EXAM 2 Flashcards
(77 cards)
1
Q
- In testing the completeness assertion for a liability account, an auditor ordinarily works from the
A
potentially unrecorded items to the financial statements
2
Q
- An auditor selected items for test counts from a client’s inventory listing before observing the client’s physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management’s assertion of:
A
existence or occurrence
3
Q
- In auditing accrued liabilities, an auditor’s procedures most likely would focus primarily on management’s assertion of
A
completeness
4
Q
- Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
A
Assessing the allowance for uncollectible accounts for reasonableness
5
Q
- Which of the following audit procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories?
A
Inspect agreements for evidence of inventory held on consignment
6
Q
- In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the:
A
financial statement assertions
7
Q
- Which of the following is not a way in which auditors use the concept of overall materiality?
A
As a guide for assessing control risk
8
Q
- For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?
A
Assessment of inherent risk, no; assessment of control risk, no
9
Q
- Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should
A
obtain knowledge of matters that relate to the nature of the entity’s business
10
Q
- During the initial planning phase of an audit, a CPA most likely would:
A
discuss the timing of the audit procedures with the client’s management
11
Q
- Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?
A
Analytical procedures have revealed no unusual or unexpected results
12
Q
- Identify the type of procedure used by auditors for each of the following examples.
- Find brokers’ invoices and canceled checks showing agreement with record amounts for securities investments.
A
– Document inspection (vouching)
13
Q
- Identify the type of procedure used by auditors for each of the following examples.
- Observe test counting of client’s physical inventory taking.
A
– Observation
14
Q
- Identify the type of procedure used by auditors for each of the following examples.
- Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger.
A
– Document inspection (tracing)
15
Q
- Identify the type of procedure used by auditors for each of the following examples.
- Ask client personnel about accounting events.
A
– Inquiry and written representations
16
Q
- Identify the type of procedure used by auditors for each of the following examples.
- Study financial information in relation to nonfinancial information.
A
– Analytical procedures
17
Q
- Scan expense accounts for credit entries.
A
– Document inspection (scanning)
18
Q
- Compare financial information with that of prior periods.
A
– Analytical procedures
19
Q
- Obtain written client representation letter.
A
– Inquiry and written representations
20
Q
- Scan payrolls check lists for unusually large checks.
A
– Document inspection (scanning)
21
Q
- Complete an internal control questionnaire.
A
– Inquiry and written representations
22
Q
- Obtain client’s lawyer’s letter.
A
– Confirmation
23
Q
- Study predictable financial information patterns (e.g., ratio analysis).
A
– Analytical procedures
24
Q
- Analyze valuation of receivables by re-aging them by due date.
A
– Reperformance
25
14. Obtain accounts receivable confirmations.
– Confirmation
26
15. Compare financial information with budgets and forecasts.
– Analytical procedures
27
16. Verify existence of fixed assets by locating them.
– Inspection of tangible assets
28
17. Compare financial information to industry statistics.
– Analytical procedures
29
18. Recompute the client’s calculation of depreciation expense.
– Recalculation
30
Q: When initiating communications with predecessor auditors, prospective auditors should expect.
CORRECT ANSWER All of the choices are correct.
31
Q: When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?
CORRECT ANSWER The auditors’ judgment about their independence with regard to the client
32
Q: An auditor's permanent file audit documentation most likely will contain:
CORRECT ANSWER Excerpts of the corporate charter and bylaws.
33
Q: Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?
CORRECT ANSWER Being able to decide early what type of audit opinion to issue
34
Q: An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?
CORRECT ANSWER Schedules and analyses to be prepared by the client’s employees.
35
Q: When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory... Should Costanza refer to Benes’s work in the audit report?
CORRECT ANSWER The auditors’ report should mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions.
36
Q: Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?
CORRECT ANSWER Scanning the minutes for significant transactions with members of the board of directors
37
Q: Which of the following would be considered an analytical procedure?
CORRECT ANSWER Comparing inventory balances to recent sales activities
38
Q: Which of the following procedures would most likely be performed during planning?
CORRECT ANSWER Identifying related parties
39
Q: Prior to accepting a new audit engagement, a public accounting firm should:
CORRECT ANSWER All of the choices are correct.
40
Q: An audit plan contains:
CORRECT ANSWER Specifications of procedures the auditors believe appropriate for the financial statements under audit.
41
Q: When auditing the existence assertion for an asset, auditors proceed from the:
CORRECT ANSWER General ledger back to the supporting original transaction documents.
42
Q: Confirmations of accounts receivable provide evidence primarily about which two assertions?
CORRECT ANSWER Existence and rights and obligations
43
Q: With respect to the concept of materiality, which of the following statements is correct?
CORRECT ANSWER Materiality is a matter of professional judgment.
44
Q: During the planning phase of a financial statement audit, which of the following procedures would most likely be performed?
