Chapter 5 Smartbook
True or false: An important consideration when evaluating fair value measures is to ensure that the company's methods are applied consistently in all situations.
False
These components of audit risk exist for a client even if an audit is not performed.
Inherent risk and control risk
The client ______. 1. Never has the right to demand access to the auditors' working papers 2. May only demand access to the auditors' working papers if all fees have been paid 3. Always has the right to demand access to the auditors' working papers
Never has the right to demand access to the auditors' working papers
These transactions involve activities that occur only periodically, such as taking physical inventories or calculating depreciation expense.
Nonroutine transactions
Important pattens related to human behavior and interactions are often revealed with data analytical techniques, including the use of _______________intelligence.
artificial
The working papers for a particular engagement are included in the ___________ ___________.
audit file
Working papers need to be safeguarded because they contain ______ information.
confidential client
The comparison of relationships between two or more financial statement accounts is called __________ __________.
ratio analysis
The comparison of relationships between two or more financial statement accounts is called ____________ ____________.
ratio analysis
Analytical procedures and tests of detail of account balances, transactions, and disclosures are ___________ procedures.
substansive
As audit working papers are prepared, auditors use several symbols or ____________ _____________ to identify specific steps in the work performed.
tick marks
The use of statistical models to quantify the auditors' expectation about a financial statement amount or ratio is called __________ __________.
regression analysis
Memoranda of the planning process and significant discussions with management are considered ______.
administrative working papers
The audit risk model is: AR =
IR x CR x DR
A sophisticated expectation development technique using statistical models to quantify auditor expectations is ______ analysis.
regression
Cross-sectional ratio analysis
Comparison with similar firms (e.g. industry) at a point in time
Watching a process or procedure being performed by others is the definition of _____________.
observation
Select all that apply A spreadsheet that combines Petty Cash with all the company's bank accounts is an example of a ______. -summary schedule -working trial balance -corroborating document -lead schedule
-summary schedule -lead schedule
When obtaining audit evidence, inquiries of knowledgeable persons ______.
may be oral or written and may result in oral or written replies
The development of common-size financial statements is also known as __________ __________.
vertical analysis
A client representation letter ______ be used as a substitute for performing other audit procedures.
should never
Select all that apply: Workpapers may include ___________. -Representation letter -Bank reconciliations -Working trial balance -Financial statements -Audit plans
-representation letter -bank reconciliations -working trial balance -audit plans
Risk of material misstatement consists of two components, ____________ risk and ___________ risk.
inherent, control
Audit evidence gathered from oral or written inquiries made by the auditor can include ______.
-Written representations from company personnel -Written representations from outside parties -Oral representations from company personnel
All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded under the _______________ assertion.
Completeness
The auditors have assessed the risk of material misstatement for the existence of cash as high. Which is the most effective audit procedure for the auditor to perform?
Confirm cash in bank
Select all that apply: Factors that can influence the level of audit documentation detail include ___________. -Size of the audit client -Nature of auditing procedures -Extent of judgement involved -Risk of misstatement
-Nature of auditing procedures -Extent of judgment involved -Risk of misstatement
Select all that apply: Auditing standards require auditors to perform analytical procedures __________. -Near the conclusion of the audit -During the risk assessment stage -As substantive procedures
-Near the conclusion of the audit -During the risk assessment stage
Select all that apply: Significant audit findings or issues that need to be documented include _____________. -issues related to accounting estimates -selection of appropriate accounting principles -selection of appropriate auditing standards -accounting for complex and unusual transactions
-issues related to accounting estimates -selection of appropriate accounting principles -accounting for complex and unusual transactions
Completeness assertions
All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded.
Rights and obligations assertions
Company holds rights to the assets, and liabilities are the obligations of the company
To audit fair value estimates, auditors can use all of the following approaches except ______. 1. Hire a valuation specialist 2. Independently develop an estimate to compare to management 3. Confirm management's estimate 4. Test management's process
Confirm management's estimate
Seeking and treating as more persuasive information that is consistent with one's initial beliefs is ______ bias.
