Auditing Exam 2 (Ch. 5,6,7,9)
Segregation of duties is a control aimed at _______ misstatement.
preventing
Preparing bank ___________ can help detect misstatements that have been made.
reconciliations
Without regard to the effect of controls, __________ have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.
relevant assertions
The final step of an audit is issuing the audit ________.
report
Tests of controls and __________ are referred to as "further audit procedures."
substantive procedures
The term __________ relates to the quantity of evidence that the auditors should obtain.
sufficient
To use attributes sampling tables, the auditors must stipulate the desired risk of assessing control risk too low, the expected deviation rate in the population, and the desired __________.
tolerable deviation rate
A Type ___ report assesses the controls and their suitability.
1
A Type ___ report assesses the controls, their suitability, and effectiveness.
2
An auditor performs attribute sampling to test for proper cancellation of payment vouchers. In a sample population of 100, two vouchers are missing the proper cancellation, while one simply cannot be located. The error rate of the sample is
3%
Commitment to integrity and ethical values
A clearly articulated statement of ethical values
Which of the following business characteristics is not indicative of high inherent risk?
A large amount of assets
Which of the following statements are ordinarily not correct about the sample size in statistical sampling when testing controls?
A larger population requires a proportionately larger sample size.
Which of the following items would be the least persuasive type of audit evidence?
A letter of representation signed by the client's president and chief executive officer.
Preliminary arrangements agreed to by the auditors and the client should be documented in writing by the auditors. This documentation is known as:
An engagement letter.
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the:
Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.
Which of the following statistical sampling techniques is least desirable for use by the auditors?
Block selection
Establish the existence of assets
Cash can be verified by physical inspection.
Which of the following are principles associated with the control environment?
Commitment to competence, participation of those charged with governance, and ethical values and integrity
Which of the following is not an objective that is intended to be achieved by proper audit documentation?
Comparing actual time spent on the engagement to engagement budgets.
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 working papers would probably:
Document the assistant auditor's position and how the difference of opinion was resolved.
Which of the following is not a financial statement assertion made by management?
Effectiveness of internal control
A dual purpose test simultaneously:
Functions as a substantive test and as a test of controls.
An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as:
Horizontal analysis.
Tests of controls do not address:
How controls were originated.
An entity's ongoing monitoring activities often include:
Management review of weekly performance reports.
When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:
May occur in a systematic pattern and destroy the sample randomness.
The audit committee of a company must be made up of:
Members of the board of directors who are not officers or employees.
Accounting Information Systems
Methods and records to process, summarize, and report the company's transactions
A control that reduces the risk of misstatement by remediating control deficiencies through automated means
N/A
A deficiency in internal control that is less severe than a material weakness, but more severe than a significant deficiency
N/A
Duplicate controls that achieve a control objective
N/A
Procedures cycled periodically through the auditors' internal control deviation analysis
N/A
What is the most likely opportunity for theft or fraud by employees?
Needlessly complex transactions.
Which of the following is least likely to be a test of controls?
Observation of confirmations.
X Company is concerned that it does not have enough employees to ensure adequate segregation of duties in its revenue cycle. Which of the following may be performed by the same individual?
Opening the mail and reconciling the perpetual inventory records to the physical count.
Tests of controls ordinarily are designed to provide evidence of:
Operating effectiveness.
Audit documentation should enable an experienced auditor without direct knowledge about the client to understand the procedures performed, the evidence obtained, and the conclusions reached by the auditor. Audit documentation should include: Audit Plan / Documentation of Control Risk / Client Representation Letter a.Yes Yes Yes b.Yes No Yes c.Yes Yes No d.No Yes Yes
Option A
Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive / Opportunity A.Yes Yes B.Yes No C.No Yes D.No No
Option A.
Which of the following are components of the risk of material misstatement (RMM) and can be expressed in both quantitative and qualitative terms? Control Risk / Detection Risk / Inherent Risk a.No No Yes b.Yes Yes Yes c.Yes No Yes d.Yes Yes No
Option C.
Service organization
Perform data processing/computer/IT services, like payroll processing, for various clients
When would it not be appropriate to apply analytical procedures in an audit of financial statements?
Performing tests of controls.
In what section of the audit working papers would a long-term lease agreement be filed?
Permanent working paper file.
Which of the following is not generally used for selecting samples?
Physical representation numbers.
The stages of an audit
Plant the audit Obtain an understanding of the client and it's environment, including internal control Assess the risks of misstatement and design further audit procedures Perform further audit procedures Complete the audit Form an opinion and issue the audit report
Dual signatures for checks.
Preventive
Segregation of duties over purchasing.
