Chapter 4: Auditing

Existence is riskier than completeness for ______. Multiple choice question. neither accounts payable nor cash both accounts payable and cash accounts payable cash

cash

In the audit risk model, the assessment of inherent risk and ______risk lead to a determination of ______risk.

control, detection

A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups ______ is called or defalcation.

embezzlement

The nature, timing, and extent of resources needed to perform the engagement should be outlined in the audit ______.

strategy

Knowing if a client is centralized or decentralized is a component of: Multiple choice question. -assessing detection risk. -understanding the nature of the company. -identifying related parties. -recognizing industry concerns.

understanding the nature of the company

Most firms express their audit risk ______. Multiple choice question. quantitatively (as numbers) using qualitative measures

using qualitative measures

Select all that apply Which of the following statements are true? Multiple select question. -If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. -Under SEC rules, limited disclosures to outside agencies of frauds and clients' noncompliance are permitted. -When a court issues a subpoena, an auditor can refuse to respond on the basis of audit-client privilege. -Auditors are normally required to keep client information confidential.

-If an audit firm resigns, they can address fraud and noncompliance issues in the letter attached to Form 8-K. -Auditors are normally required to keep client information confidential.

Select all that apply Under which of the following circumstances are auditors permitted to disclose information regarding fraud and clients' noncompliance? If the audit firm resigns or is fired When the auditor is a successor auditor When answering a subpoena

-If the audit firm resigns or is fired -When answering a subpoena

Select all that apply Analytical procedures are required ______. at the end of the audit at the beginning of the audit as substantive testing procedures

-at the end of the audit -at the beginning of the audit

General business sources ______ Multiple choice question. -can relate to an industry or individual company -only relate to an industry and exclude individual companies -only relate to an individual company and exclude industry publications

-can relate to an industry or individual company

Select all that apply In the audit risk model ______. -detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk -the desired level of audit risk is based on the assessed level of inherent, control and detection risk -detection risk is considered to be independent of inherent and control risks which are interrelated -AR = IR × CR × DR

-detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk -AR = IR × CR × DR

When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary ______ ______.

Analytical Procedure

The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe and act on it is the definition of ______.

Fraud

Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their ______ ______assessment.

Fraud Risk

Calculating year-to-year changes in balance sheet and income statement accounts is called ______ analysis.

Horizontal

The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is ______ risk.

Inherent

Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called ______risks.

Significant

Audit risk is evaluated at both the overall financial statement level and for each significant ______ and ______

account and disclosure

The audit strategy memorandum becomes the basis for preparing the ______. Multiple choice question. audit team audit plan audit risk model engagement plan

audit plan

Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, the auditors must inform the ______. Multiple choice question. CFO and CEO audit committee SEC board of directors

board of directors

An auditor should consider the laws and regulations that are typically known by auditors to have a potentially material effect on the financial statements for ______-______ noncompliance.

direct effect

A violation of equal employment opportunities is an example of ______-______ noncompliance.

indirect-effect (OSHA, FDA, EEO)

The auditor's responsibility for detecting indirect-effect noncompliance is ______. Multiple choice question. -higher than his or her responsibility for direct-effect noncompliance -nonexistent as there is no responsibility -limited -the same as the responsibility for direct-effect noncompliance

limited

Select all that apply Examples of business risks include: inaccurate accounting estimates. new products and services. industry developments. business expansion.

new products and services. industry developments. business expansion.

Issues of particular importance in times of economic distress include: Multiple select question. -revenue recognition. -inventory. -fair value measurements. -goodwill impairment. -management compensation.

revenue recognition. inventory. fair value measurements. goodwill impairment.