Confirmation bias
These transactions generally have the highest level of inherent risk.
Estimation
An audit should include sufficient appropriate evidence to obtain reasonable assurance that related parties, relationships, and transactions have been properly identified, accounted for, and disclosed in the financial statements. This requirement is explicit in the _____ standards.
PCAOB
Purpose of manager
Review of work done by staff and senior auditors near the end of the audit to make sure working papers "tie together."
Test of disclosure
Test of property, plant, and equipment footnote
Audit documentation should be sufficient to allow ______ to understand the audit work performed, the evidence obtained, and the significant conclusions reached.
an experienced auditor
Auditors use plausible relationships among financial statement data to gather audit evidence about the reasonableness of financial statement amounts when performing ____________ procedures.
analytical
Inherent Risk x Control Risk x Detection Risk = ___________ ____________.
audit risk
Completed confirmations should be sent directly to the ______.
auditor
The examination of big data to uncover hidden patterns, unknown correlations, market trends, and other useful business applications is called __________ ____________.
data analytics
For a given level of audit risk, ____________ risk varies inversely with the risk of material misstatement.
detection
Today most working papers are prepared ______.
on electronic devices
A number of factors, including the predictability of the relationships and reliability of the underlying data used, determine an analytical procedure's ___________.
precision
For related party transactions, auditors should be most concerned about obtaining evidence regarding ______.
presentation and disclosure
Fill in the blank question. In that an explicit expectation is computed for the financial statement amount using financial or nonfinancial data, a reasonableness test is similar to ____________ ____________.
regression analysis
Individuals or entities that may have dealings with the client in which one party is significantly influenced by the other such that it may not pursue its separate interests are known as __________ parties.
related
To identify the specific audit steps performed, auditors use these symbols when preparing the working paper.
tick marks
Select all that apply: Auditors are required to _________. -Develop any necessary estimates that management fails to make -Evaluate the reasonableness of accounting estimates -Ensure accounting estimates are properly accounted for and disclosed
-Evaluate the reasonableness of accounting estimates -Ensure accounting estimates are properly accounted for and disclosed
Select all that apply: Auditors should investigate any significant differences between their prior expectations and the actual amounts on the client's financial statements. Which of the following are proper methods of investigation? -Inquiry of management -Inquiry of the employees who entered the transactions -Expanding the tests of financial statements to determine materiality -Reconsidering the factors and methods originally used in making the expectations
-Inquiry of management -Expanding the tests of financial statements to determine materiality -Reconsidering the factors and methods originally used in making the expectations
Select all that apply: Data analytics _________. -May assist in the assessment of risk and material misstatement -Generally has no effect on the auditors' substantive procedures -May involve testing populations instead of samples -Results in a more detailed understanding of the client
-May assist in the assessment of risk of material misstatement -May involve testing entire populations instead of samples -Results in a more detailed understanding of the client
Presentation and disclosure
Accounts are described and classified in accordance with GAAP and financial statement notes are complete, appropriate, and clearly expressed
Making judgments by starting from an initial belief and then making insufficient adjustments to the belief when contrary information is encountered is ______ bias.
Anchoring bias
An audit firm's audit documentation DOES NOT ______. 1. Assist in planning future audits 2. Demonstrate audit team accountability 3. Assist predecessor auditors in performing their role 4. Assist supervisors in reviewing work quality
Assist predecessor auditors in performing their role
The return envelope sent with confirmations should be addressed to the ______.
Auditor's office
All of the following are acceptable methods to evaluate the reasonableness of accounting estimates except ______. 1. Confirm the estimate with a third party 2. Review and test management's process of developing estimates 3. Independently develop an estimate to compare to management's estimate 4. Review subsequent events bearing on the estimate
Confirm the estimate with a third party
Helping the auditors identify items that indicate a heightened risk of material misstatement of the financial statements is the objective of analytical procedures ______.
