Auditing - D215
Management is responsible for which of the following? Preparing financial statements which will please the board of directors and investors. Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements. Preparing financial statements in accordance with the appropriate auditing standards. Issuing an opinion on whether the financial statements are presented fairly in accordance with the appropriate financial reporting framework.
Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.
Dunbrio & Co. has determined that the client's accounts receivable account has a low inherent risk of material misstatement and the client's internal controls have been thoroughly tested and represent a very low control risk. Based on this information, what is Dunbrio's detection risk and to what extent do they need to perform substantive procedures? Detection risk is low; extensive substantive procedures required Detection risk is moderate; some substantive procedures required Detection risk is very low; few substantive procedures required Detection risk is high; few substantive procedures required
Detection risk is high; few substantive procedures required A low inherent risk and low control risk corresponds to a high detection risk (higher likelihood that a misstatement will not be found) and, as a result, fewer substantive procedures need to be performed (because the controls are effective and there is a low inherent risk of misstatement).
Spaglin, Inc. is auditing Synesthor. Spaglin has determined that the inherent risk is 20%, the control risk is 35%, and the detection risk is 1.8%. What is Synesthor's overall audit risk? 8.000% 0.126% 0.63% 100%
.126% Overall audit risk is calculated by considering the risk of material misstatement by the client and the risk that the auditor may not detect the misstatement (detection risk) [ AR = RMM x DR ]. Risk of material misstatement is made up of two components: (1) the inherent risk of the company to make a misstatement and (2) the control risk which is defined as the risk that the company's internal controls will not prevent or detect a material misstatement [ RMM = IR x CR ]. Therefore, Synesthor's overall audit risk is calculated as: AR = RMM x DR = IR x CR x DR = .2 x .35 x .018 = .00126 = 0.126%.
DFG, PC is auditing Plairtrack, Inc., a long-term audit client. Plairtrack has devoted substantial resources into it's new division as it enters the high-tech pharmaceutical industry. DFG has determined that the inherent risk, due to Plairtrack's new arrival to the industry is 80%, but it's control risk is a low 10% because they've been in business for 20 years. Due to DFGs familiarity with both the industry and Plairtrack, they have set the detection risk at 2%. What is Plairtrack's risk of material misstatement? 2% 1.60% 16% 8%
8% Overall audit risk is calculated by considering the risk of material misstatement by the client and the risk that the auditor may not detect the misstatement (detection risk) [ AR = RMM x DR ]. Risk of material misstatement is made up of two components: (1) the inherent risk of the company to make a misstatement and (2) the control risk which determines the risk that the company's internal controls will not prevent or detect a material misstatement [ RMM = IR x CR ]. Plairtrack's risk of material misstatement is calculated as: RMM = IR x CR = .8 x .1 = 8%.
Which of the following comes under the purview of the Public Company Accounting Oversight Board? Auditing Standards (AS) Statements on Standards for Attestation Engagement (SSAE) Statements on Quality Control Standards (SQCS) Statements on Auditing Standards (SAS)
Auditing Standards (AS)
Which two audits does an integrated audit combine? A compliance audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR) A financial statement audit and a compliance audit A financial statement audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR) A performance audit and an environmental audit
A financial statement audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR)
Which of the following is a private professional membership organization of CPAs representing the accounting profession? IAASB AICPA ASB PCAOB
AICPA
Allay Auditing is conducting an audit of Whole Pine Inc. Whole Pine included on their financial statements an uncollectible accounts estimate of $250,000. Allay has determined that Whole Pine has a well designed, implemented, and documented controls over the preparation of the uncollectible accounts estimate. What is Allay's appropriate risk response? Allay should test the operating effectiveness of the assertions. Allay should test the operating effectiveness of the controls. Allay should obtain written representation from management to this effect, which negates the need for any testing. Allay should focus this audit time on another area, and conclude there is no material risk in this area.
Allay should test the operating effectiveness of the controls.
A CPA, who is a staff accountant on an attest engagement, is considering the timing of substantive procedures.Which reason would support the auditor's conclusion to test at an interim period? The client performs adjusting entries on the account at year-end. Assessed risk of material misstatement is low. The company will be conducting a count of the supplies at year-end. A material change is expected in the account during the period from interim to year-end.
Assessed risk of material misstatement is low.
Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. Which condition would require the auditor to apply professional skepticism? New information confirms earlier responses to auditor inquiries. Audit evidence recently gathered is contradictory to other evidence previously gathered. No conditions were noted that provided evidence of possible fraud. No situations were noted that would indicate the need for additional audit procedures beyond what is required by GAAS.
Audit evidence recently gathered is contradictory to other evidence previously gathered.
Which of the following represent a common categorization of control activities? Authorization controls, control over human error, information-processing controls, physical controls, and segregation of duties. Authorization controls, information-processing controls, physical controls, and segregation of duties. Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties. Authorization controls, control over human error, information-processing controls, and segregation of duties.
Authorization controls, performance reviews, information-processing controls, physical controls, and segregation of duties
A CPA, who is a staff member on an audit engagement team, has a difference of opinion from her supervisor regarding the application of an auditing standard. She concludes that the difference may result in a material misrepresentation. She discussed her concerns with her supervisor, but the difference of opinion is not resolved. Which action should the staff member do next? Ignore the situation as the supervisor has more seniority. Bring her concerns to the manager on the engagement. Discuss her concerns with the company's management. Resign from the engagement.
Bring her concerns to the manager on the engagement.
Which of the following falls within the purview of a financial statement preparer? Independent audit Changes in equity Business valuation Mergers and acquisitions
Changes in equity
Susan, a college student, is preparing an essay. Which of the following principles should she use to explain why a Certified Public Accountant (CPA) is defined as a Concern for Public Interest (CPI) professional? High level of compensation High level of skill Expert in her field Code of Ethics
Code of Ethics
Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities? Code of Professional Conduct Principles Rules of Conduct Interpretations
Code of Professional Conduct
he structure of the AICPA _______________ includes four major sections: preface, rules for members in public practice, rules for members in business, and rules for other members. Conceptual Framework Code of Professional Conduct Independence Rules Rules of Conduct
Code of Professional Conduct
Which of the following is the discovery of material weakness? Risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated Conclusion that the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit High, but not absolute, level of assurance in a judgment about matters that are subjective Identification of accounts and related assertions most at risk of material misstatement is part of assurance services and not the discovery of a material weakness
Conclusion that the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit
Jerdana Accounting Firm is auditing Endothon Company. Jerdana has determined that $5 million is the planning materiality and $1 million is the performance materiality for each account. When Jerdana starts the audit, they find that none of Endothon's accounts are above the $1 million performance materiality. What should Jerdana do? Only perform audit procedures on random accounts because they have to earn their fees. Continue to perform the detailed audit procedures on every account because if any misstatements exists, they may still be material in aggregate. Resign from the audit engagement because there are no audit procedures to be performed. Inform the client that they will not perform any audit procedures on the immaterial accounts.
Continue to perform the detailed audit procedures on every account because if any misstatements exists, they may still be material in aggregate.
One of the seventeen COSO principles of internal control states that "the organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives." To which component of internal control does this principle belong? Risk Assessment Information and Communication Control Environment Control Activities
Control Environment
Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure? Rights and obligations Accuracy Cutoff Completeness
Cutoff
If a CPA is unable to implement effective safeguards, what should the CPA do? Decline the engagement. Proceed with the professional service. Evaluate the significance of the threat. Document the identified threats.
Decline the engagement.
A CPA, who is a staff accountant on an attest engagement, is considering the extent of substantive procedures. The inherent risk was assessed as high and the control risk was assessed as medium.What is the extent of substantive procedures testing? Detection risk is high and few substantive procedures are required. Detection risk is medium and some substantive procedures are required. Detection risk is low and considerable substantive procedures are required. Detection risk is very low and extensive substantive procedures are required.
Detection risk is medium and some substantive procedures are required.
Edgeway Associates is conducting an audit of Tabianna's warranty liability account shown on the balance sheet. Testing the operative effectiveness of Tabianna's controls did not provide sufficient evidence. What action should Edgeway take? Edgeway should consider increasing the risk and cost associated with the audit. Edgeway should also conduct substantive procedures on the reasonableness of the estimate. Edgeway should disregard testing of controls completely, and instead focus on substantive testing. Edgeway should conduct tests of internal controls pertaining to the estimate.
Edgeway should also conduct substantive procedures on the reasonableness of the estimate. If testing the operating effectiveness of controls alone does not provide sufficient appropriate audit evidence, Edgeway should also conduct substantive procedures on the reasonableness of accounting estimates.