Preventive
Supervisory approval of time cards.
Preventive
Preventive control
Segregation of duties
Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration?
The rate of technological change is moderate in the industry.
The tolerable deviation rate in sampling for tests of controls is:
The rate the auditor will tolerate without modifying the planned assessment of control risk.
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?
To increase the efficiency of the audit by eliminating the need for other audit procedures.
Which of the following symbols indicate that a file has been consulted?
Trapezoid to triangle.
The Foreign Corrupt Practices Act of 1977 prohibits __________ to foreign officials to obtain business and requires companies to maintain an effective system of internal control.
bribes
The risk of material misstatement is composed of two risks that the auditor assesses, those risks are inherent risk and __________ risk.
control
_______controls come into play when a misstatement is found.
corrective
A form of insurance in which an insurance company agrees to reimburse an employer for losses attributable to employee theft is referred to as ____________.
fidelity bonds
If the variability of a population increases, as measured by the standard deviation, the required sample size for the population will __________.
increase
The auditors must assess the risk of material misstatement of financial statements due to the two types of fraud, fraudulent financial reporting and __________.
misappropriation of assets
Which organization developed the framework most commonly used by the auditing profession for benchmarking internal control of non-issuers?
The Committee of Sponsoring Organizations of the Treadway Commission
Which of the following statements regarding fraud is not true?
The dollar amount involved is what distinguishes fraud from error.
In which of the following circumstances is it least likely that tests of controls will be performed?
The expected deviation rate exceeds the tolerable deviation rate.
When evaluating the sufficiency and appropriateness of audit evidence, the auditor should consider all of the following except:
The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements.
Regarding pension obligations and their associated auditing issues,
The findings of a specialist, such as an actuary, constitute audit evidence to be evaluated by the auditor.
Analytical procedures are most likely to detect:
Unusual transactions.
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
Use less predictable audit procedures.
Documentary Evidence
Variety of records in support of the company's business and accounting information system
Adding and subtracting the __________ to and from the projected misstatement creates an interval within which the true value of the population is likely to lie.
allowance for sampling risk
The audit approach of evaluating financial statement information by a study of relationships among financial and nonfinancial data is __________.
analytical procedures
Fair values can be evaluated by comparing to prices on _______ markets.
existing
Analytical procedures are the primary way to test data _______.
interrelationships
The amount of evidence that is considered sufficient varies __________ with the reliability of the evidence.
inversely
Separate __________ are used to combine similar general ledger accounts into the total that appears on the working trial balance.
lead schedules
The primary source of evidence about pending litigation is the attorney ______.
letter
In performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the __________.
risk of assessing control risk too lowselected answer correct
______should develop a statement of ethical values.
senior management
If employees lack ________, they may be ineffective in performing their duties.
skills
The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.
smaller
Auditors may use audit ______ to test clerical accuracy.
software
The term __________ refers to the process of dividing a population into relatively homogeneous subgroups.
stratification
Tests of balances and transactions designed to detect material misstatements are called __________.
substantive procedure
Audit effectiveness is impacted when the auditor doesn't do enough _______.
testing
Audit procedures that are focused on the effectiveness of internal control are called __________.
tests of controls
A cutoff test that relates to plant assets typically affects __________.
the balance sheet
Effective board of directors
the extent of independence of this group is critical
There are _____ types of reports that auditors of service organizations (service auditors) can provide.
two
The auditors of a service organization, known as service auditors, may review the controls at the organization and issue a report that may be relied upon by __________.
user auditors
The __________ is a schedule listing the balances of accounts in the client's general ledger.
working trial balance
Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:
Direct participation by the owner in key record-keeping and control activities of the business.
Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level?
Emphasize the need to remain neutral, rather than to exercise professional skepticism.
The purpose of this document is to avoid misunderstandings between the auditors and the client.
Engagement letter
To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except:
Establish internal control with no material weakness.
TWD has such a strong financial presence in its industry to allow it often to dictate the terms or conditions of transactions with its suppliers.
Increase
The accounting department has experienced a high rate of turnover of key personnel.
Increase
Which of the following is an example of an auditor's response to the risk of material misstatement at the financial statement level?
Increase the need for professional skepticism among members of the engagement team.
Interest rates have been very volatile recently.
Increase, Yes
NFB's formula has consistently underestimated the allowance for loan losses in current years.
Increase, Yes
The banking industry has been significantly impacted by the downturn in the economy in recent years.
Increase, Yes
_______risk is the risk of material misstatement of an assertion without considering internal control.
Inherent
The risk of material misstatement of an assertion about an account without considering internal control.
