________.
controls ; details
Examination of supporting evidence, inquiries of independent persons and evaluating evidence obtained from other auditing procedures are all common ________ procedures.
corroborating
Important information on the ability of the entity to continue as a going concern are provided _______ ratios.
coverage
The _________ ratio is usually considered acceptable if it is 2 to 1 or better.
current
Misstatements arising from the misappropriation of assets is sometimes referred to as
defalcation
Auditing standards distinguish between illegal acts that have ________ and and material effects on the financial statements and those that have material but ________ effects.
direct ; indirect
A management statement that the inventory shown on the balance sheet was available for sale at the balance sheet date is an example of the ________ assertion.
existence
A management statement that the property, plant and equipment shown on the balance sheet was owned and available for sale at the balance sheet date is an example of the ______ assertion.
existence
Documents originating within the entity but circulated to independent sources outside the entity and documents generated outside the entity are referred to as _________ documents.
external
An auditor tests an invoice for services provided and determines that the amount charged is incorrect. This is an example of a ______ misstatement.
factual
As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:
find smaller errors
An intentional act involving the use of deception that results in an misstatement in the financial statements is referred to as
fraud
Incentive, opportunity and rationalization are three conditions that are sometimes referred to as the ____ ____ triangle.
fraud risk
Which of the following is correct concerning required auditor communications about fraud?
fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved
When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist?
in response to inquiries from a successor auditor
The more detailed the level at which an expectation is formed, the ______ the precision.
greater
If an entity overstates sales, the ______ ratio will likely be higher than in prior years.
gross profit percentage
When a prospective client refuses to permit the predecessor auditor to respond, the successor auditor should ______.
have reservations about accepting the client
Violations of laws or regulations are referred to as ______ _______.
illegal acts
Audit documentation is the property of the ______.
independent auditors
The process of _______ and ________-___________ provides a trail from the financial statements to the individual audit documents that a reviewer can easily follow.
indexing and cross-refrensing
In order to evaluate profitability ratios, each should be interpreted by comparison to ______ data.
industry
It is generally ______ for the auditor to simply subdivide materiality proportionally to each account.
inefficient
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.
inherent
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.
inherent
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.
inherent ; control
At the assertion level, audit risk consists of ________ risk, _________ risk and ________ risk.
inherent ; control ; detection
XYZ company, a client, lacks sufficient working capital to continue operations
inherent risk
cash is more susceptible to theft than an inventory of coal
inherent risk
notes receivable are susceptible to material misstatement, assuming there are no related internal controls
inherent risk
technological developments make a major product obsolete
inherent risk
the client is very close to violating debt covenants
inherent risk
Risk of material misstatement refers to a combination of which two components of the audit risk model?
inherent risk and control risk
This is an important audit procedure that is used extensively throughout the audit and is often complementary to performing other audit procedures.
inquiry
Counting cash on hand and examining inventory are examples of ________ of tangible assets.
inspection
Duplicate copies of invoices and shipping remittances are examples of ______ documents.
internal
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
internal control
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.
judgemental
Auditing standards state that audit risk must be reduced to at least a ______ level.
low
When an entity operates in a highly regulated industry, the auditor would choose a _____ percentage in deciding the appropriate percentage to apply to a selected materiality benchmark.
lower
The responsibility to identify, control and mitigate business risks that may affect the entity's ability to achieve its objectives rests with the ______.
management
The combination of inherent risk and control risk is referred to in auditing standards as the risk of __________ ___________.
material misstatement
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decision of users is overall _________.
materiality
Which of the following concepts are pervasive in the application of auditing standards?
materiality and audit risk
Tolerable misstatement is:
materiality used to establish a scope for the audit procedures for the individual account balance or disclosures
As generally conceived, the audit committee of a publicly held company should be made up of:
members of the board of directors who are not officers or employees
The _____ precise the expectation, the ______ the likelihood that the difference is actually a misstatement.
more ; greater
The ______ of the audit evidence refers to the form or type of information, which includes accounting records and other available information.
nature
The auditor should obtain information about the conduct of operations, joint ventures, planned acquisitions, and major subsidiaries as part of learning about the ______.
nature of the entity
Audit evidence is subject to human error which is referred to as _______ risk.
nonsampling
Looking at a process or procedure being performed by others is referred to as ________.
observation
This is useful in helping auditors understand the entity's processes but is generally not considered very reliable.
observation
Auditor risk assessment procedures are used to ______.
obtain and understanding of the entity and its environment
Auditors can reduce audit risk to an acceptably low level by ______.
obtaining an understanding of the entity and its environment
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor:
obtains reasonable assurance about whether the financial statements are free of material misstatement
Because the entity's personnel might have incentives to record fictitious transactions, the _________ assertion is relevant for revenue transactions.
occurence
The ______ assertion relates to whether all recorded transactions and events have happened and pertain to the entity.
