Audit Quiz 3

Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."

Which of the following documentation is not required for an audit in accordance with auditing standards?

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

Which of the following statements about evidence is true?

A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter?

A client-prepared statement of account showing the details of the customers account balance.

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in

A more efficient manner.

The components of internal control include

A process of managing risks relevant to preparing financial statements.

Which of the following is usually included or shown in the audit documentation?

A summary of how significant findings were addressed.

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

AICPA Accounting Trends and Techniques.

A CPA is conducting the first audit of a nonissuer's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is

Acceptable if the client and the predecessor auditor agree to it.

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may

Access information stored on computer files while having a limited understanding of the client's hardware and software features.

Analytical procedures used as risk assessment procedures should

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

Which of the following statements would least likely appear in an auditor's engagement letter?

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

Financial statement audit plans usually should be developed

After the auditor has established the overall audit strategy.

Which of the following is required documentation in an audit in accordance with auditing standards?

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

Which of the following presumptions is least likely to relate to the reliability of audit evidence?

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include

Analyses of capital stock and other owners' equity accounts.

Which of the following concepts distinguishes the retention of computerized audit documentation from the traditional hard copy form?

Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures.

Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing?

Analysis of income statement accounts.

Which of the following statements is true concerning analytical procedures used as risk assessment procedures?

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

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use fo audit personnel?

Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

An auditor would least likely use computer software to

Assess risk.

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive procedures.

Using personal computers in auditing may affect the methods used to review the work of staff assistants because

Audit documentation may not contain readily observable details of calculations.

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion?

Auditor judgement.

The most reliable forms of documentary evidence are those documents that are

Authorized by a responsible official.

When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C?

BAC.

The PCAOB's AS 1215, Audit Documentation, requires that a complete and final set of audit documentation by assembled for retention as of a date not more than 45 days after the audit report release date. After that date, audit documentation may

Be added, but no audit documentation may be deleted or discarded.

Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests.

Both I and II

Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true?

Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.

An auditor's audit documentation will least likely show how the

Client's schedules were prepared.

Which of the following factors would most likely cause an auditor not to accept a new audit engagement?

Concluding that the entity's management probably lacks integrity.

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Audit documentation that records the procedures used by the auditor to gather evidence should be

Designed to meet the circumstances of the particular engagement.

When planning an audit, an auditor should

Determine materiality for the financial statements as a whole.

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether the credit limits are being exceeded. The best procedure for the auditor to follow is to

Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the

Difficulty and cost involved in testing a particular item.

The auditor with final responsibility for an engagement and one of the assistance have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to

Document the details of the disagreement with the conclusion reached.

An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file?

Economic order quantity.

Standardized working papers are often used, chiefly because they allow audit documentation to be prepared more

Efficiently.

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the

Engagement letter.

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The audit documentation would probably be

Expanded to detail the assistant auditor's position and how the difference of opinion was resolved.

Which of the following tasks can be achieved using generalized audit software?

Filtering data based on accounts receivable data recording.

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Financial statement assertions.

The risks of material misstatements (RMMs) should be assessed in terms of

Financial statement assertions.

The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants

How the results of various auditing procedures performed by the assistants should be evaluated.

An auditor most likely obtains an understanding of a new client to

Identify areas of audit emphasis.

Which of the following is a step in an auditor's decision to rely on internal controls?

Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered.

Which of the following is an aspect of scheduling and controlling the audit engagement?

Include in the audit plan a column for estimated and actual time.

Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

Inherent risk.

Which of the following procedures would provide the most reliable audit evidence?

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

Computer technology makes it possible to perform paperless audits. For example, in an audit of computer-processed customer accounts receivable balances, an auditor might use a personal computer to access the accounts receivables files directly and copy selected customer records into the computer for audit analysis. Which of the following is an advantage of this type of paperless audit or accounts receivable balances?

It allows immediate processing of audit data on a spreadsheet working paper.

Which of the following represents a limitation on the use of generalized audit software (GAS)?

It can only be used on hardware with compatible operating systems.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true?

It is an acceptable practice to carry out part of the audit at interim dates.

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?

It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.

The negative request form of accounts receivable confirmation may be used when the

LOW (risk of material misstatement is) and MANY (number of small balances is) and LIKELY (consideration by the recipient is).