Inherent risk
In the consideration of internal control, the operating effectiveness of controls is tested by:
Test of controls
The audit committee should be composed of directors who are not _______of the organization.
employees
The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective?
(1) Trace from source documents to journals.
The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective?
Either (1) or (2).
Which of the following is not an advantage of establishing an enterprise risk management system within an organization?
Eliminates all risks.
The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective?
(2) Vouch from journals to source documents.
An auditor has determined a $10 million materiality level for a client's balance sheet and a $3 million materiality level for the client's income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of
$3 million or more
Which of the following should not normally be included in the engagement letter for an audit?
A listing of the client's branch offices selected for testing.
Which of the following best illustrates the concept of sampling risk?
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
Type 1 report
A report that documents a service organization's controls and documents their suitability
Type 2 report
A report that documents a service organization's controls and documents their suitability AND effectiveness
The auditors' primary objective in selecting a sample of items from an audit population is to obtain:
A representative sample
Detective control
A requirement to prepare bank reconciliations
effective organizational structure
A well designed structure provides a basis for planning, directing, and controlling operations
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets?
An unreliable accounting system.
Comparing the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable during an audit would be a type of:
Analytical Procedure.
An auditor's objective in the performance of audit procedures is to obtain evidence that either supports or refutes management assertions. Which of the following is a procedure designed to achieve that objective?
Analytical procedures.
In developing an expectation for analytical procedures, the auditors are least likely to consider:
Anticipated costs of audit completion.
What objectives of controls are of primary interest to an auditor performing a financial statement audit?
Accurate and reliable financial reporting
Performing analytical procedures may help an auditor to:
Achieve audit objectives related to a particular assertion.
At the completion of the audit, the auditors are least likely to know:
Actual control risk.
Affects audit efficiency
Assessing control risk too high Performing more testing than necessary
Affects audit effectiveness
Assessing control risk too low Not performing enough testing
Which of the following is not a function of audit working papers?
Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.
Which of the following sampling techniques is typically used for tests of controls?
Attribute sampling.
When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?
Attributes
A description of the nature, timing, and extent of the audit procedures to be performed.
Audit plan
At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated.
Audit risk
Verify the cutoff of transactions
Auditors examine transactions just before and just after year end.
Tracing from source documents to journals most directly tests:
Completeness (understatements).
Computations
Computations made independently to prove arithmetical accuracy of client records
Which of the following is an element of sampling risk?
Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.
Which of the following is not a primary approach to auditing an accounting estimate?
Confirm the amounts
Data Interrelationships
Comparison between the relationships among financial or nonfinancial data
A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective
Compensating control
A control that functions together with another control to achieve the same control objective
Complementary control
Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?
Confirmation
Which of the following confirmation requests would be least likely to be used?
Confirming authorization for major transactions with directors.
When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:
Consider the organizational level to which the internal auditors report the results of their work.
Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at:
Considering unusual or unexpected account balances that were not previously identified.
According to the COSO Integrated Framework, reviews of actual business performance with budgets is an example of which of the five components of internal control?
Control activities
Of the following statements about internal control, which one is not valid?
Control activities ensure all fraud will be eliminated.
Of the following, which is the least reliable type of audit evidence?
Copies of sales invoices inspected by the auditors.
Adjustment of perpetual inventory records to physical counts.
Corrective
A control established to remedy misstatements that are discovered
Corrective control
In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:
Efficiency of the audit
TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's financial performance.
Decrease
Management has been receptive to Green's suggestions relating to accounting adjustments.
Decrease, No
NFB operates in a growing, prosperous area and has remained profitable over the years.
Decrease, No
The internal auditor reports directly to Harris, a minority shareholder, who also acts as chairman of the board's audit committee.
Decrease, No
A situation in which a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis
Deficiency in internal control
Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to sustain losses?
Dept to equity.
During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:
Design further audit procedures.
The primary objective of tests of details of transactions performed as substantive procedures is to:
Detect material misstatements in the financial statements.
Which of the following would be least likely to be considered an objective of internal control?
Detecting management fraud.
Auditors will apply tests of details to accomplish which of the following?
Detecting material misstatements affecting the financial statements.
The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
Detection risk.
Annual physical inventory.
Detective
Internal audits of payroll.
Detective
Management review of budget/actual information.
Detective
Monthly reconciliation of bank accounts.
Detective
For which of the following audit tests would an auditor most likely use variables sampling?
Determining that all payables are recorded at year end.
When evaluating management's fair value estimates of items for which only Level III inputs are available, an auditor would be most likely to
Evaluate how consistently the process by which management made the fair value estimates was applied from item to item.
