BUS5630 - Exam 1 Review

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

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

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed

After the auditor has obtained an understanding of existing internal control.

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

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

Which of the following procedures is considered a test of controls?

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following statements best describes an auditor's responsibility to detect fraud or error?

An auditor should design an audit to provide reasonable assurance of detecting fraud or error that is material to the financial statements.

Auditing standards require that sufficient appropriate evidence be obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidence required may be obtained, in part, through

Analytical procedures.

Which of the following matters does an auditor usually include in the engagement letter?

Arrangements regarding fees and billing.

For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent

As Risk Assessment Procedures - Yes As Substantive Procedures - No To Assist in Forming an Overall Conclusion - Yes

Proper segregation of functional responsibilities to achieve effective internal control calls for separation of the functions of

Authorization, recording, and custody.

When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A=Tests of controls B=Preparation of a flowchart documenting the understanding of the client's internal control C=Substantive procedures

BAC.

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

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

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it

Changes the company's operating results from a net loss to a net income.

Which of the following procedures is not used in tests of controls over purchases?

Confirm inventory held in public warehouses.

Which of the following components of internal control includes development and use of training policies that communicate prospective roles and responsibilities to employees?

Control environment.

Which of the following components of internal control would be considered the foundation for the other components?

Control environment.

Which of the following best describe the interrelated components of internal control?

Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls.

After obtaining an understanding of the entity and its environment, including its internal control, the auditor assesses

Control risk and inherent risk to determine the acceptable level of detection risk.

An auditor may decide to perform only substantive procedures for certain assertions because the auditor believes

Controls are not relevant to the assertions.

An auditor finds that inventory shipped FOB shipping point before the end of Year 1 was incorrectly recorded as a sale in Year 2, when the shipped goods arrived to the customer. Which auditing assertion regarding transactions and events does this most likely relate to?

Cutoff

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is

Detection risk.

An auditor uses the knowledge provided by the understanding of the system of internal control and the assessed risks of material misstatement primarily to

Determine the nature, timing, and extent of substantive procedures for financial statement assertions.

Inherent risk and control risk differ from detection risk in that they

Exist independently of the financial statement audit.

When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the

Extent of tests of details.

When an auditor increases the assessment of the risks of material misstatement because certain controls were determined to be ineffective, the auditor will most likely increase the

Extent of tests of details.

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

Hill, the auditor.

A conceptually logical approach to the auditor's consideration of relevant controls consists of the following four steps: Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented. Evaluate the operating effectiveness of relevant controls. Assess the risks of material misstatement. Design further audit procedures. What is the most logical order in which these four steps are performed?

I, III, IV, II.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

Implemented.

In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion

Includes brainstorming about how assets can be misappropriated.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would

Increase the assessment of control risk and increase the extent of substantive tests.

An auditor may compensate for a high assessed risk of material misstatement by

Increasing the extent of substantive analytical procedures.

Which of the following is a component part of the COSO's internal control framework?

Information systems.

Which of the following most likely should be included as part of an auditor's tests of controls?

Inspection.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment

Is based on evaluating whether the entity's related controls have been suitably designed and implemented.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

After obtaining an understanding of internal control and assessing the risks of material misstatement in a financial statement audit, an auditor decided to perform tests of controls. The auditor most likely decided that

It would be efficient to perform tests of controls that would result in a reduction in substantive procedures.

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Make a preliminary judgment about materiality.

The control environment may decrease the effectiveness of control activities when

Management has substantial incentives for meeting earnings projections.

Users of an issuer's financial statements demand independent audits because

Management may not be objective in reporting.

The ultimate purpose of assessing control risk in a financial statement audit is to contribute to the auditor's evaluation of the risk that

Material misstatements may exist in the financial statements.

Which of the following elements underlies the development of an overall audit strategy?

Materiality and audit risk.

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

Materiality.

Examination, review, and agreed-upon procedures engagements

Must be documented by the practitioner.

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

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

The auditor observes client employees while obtaining an understanding of internal control to

Obtain knowledge of the design and implementation of relevant controls.

A financial statement audit is designed to

Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Perform the planned auditing procedures closer to the balance sheet date.

As the acceptable level of audit risk decreases, an auditor may

Postpone the planned timing of substantive tests from interim dates to the year end.

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?

Preparation of system flowcharts.

Three conditions are generally present in the client's organization when fraud occurs. Those conditions include each of the following except a(n)

Professional skepticism about the likelihood of fraud.

The primary reason for an audit by an independent, external audit firm is to

Provide increased assurance to users as to the fairness of the financial statements.

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including

Reperformance and observation.

Which of the following statements is correct with respect to the testing of controls in an audit of an issuer's financial statements?

Tests of controls are not required to be performed on assertions for which substantive procedures alone provide insufficient audit evidence.

An independent auditor must have which of the following?

The ability to exercise sound professional judgment.

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

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

Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted?

The integrity of the entity's management is suspect.

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

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

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

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

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)?

They are generally accepted auditing standards.

As the acceptable level of detection risk increases for a given audit risk, an auditor may change the

Timing of substantive procedures from year end to an interim date.

An auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's

Understanding of the reasons for the change in auditors.

An auditor reviews an audit client's accounting policies when considering which of the following matters?

Understanding the entity and its environment, including its internal control.

Tests of controls are concerned primarily with each of the following questions except

Were the controls approved by the board of directors?