According to professional standards ______ ______underlies the entire audit process.

risk assessment

True or false: The professional standards make clear that risk assessment underlies the entire audit process.

true

Fraud risk Blank______. Multiple select question. -is not specifically mentioned in the audit risk model -must be considered on each audit engagement -is the risk of material error by management when issuing financial statements

-is not specifically mentioned in the audit risk model -must be considered on each audit engagement

Select all that apply Noncompliance or suspected noncompliance ______. -should always be recorded to the audit committee -may require discussions with the client's legal council -always requires financial statement disclosure -must always be responded to by the auditors

-may require discussions with the client's legal council -must always be responded to by the auditors

The key difference between error and fraud is: Multiple choice question. who is responsible. the magnitude of the misstatement. intent.

Intent

If preliminary findings indicate the possibility of fraud, auditors should ______. Multiple choice question. issue a disclaimer of opinion involve fraud examination professionals enlist the cooperation of the Board of Directors

Involve fraud examination professionals

A misstatement in the financial statements may be caused by a(n) ______ or ______.

error or fraud

The probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated is the definition of __________ _________

audit risk

A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a Blank______ assertion. Multiple choice question. significant relevant material risky

relevant (key word: management assertion)

A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______. Multiple choice question. -reported to management above the level of the people involved -ignored -noted in the working papers but not reported to anyone outside the audit team -reported in notes to the financial statements

reported to management above the level of the people involved

Select all that apply Which of the following statements are correct? -If an auditor becomes aware of an illegal act procedures must be performed to determine if one occurred. -Auditors are not expected to know all relevant laws and regulations affecting their clients. -Auditors are not required to provide assurance about indirect-effect noncompliance.

-Auditors are not expected to know all relevant laws and regulations affecting their clients. -Auditors are not required to provide assurance about indirect-effect noncompliance.

Select all that apply If the potential for fraud is high, auditors should ______. -perform extended procedures -include more experienced team members -examine more transactions -use less predictable audit procedures -perform more tests of transactions at interim points instead of year end

-perform extended procedures -include more experienced team members -examine more transactions -use less predictable audit procedures (Perform more tests of transactions at interim points instead of year end-->the opposite is true)

Select All That Apply Items that must be documented in the working papers during the risk assessment process include ______. -procedures to identify and assess risk -specific risks identified and audit team responses -results of audit procedures, particularly procedures regarding management override -communications to the audit team and audit firm partners

-procedures to identify and assess risk -specific risks identified and audit team responses -results of audit procedures, particularly procedures regarding management override

Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of ______ ______.

Accounting Estimates

On every audit engagement, the risk assessment process includes required ______ sessions in which critical audit areas are discussed.

Brainstorming

If the potential for fraud is high, auditors should perform ______ ______ , including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points.

Extended Procedures

True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.

False

Intentional misstatements in financial statements to deceive financial statement users is the definition of ______ ______ ______

Fraudulent Financial Reporting

A well planned and carefully performed audit______ audit risk. Multiple choice question. can virtually eliminate still has some

Still has some

Auditors are able to reduce detection risk by completing more and stronger ______. Multiple choice question. substantive tests tests of details

Substantive

Tests of details and analytical procedures which study plausible relationships are the two categories of ______ ______

Substantive Procedures

The misdeeds of people who steal with a pencil or computer terminal are known as ______ ______crimes.

white collar

The audit strategy is a result of the ______. Multiple choice question. engagement plan resources available audit plan audit risk model

audit risk model

The audit plan includes a description of the _____ _____memorandum.

audit strategy

Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called ______ risks.

business

Factors related to the susceptibility of accounts to misstatement or fraud include ______. Multiple select question. complexity liquidity organizational structure

complexity liquidity

Question an auditor asks when assessing ______risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"

control

According to auditing standards, an "auditors responsibility to detect and report misstatements from illegal acts that have a direct and material effect on the determination of financial statement amounts is the same as that for misstatement caused by Blank______. Multiple choice question. direct-effect noncompliance error or fraud indirect-effect noncompliance

error or fraud

Noncompliance or suspected noncompliance ______. Multiple choice question. -does not have to be responded to if it is "clearly inconsequential" -must always be responded to by the auditor

must alway be responded to by the auditor

Frauds involving senior management or high-level employees ______. Multiple choice question. -may be inconsequential, depending on the threshold level -always require the auditor to disclaim an opinion -should be reported to the audit committee or Board of Directors

should be reported to the audit committee or Board of Directors

Under the Private Securities Litigation Reform Act of 1995, when auditors believe an illegal act that is more than "clearly inconsequential' has or may have occurred, they must ______ inform the SEC. sometimes never always

sometimes

Select all that apply Items that must be documented in the working papers during the risk assessment process include ______. explanation of why improper revenue recognition is a risk significant decisions during discussion other conditions causing auditors to plan additional procedures discussions with engagement personnel