Which of the following audit procedures is most likely to be conducted only after year-end?
Evaluation of management's adjusting journal entries to the financial statements.
Establish completeness of the recorded assets
Examining shipping documents helps to determine if assets are properly recorded
Vouching from journals (or ledgers) to source documents most directly tests:
Existence (overstatements).
Which of the following best describes what is meant by the term "fraud risk factor"?
Factors often observed in circumstances where frauds have occurred.
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
Facts that might bear on the integrity of management.
During December 20X1, TWD completed a barter transaction with a municipality. TWD removed waste from the municipally owned site and acquired title to another contaminated site at below market price. TWD intends to service this new site in 20X2.
Increase
Which of the following statements is correct regarding the auditing of management estimates?
In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework.
An auditor discovers that an account balance believed to be materially misstated based on an audit sample was not materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?
Incorrect rejection
An initial public offering of TWD's stock is planned for late 20X2.
Increase
During 20X1, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
Increase
During 20X1, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant influence over UEL.
Increase
attracting, developing, and retaining competent employees
Management is committed to hiring employees with appropriate levels of education, experience, and evidence of integrity and ethical behavior
A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:
Knowledge necessary to determine the nature, timing, and extent of further audit procedures.
Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?
Legality.
The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered:
Low.
Corrective control
Maintaining backups of data
When using a specialist to obtain evidence in an audit, the auditor will consider the specialist's competence and objectivity. Which of the following would the auditor do when evaluating the specialist's objectivity?
Make inquiries regarding the specialist's relationships.
A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis
Material weakness in internal controlselected answer correct
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
Materiality and audit risk.
During December 20X1, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
No effect
Which of the following statements regarding auditor documentation of the client's internal control is correct?
No one particular form of documentation is necessary, and the extent of documentation may vary.
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:
Record and conceal fraudulent transactions in the normal course of assigned tasks.
As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:
Recorded sales have been properly posted to customer accounts.
Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Tests of Details / Substantive Analytical Procedures A.Yes Yes B.Yes No C.No Yes D.No No
Option A
What is the most likely rationalization for theft or fraud by employees?
Perceived mistreatment by management.
Watt & Foster LLC is a CPA firm that wants to ensure that it only associates with clients whose management has integrity. To achieve this, Watt & Foster need not:
Refuse to accept a client who has been issued an adverse opinion sometime during the last three years.
Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?
Preparing bank reconciliations.
Analytical procedures are required at the risk assessment stage and as:
Procedures near the end of the audit.
Which of the following is not a function of working papers?
Provide support for the accounting records.
Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to cover current obligations?
Quick ratio.
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts?
Ratio analysis.
Which of the following is not one of the assertions made by management about an account balance?
Relevance.
Third Party Representations
Representations or evidence from outside parties
Determine the appropriate financial statement presentation and disclosure of the asset
Reviewing subsequent events is an important step
Which assertions may be supported by evidence obtained when an auditor traces items recorded in inventory to purchase documents?
Rights & obligations and valuation & allocation
Establish that the company has rights to the asset
Rights to cash can be verified by sending a confirmation.
________assessment procedures are performed when obtaining an understanding of the client.
Risk
Which of the following are considered components of internal control?
Risk assessment
X Company recognizes the need to stay current on all accounting pronouncements to make certain that the company's financial statements are being prepared in accordance with current GAAP. Identifying this need relates to which internal control component?
Risk assessment
When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:
Test controls for all significant accounts.
______ auditors are the auditors of a service organization.
Service
______ may be involved in some testing of calculations.
Specialists
Which portion of an audit is least likely to be completed before the balance sheet date?
Substantive procedures.
An auditor may compensate for a weakness in internal control by increasing the extent of:
Substantive tests of details.
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.
Supervisory position.
A primary purpose of the audit working papers is to:
Support the auditors' opinion.
Physical Evidence
Tangible asset from examination
An auditor established a $100,000 tolerable misstatement for an audit procedure applied to an asset with an account balance of $7,500,000. The auditor selected a sample of every fiftieth item from the population that represented the asset account balance and discovered overstatements of $1,200 and understatements of $300. Under these circumstances, the auditor most likely would conclude that
The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. 1,200-300=900 900x50=45,000 45,000<100,000
An auditor has established the planned assessed risk of material misstatement for an area of the audit as low because the client has established meaningful controls to prevent a material misstatement. The auditor has performed walkthroughs to determine if the policies have been placed in operation. Next:
The auditor should perform tests of controls and, if results are satisfactory, the nature, timing, and extent of further audit procedures will be adjusted as less additional evidence will be required.