Identify a service that falls under audit services. Compilation of historical financial statements Review of financial forecast Examination of historical financial statements Inspection of website security
Examination of historical financial statements
Which group of a company's board of directors is an auditor likely to meet with throughout the audit? Non-executive directors Executive directors Internal auditors Shareholders
Executive directors
Which of the following is the threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product? Advocacy threat Adverse interest threat Familiarity threat Self-review threat
Familiarity threat
While auditing Zegy, Inc, a computer component manufacturer, Kaper Independent Auditors (KIA) found that Zegy was made aware that approximately 75% of its most popular hard drives that were sold in the past 10 years could fail due to a catastrophic failure. Zegy's lifetime warranty requires a full replacement upon failure of a drive. Internal memos indicate that the CEO and CFO knew of the risk prior to the date of the financial statements. No disclosure or estimate for the contingent liability was included in the financial statements or notes. In the context of identifying fraud, which of the following describes Zegy's misstatement or omission of the contingent liability?
Fraudulent financial reporting Fraudulent financial reporting is intentionally misstating or omitting important facts from the financial statements. KIA knows that the misstatements (or omission) could affect the decisions made by users of the financials statements (investors, banks, etc.).
Within a U.S. context, the applicable financial reporting framework is typically _______. American Accounting Association (AAA) Internationl Auditing and Assurance Standards Board (IAASB) Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles (GAAP)
An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls? Software-based audit techniques using test data and IT General Controls (ITGCs). Reperformance of the bank reconciliation procedure. Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure. Inquiry of the person performing the bank reconciliation and the bank officer in charge of the client's account.
Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure.
What does COSO define as a process effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting and compliance?
Internal control
John is preparing for an integrated audit of Utilhill, Inc. John will need to issue an opinion on the financial statements and on the internal controls over financial reporting (ICFR). Which of the following is correct in relation to the approach John should use and the report John should write? Regardless of the outcome of the control tests, John should ensure that both the audit opinion and the internal control opinion are the same. John should use a bottom-up approach to determine which controls to test. John should use a top-down approach to determine which controls to test. Regardless of the outcome of the control tests, John should ensure that both the audit opinion and the internal control opinion are the different.
John should use a top-down approach to determine which controls to test. When performing an integrated audit (to issue an opinion on the financial statements and an opinion on ICFR), the auditor uses a top-down approach to determine which controls to select.
If auditors conclude the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit, it would mean the auditors discovered a/an _______ in the client's ICFR. Material weakness Reasonable assurance Audit risk Inherent risk
Material weakness
Which of the following is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented on a timely basis? Immaterial weakness Material weakness Deficiency in internal control Significant deficiency
Material weakness
In the context of identifying fraud, which of the following describes theft of inventory by employees or others? Fraudulent financial reporting Omission of material facts A loss that is not the result of fraud Misappropriation of assets
Misappropriation of assets
An audit client is upset about the auditors' overall audit risk assessment. The client states that they govern efficiently and that the audit risk should be set to zero. Therefore, the amount of testing that needs to be done should be minimal.Which risk factors can be reduced to zero? Detection risk and inherent risk, but not control risk Neither detection risk, inherent risk, nor control risk Inherent risk, control risk, and detection risk Control risk and detection risk, but not inherent risk
Neither detection risk, inherent risk, nor control risk It is impossible to reduce any of these risks to zero. Risk will always exist in an audit, whether it is from economic or industry factors (inherent risk), a failure of an internal control (control risk), or a failure of an audit procedure (detection risk).
Which part of corporate governance is not part of the company's management team, and have involvement limited to preparing for and participating in board meetings and relevant board committee meetings? Executive directors External auditors Internal auditors Non-executive directors
Non-executive directors
Luke's Fish Emporium is being audited by Dunn Hollow Firm. Luke's annual net income is $10,250,000. Dunn Hollow has determined that 10% of net income is the planning materiality for accounts found on the income statement. Which of the following accounts is material? Extraordinary Loss of $150,000 Bonuses to Contractors of $600,000 Miscellaneous Expenses of $986,659 Other Income of $1,425,000
Other Income of $1,425,000 $1.425.000 / $10,250,000 = 13.9% is above the planning materiality and therefore is material.
Which of the following general standards refers to adequately preparing for the engagement and providing the appropriate management oversight to the performance of professional services? Planning and Supervision Due Care Sufficient Relevant Data Audit Planning
Planning and Supervision
How does a small firm resolve the conflict of interest issue in a divorce case? Using separate engagement teams in providing tax services to both parties. They do not need to resolve the conflict of interest in the case of a divorce. Provide tax services to only one of the two parties. Resign from the engagement.