Performed at the risk assessment stage
Purpose of second partner review
Quality review to provide assurance that the CPA firm's in-house quality control policies have been complied with.
Audit documentation, which is the record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach, is also known as ______.
Working papers
Evaluations of financial statement information by a study of relationships among financial and nonfinancial data is the basis of _____________ procedures.
analytical
Audit working papers are the property of the ______.
auditors
The audit risk model is a function of ______ risk.
control, inherent, and detection risk
Documents that substantiate representations contained in the client's financial statements such as audit confirmations, minutes of directors' meetings, and client representation letter are known as ____________ documents.
corroborating
Whether it was created within the company (sales invoice) or outside the company (vendor invoice) impacts the reliability ____________ of evidence.
documentary
The price that would be received to sell an asset or the amount that must be paid to transfer a liability in an orderly transaction between market participants is the definition of ______ value.
fair
The price that would be received to sell an asset or the amount that must be paid to transfer a liability in an orderly transaction between market participants is the definition of ___________ ____________.
fair value
These components of audit risk exist for a client even if an audit is not performed
inherent risk and control risk
Making accounting estimates is the responsibility of ______.
management
Inherent risk and control risk are the two components of the risk of ___________ __________.
material misstatement
Used to develop a more precise expectation of a financial statement balance that is not based on a statistical model, a(n) _____________ ____________ is similar to regression analysis.
reasonableness test
For items that are correctly recorded but not fairly presented in the client's financial statements, auditors develop __________ journal entries.
reclassification
Individuals or entities that may have dealings with the client in which one party is significantly influenced by the other such that it may not pursue its separate interests are known as ____________ parties.
related
Comparing the price on an invoice to that on an approved price list is an example of the audit procedure of ____________.
reperformance
Auditors are given 60 days after the audit ______ date to complete the audit file.
report release
Auditing standards require auditors to perform analytical procedures at the _____________ ____________ stage and near the end of the audit.
risk assessment
Audit documentation should identify all of the following except_________. 1. Auditors who performed the work 2. The dates audit work was performed 3. Auditors who reviewed the work 4. The dates client transactions and entries were made
the dates client transactions and entries were made
The record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach is called audit documentation or___________ ___________.
working papers
The backbone of the working papers (which is ordinarily an electronic spreadsheet) is the ___________ _____________ ____________.
working trial balance
The backbone of the working papers is the ______, which is the key schedule that controls and summarizes all supporting papers.
working trial balance
Audit evidence in paper or electronic form that is obtained through inspection of records is referred to as _____________ evidence.
documentary
Test of controls are designed to test the operating ______________ of controls in preventing or detecting material misstatements.
effectiveness
Documents or business data flow from one company to another, often without human intervention when using ___________ _____________ interchange.
electronic data
E-mail ordering is an example of EDI or _____________ ___________ interchange.
electronic data
Inherent risk is generally highest for _______________ transactions because they involve management judgments or assumptions.
estimation
Confirmations are generally effective at providing evidence for the ______ assertion.
existence
Inspections of tangible assets provide high-quality evidence as to the ____________ assertion.
existence
A review of client financial statement amounts and ratios over time is called __________ _________.
horizontal analysis
The possibility of material misstatement of an assertion before consideration of the client's internal control is called ___________ risk.
inherent
The possibility of material misstatement of an assertion before consideration of the client's internal control is called ____________ risk.
inherent
Audit risk for an account or assertion is at an acceptable low level when the auditors have obtained ______________ __________ audit evidence
sufficient, appropriate
True or false: When performing analytical procedures, the best data for developing an expectation is industry averages.
False
These transactions involve recurring financial statement activities recorded in the accounting records in the normal course of business restricting inherent risk.
