Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
Awareness of the consistency in the application of generally accepted accounting
principles between periods.
Understanding as to the reasons for the change of auditors.
Evaluation of all matters of continuing accounting significance.
Opinion of any subsequent events occurring since the predecessor’s audit report was
issued.
A written understanding between the auditor and the client concerning the auditor’s
responsibility for the discovery of illegal acts is usually set forth in a(n)
Engagement letter.
Letter of audit inquiry.
Management letter.
Internal control letter.
Miller Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to
the audit committee. In planning to use the internal auditors to help in performing the audit, the
independent auditor most likely will
Increase the extent of the procedures needed to reduce control risk to an acceptable
level.
Avoid using the work performed by the internal auditors.
Place limited reliance on the work performed by the internal auditors.
Decrease the extent of the tests of controls needed to support the assessed level of
detection risk.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the client’s management.
Identify specific internal control activities that are likely to prevent fraud.
Inquire of the client’s attorney if it is probable that any unrecorded claims will be
asserted.
Evaluate the reasonableness of the client’s accounting estimates.
When planning an audit, an auditor should
Determine planning materiality for audit purposes.
Consider whether the extent of substantive procedures may be reduced based on the results of
the internal control questionnaire.
Conclude whether changes in compliance with prescribed internal controls justify reliance
on them.
Prepare a preliminary draft of the management representation letter.
As generally conceived, the audit committee of a publicly held company should be made up of
Representatives from the client’s management, investors, suppliers, and customers.
Members of the board of directors who are not officers or employees.
Representatives of the major equity interests (preferred stock, common stock).
The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
An auditor who discovers that a client’s employees paid small bribes to municipal officials most
likely would withdraw from the engagement if
The client receives financial assistance from a federal government agency.
The payments violated the client’s policies regarding the prevention of illegal acts.
Management fails to take the appropriate remedial action.
Documentation that is necessary to prove that the bribes were paid does not exist.
Which of these statements concerning illegal acts by clients is correct?
An audit in accordance with generally accepted auditing standards normally includes audit
procedures specifically designed to detect illegal acts that have an indirect but material effect on
the financial statements.
An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on
the financial statements.
An auditor’s responsibility to detect illegal acts that have a direct and material effect on the
financial statements is the same as that for errors and fraud.
An auditor considers illegal acts from the perspective of the reliability of management’s
representations rather than their relation to audit objectives derived from financial statement
assertions.
The engagement partner and manager review the work of engagement team members to
evaluate which of the following:
12_30_2011
All of the above.
The objectives of the procedures were achieved.
The results of the work support the conclusions reached.
The work was performed and documented.
Tolerable misstatement is
Materiality for the balance sheet as a whole.
Materiality allocated to a specific account.
The amount of misstatement that management is willing to tolerate in the financial
statements.
Materiality for the income statement as a whole.
Which of the following concepts are pervasive in the application of generally accepted auditing
standards, particularly the standards of fieldwork and reporting?
Control risk.
Materiality and audit risk.
Internal control.
Expected misstatement.
The existence of audit risk is recognized by the statement in the auditor’s standard report that
the auditor
Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
Is responsible for expressing an opinion on the financial statements, which are the responsibility
of management.
Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
Realizes that some matters, either individually or in the aggregate, are important while other
matters are not important.
Risk of material misstatement refers to a combination of which two “client” components of the
audit risk model?
Audit risk and control risk.
Audit risk and inherent risk.
Control risk and detection risk.
Inherent risk and control risk.
As lower acceptable levels of both audit risk and materiality are established, the auditor should
plan
more
work
on
individual
accounts
to
Rev: 02-02-2012
Find smaller errors.
Increase the tolerable misstatements in the accounts.
Decrease the risk of overreliance.
Find larger errors.
When is a duty to disclose fraud to parties other than the client’s senior management and its
audit committee most likely to exist?
In response to inquiries from a successor auditor.
When the fraud results from misappropriation of assets rather than fraudulent financial
reporting.
When a line manager rather than a lower-level employee commits the fraudulent act.
When the amount is material.
Which of the following characteristics most likely would heighten an auditor’s concern about
the risk of intentional manipulation of financial statements?