Provide tax services to only one of the two parties.
A CPA, who is a staff accountant on an attest engagement, is considering the nature of substantive procedures to test for accuracy and valuation of depreciation expense for a newly acquired fixed asset.Which test lends itself to testing the accuracy and valuation of depreciation expense? Observation Recalculation Inquiry Inspection
Recalculation
Part of risk assessment is searching for related parties and transactions. Which of the following is true of related parties? Management does not need controls in place for identifying related parties. The presence of related parties is not considered a fraud risk factor. Related party transactions must be disclosed even if they seem to be conducted at independently. A subsidiary company is not considered a related party.
Related party transactions must be disclosed even if they seem to be conducted at independently.
Which phase of an audit involves an evaluation of the results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements? Risk response phase Reporting phase Detection risk phase Inherent risk phase
Reporting phase
A CPA, who is a staff accountant on an attest engagement, is considering the nature of substantive procedures to test for slow-moving inventory. ADA was originally used to identify the slow-moving items.Which substantive procedure would an auditor use to test the net realizable value of the inventory? Observation Inquiry Recalculation Scanning
Scanning Scanning is a type of analytical procedure in which auditors use their professional judgement to review accounting data to identify unusual or significant items that may be an indication of a material misstatement. Scanning includes the identification of unusual individual items detailed in transaction reports.
A CPA, who is a staff accountant on an attest engagement, is considering the nature of substantive procedures to test the completeness assertion for a contract. He determined after testing internal controls that they were not effective and the risk of material misstatement is high.What should the CPA do next? Obtain a detailed report for the contract account. Inquire of management the details of the contract. Inspect the contract document. Send a confirmation to the outside party.
Send a confirmation to the outside party. The CPA is testing the completeness assertion and internal controls were not effective. Confirming the details of the contract with an outside third party provides more reliable evidence.
Figuly & Wiggins, Inc. is auditing a client that has $100,000 in net income. After determining the planning materiality as 10% of net income, the auditing team has discovered several issues. Which of the following represents qualitatively material information? Other expenses of $2,462 Miscellaneous Expenses of $10,629 Suspected theft of cash by the controller of $1,250 Loss on Equipment destroyed in a fire caused by lightning of $9,500
Suspected theft of cash by the controller of $1,250 qualitative items discount the quality of the financial statements
Kathy is a member on the audit team from Bones Simon, LLC auditing Paddleboards, Inc. During their brainstorming session the team chose Kathy to investigate fraud associated with misappropriation of assets. Which potentially fraudulent activity will Kathy investigate? The controller used the company credit card to purchase a home computer. The financial statements do not show a probable legal settlement that was known before the financial statement date. Recording of sales in December was contracted and services performed in the following January. The CFO valued the assets of a subsidiary at 250% of the appraised value.
The controller used the company credit card to purchase a home computer.
Autojor is being audited by Dinnegel, Inc. Dinnegel has determined that the overall audit risk is 1.67%. During the course of the audit however, Dinnegel finds that Autojor's internal controls have improved significantly since the previous audit. As a result, the risk of material misstatement decreases, but Dinnegel has determined that the overall audit risk remains the same. Why has Dinnegel determined that the overall audit risk remains the same? The inherent risk increased. The inherent risk decreased. The detection risk increased. The detection risk decreased.
The detection risk increased. Recall that Audit Risk (AR) = Risk of Material Misstatement (RMM) x Detection Risk (DR). and that RMM = Inherent Risk (IR) x Control Risk (CR). Therefore AR = IR x CR x DR. Mathematically, DR = AR / (IRxCR). In our scenario, AR and IR remain constant and CR decreases. Therefore, DR must increase. This makes sense when you consider that the better the company's controls are, the more difficult it will be for the auditor to detect a misstatement because it is less likely a misstatement occurred.
What should CPAs clarify while preparing financial statements for small businesses? Their role in nonattest services The conceptual framework The financial reporting framework Their part in an engagement
The financial reporting framework
Jimmy has been asked by his audit manager to create a plan for auditing internal controls related to accounts receveivable for Kretsmart. Kretsmart's year ends December 31, 2020. Jimmy's manager has given him several dates to choose from to conduct his evaluation of Kretsmart 's internal controls. Which date should Jimmy choose? After the balance sheet date on January 15, 2021 The interim date of October 31, 2020 The balance sheet date of December 31, 2020 On March 31, 2021, the date that the audit report is issued
The interim date of October 31, 2020 testing of internal controls is performed during an interim period, which may be two or three months before the client's year-end.