CORRECT ANSWER Compare financial information with nonfinancial operating data.
45
Q: Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
CORRECT ANSWER They typically use financial and nonfinancial data aggregated at a high level.
46
Q: The company being audited has an internal auditor who is both competent and objective... Under these circumstances, the independent auditor may:
CORRECT ANSWER Allow the internal auditor to perform certain tests of internal controls.
47
Q: Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
CORRECT ANSWER There will be a client-imposed scope limitation.
48
Q: (Repeated/clarifying) During the planning phase of a financial statement audit, which of the following procedures would most likely be performed?
CORRECT ANSWER Compare financial information with nonfinancial operating data.
49
Q: (Repeated) Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
CORRECT ANSWER They typically use financial and nonfinancial data aggregated at a high level.
50
Q: (Implied continuation from internal auditor question) The company being audited has an internal auditor who is both competent and objective...
CORRECT ANSWER Allow the internal auditor to perform certain tests of internal controls.
51
Fraud vs. Error
* Errors = Unintentional
* Fraud =Intentional (e.g., fraudulent financial reporting, asset misappropriation)
52
Earnings Management Techniques
* Income smoothing: Make earnings look consistent
* Big bath: Inflate losses now to inflate future profits
* Cookie jar: Overstate reserves when doing well, release later
53
Fraud Risk Factors
1. Management Influence
* Aggressive reporting, pressure to meet forecasts, overrides
2. Industry Conditions
* High competition, changing regulations
3. Operating Characteristics
* Poor cash flow, complex estimates, weak internal controls
54
Audit Risk Model
AR = IR × CR × DR
* AR: Audit Risk – issuing wrong opinion
* IR: Inherent Risk – susceptibility of account to misstatement
* CR: Control Risk – risk internal controls won’t catch it
* DR: Detection Risk – risk auditor fails to detect it
* Low DR = more effective, year-end, extensive tests
55
Responding to Risks
* Presume revenue recognition is a fraud risk
* Evaluate management override (e.g., journal entries)
* Adjust procedures for high-risk areas
56
1. Auditors use brainstorming:
✅ Correct Answer: to heighten the audit team’s awareness of fraud potential.
57
2. Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit?
✅ Correct Answer: Increase the assessment of detection risk for sales.
58
3. What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?
✅ Correct Answer: Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable.
59
4. Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to:
✅ Correct Answer: identify unusual conditions that deserve additional audit effort.
60
61
5. If an auditor encounters significant risks at the client, the auditor should do all of the following except:
Correct Answer: inform the SEC.
62
6. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client’s financial statements most likely would withdraw from the engagement if:
: ✅ Correct Answer: the client does not take the remedial action that the auditor considers necessary.
63
7. Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:
Correct Answer: decrease detection risk.
64
8. Which of the following statements concerning noncompliance by clients is correct?
Correct Answer: An auditor’s responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds.
65
9. Inherent risk and control risk differ from detection risk in which of the following ways?
Correct Answer: Inherent risk and control risk exist independently of the audit.
66
10. While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company’s sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial indication about the potential for fraud in sales revenue?
Correct Answer: There is a broad indication of financial reporting fraud.
67
11. In auditing related party transactions, an auditor ordinarily places primary emphasis on:
Correct Answer: the adequacy of the disclosure of the related party transactions.
68
12. Which of the following analytical procedures most likely would be used during the planning stage of an audit?
Correct Answer: Comparing current-year to prior-year sales volumes.
69
13. Which of the following information that comes to an auditor’s attention most likely would raise a question about the occurrence of illegal acts?
Correct Answer: The discovery of unexplained payments made to government employees.
70
14. External auditors are responsible
Correct Answer: for reporting immaterial frauds to a level of management at least one level above the people involved.
71
15. The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:
Correct Answer: assurances provided by substantive tests to a lower level.
72
Increase audit risk, Decrease audit risk, or Have no effect on audit risk
Company Profile
This was the first year TWD operated at a profit since 2020 because the municipalities received increased federal and state funding for environmental purposes.
Answer: Decrease
73
Increase audit risk, Decrease audit risk, or Have no effect on audit risk
TWD's board of directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer.
Answer: Increase
74
Increase audit risk, Decrease audit risk, or Have no effect on audit risk
The internal auditor reports to the controller, and the controller reports to Mead.
Answer: Increase
75
Increase audit risk, Decrease audit risk, or Have no effect on audit risk
The accounting department has experienced a high rate of turnover of key personnel.
Answer: Increase
76
Increase audit risk, Decrease audit risk, or
TWD’s bank has a loan officer who meets regularly with TWD’s CEO and controller to monitor TWD’s financial performance.
Answer: Decrease
77
Increase audit risk, Decrease audit risk, or
TWD’s employees are paid biweekly.
Answer: No effect