Management's written representations should be in the form of a letter addressed to:
The auditor.
Discovery sampling is particularly effective when:
The auditors are looking for critical deviations that are not expected to be frequent in number.
What ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion?
The auditors' judgement.
Auditors must obtain written client representations that typically should be signed by:
The chief executive officer and the chief financial officer.
In deciding whether to accept a prospective audit client, which of the following would have the biggest impact on the auditor's decision?
The client's predecessor auditor indicated that the client's management lacks integrity.
Individual accountability
The organization must hold individuals accountable for their internal control responsibilities
The auditor is considering the use of the client's internal auditors to assist in the audit. As a result, the auditor is evaluating the competence and objectivity of the internal auditors. Factors the auditor will consider when evaluating an internal auditor's competence will include the following except:
The organizational level to which the internal auditor reports
Which of the following would be a potential control deficiency because of a lack of segregation of duties?
The person who is responsible for ordering equipment receives the equipment before it is released to the shop floor.
The preliminary assessments of control risk are often referred to as:
The planned assessed level of control risk.
Which of the following statements best describes why auditors investigate related party transactions?
The substance of related party transactions may differ from their form.
In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?
The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
Which of the following best describes why an auditor is always required to document the auditor's understanding of internal controls?
To document the basis for risk assessment
Which of the following is accurate regarding tolerable misstatement?
Tolerable misstatement is directly related to materiality.
To obtain assurance that the accounting records accurately reflect only transactions that actually occurred, supporting management's occurrence assertion, the auditor would most likely examine a sample of general ledger postings and
Trace them back to the supporting source documentation.
The sequence of procedures applied by the client in processing a particular type of recurring transaction
Transaction cycle
An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as:
Vertical analysis.
Determine the appropriate valuation of assets
Vouch the cost of acquisition to paid checks
A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records
Walk-through
Which of the following statements would be least likely to be included in an audit engagement letter?
We will not disclose any advice provided under the terms of this engagement letter to third parties unless instructed to do so.
Client Representations
Written documentation and representation from clients
The auditors develop __________ to recommend to management to correct the effects of errors or fraud in the client's accounting records.
adjusting entries
The requirement to _________ journal entries is an example of a preventive control.
approve
The __________ of SEC registrants selects the company's audit firm.
audit committee
Representation letters are dated as of the date of the ________.
audit report
Service auditors
auditors selected by a service organization to assess systems
Type 2 reports address operating _______; Type 1 do not.
effectiveness
Audit _______is affected when too much substantive testing is done.
efficiency
The purpose of an analysis of an account is to illustrate __________ in the account for the period under audit.
changes
Under COSO, the control environment, risk assessment, the accounting information and communication system, control activities and monitoring are referred to as the ____________ of internal control.
components
The authenticity and accuracy of an account receivable may be tested by __________ with the debtor, or by vouching entries in the account to supporting documents.
confirmation
A __________ is a type of documentary evidence transmitted directly to the auditors by a third party (e.g., a customer or a vender).
confirmation reply
HexaCo has various policies and procedures pertaining to the company's operations. Policies and procedures that management uses to provide reasonable assurance that the entity's objectives will be achieved are referred to as
control activities
A client's __________ factors include such things as management philosophy and operating style, and organizational structure.
control environment
Inventory can be observed as it is ______ by client personnel.
counted
The term __________ refers to the process of determining that transactions are reflected in the proper accounting period.
cutoff
The examination of large data sets to uncover hidden patterns, unknown correlations and other useful information is referred to as _________.
data analytics
To enhance the control environment, management develops job __________.
descriptions
The goal to find a misstatement that has already been made is a type of ________ control.
detective
Tests of controls are performed to determine whether key controls operate __________.
effectively
An audit needs to have the correct balance of efficiency and _________.
effectiveness
Auditors must carefully control the risk of assessing risk too high or _____when performing test of controls.
low
Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.
numbered
Organizational structure provides a basis for planning, directing, and controlling _________.
operations
Working papers of audit interest over an extended period of time should be filed in the __________.
permanent file
Audit _______ begins with determining the requirements for the engagement.
planning
In relying upon the work of a specialist, the auditors must ascertain the __________ and reputation of the specialist.
professional qualifications
Assessing the control risk too low results in an inappropriate _______ of the extent of substantive procedures.
reduction
A letter signed by officers of the client company at the auditors' request which sets forth certain assertions about the company's financial position and operations is known as a __________.
representation letter
Assertions are __________ that are set forth in the financial statements.
representations of management
Performing certain audit procedures at an interim date, rather than at the balance sheet date, results in additional __________ that must be controlled by the auditors.
risk