occurence
The auditor's consideration of materiality on an audit is a matter of ______.
professional judgement
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.
professional skepticism
The key mind-set behind effectively performing substantive analytical procedures is one of appropriate _______ _________ and obtaining a sufficient amount of appropriate audit evidence.
professional skepticism
Significant fluctuations in the ______ ratio may indicate that selling, general and administrative expenses are misstated.
profit margin
The entity's success or failure for a given period is measured by _________ ratios.
profitability
The greater the incentive or pressure, the more likely an individual will be able to ______.
rationalize the acceptability of committing fraud
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.
projected
The auditor's best estimate of misstatements in populations are called _________ misstatements.
projected
Many public accounting firms find it appropriate to use ______ in the audit risk model.
qualitative terms
Determining whether an explanation or error can explain the observed difference is called __________.
quantification
All types of analysis are used for substantive analytical procedures, but ______ analysis is not commonly used for preliminary or final analytical procedures.
reasonableness
Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using ______ analysis.
reasonableness
Modeling the association between certain elements of the balance sheet and related income statement accounts is typically done using _______ analysis.
reasonableness
Checking the mathematical accuracy of documents or records is referred to as
recalculation
Footing, crossfooting, reconciling subsidiary ledgers and testing postings are all examples of
recalculation
When filling the "assurance bucket", existence or validity is typically more important for accounts ________ than for accounts __________.
receivable ; payable
If an entity's response to identified risks is adequate, the risk of material misstatement may be ______.
reduced
Auditors should attempt to identify all _______ _______ because transactions with them may not be at "arm's length."
related parties
Materiality is a(n) __ concept.
relative
The relationship of audit evidence to the assertion being tested is called the ________ of the evidence.
relevance
If the auditor relies on evidence that is unrelated to the assertion, an incorrect conclusion may be reached because the evidence used was not ______.
relevant
The ability to develop precise expectations is influenced by the _______ of the available data.
reliability
The independence of the source of the evidence, the effectiveness of internal controls and the auditor's direct personal knowledge all affect the ______ of data for developing expectations.
reliability
The auditor's independent execution of procedures or controls that were originally performed by company personnel is referred to as ____________.
reperformance
The independent execution by the auditor of procedures or controls that were originally performed by company personnel is called ______.
reperformance
A management statement that the entity is making payments and has control of a leased asset is an example of the ______ assertion.
rights and obligations
Assertions about ________ and __________ address whether the entity owns or controls the assets included on the financial statements, and that liabilities are debts of the entity.
rights and obligations
When auditing a company with multiple locations, the amount of audit attention devoted to various locations depends upon the ______.
risk of material misstatement
If inherent and control risks are high, in order to achieve the planned level of audit risk, the auditor will ______ level of detection risk.
set a lower
An entity's ability to meet its current obligations can be evaluated using __________-___________ ___________ ratios.
short-term liquidity
Coverage ratios provide information on the long-term ______ of the entity.
solvency
Assume an entity has 2,500 customers. If the auditor mails confirmation to 25 of the largest customers and only 20 respond the auditor must ______.
still gather sufficient evidence on each of the 25 accounts
To detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements, the auditor designs _______ _______.
substantive procedures
Tests of controls are performed to ______.
test the operating effectiveness of controls
Operating effectiveness is checked using ______.
tests of controls only
Which of the following would an auditor most likely use in determining overall materiality when planning the audit?
the entity's income before taxes for the period-to-date (e.g., 6 months)
Notations that are made by the auditor near, or next to, an item or amount on an audit document that are used to document work performed are called ________ __________.
tick marks
In general, ______ analysis is the least precise method to form an expectation while ______ analysis is the most precise.
trend ; reasonableness
True or false: Although the auditor owns the audit documents, they cannot be shown to outside parties without the entity's consent, except under certain circumstances.
true
The second step in the analytical procedures decision process is to define a _________ difference.
tolerable
An amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements that would result in material misstatement of the financial statements is _________ ________.
tolerable misstatement
The amount of difference that can be accepted will generally always be lower than ________ ___________.
tolerable misstatement
The amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is called _________ ________.
tolerable misstatement
The purpose of setting _______ _______ is to establish a scope for the audit procedures for the individual account balance or disclosures.
tolerable misstatement
Comparing current year financial statements with budgeted amounts is usually performed using ______ analysis.
trend
The comparison of financial statement amounts between the current period and prior period can be done using absolute amounts which is _______ analysis or by converting the financial statement amounts to common-sized statements which is _________.
trend ; ratio
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.
unqualified
substantive procedures
used to detect material misstatements at the relevant assertion level
risk assessment procedures
used to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at financial statement and relevant assertion levels.
test of controls
used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level.
Risk assessment, benchmarking and recommendations based on the assessment of business risk are all examples of ________-_______ services.
value-added