Routine transactions
The audit procedure that requires an auditor to use professional judgment as they review accounting data to identify significant unusual items is called ______.
Scanning
Watching a process or procedure being performed by others is the definition of ______.
Observation
Audit evidence is ordinarily more reliable when it is obtained from knowledgeable sources ______ the client company.
Outisde
Maintaining a questioning mind, being alert to conditions that may indicate possible misstatements due to fraud or error, and critically assessing audit evidence are components of ___________ ____________.
Professional slepticism
Which of the following relates to the assertion being addressed? 1. Relevance 2. Both reliability and relevance 3. Reliability
Relevance
In evaluating the appropriateness of audit evidence, auditors consider its ______.
Relevance and reliability
Which of the following relates to the circumstances in which evidence is obtained?
Reliability
Select all that apply: Data analytic techniques ______. -Include the use of artificial intelligence -Reveal trends related to human behavior -Are not used to improve effectiveness -Can enhance operating efficiency
-Include the use of aritificial intelligence -Reveal trends related to human behavior -Can enhance operating efficiency
Select all that apply: Common methods for auditors to determine related parties include ____________. -Inquiries of management -Conflict-of-interest statements -Contacting client customers and vendors -Reviewing SEC filings
-Inquiries of management -Conflict-of-interest statements -Reviewing SEC filings
Select all that apply: Sophisticated data analytic skills ___________. -Will likely be required of all auditors in the near future -Must not replace the need to exercise professional judgement -And techniques must be applied on a client-by-client basis
-Must not replace the need to exercise professional judgment -And techniques must be applied on a client-by-client basis
Calculating days sales in ending accounts receivable and comparing it to the prior year would be an example of ______.
Analytical procedure
External confirmations are normally used to gather evidence for all of the following accounts except ______. 1. Cash 2. Notes payable 3. Buildings 4. Accounts receivable
Buildings
Test of account balance
Confirmation of accounts receivable balance
True or false: Auditors are not required to use analytical procedures as substantive procedures to provide evidence about financial statement assertions.
True
True or false: The SEC interpretation of Sarbanes-Oxley requires working papers be retained regardless of whether they support or are inconsistent with the auditor's final conclusion relating to significant matters.
True
Throughout the audit, auditors accumulate non-trivial misstatements identified and propose appropriate ______ journal entires.
adjusting
Sufficiency relates to the quantity and ___________ relates to the quality of audit evidence needed.
appropriateness
Oral client representations generally ______ considered sufficient audit evidence in themselves.
are not
Management makes an estimate by selecting a method, developing a combination of implicit and explicit ___________ and using ___________ to apply that method.
assumptions, data
Data analytics is the examination of large datasets or _____________ ____________ to uncover hidden patterns, unknown correlations, market trends, and other useful business applications.
big data
No information may be discarded from the working papers after the ______ date.
documentation completion
Separate summary or ____________ ______________ (also called grouping sheets) are set up to combine similar general ledger accounts.
lead schedules
Much of the information contained in the file ____________ is gathered during the course of the first audit of a client's records.
permanent
A primary measure of the effectiveness of an analytical procedure is its ____________.
precision
Select All that Apply: Management makes financial statement assertions related to ____________. -Classes of transactions and events. -Account balances -Fairness of the audit opinion -Presentation and disclosure
-Classes of transactions and events -Account balances -Presentation and disclosure
Select all that apply: An auditor would consider hiring a specialist for assistance in ______. -Testing the internal controls of a manufacturing company -Estimation of oil and gas reserves -Determining the value of art pieces held by the company -Examining the company's prior year tax returns -Determining the value of a diamond shop's inventory
-Estimation of oil and gas reserves -Determining the value of art pieces held by the company -Determining the value of a diamond shop's inventory
Select all that apply: Recalculations ____________. -Should always be done by the independent auditor without the involvment of specialists -Include making certain that accounting records agree with the financial statements -Are used to prove the accuracy of client calculations such as earnings per share
-Include making certain that accounting records agree with the financial statements -Are used to prove the accuracy of client calculation such as earnings per share.