(explanation of why improper revenue recognition is NOT a risk) -significant decisions during discussion -other conditions causing auditors to plan additional procedures -discussions with engagement personnel

Audit teams are concerned Blank______. Multiple choice question. -with all material fraudulent activities whether or not they affect the financial statements -with all material and immaterial frauds -only with fraudulent activity that results in materially misstated financial statements -with all fraudulent activities that have any connection to the financial statements

- only with fraudulent activity that results in materially misstated financial statements

Regardless of when analytical procedures are performed, testing is concluded by ______. Multiple choice question. -defining a significant difference -developing an expectation -comparing expectations with recorded amounts -investigating significant differences -documenting team findings

-documenting team findings

The probability that, in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements is Blank______ risk. Multiple choice question. detection inherent control

Inherent

The type of procedure ______ is referred to as the of an audit procedures.

Nature

An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a Blank______ account or disclosure. Multiple choice question. material relevant risky significant

significant

Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements. Multiple choice question. one; one two; one one; two two; two

two; two

Which of the following statements regarding audit risk are correct? Multiple select question. -Audit risk should be at an appropriately low level. -The auditing professional has an official standard regarding acceptable level of audit risk. -The focus on evaluating audit risk is on the relevant assertions identified. -Audit risk is generally only evaluated at the overall financial statement level.

-Audit risk should be at an appropriately low level. -The focus on evaluating audit risk is on the relevant assertions identified.

Select all that apply Which of the following statements are correct? -Auditors devote significant time to understanding client's business risks. -Gaining an understanding of strategies and procedures involves gathering evidence in areas historically addressed by auditors. -Most business risks are eventually reflected in the financial statements.

-Auditors devote significant time to understanding client's business risks. -Most business risks are eventually reflected in the financial statements.

Which of the following statements are true regarding assessing the risk of fraud? Multiple select question. -The easiest way to look for omission of liabilities is the "dangling credit". -The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable. -Some fraudulent accounting entries only affect one account or place in the financial statements. -Balances that contain difficult estimates to audit are very challenging for auditors.

-The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable. -Balances that contain difficult estimates to audit are very challenging for auditors.

Auditors ______. -can estimate inherent risk to be zero and omit other evidence-gathering procedures -would not seem to exhibit due professional care if the level of audit risk was too high -are not permitted to rely exclusively on evidence produced by substantive procedures, even when control risk is high -cannot place complete reliance on internal controls to the exclusion of other audit procedures

-cannot place complete reliance on internal controls to the exclusion of other audit procedures -would not seem to exhibit due professional care if the level of audit risk was too high

Select All That Apply Investigating significant differences at the preliminary stage Blank______. -help auditors identify risks as an aid in preparing the audit plan -can be used to plan additional audit work -may be considered attention directing -provides direct evidence about the number in the financial statements

-help auditors identify risks as an aid in preparing the audit plan -can be used to plan additional audit work -may be considered attention directing

Select all that apply A company's performance measures Blank______. -identify what managers deem as key indicators of company performance -might indicate qualitative factors to consider when determining materiality -related to management compensation help auditors gain a better unde

-identify what managers deem as key indicators of company performance -might indicate qualitative factors to consider when determining materiality

Select all that apply Finding out a client is planning to acquire another company Blank______. -requires the auditor to issue a modified audit opinion -is a component of understanding the nature of the company -is a component of recognizing industry concerns -results in additional risks for the auditor

-is a component of understanding the nature of the company -results in additional risks for the auditor

Select all that apply Interviewing the entity's management, internal auditors, directors, audit committee, and other employees: -should not be used to build personal working relationships. -is a required audit procedure. -provides information on personnel competence and integrity. -helps bring auditors up to date on business and industry changes.

