Ch 6 - Audit Responsibilities and Objectives Flashcards Preview

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Flashcards in Ch 6 - Audit Responsibilities and Objectives Deck (75):
1

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.

2

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.

3

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.

4

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.

5

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

6

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.

7

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

8

The transaction-related audit objective of timing is related to the assertion of cutoff.

A) True

B) False

A) True

9

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

10

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.

11

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

12

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

13

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.

14

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.

15

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

16

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.

17

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.

18

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

19

"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

20

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

21

The auditors determine which disclosures must be presented in the financial statements.

A) True

B) False

B) False

22

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.

23

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

24

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

25

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

26

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

27

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

28

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

29

What are two types of fraud?

1) Misappropriation of assets
2) fraudulent financial reporting

30

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

31

A common way to divide an audit by keeping closely related types of transactions and account balances in the same segment is called the ________approach.

cycle

32

What journals are included in the Sales and Collection cycle?

Sales journal
Cash receipts journal
General journal

33

What balance sheet accounts are included in the Sales and Collection Cycle?

Cash in bank
Trade A/R
Other A/R
Allow for uncollectible accts

34

What income statement accounts are included in the Sales and Collection Cycle?

Sales
Sales R&A
Bad debt expense

35

What journals are included in the Acquisition and payment cycle?

Acquisitions journal
Cash disbursements journal
General Journal

36

What balance sheet accounts are included in the Acquisition and payment Cycle?

Cash in bank
Inventories
Prepaid expenses
Land
Buildings
Computer and other equipment
Furniture and Fixtures
Accum. Dep
Trade A/P
Other accrued payables
Accrued income tax
Deferred tax

37

What income statement accounts are included in the Acquisition and payment Cycle?

Various expenses
Gain on sale of assets
Income taxes

38

What journals are included in the Payroll and personnel cycle?

Payroll journal
General journal

39

What balance sheet accounts are included in the Payroll and personnel Cycle?

Cash in bank
Accrued payroll
Accrued payroll taxes

40

What income statement accounts are included in the Payroll and personnel Cycle?

Salaries and commissions
payroll taxes

41

What journals are included in the Inventory and warehousing cycle?

Acquisitions journal
Sales journal
General journal

42

What balance sheet accounts are included in the Inventory and warehousing Cycle?

Inventories

43

What income statement accounts are included in the Inventory and warehousing Cycle?

Cost of goods sold

44

What journals are included in the Capital acquisition and repayment cycle?

Acquisitions journal
Cash disbursements journal
General journal

45

What balance sheet accounts are included in the Capital acquisition and repayment cycle?

Cash in bank
N/P
LT N/P
Accrued interest
Capital Stock
Capital in excess of par
R/E
Dividends
Dividends payable

46

What income statement accounts are included in the Capital acquisition and repayment Cycle?

Interest expense

47

Auditors have found that generally the most effective and efficient way to conduct audits is to obtain some combination of _____ for each class of transactions and for the _____ _____ in the related accounts

assurance
ending balance

48

Three types of audit objectives are:

1) transaction related
2) balance related
3) presentation and disclosure related

49

International auditing standards and the AICPA auditing standards classify management assertions into three broad categories:

1) Assertions about classes of transactions and events for the period under audit

2) Assertions about account balances at period end

3) Assertions about presentation and disclosure

50

Assertions about Classes of Transactions and Events include: (there are 5)

1) Occurrence - transactions and events that have been recorded have occurred and pertain to the entity.

2) Completeness - All transactions and events that should have been recorded have been recorded.

3) Accuracy - Amounts and other data relating to recorded transactions and events have been recorded appropriately

4) Classification - Transactions and events have been recorded in the proper accounts

5) Cutoff - Transactions and events have been recorded in the correct accounting period.

51

What is the assertion about Classes of Transactions and Events:

Transactions and events that have been recorded have occurred and pertain to the entity.

Occurrence

52

What is the assertion about Classes of Transactions and Events:

All transactions and events that should have been recorded have been recorded.