Select all that apply The purpose of the permanent file is to ______. -provide new staff members with a quick summary of policies and organization of the client -provide necessary support for the current year's audit opinion -refresh auditor's memories on items applicable to a period of years for the client
-Provide new staff members with a quick summary of policies and organization of the client -Refresh auditor's memories on items applicable to a period of years for the client
Select all that apply: When developing expectations for analytical procedures _________. -Industry averages should be avoided whenever possible -Separate relationships may be computed for each division or product line -Prior year financial statements may be used -Client forecasts should not be used because the data is not verifiable -Dollar amounts, quantities, ratios, or percentages may be used
-Separate relationships may be computed for each division or product line -Prior year financial statements may be used -Dollar amounts, quantities, ratios, or percentages may be used
Select all that apply: The Public Company Accounting Oversight Board requires that auditors emphasize ______. -Financial relationships and transactions with the Board of Directors -Significant unusual transactions -Relationships and transactions with related parties
-Significant unusual transactions -Relationships and transactions with related parties
Select all that apply Auditing standards require that audit documentation provide evidence______________. -That the audit was planned and performed in accordance with GAAP -That the audit was planned and performed in accordance with GAAS -Of the auditor's basis for concluding on the achievement of the audit's overall objectives
-That the audit was planned and performed in accordance with GAAS -Of the auditor's basis for concluding on the achievement of the audit's overall objectives
Select all that apply When an unresolved difference of opinion arises ______. -all members of the audit team have the right to document the disagreement in the working papers -the opinion of the senior on the audit will prevail in the audit report -the opinion of the partner-in-charge will prevail in the audit report -auditing standards require that every difference is documented in the working papers
-all members of the audit team have the right to document the disagreement in the working papers -the opinion of the partner-in-charge will prevail in the audit report
Select all that apply The advantages of using computer-generated working papers include ______. -documents can be scanned -an adjustment can be carried through the current file quicker -the need to manually "push through" an adjustment throughout the current file -a nearly "paperless" audit can be performed
-documents can be scanned -an adjustment can be carried through the current file quicker -a nearly "paperless" audit can be performed
Horizontal analysis ratio analysis
Review of client financial statement amount over time
Purpose of in-charge partner
Review of entire set of working papers to determine audit was performed in accordance with GAAS and provide support for audit report.
Purpose of Senior
Review of work performed by staff assistant to make sure audit procedures are performed properly and conclusions are clearly expressed
The risk that a material misstatement could occur in a relevant assertion and not be detected on a timely basis by the client's internal control is called ____________ risk.
control
Performing sophisticated statistical techniques and data mining ______.
is often done by specialists or third-party providers
In performing audit procedures, without regard to the effect of controls, ______ assertions are those that have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.
relevant
Representations in the representation letter include ______.
-Financial statements are complete and were prepared with the use of generally accepted accounting principles -All items requiring any disclosure are sufficiently disclosed
Select all that apply: Workpapers may include__________. -Organizational charts -Board meeting minutes -Engagement letter -Ledger account analyses -Internal control questionnaires
-Organizational charts -Board meeting minutes -Ledger account analyses -Internal control questionaires
Auditors gather evidence to restrict this risk to the appropriate level.
Detection
True or false: Auditors should not obtain assistance in evaluating estimates from specialists hired by management.
False
True or false: Data analytics is not used in most audits because it is often an inefficient procedure that fails the cost-benefit test.
False
The most reliable piece of documentary evidence created within the client's organization is ordinarily a ______.
Paid check
Existence or Occurrence Assertions
Assets, liabilities, and equity interests exist and recorded transactions and events have occurred
True or false: The AICPA Code of Professional Conduct generally allows auditors to share working papers without restriction within the client's organization.
