Audit SB Chapter 6
A $500 error would most likely be considered material for ______.
a school fund raising organization
During the audit the client's staff may prepare a(n) ______. analysis of the adequacy of internal controls analysis of accounts written off aging of accounts receivable trial balance
analysis of accounts written off aging of accounts receivable trial balance
Comparing current year balances to prior year balances is an example of ______.
analytical procedures
Risk assessment procedures include ______. inquiry of external parties analytical procedures recalculation of balances observation and inspection
analytical procedures observation and inspection inquiry of external parties
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called _____ risk
audit
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called ______ risk.
audit
Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ______ of assets.
completeness
Following specific transactions from their source documents forward to their inclusion in the financial statement summary figures is a test of the ______ assertion.
completeness
Auditors vouch cash receipt transactions occurring near period end to verify _____ of transactions.
cutoff
In a first time audit, if the auditors cannot obtain sufficient evidence about the balance of beginning inventories, they may have to ______.
disclaim an opinion on the income statement
An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as a(n) ______ procedure.
dual-purpose
Physical examination of plant and equipment verifies ______.
existence
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ____ of assets.
existence
Material misstatement of financial statements by management with the intent to mislead financial statement users is called ______.
fraudulent financial reporting
The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis for the auditors' selection of ______ audit procedures.
further
Data preparation is the process of ______.
identifying data formats or errors that may affect the validity of the analysis
Obtaining evidence about opening balances is necessary ______.
in the first audit of a client
Auditors may respond to fraud risk by all of the following except ______.
increasing use of client staff during substantive procedures
To identify fraud risks, auditors perform a number of procedures including ______. inquiries of legal representation inquiries of management performing analytical procedures considering fraud risk factors
inquiries of management performing analytical procedures considering fraud risk factors
Planning materiality is commonly based on % of ______. net income total revenues total assets total liabilities
net income total revenues total assets
The planning materiality amount that will require the auditors to gather the most audit evidence is ______.
$10,000
An audit committee must be composed of at least three ______.
outside directors
Auditors consider materiality to determine their scope of the audit during the ______ stage of an audit.
planning
Analytical procedures provide ______ evidence as to the reasonableness of various revenues and expenses.
direct
When an audit firm is considering a new client, they are required to attempt to communicate with the ______ auditor.
predecessor
All of the following are common indications of fraud except ______.
related party transactions
If auditors obtain evidence of fraud they should evaluate the implications and ______.
report the matter to a manager at least one level above the one involved
Many firms have developed a(n) ____ ____ that uses a combination of financial and nonfinancial performance measures to assess the organization.
Blank 1: balanced Blank 2: scorecard
To obtain the understanding of the entity and its environment, auditors perform ____ ____ procedures
Blank 1: risk Blank 2: assessment
Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditors' _____ procedures.
analytical
Achieving management's objectives is always subject to ____ risks
business
Potential significant business risks for a client include ______. material price volatility changes in government regulations hiring a new production manager interest rate increases competition
competition changes in government regulations material price volatility interest rate increases
The overall risk of association with a particular business is often referred to as _____ risk.
engagement
Opportunities for misstatements arising from fraudulent financial reporting are ______ by a strong financial presence or ability to dominate a certain industry sector.
increased
The risk of material misstatement of an assertion without considering internal control is called
inherent
Even if specific risks of material misstatement due to fraud are not identified by the auditors, there is always a possibility of management override of _____ _____.
internal control
Auditors test the client's rights to assets to verify that all ______.
receivables belong to the client
Assertions such as existence or occurrence, rights and obligations, completeness, and cutoff are considered ____ assertions
relevant
An increase in the level of planning materiality results a decrease in ______.
scope of audit procedures
Engagement letters should include all of the following except ______.
the exact fees to be charged for the audit
When auditors obtain evidence of fraud, they should ______ withdraw from the engagement.
sometimes
The client's staff may prepare some of the _____ _____ for the auditors
Blank 1: working Blank 2: paper or papers
True or false: Asset valuation is relatively straight-forward for all assets because they are recorded at cost and recorded values are not changed due to the historical cost principle.
False
Identify which of the following would not be covered in the engagement letter of an audit.
Internal controls to be tested
When materiality is allocated to a particular account, it is referred to as ____ materiality.
performance
Further audit procedures include
tests of controls and substantive procedures
Opportunity factors related to misstatements arising from fraudulent financial reporting include ______. significant financial interests in the entity contractual arrangements that lack a business purpose high turnover of senior management significant complex or unusual transactions a strained relationship between auditors and senior management
contractual arrangements that lack a business purpose high turnover of senior management significant complex or unusual transactions
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ______ assets.
existence of
Risk factors reflective of attitudes and/or rationalizations by board members, management, or employees that allow them to justify fraudulent financial reporting include ______. failure to correct known significant deficiencies on a timely basis ineffective accounting and information systems attempts to justify inappropriate accounting on the basis of materiality ineffective communication of entity's ethical standards
ineffective communication of entity's ethical standards failure to correct known significant deficiencies on a timely basis attempts to justify inappropriate accounting on the basis of materiality
Inherent risk is the risk ______.