The audit working paper that reflects the major components of an amount reported in the financial statements is the

Lead schedule.

Before accepting an engagement to audit a new client, an auditor is required to

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

An auditor's engagement letter will most likely include

Management's acknowledgment of its responsibility for maintaining effective internal control.

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that

Material misstatements may exist in the financial statements.

The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consistent with inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that

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

Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of

Materiality.

Specialized audit software

May be written in a procedure-oriented language.

If an auditor conducts an audit of financial statements in accordance with applicable auditing standards, which of the following will the auditor most likely detect?

Misposting of recorded transactions.

As the acceptable level of detection risk decreases, an auditor may change the

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

You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence?

Notes on discussions with mechanics in the maintenance operation.

Most of the auditor's work forming an opinion on financial statements consists of

Obtaining and evaluating audit evidence.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

One of the cashier's has been covering a personal embezzlement by lapping.

In developing an audit plan, an auditor should

Perform risk assessment procedures.

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

Perform risk assessment procedures.

Which of the following statements about materiality is most likely to be true?

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

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

Performance of audit tests on a continuous basis.

Audit planning for an initial audit most likely includes

Performing procedures involving opening balances.

Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to

Permit cross-referencing and simplify supervisory review.

To obtain an understanding of a continuing client in planning an audit, an auditor most likely would

Read internal audit reports.

An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for

Reclassifications and adjustments.

In gathering evidence in the performance of substantive procedures, the auditor most likely

Relies on persuasive rather than conclusive evidence in the majority of cases.

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

In the confirmation of accounts receivable, the auditor would most likely

Request confirmation of a sample of the inactive accounts.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

Results are consistent with the conclusions to be presented in the auditor's report.

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of the audit problems that might be encountered?

Results of performing substantive procedures.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.

The appropriateness of evidence available to an auditor is least likely to be affected by the

Sampling method employed by the auditor to obtain a sample of such evidence.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?

Search fro unrecorded cash receipts.

Which of the following is an auditor least likely to perform in planning a financial statement audit?

Selecting a sample of vendors' invoices for comparison with receiving reports.

One of the primary roles of an engagement work program is to

Serve as a tool for planning and conducting engagement work.

Which of the following statements is most accurate regarding sufficient and appropriate documentation?

Sufficient and appropriate documentation should include evidence that it has been reviewed.

Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should

Suggest that the auditor obtain the client's permission to discuss the reasons.

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance sheet remains in the suspense account at year-end, the auditor would be most concerned about

Suspense debits that management believes will benefit future operations.

The two requirements crucial to achieving audit efficiency and effectiveness with a personal computer are selecting

The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

The auditor cannot infer that all nonrespondents have verified their account information.

The auditor should establish an overall audit strategy. Which of the following statements is most consistent with this requirement?

The auditor should plan the audit so that it will be performed effectively.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

The auditor's judgement.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes

The auditors responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditors attention.

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when

The combined assessed level of inherent and control risk is high.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgement about materiality for the financial statements as a whole?

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

A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation?

The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

In planning the audit engagement, the auditor should consider each of the following except

The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.

Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use

The negative form for small balances.

The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true?

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

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

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

AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?

The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings.

Which of the following statements about audit evidence is true?

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

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

There will be a client-imposed scope limitation.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed.

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement?

Tour the client's facilities.

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of

Transactions.

When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether

Uncorrected misstatements are material.

The objective of performing analytical procedures in planning an audit is to identify the existence of

Unusual transactions and events.

Auditors often make use of computer programs the perform routine processing functions, such as sorting and merging. These programs are made available by computer companies and others and are specifically referred to as

Utility programs.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicated the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely

Verify that the amount was received.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders.

After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on

Whether the financial statements are consistent with the auditor's understanding of the entity.

In assessing whether to accept a client for an audit engagement, a CPA should consider the

YES (client's business risk) and YES (CPA's business risk)

Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to

YES (contingencies) and YES (balance sheet accounts)

Which of the following audit risk components may be assessed in non quantitative terms?

YES (control risk) and YES (detection risk) and YES (inherent risk)

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's

YES (understanding of the entity's control environment) and YES (overall responses to assessed risks)