AUD Becker 3

Question 1

What factor most likely would assist an independent auditor is assessing the objectivity of the internal auditor?

Answer 1

The organizational status of the director of internal audit.

Question 2

When assessing internal auditors’ objectivity, an independent auditor should

Answer 2

Consider the policies the prohibit the internal auditors from auditing areas where they were recently assigned.

Question 3

What is NOT a required part of the understanding between the client and the auditor?

Answer 3

Mgmt’s responsibility to correct deficiencies in internal control identified by the auditor.

Question 4

Which of the following factors would a CPA ordinarily consider in the planning stage?
I. Financial statement accounts likely to contain a misstatement?
II. Conditions that require extension of audit tests?

Answer 4

I. Financial statement accounts likely to contain a misstatement? YES
II. Conditions that require extension of audit tests? NO

Question 5

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditors report if, as a result of the specialists findings, the auditor

Answer 5

Becomes aware of conditions causing substantial doubt about the entity’s ability to continue as a going concern.

Question 6

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods

Answer 6

Influence the design of internal control

Question 7

When assessing an internal auditor’s competence, a CPA ordinarily obtains information about all of the following EXCEPT

Answer 7

Access to information about related parties

Question 8

Samples to test internal control are intended to provide a basis for the auditor to conclude whether

Answer 8

The controls are operating effectively.

Question 9

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

Answer 9

Extent test of details

Question 10

The acceptable level of detection risk is inversely related to

Answer 10

Assurance provided by substantive tests

Question 11

Regardless of the assessed level of control risk, an auditor would perform some

Answer 11

Substantive tests to restrict detection risk for significant transaction classes.

Question 12

As the acceptable level of detection risk decreases, the assurance directly provided from

Answer 12

Substantive tests should increase

Question 13

In a financial statement audit, inherent risk is evaluated to help an auditor assess

Answer 13

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

Question 14

What is an important consideration when deciding the nature of tests to use in a financial statement audit?

Answer 14

The procedures to be applied on a particular engagement are a matter of the auditor’s professional judgement.

Question 15

Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?

Answer 15

The fraud risk factors should be discussed by engagement personnel during planning.

Question 16

What factor would most likely would heighten an auditors concern about the risk of fraudulent financial reporting?

Answer 16

An overly complex organizational structure involving unusual lines of authority.

Question 17

Prior to, or in conjunction with, the information gathering procedures for an audit, audit team members should discuss the potential for material misstatements due to fraud. What is the mind set that the audit team should maintain?

Answer 17

Questioning.

Question 18

What is the primary objective of the fraud brainstorming session

Answer 18

Assess the potential for material misstatement due to fraud.

Question 19

What statement is true concerning analytical procedures used in planning an audit engagement?

Answer 19

They usually use financial and non financial data aggregated at a high level.

Question 20

If the assessed level of fraud risk is high

Answer 20

The auditor should attempt to reduce detection risk.

Question 21

Which of the following procedures would LEAST likely result in the discovery of possible noncompliance with laws and regulations?

Answer 21

Reviewing an internal control questionnaire.

Question 22

While performing analytical procedures in the planning state, the auditor most likely would develop expectations by reviewing?

Answer 22

Unaudited information from the internal quarterly reports.

Question 23

When the auditor’s risk assessment is based on the effective operation of controls, the audit will most likely involve

Answer 23

identifying specific internal controls relevant to specific assertions

Question 24

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports

Answer 24

the planned level of assurance at the relevant assertion level

Question 25

Test of controls include such procedures as

Answer 25

Inspecting documentation Inquiry - alone is not sufficient Observation Reperformance

Question 26

As part of understanding internal control, an auditor is NOT required to

Answer 26

Obtain knowledge about the operating effectiveness of internal control

Question 27

What would be difficult to determine because electronic evidence may not be retrievable after a specific period of time?

Answer 27

The timing of control and substantive tests.

Question 28

What is not a financial statement assertion related to account balances?

Answer 28

Valuation and Competence

Question 29

What is an example of fraudulent financial reporting?

Answer 29

Company management changes inventory count tags and overstates ending inventory, while understanding COGS.

Question 30

What is meant by the term "fraud risk factors?"

Answer 30

Factors whose presence often has been observed in circumstances where frauds have occurred.

Question 31

When considering internal control, an auditor should be aware of the concept of reasonable assurance which recognizes that

Answer 31

The cost of an entity's internal control should not exceed the benefits expected to be derived.

Question 32

An entity's ongoing monitoring activities often include

Answer 32

Reviewing the purchasing function

Question 33

What is a provision of the Foreign Corrupt Practices Act?

Answer 33

Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurance that internal control objectives are met.

Question 34

What statement is correct concerning the relevance of various types of controls to a financial audit?

Answer 34

Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may be relevant.

Question 35

What statement regarding auditor documentation of the client's internal control is correct?

Answer 35

No one particular form of documentation is necessary, and the extent of documentation may vary.

Question 36

What may not be required on a particular audit of a nonissuer (nonpublic) company?