of material misstatement of an assertion without considering internal control
Incentives and pressures risk factors related to misstatements arising from fraudulent financial reporting include ______. significant related party transactions that are unusual or unaudited threats to the firm's financial stability or profitability the need to obtain additional debt or equity financing management compensation that is significantly tied to company performance a known history of violations of laws and other regulations
threats to the firm's financial stability or profitability the need to obtain additional debt or equity financing management compensation that is significantly tied to company performance
Because manipulation is one of the most common techniques used in fraudulent financial reporting, professional standards require the auditor to perform risk assessment analytical procedures related to ______.
revenue
Which of the following is not a relevant assertion? Existence or occurrence Rights and obligations Cutoff Materiality and appropriation
Materiality and appropriation
Comparing a company's inventory turnover to industry standard rates is an example of ______.
analytical procedures
Auditors test completeness of receivables in order to determine that all ______.
receivables have been recorded
The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at ______.
the financial statement and relevant assertion levels
Responsibility for the appointment, compensation, and oversight of the auditors rests with the client's ______.
audit committee
The time interval from the beginning of audit work to the balance sheet date is called the _____ period.
interim
At the planning stage of an audit, auditors consider materiality to determine their ______.
scope of the audit
The systems portion of the audit addresses ______.
effectiveness of the client's internal control
Which of the following is not a facet of the overall audit strategy?
Setting a date when the final audit fees will be paid
When considering fraud, auditors consider misstatements arising from fraudulent financial reporting, which is _____ fraud, and misstatements arising from misappropriation of assets, which is also called _____.
management defalcations
Planning materiality is commonly based on all of the following except % of ______.
total expenses
A possible fraud concern management ______ of the allowance for doubtful accounts.
understatement
Top management fraud is often accomplished by ______.
unusual transactions that involve related parties intentionally misstating accounting estimates
During the second stage of the audit process, auditors must obtain an understanding of the nature of _____ _____ because it allows them to identify accounts and classes of transactions that may be misstated and to tailor audit procedures to the existing system
Blank 1: internal Blank 2: control
If auditors determine planning materiality for a specific client to be $50,000, then performance materiality will likely be ______ $50,000.
less than
If auditors identify fraud risks, the auditors may modify their overall approach to the audit by ______.
adding specialized audit staff increasing third-party confirmations
When management or the board of directors have significant financial interests in the entity, the ______ risk factors relating to misstatements from fraudulent financial reporting are increased.
incentives and pressures
Risk factors reflective of attitudes and/or rationalizations by board members, management, or employees that allow them to justify fraudulent financial reporting ______ susceptible to observation by the auditors.
may not be
Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement _____ of assets.
presentation
A dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a ______.
test of controls
Auditors should evaluate the relationship between the data and the related control objective, risk, or account when considering the ______ of the data.
relevance
According to auditing standards, successor auditors must attempt to communicate with predecessor auditors ______.
before accepting the engagement
True or false: Because asset manipulation is one of the most common techniques used in fraudulent financial reporting, the professional standards require auditors to perform risk assessment analytical procedures related to assets.
False
The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity is called ______ risk.
engagement
If assets are subject to depreciation, an analysis of the reasonableness of the cost allocation and verification of the computation of the remaining unallocated cost are important in assessing the ______ of assets.
valuation
If the auditors' objective is to test ______, they follow the stream of evidence back to its source.
existence
Using analysis, modeling, or visualization to analyze patterns, identify anomalies, or extract other useful information related to the subject matter of an audit is the basis of audit ______ _______
Blank 1: data Blank 2: analytics
During the second stage of the audit process, auditors use _____ _____ procedures to gather information to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures.
Blank 1: risk Blank 2: assessment
Generally accepted auditing standards require that indications of management fraud should be communicated to the ______, to assist in its oversight of the financial reporting process of the company.
audit committee
The overall audit strategy involves determining overall characteristics of the engagement that ______. determine the auditors' opinion define the audit scope determine the focus of the audit team determine the timing of procedures
define the audit scope determine the focus of the audit team determine the timing of procedures
The required understanding of the client is used to help plan the audit and assess the risks of material misstatement at the financial statement and _____ _____.
Blank 1: relevant Blank 2: assertion or assertions
The nature and extent of the audit work to be performed on a particular engagement depend largely upon the ______.
effectiveness of the client's internal control
The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n) ____ cycle
transaction
Audit data analytic techniques ______. should not be used in substantive procedures can be used in tests of controls can be used to perform risk assessments cannot be used to form an overall conclusion on the financial statements
can be used to perform risk assessments can be used in tests of controls
Reviewing related party transactions to confirm that they are properly recorded is an example of verifying ______ assets.
presentation of
During the planning stages of the audit, the auditors develop a(n) ______. strategy audit plan schedule opinion
strategy audit plan schedule
Procedures aimed directly at financial statement account balances are included in the _______ portion of the audit program
substantive
