Ch 6 - Audit Responsibilities and Objectives Flashcards
The objective of an audit of the financial statements is an expression of an opinion on:
A) the fairness of the financial statements in all material respects.
B) the accuracy of the annual report.
C) the accuracy of the balance sheet and income statement.
D) the accuracy of the financial statements.
A) the fairness of the financial statements in all material respects.
Why does the auditor divide the financial statements into segments around the financial statement cycles?
A) Most auditors are trained to audit cycles as opposed to entire financial statements.
B) The cycle approach is required by auditing standards.
C) The approach aids in the assignment of tasks to different members of the audit team.
D) The cycle approach allows the auditor to detect illegal acts
C) The approach aids in the assignment of tasks to different members of the audit team.
When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should:
A) still include some audit procedures designed specifically to uncover illegalities.
B) make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.
C) include audit procedures which have a strong probability of detecting illegal acts.
D) ignore the issue.
B) make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.
In describing the cycle approach to segmenting an audit, which of the following statements is not true?
A) The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and services and payment” cycle.
B) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
C) Some journals and general ledger accounts are included in more than one cycle.
D) All general ledger accounts and journals are included at least once.
B) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
Fraudulent financial reporting is most likely to be committed by whom?
A) Line employees of the company
B) Company management
C) The company’s auditors
D) Outside members of the company’s board of directors
B) Company management
If a client has violated federal tax laws:
A) and the amount is significant, the auditor should communicate with those charged with governance.
B) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.
C) the noncompliance generally will not impact the financial statements.
D) the auditor must notify the IRS.
A) and the amount is significant, the auditor should communicate with those charged with governance.
General transaction-related audit objectives vary from audit to audit, depending on the nature and characteristics of the client’s business and industry.
A) True
B) False
B) False
The transaction-related audit objective of timing is related to the assertion of cutoff.
A) True
B) False
A) True
International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements?
A) Assertions about classes of transactions for the period under audit
B) Assertions about presentation and disclosure
C) Assertions about the quality of source documents used to prepare the financial statements
D) Assertions about account balances at period end
C) Assertions about the quality of source documents used to prepare the financial statements
If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor:
A) should notify regulators of the circumstances.
B) should request an increase in audit fees so that more resources can be used to conduct the audit.
C) has the responsibility of notifying financial statement users through the auditor’s report.
D) should withdraw from the engagement.
C) has the responsibility of notifying financial statement users through the auditor’s report.
For a private company audit, tests of controls are normally performed only on those internal controls the auditor believes have not been operating effectively during the period under audit.
A) True
B) False
B) False
When an auditor has reduced assessed control risk based on tests of controls, he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.
A) True
B) False
A) True
The classification balance-related audit objective:
A) involves tying in the account balances to the general ledger.
B) involves determining if items included on a client’s listing are included in the correct general leger accounts.
C) involves determining if items included on a client’s listing are disclosed properly in the financial statements.
D) is the counterpart to the management assertion of completeness.
B) involves determining if items included on a client’s listing are included in the correct general leger accounts.
The detail tie-in objective is not concerned that the details in the account balance:
A) agree with the total in the general ledger.
B) foot to the total in the account balance.
C) are properly disclosed in accordance with GAAP.
D) agree with related subsidiary ledger amounts.
C) are properly disclosed in accordance with GAAP.
Under the cycle approach to segmenting an audit, transactions recorded in different journals should never be combined with the general ledger balances that result from those transactions.
A) True
B) False
B) False
An auditor discovers that the company’s bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of:
A) misappropriation of assets.
B) a defalcation.
C) employee fraud.
D) an error.
D) an error.
In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is:
A) greater for employee fraud because of the higher crime rate among blue collar workers.
B) greater for management fraud because of management’s ability to override existing internal controls.
C) greater for employee fraud because of the larger number of employees in the organization.
D) greater for management fraud because managers are inherently more deceptive than employees.
B) greater for management fraud because of management’s ability to override existing internal controls.
Which of the following would most likely be deemed a direct-effect illegal act?
A) Violation of federal environmental regulations
B) Violation of federal income tax laws
C) Violation of federal employment laws
D) Violation of civil rights laws
B) Violation of federal income tax laws
“The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of:
A) a rule in the AICPA’s Code of Professional Conduct.
B) unprofessional behavior.
C) due diligence.
D) an attitude of professional skepticism.
D) an attitude of professional skepticism
An auditor assesses the risk of material misstatement to determine the impact on the audit plan and to determine the nature, extent, and timing of the audit procedures.
A) True
B) False
A) True
The auditors determine which disclosures must be presented in the financial statements.
A) True
B) False
B) False
A questioning mindset:
A) means the auditor should approach the audit with a “do not trust anyone” mental outlook.
B) assures that the auditor will only accept honest clients.
C) means the auditor should approach the audit with a “trust but verify” mental outlook.
D) means the auditor must prove every statement that management makes to them.
C) means the auditor should approach the audit with a “trust but verify” mental outlook.
Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts.
A) True
B) False
B) False
Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.
A) True
B) False
A) True
Auditing standards make ________ distinction(s) between the auditor’s responsibilities for searching for errors and fraud.
A) no
B) various
C) little
D) a significant
A) no
What are the five steps to develop audit objectives?
1) Understand objectives and responsibilities for the audit
2) Divide financial statements into cycles
3) Know management assertions about financial statements
4) Know general audit objectives for classes of transactions, accounts, and disclosures
5) Know specific audit objectives for classes of transactions, accounts and disclosures
What are management’s responsibilities? (4)
1) Adopt sound accounting policies
2) Maintain adequate internal control
3) Determine FAIR Disclosures
4) Sarbanes-Oxley requres the CEO to certify the financial statements of public companies
Misstatements are usually considered material if the combined uncorrected errors and fraud in the financial statements would likely have changed or influenced the decisions of a _________________ using the statements.
reasonable person
What are two types of fraud?
1) Misappropriation of assets
2) fraudulent financial reporting
What are six factors of professional skepticism?
1) Questioning mindset
2) Suspension of judgment (don’t decide without the facts)
3) Search for knowledge
4) Interpersonal understanding (understand people)
5) Autonomy
6) Self-esteem