-is a required audit procedure. -provides information on personnel competence and integrity. -helps bring auditors up to date on business and industry changes.

Detection risk: Multiple select question. -determines the overall level of audit risk. -is the amount of risk the auditor can allow. -is calculated and derived from other risks.

-is the amount of risk the auditor can allow. -is calculated and derived from other risks.

Select all that apply Inherent risk ______. Multiple select question. -is not related to the nature of the client's business -can be controlled by the auditors -is the susceptibility of the account to misstatement -is not created by the auditors

-is the susceptibility of the account to misstatement -is not created by the auditors (it IS related to the nature of the client's business)

Select all that apply Business risk assessment ______. -makes auditors more knowledgeable about the client's business and environment -may involve asking production personnel about labor problems -is an important component of an audit -should focus on gathering evidence in areas historically addressed by auditors

-makes auditors more knowledgeable about the client's business and environment -may involve asking production personnel about labor problems -is an important component of an audit

Select all that apply When developing an expectation of an account balance, auditors ______. -may consider third party information -should not consider budgets and forecasts -may use vertical and horizontal analysis -may consider relevant nonfinancial information

-may consider third party information -may use vertical (percentages of a base in financial statements) and horizontal(yr to yr changes in financial statements) analysis -may consider relevant nonfinancial information

Select all that apply With respect to accounting estimates, auditors are responsible for: -monitoring differences between estimates and audit evidence. -looking for indications of systematic bias. -ensuring that all accounting estimates are conservative. -making accounting estimates.

-monitoring differences between estimates and audit evidence. -looking for indications of systematic bias.

Select All That Apply The assessment of inherent risk ______. -needs to occur for each significant financial statement account and disclosure -needs to be evaluated without regards to internal controls does not need to consider the overall materiality level

-needs to occur for each significant financial statement account and disclosure -needs to be evaluated without regards to internal controls

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______. Multiple select question. -omitting important information from disclosures -understating expenses and revenues -overstating assets or understating liabilities

-omitting important information from disclosures -overstating assets or understating liabilities

Select all that apply General business sources include Blank______. -registration statements and 10-K filings -business newspapers -specialized trade magazines and journals company charter and bylaws

-registration statements and 10-K filings -business newspapers -specialized trade magazines and journals

Knowing industry characteristics: Multiple select question. -relates to differences in production and marketing activities. -requires all auditors to be experts in every area related to the client's industry. -includes knowledge of the client's competition.

-relates to differences in production and marketing activities. -includes knowledge of the client's competition.

All companies trading on the stock exchanges are required to have a(n) ______ ______ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management,

Audit Committee

When completing analytical procedures, an auditor should define a significant difference Blank______ comparing expectations with recorded amounts. Multiple choice question. after before either before or after

Before

Another name for employee fraud, embezzlement, and larceny is ______.

Defalcation

Employee fraud can be classified as either ______ or ______.

Embezzlement or Larceny

The use of fraudulent means to misappropriate funds or other property from one's employer in the definition of ______ ______.

Employee Fraud

True or false: A company's failure to provide minutes is not considered a significant scope limitation.

False

An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______. Multiple choice question. permissible and often done not permissible permissible, but rarely done

Permissible, but rarely done

At the preliminary stage, analytical procedures are ______tests.

Reasonableness

The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the ______ ______ process and ultimately the audit plan.

Risk Assessment

A company's failure to provide minutes of the meetings of directors and committees of the board of directors is a significant ______ ______that could result in the public accounting firm's disclaiming an opinion on the financial statements.

Scope Limitation

True or false: Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.

True

True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when management's estimates all exhibit conservatism.

True

True or false: The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement.