Which group licenses CPAs? The state boards of accountancy The Securities and Exchange Commission (SEC) The Financial Accounting Standards Board (FASB) The American Institute of Certified Public Accountants (AICPA)
The state boards of accountancy
Which statement is correct as to financial statement audit reports for public versus private companies? There is a standard report for the audit of private company financial statements but none for auditing public company financial statements. There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements. There is a standard report for the audit of public company financial statements but none for auditing private company financial statements. There is no distinction between standard reports for the audit of financial statements, regardless of whether the company is private or public.
There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.
Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures? There is heightened risk of fraud. Client has a strong and effective internal control environment. Unpredictability provides the audit team with more variety. Client was not audited in the previous year.
There is heightened risk of fraud.
Which of the following beliefs will narrow the audit expectation gap? The auditor is guaranteeing the future viability of the entity. There is no guarantee the auditor will find all material fraud, should fraud have occurred. An unmodified audit opinion is an indicator of complete accuracy of the financial statements. The auditor is providing complete assurance.
There is no guarantee the auditor will find all material fraud, should fraud have occurred.
During your audit of Paradigm Toys, your test of a control over revenue recognition shows that the control is ineffective. Explain what you should do next. You should consider whether there is a compensating control that might prevent and correct a misstatement missed by the original control being tested. You should obtain additional written assurances from management. You should consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested. You should consider withdrawing from the engagement.
You should consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested.
When performing tests of controls, the auditor is making _______. certain that he or she will ultimately be in a position to render absolute assurance on the financial statements and internal control sure that all controls are working perfectly, with no errors, material or immaterial a "yes or no" decision with respect to effectiveness multiple decisions
a "yes or no" decision with respect to effectiveness
When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is: a class of transactions related to the account balance being tested (e.g., sales to accounts receivable). a population that is overstated if the population of interest is understated (or vice versa). a class of transactions or the account balance to be tested. a subset of the population that is the basis for sampling
a population that is overstated if the population of interest is understated (or vice versa).
Internal control is defined as: a process designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance. the entity's system to ensure that management and those charged with governance of the entity have quality information for decision making. the entity's system to prevent, or detect and correct, misstatements in the financial statements. a process, implemented by management, to ensure the integrity of the entity's management information system.
a process designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance.
Entity-level controls involve _______. all controls recommended by the internal audit function all four components of internal controls all five components of internal controls all auditor and client controls
all five components of internal controls 5 components of IC is risk assessment, information and communication, monitoring activities, and existing control activities - are often referred to by the acronym C.R.I.M.E.
Client closing procedures: affect balance sheet accounts only so auditors much closely examine the client's balance sheet are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period are routine transactions that do not impact audit risk and can be ignored in the audit process affect expense accounts only so auditors must closely examine the client's income statement
are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period
Examination of internal controls is a service that comes under _______ services, which fall under _______ services. assurance; attestation attestation; assurance attestation; audit acceptable; assurance
attestation; assurance Attestation services (under the umbrella of assurance services) include review of historical financial statements, review of financial forecast, and examination of internal control.
It is important for an auditor to understand a public company's system of internal control in order to: develop an audit strategy to best audit external control over financial reporting. develop and audit strategy and make a final assessment of control risk. audit internal control over financial reporting, assess risk, and develop an audit strategy. audit external control over financial reporting.
audit internal control over financial reporting, assess risk, and develop an audit strategy.
The assertion related to recording transactions in the correct accounting period is: completeness. cutoff. accuracy. occurrence.
cutoff
When gaining an understanding of the client's sources of financing, the auditor: determines if the client is meeting principal and interest payments when they are due. determines if the client is writing off uncollectible accounts receivable. is not interested in debt covenants because most debt contracts are the same. ignores the relative reliance on debt versus equity funding because that is a management decision, not an audit issue.
determines if the client is meeting principal and interest payments when they are due. The auditor will determine if the client is meeting principal and interest payments when they are due to gain an understanding of the client's sources of financing.