False
Working papers are assigned this, which allows the information to be tied together through a system of cross-referencing.
index number
Select all that apply: Complicating factors in evaluating accounting estimates include ______. -Some methods may corroborate management's estimates while others contradict them -Large changes in significant assumptions lead to large changes in the amount of the estimate -Potential management bias when evaluating the reasonableness of assumptions used in estimates
-Some methods may corroborate management's estimates while others contradict them -Potential management bias when evaluating the reasonableness of assumptions used in estimates Larges changes is not right because the correct phrase is relatively small changes may lead to large changes in the amount of the estimate
The working papers that pertain solely to this year's audit are called the _____________ files.
current
The nature of _______________ transactions restricts inherent risk, although controls must be implemented to assure proper recording.
routine
Sarbanes-Oxley requires that, for public clients, auditors must retain working papers for ______.
seven years
An individual or company that has a certain expertise in a field of knowledge other than accounting and auditing is called a(n) ______________.
specialist
Cutoff assertions
Transactions and events have been recorded in the correct accounting period
Factors that affect inherent risk include the nature of the _______.
-Client's environment -Client -Account
Select all that apply: Categories of traditional financial ratios include __________ ratios. -Activity -Performance -Longevity -Leverage
-Leverage -Activity
Control risk is a function of ______.
-Operating effectiveness of internal control -Design effectiveness of internal control
Select all that apply: Control risk is a function of ________. -Operating effectiveness of internal control -Nature of account -Nature of client and its environment -Design effectiveness of internal control.
-Operating effectiveness of internal control -Design effectiveness of internal control
Audit evidence is ordinarily more reliable when it is ______.
-Provided by original documents -Generated through a system of effective internal controls -Obtained directly by the auditors
Valuation, allocation, or accuracy
All transactions, assets, liabilities, and equity interests are included in the financial statements at proper amounts
The representation letter should be dated the same as the date of the ______.
Auditor's report
The reliability of customer sales invoices created by the client and held internally depends on the ______.
Effectiveness of internal control
Management makes assertions for financial statements regarding all of the following except ______. 1. properly presented disclosures 2. proper amounts in various accounts 3. properly recorded transactions 4. fairness of the audit opinion
Fairness of the audit opinion
True or false: A client representation letter may be used as a substitute for performing other audit procedures.
False
True or false: Inspection of assets is the best way to determine ownership, valuation, and condition of the assets.
False
Detection risk is restricted through the performance of __________.
Substantive procedures
Test of class of transaction
Tests of inventory purchases to determine if properly accounted for
True or false: An important component of applying professional skepticism is awareness of the possibility that information received may be biased, or outright incorrect.
True
Auditors should investigate ______ differences between their prior expectations and the actual amounts on the client's financial statement.
any significant
During an audit, client oral inquiries ______.
may be made of both officers and employees
Inherent risk may be high for ___________ transactions because they are not part of the normal flow of transactions and specialized skills may be needed to perform the activity.
nonroutine
To prove the arithmetical accuracy of the client's analyses and records, auditors make independent ____________.
recalculations
Without regard to the effect of controls, _______________ assertions are those that have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated
relevant
Without regard to the effect of controls, _____________ assertions are those that have a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated.
relevant assertions
Comparing the price on an invoice to that on an approved price list is an example of the audit procedure of ______. Multiple choice question.
reperformance
Comparing the price on an invoice to that on an approved price list is an example of the audit procedure of ___________.
reperformance
Several specific items, such as the fact that all known liabilities are reflected in the financial statements, are included in the written _____________ _____________ the CPAs obtain from client officers at the conclusion of the audit.
representation letter
The review of changes in an account balance over time is called ______ analysis.
trend analysis
The review of changes in an account balance over time is called _________ ___________.
trend analysis
Audit risk is the risk that financial statements will contain a material departure from GAAP and the auditor will issue a(n) ______ opinion.
unmodified