True

White-collar crimes may ______ the organization. Multiple choice question. only be perpetrated upon be perpetrated by or upon only be perpetrated by

be perpetrated by or upon

When thinking about each of the relevant financial statement assertions, the auditor should focus on ______. Multiple choice question. dollar amount is considered significant can go wrong is being done right

can go wrong

Fraud risk Blank______. Multiple choice question. -can only be ignored with continuing audit clients -may or may not be ignored depending on the assessment of inherent and control risks -can never be ignored

can never be ignored

The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is Blank______ risk. Multiple choice question. detection control inherent

control

The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable: Multiple choice question. decreases as the RMM increases. decreases as the RMM decreases. is not dependent on RMM.

decreases as the RMM increases

The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable: Multiple choice question. decreases as the RMM decreases. is not dependent on RMM. decreases as the RMM increases.

decreases as the RMM increases (Note: RMM -->inherent risk and control risk)

The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk. Multiple choice question. control detection inherent

detection

Auditors can and do influence the level of ______. Multiple choice question. both detection and inherent risk detection risk only both detection and control risk control, detection and inherent risk

detection risk only

A violation of pension laws or government contract regulations is an example of ______-______ noncompliance.

direct-effect

Auditing standards use the term ______ to refer to misappropriation of assets. Multiple choice question. embezzlement defalcation larceny employee fraud

employee fraud

An unintentional misstatement or financial statement omission is referred to as a(n) ______

error

An unintentional misstatement or financial statement omission is referred to as a(n) ______. Multiple choice question. error embezzlement larceny defalcation

error

According to professional auditing standards, which of the following is NOT a type of audit risk? Multiple choice question. control detection inherent fraud

fraud

By definition ______ risks are significant risks.

fraud

Auditors have a responsibility to detect ______. Multiple choice question. -all fraudulent activity regardless of if it affects the financial statements -only fraud that involves management -fraudulent activity that results in materially misstated financial statements

fraudulent activity that results in materially misstated financial statements

Management fraud is sometimes referred to as ______ ______ ______

fraudulent financial reporting

The basis for executing an appropriate response to identified risks is ______ risk assessment. Multiple choice question. detection inherent control fraud

inherent

The formula for the audit risk model is ______. Multiple choice question. -detection risk - (inherent risk + control risk) -(inherent risk + control risk) - detection risk -inherent risk × control risk × detection risk -inherent risk + control risk + detection risk

inherent risk × control risk × detection risk

The professional standards break down overall audit risk into ______risk, ______risk and ______risk.

inherent, control, detection

There is a(n) ______ relationship between RMM and detection risk. Multiple choice question. inverse direct

inverse

When an employee misappropriates funds or property not entrusted to his or her custody, an act of ______ or simple theft has occurred.

larceny

An account or disclosure ______. Multiple choice question. -may be significant even though the balance is below materiality -is only significant if it exceeds the materiality level

may be significant even though the balance is below materiality

Company discussion boards: Multiple choice question. -can be used as a replacement for discussions with client personnel. -should not be considered a reliable source of company information. -may be used by anonymous whistle-blowers.

may be used by anonymous whistle-blowers.

When doing fraud risk assessment, auditors ______. Multiple choice question. -must presume improper revenue recognition is a risk -base the assessment of improper revenue recognition of prior audit reports -plan to test for improper revenue recognition without making any assumptions -should not presume improper revenue recognition is a risk without cause

must presume improper revenue recognition is a risk

Based on the allowable or planned level of detection risk, auditors modify the ______, the ______, and the ______of further audit procedures.

nature, timing, extent

A higher assessed risk of material misstatement for a relevant assertion being audited Blank______ detection risk. Multiple choice question. increases has no impact on reduces

reduces

An auditor's primary objective in regard to ______ ______ is to obtain the evidence needed to determine if transactions with them have been properly accounted for and disclosed in the financial statements.

related parties

Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called ______ ______.

related parties

Factors related to the susceptibility of accounts to misstatement or fraud include: Multiple select question. if the account records payables. size of account balance. the volume of transactions.

size of account balance. the volume of transactions.