Answer 36

Test of controls

Question 37

An auditor may compensate for a weakness in internal control by increasing

Answer 37

Extent of analytical procedures

Question 38

Regardless of the assessed level of control risk, an auditor would perform some

Answer 38

substantive tests to restrict detection risk for significant transaction classes

Question 39

What control is least likely to be relevant to a financial statement audit?

Answer 39

Procedures that prevent the excess use of materials in production.

Question 40

What would NOT be considered an inherent limitation of the potential effectiveness of an entity's internal control?

Answer 40

Incompatible duties, Lack of segregation of duties, Lack of audit committee

Question 41

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. What action would be efficient for obtaining information about the transfer agents internal control?

Answer 41

Review reports on internal control placed in operation and it's operating effectiveness produced by the agent's own auditor.

Question 42

In obtaining an understanding of the entity and it's environment, including its internal control, an auditor is required to obtain knowledge about the

Answer 42

Design of relevant internal controls pertaining to financial reporting in each of the 5 internal control components.

Question 43

In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to

Answer 43

Identify the types of potential misstatements that could occur.

Question 44

Which of the following is NOT a possible reason why a properly designed system of internal control may fail to prevent or detect fraud?

Answer 44

Inadequate segregation of duties may allow one person.

Question 45

An auditor’s risk assessment is based on the assumption that controls are operating effectively. Which of the following was NOT a step in making this assessment?

Answer 45

Perform tests of details of transactions to detect material misstatements in the financial statements.

Question 46

When an auditor plans to rely on controls that have changed since they were last tested, what course of action would be most appropriate?

Answer 46

Test the operating effectiveness of such controls in the current audit.

Question 47

An auditor of a manufacturer most likely would question whether a client has committed acts of non compliance with laws and regulations if the client has

Answer 47

Been forced to discontinue operations in a foreign country.

Question 48

What is NOT a control environment factor?

Answer 48

Proper segregation of duties.

Question 49

What statement is true regarding the risk assessment component of internal control?

Answer 49

An auditor evaluates an entity's risk assessment to understand how management addresses risk relevant to financial reporting.

Question 50

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should

Answer 50

consider whether the amounts of the year-end balances are selected for interim testing are reasonably predictable.

Question 51

An auditor should obtain knowledge of a client's information and communication system in order to understand each of the following, EXCEPT:

Answer 51

The means used by an entity to ensure that management directives are carried out.

Question 52

An auditor is required to document the auditor's understanding of? I. Entity's control activities that help ensure management directives are carried out? II. Entity's control environment factors that help the auditor plan the engagement?

Answer 52

I. Entity's control activities that help ensure management directives are carried out? YES II. Entity's control environment factors that help the auditor plan the engagement? YES

Question 53

What statement about internal control is correct?

Answer 53

Internal control is relevant to the entire entity or to any of its operating units or business functions.

Question 54

What is NOT a step in an auditor's assessment of control risk?

Answer 54

Perform tests of details of transactions to detect material misstatements in the financial statements.

Question 55

The framework most likely to be used by management in it's internal control assessment under requirements of SOX 2002 is?

Answer 55

COSO Internal Framework

Question 56

What is an accurate statement about internal control weakness?

Answer 56

Material weaknesses are also control deficiencies and significant deficiencies.

Question 57

The minimum likelihood of loss involved in the consideration of a control deficiency is

Answer 57

Not explicitly considered.

Question 58

For an issuer (public) co. audit of internal control, walkthroughs provide the auditor with primary evidence to: I. Evaluate the effectiveness of internal control. II. Confirm whether controls have been implemented.

Answer 58

I. Evaluate the effectiveness of internal control. YES | II. Confirm whether controls have been implemented. YES

Question 59

For purposes of an audit of internal control performed under PCAOB, an account is significant if there is more than

Answer 59

Remote likelihood that is could contain material misstatements.

Question 60

How large must the actual loss identified by the auditor be for a control deficiency to possibly be considered a material weakness? I. Immaterial II. Material

Answer 60

I. Immaterial - BOTH | II. Material - BOTH

Question 61

In reporting on an entity's internal control over financial reporting, a practitioner should include a paragraph that describes the

Answer 61

Inherent limitations of any internal control.

Question 62

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

Answer 62

The auditors responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that came to the auditors attention.

Question 63

Analytical procedures used during risk assessment in an audit should focus on

Answer 63

Providing assurance that potential material misstatements will be identified.

Question 64

Which of the following is least likely to be considered a risk assessment procedure?

Answer 64

Confirmation of ending accounts receivable.

Question 65

In an audit of a nonissuer co, the auditors identify rusks. These risks often

Answer 65

Involve judgemental matters.

Question 66

Information and communication would be the component for the following factors:

Answer 66

1. Proper presentation of transactions and related disclosures. 2. Measurement and recording of proper monetary values. 3. The way in which significant events are captured by accounting system.