Working papers: document the results of the tests but not the purpose of the control selected for testing. document the purpose of the control selected for testing and the conclusion made by the auditor but not the results of the test. are necessary for the first-year auditor to keep track of the daily work but are not important to the overall audit. document the auditor's conclusion about control risk and the basis for that conclusion.
document the auditor's conclusion about control risk and the basis for that conclusion.
The choice of statistical or non-statistical sampling _______. is best determined by management, who know the company best does not affect the selection of procedures, or the competence of evidence obtained about individual sample items does not affect the selection of procedures, or the competence of evidence obtained about individual population items affects the selection of procedures, or the competence of evidence obtained about individual sample items
does not affect the selection of procedures, or the competence of evidence obtained about individual sample items
When auditors remain independent of the entity, its management, and its staff when completing the audit work, and works with an alert and questioning mind, the auditor is gathering relevant data. exhibiting professional skepticism. looking for significant risk. developing an audit strategy.
exhibiting professional skepticism.
When an auditor inspects a tangible asset to support a balance in the client's records, the auditor is gathering evidence to support the: rights and obligations assertion. valuation and allocation assertion. completeness assertion. existence assertion.
existence assertion
Economic conditions impact _______. auditor performance neither financial statement user's expectations not auditor performance financial statement user's expectations both financial statement user's expectations and auditor performance
financial statement user's expectations
The risk assessment phase of an audit includes: writing the report on internal controls. audit execution. gaining an understanding of the client. preparation of the auditor's report.
gaining an understanding of the client.
Who among the following users of the financial statement of a company may be particularly interested in evaluating whether the company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company's activities? government employees general pubic customers
government
If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as_______. high and set detection risk as high low and set detection risk as low high and set detection risk as low low and set detection risk as high
high and set detection risk as low
With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______. subjective and not absolute 100%, but not objective high, but not absolute guaranteed and absolute
high, but not absolute
If tests of controls indicate that a key control is not functioning as designed, and if other compensating controls do not exist, the auditor should _______. decrease the assessed level of control risk, making no changes to the nature, timing and extent of substantive tests related to the assertion. make appropriate changes to the nature, timing and extent of substantive tests related to the assertion. increase the level of assessed detection risk and make appropriate changes to the nature, timing and extent of substantive tests related to the assertion. increase the assessed level of control risk, decrease the level of assessed detection risk and make appropriate changes to the nature, timing and extent of substantive tests related to the assertion.
increase the assessed level of control risk, decrease the level of assessed detection risk and make appropriate changes to the nature, timing and extent of substantive tests related to the assertion.
Upon consideration of a client's system of internal control, when an auditor identifies areas with weaknesses, ________. the auditor should disclaim an opinion on those areas reduced substantive testing in this area will be appropriate to reach the desired level of assurance increased substantive testing in this area will be appropriate to reach the desired level of assurance the auditor should document the weaknesses and refer to them during next year's audit
increased substantive testing in this area will be appropriate to reach the desired level of assurance
Generally speaking, the existence of related party transactions ________. increases inherent risk and should be investigated further decreases inherent risk and should be investigated further is not worth of further investigation is illegal and should be reported to the Securities and Exchange Commission
increases inherent risk and should be investigated further
When an auditor assesses how well-positioned the client is to cope with current and changing government policies, regulations, laws, and economic conditions, he or she is assessing the organization at the employee-level. industry-level. entity-level. transaction-level.
industry-level.
An important aspect of selecting a sample _______. involves determining the population and sampling unit involves conferring with internal auditors with respect to their sampling preferences involves determining the sample and sampling unit involves being as subjective as possible
involves determining the population and sampling unit
An entity's risk assessment process: is the entity's process for identifying and responding to business risks and the results of those risks. never allows management of an entity to decide to accept a risk without taking any action. is designed to help an entity think about risk in the same way that an auditor thinks about risk. is established only if the entity is subject to unusually high risk.
is the entity's process for identifying and responding to business risks and the results of those risks.
The expected rate of deviation in the population _______. is the rate at which the auditor expects controls not to function as planned is the rate at which the auditor expects controls to function as planned relates to how many accounts within the population will be stated correctly relates to how many accounts within the population will be consistent with the auditor's expectation
is the rate at which the auditor expects controls not to function as planned
Nonsampling risk: is the risk that the auditor reaches a conclusion from a sample different from that reached from the population. is the risk that the auditor concludes that material misstatement does not exist when it does. is the risk that the auditor concludes that a material misstatement exists when it does not. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
The audit strategy known as the predominantly "substantive approach": means the auditor will conduct some interim testing and minimal year-end account-balance testing. is appropriate when internal controls are very strong and fraud risk is high. means the auditor will spend minimum effort testing the client's system of internal controls. requires the auditor to conduct extensive control testing because of weak internal controls.
means the auditor will spend minimum effort testing the client's system of internal controls.