Completeness

53

What is the assertion about Classes of Transactions and Events:

Amounts and other data relating to recorded transactions and events have been recorded appropriately

Accuracy

54

What is the assertion about Classes of Transactions and Events:

Transactions and events have been recorded in the proper accounts

Classification

55

What is the assertion about Classes of Transactions and Events:

Transactions and events have been recorded in the correct accounting period.

Cutoff

56

Assertions about Account Balances include: (there are 4)

1) Existence - Assets, liabilities, and equity interests exist

2) Completeness - All assets, liabilities, and equity interests that should have been recorded have been recorded.

3) Valuation and allocation - Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded.

4) Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligation of the entity.

57

What is the assertion about Account Balances:

Assets, liabilities, and equity interests exist

Existence

58

What is the assertion about Account Balances:

All assets, liabilities, and equity interests that should have been recorded have been recorded.

Completeness

59

What is the assertion about Account Balances:

Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded.

Valuation and allocation

60

What is the assertion about Account Balances:

the entity holds or controls the rights to assets, and liabilities are the obligation of the entity.

Rights and obligations

61

Assertions about Presentation and Disclosure include (there are 4):

1) Occurrence and rights and obligations - disclosed events and transactions have occurred and pertain to the entity.

2) Completeness - All disclosures that should have been included in the financial statements have been included

3) Accuracy and valuation - Financial and other information are disclosed appropriately and at appropriate amounts.

4) Classification and understandability - Financial and other information is appropriately presented and described and disclosures are clearly expressed.

62

What is the assertion about Presentation and Disclosure:

disclosed events and transactions have occurred and pertain to the entity.

Occurrence and rights and obligations

63

What is the assertion about Presentation and Disclosure:

All disclosures that should have been included in the financial statements have been included

Completeness

64

What is the assertion about Presentation and Disclosure:

Financial and other information are disclosed appropriately and at appropriate amounts.

Accuracy and valuation

65

What is the assertion about Presentation and Disclosure:

Financial and other information is appropriately presented and described and disclosures are clearly expressed.

Classification and understandability

66

What are the four phases of a financial statement audit?

1) Plan and design and audit approach based on risk assessment procedures

2) Perform tests of controls and substantive tests of transactions

3) Perform analytical procedures and tests of details of balances

4) Complete the audit and issue an audit report

67

Which of the following best describes the reason why an independent auditor reports on financial statements?

1) A misappropriation of assets may exist, and it is more likely to be detected by independent auditors

2) Different interests may exist between the company preparing the statements and the persons using the statements

3) A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work

4) Poorly designed internal controls may be in existence

2) Different interests may exist between the company preparing the statements and the persons using the statements

68

Because of the risk of material misstatement, an audit should be planned and performed with an attitude of

1) objective judgement
2) independent integrity
3) professional skepticism
4) impartial conservatism

3) professional skepticism

69

The major reason an independent auditor gathers audit evidence is to

1) form an opinion on the financial statements
2) detect fraud
3) evaluate management
4) assess control risk

1) form an opinion on the financial statements

70

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?

1) Misappropriation of an asset or group of assets.

2) Clerical mistakes in the accounting data underlying the financial statements.

3) Mistakes in the application of accounting principles

4) Misinterpretation of facts that existed when the financial statements were prepared.

1) Misappropriation of an asset or group of assets.

71

What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?

Errors....Fraud

1) Limited...Negative
2) Reasonable...Reasonable
3) Limited...Limited
4) Reasonable...Limited

2) Reasonable...Reasonable

72

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

1) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

2) An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.

3) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.

4) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

1) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

73

An auditor reviews aged accounts receivable to assess likelihood of collection to support management's assertion about account balances of

1) existence
2) completeness
3) valuation and allocation
4) rights and obligations

3) valuation and allocation

74

An auditor will most likely review and entity's periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management's assertion about classes of transactions of

1) occurrence
2) completeness
3) accuracy
4) classification

2) completeness

75

In the audit of accounts payable, an auditor's procedures will most likely focus primarily on management's assertions about account balances of

1) existence
2) completeness
3) valuation and allocation
4) classification and understandability

2) completeness