Question 67

Risk assessment would be the component for the following factors:

Answer 67

1. Adoption of new accounting principles 2. New Personnel 3. Incorporation of new technology 4. Corporate restructuring.

Question 68

Monitoring would be the component for the following factors:

Answer 68

1. Internal audit function.

Question 69

Control Environment would be the component for the following factors:

Answer 69

1. Participation of those charged with governance. 2. Assignment of authority, responsibility, and accountability. 3. Human resource policies and practices.

Question 70

Existing control activities would be the component for the following factors:

Answer 70

1. Authorization of transactions 2. Segregation of duties. 3. Pre-numbering of documents. 4. Performance reviews.

Question 71

Both Management and Auditor responsible for the following tasks to be performed.

Answer 71

1. Coordinating client assistance. | 2. Establishing the timing of the audit

Question 72

Auditor responsible for the following tasks to be performed.

Answer 72

1. Following GAAS | 2. Obtain understanding of internal control

Question 73

Management responsible for the following tasks to be performed.

Answer 73

1. Preparation of Financial Statements 2. Following GAAP 3. Establish internal control 4. Provision of rep letter 5. Compliance with laws and regulations

Question 74

Since DML returned to profitable operation, its healthier financial condition leads to a decrease in the risk of material misstatement. Decrease or Increase in RMM?

Answer 74

Decrease in RMM

Question 75

The risk of material misstatement increases when the internal auditor reports to top management rather than to the audit committee, because it is less likely that the internal auditor will be able to objectively perform his or her duties. Decrease or Increase in RMM?

Answer 75

Increase in RMM

Question 76

The risk of material misstatement increases when key management positions (particularly senior accounting personnel) encounter turnover. Decrease or Increase in RMM?

Answer 76

Increase in RMM

Question 77

A change to generally accepted accounting principles will increase the risk of material misstatement because the change in basis requires management to prepare a number of entries that have not been made in the past. These entries may be made improperly. Also, difficulty in determining beginning accrual basis balances may increase the risk of misstatement. Decrease or Increase in RMM?

Answer 77

Increase in RMM

Question 78

The sale of one half of the company's controlling interest in Lawrence Equipment Leasing is a transaction that is outside the ordinary course of business, and accordingly, increases the risk of material misstatement Decrease or Increase in RMM?

Answer 78

Increase in RMM

Question 79

The risk of material misstatement increases when significant related party transactions occur, as the substance of a transaction may differ somewhat from its form. Decrease or Increase in RMM?

Answer 79

Increase in RMM

Question 80

The risk of material misstatement increases where there are unusual and difficult accounting issues present. The barter transaction would be considered to be an unusual transaction. Decrease or Increase in RMM?

Answer 80

Increase in RMM

Question 81

The risk of material misstatement increases, as it appears that management has taken an aggressive attitude toward reporting this transaction. In addition, this appears to be an unusual and difficult accounting issue involving revenue recognition. Decrease or Increase in RMM?

Answer 81

Increase in RMM

Question 82

Entities may have an incentive to intentionally misstate reported financial condition and operating results in situations in which a public (or private) placement of securities is planned. Accordingly, an initial public offering of stock increases the risk of material misstatement. Decrease or Increase in RMM?

Answer 82

Increase in RMM

Question 83

The entity's purchasing agent is required to obtain approval from senior management for purchases in excess of $2,000.00

Answer 83

Control risk I Decrease risk | Requiring approval for large purchases is a good control that would reduce control risk.

Question 84

A good portion of the entity's fixed asset base consists of capitalized items.

Answer 84

Inherent risk I Increase risk | Assertions involving complex calculations (such as lease calculations) have relatively high inherent risk.

Question 85

Brown plans to perform extensive tests of details surrounding the payroll function.

Answer 85

Detection risk I Decrease risk | Extensive testing reduces detection risk.

Question 86

The entity keeps a large quantity of cash on hand.

Answer 86

Inherent risk I Increase risk | Cash is inherently risky as it is easily stolen and not easily identified as to owner.

Question 87

Brown plans to perform all of its testing related to cash at year end.

Answer 87

Detection risk I Decrease risk | Testing at year-end (as opposed to during an interim period) reduces detection risk.

Question 88

The entity's computer applications are not protected by password controls.

Answer 88

Control risk I Increase risk | Failure to appropriately limit access to computer applications increases control risk.

Question 89

Employees report the hours worked each week without supervisory oversight.

Answer 89

Control risk ! Increase risk Failure to require supervisory approval of hours worked increases control risk (e.g., the risk that employees may deliberately overstate hours worked).

Question 90

Brown will obtain evidence primarily from external sources in testing the entity's receivables.

Answer 90

Detection risk I Decrease risk | Use of external evidence reduces detection risk.

Question 91

The entity's financial statements do not require use of significant estimates.

Answer 91

Inherent risk I Decrease risk | Not having to rely on estimates, which often have a subjective component, reduces inherent risk.

Question 92

Brown plans to perform only limited tests of details related to the purchasing function.

Answer 92

Detection risk I Increase risk | Performing limited tests of details increases detection risk.