An audit committee of a publicly traded company should be composed of: the audit partner, the CFO, and a shareholder. executive and non-executive members of the board of directors. the CFO and two other board members who are also shareholders. members of the board of directors who are independent directors.
members of the board of directors who are independent directors.
According to the integrity and objectivity rule, in the performance of any professional service, a member shall not knowingly _______. decentralize work to subordinates give a client a bad report hide activities that could be a conflict of interest misrepresent facts
misrepresent facts
The objectives of internal control include: operations objectives, internal control objectives, and financial reporting objectives. operations objectives, reporting objectives, and compliance objectives. operations objectives, control environment objectives, and financial reporting objectives. risk assessment objectives, compliance objectives, and reporting objectives.
operations objectives, reporting objectives, and compliance objectives.
IT General Controls (ITGCs) are important because they: prevent the reliability of electronic audit evidence. impact the effectiveness of manual controls. allow client staff to change programs without needing to receive authorization for the change. prevent unauthorized personnel from having access to data and applications.
prevent unauthorized personnel from having access to data and applications.
The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a: judgmental misstatement. confirmation misstatement. factual misstatement. projected misstatement.
projected misstatement.
Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements. What term captures this problem? reliability competing incentives remoteness complexity
reliability
Interpretations in the AICPA code provide additional guidance regarding the scope and applicability of the _______. conceptual framework standards principles rules of conduct
rules of conduct
Which of the following components of the AICPA are enforceable? Interpretations Rules of conduct Principles and rules of conduct Principles and interpretations
rules of conduct
With regard to statistical sampling, _______. the auditor can use judgment alone to select a sample for testing sample size is determined subjectively, or quantitatively, using appropriate statistics this function should be outsourced by the auditor to the internal audit function sample size is determined objectively, or quantitatively, using appropriate statistics
sample size is determined objectively, or quantitatively, using appropriate statistics
A/an ________ threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement. adverse interest advocacy self-review undue influence
self-review
Obtaining positive results from testing controls means that: the auditor can plan to reduce the reliance on detailed substantive testing of transactions and account balances. materiality will be set at a low dollar amount. the auditor can completely rely on a client's system of internal controls and further evaluation of internal controls is unnecessary. no substantive testing is required.
the auditor can plan to reduce the reliance on detailed substantive testing of transactions and account balances.
Once controls have been tested, _______. the auditors immediately issue an unqualified opinion on internal control the auditors document their work in a working paper the auditors should document their understanding in a memo addressed to the client's legal counsel the auditors should request all fees due for this part of the audit, before moving on to the financial statement audit
the auditors document their work in a working pape
When gaining an understanding of the client, the new auditor will not consider: related party identification. the appropriateness of the client's system of internal controls to mitigate identified business risks. controls over the technology used to process and store data electronically. the client's ability to pay for the audit.
the client's ability to pay for the audit.
If a prospective new audit client does not allow the auditor to contact its existing auditor: the existing auditor should contact the new auditor to tell them all about the client. the new auditor should consider that a negative factor on the integrity of client management. the new auditor should respect the prospective client's right to privacy. the new auditor should contact the existing auditor anyway because it is their duty.
the new auditor should consider that a negative factor on the integrity of client management.
Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding ______. the objectives of the engagement, the services to be performed, and any limitations of the engagement any limitations of the engagement, only the objectives of the engagement and the services to be performed, only the services to be performed, only
the objectives of the engagement, the services to be performed, and any limitations of the engagement
Designing substantive procedures responds to: the risk of material misstatement at the entity level. the risk of all types of misstatements at the entity level. the risk of material misstatement at the assertion level. the risk of all types of misstatements at the assertion level.
the risk of material misstatement at the assertion level.
The three categories of management assertions are: journal entries, account balances, and financial statements. journal entries, ledgers, and trial balances. classes of transactions, ledgers, and account balances. classes of transactions, account balances, and presentation and disclosure.
the three categories of management assertions are classes of transactions, account balances, and presentation and disclosure.
At the front of every audit file is the client's _______ supporting the financial statements. key performance indicators relevant assertions trial balance prior year audit file
trial balance