Insiders recently purchased additional shares of the entity’s stock.
Management places substantial emphasis on meeting earnings projections.
Turnover of senior accounting personnel is low.
The rate of change in the entity’s industry is slow.
Which of the following is a misappropriation of assets?
Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts
equal to 10 percent of sales.
Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with an
interest rate of 7 percent.
Classifying inventory held for resale as supplies.
An employee of a consumer electronics store steals 12 CD players.
Auditing standards require auditors to make certain inquiries of management regarding fraud.
Which of the following inquiries is required?
Whether management has any knowledge of fraud that has been perpetrated on or within the
entity.
Management’s attitude about hiring ethical employees.
Management’s attitudes toward regulatory authorities.
Whether management has ever intentionally violated the securities laws.
Which of the following is an example of fraudulent financial reporting?
An employee diverts customer payments to his personal use, concealing his actions by debiting
an expense account, thus overstating expenses.
Company management falsifies inventory count tags, thereby overstating ending inventory and
understating cost of sales.
An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
An employee borrows small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
Which of the following is correct concerning required auditor communications about fraud?
Any requirement to disclose fraud outside the entity is the responsibility of management and not
that of the auditor.
Fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
Fraud that involves senior management should be reported directly by the auditor to the audit
committee regardless of the amount involved.
The professional standards provide no requirements related to the communication of fraud, but
the auditor should use professional judgment in determining communication responsibilities.
Hawkins requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor auditor's working papers. The prospective client's refusal to permit
this will bear directly on Hawkins' decision concerning the
Adequacy of the preplanned audit program.
Ability to establish consistency in application of accounting principles between years.
Apparent scope limitation.
Integrity of management.
In assessing whether to accept a client for an audit engagement, a CPA should consider
the current financial health of the prospective client.
the integrity of management.
The CPA's overall engagement risk.
All of the above should be considered.
Evaluating a prospective client requires the following step(s):
Communicate with the predecessor auditor.
Preplan the audit.
Establish the terms of the engagement.
None of the above.
An auditor has withdrawn from an audit engagement of a publicly held company after finding
fraud that may materially affect the financial statements. The auditor should set forth the reasons
and findings in correspondence with the
Securities and Exchange Commission.
Client's legal counsel.
Stock exchanges where the company's stock is traded.
Audit committee of the board of directors.
When a CPA is approached to perform an audit for the first time, the CPA should make inquiries
of the predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining
rev: 10_4_12
Whether the predecessor's work should be utilized.
Whether, in the predecessor's opinion, the financial statements are materially correct.
Whether, in the predecessor's opinion, the company's internal controls have been
satisfactory.
Whether the engagement should be accepted.
Which of the following should an auditor obtain from the predecessor auditor prior to accepting
an audit engagement?
Analysis of balance sheet accounts.
Analysis of income statement accounts.
All matters of continuing accounting significance.
Facts that might bear on management integrity.
Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
The prospective client's unwillingness to permit inquiry of its legal counsel.
The inability to review the predecessor auditor's documentation.
The CPA's lack of understanding of the prospective client's operations and industry.
Indications that management has not investigated employees in key positions before
hiring them.
An auditor who discovers that a client's employees paid small bribes to municipal officials most
likely would withdraw from the engagement if
The payments violated the client's policies regarding the prevention of illegal acts.
The client receives financial assistance from a federal government agency.
Documentation that is necessary to prove that the bribes were paid does not exist.
Management fails to take the appropriate remedial action.
A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor's
Engagement letter.
Audit working papers.
Engagement letter and audit working papers.
It would not be typical to allow a review of either the engagement letter or the audit
working papers.
Evaluating a prospective client requires the following step(s):
Communicate with the SEC.
Preplan the audit.
Determine if the firm is independent of the client.
Communicate with the AICPA.
Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected?
The details of most recorded transactions are not available after a specified period of
time.
Internal control activities requiring segregation of duties are subject to management
override.
It is unlikely that sufficient appropriate evidence is available to support an opinion on
the financial statements.
Management has a reputation for consulting with several accounting firms about
significant accounting issues.
Which of the following factors most likely would cause a CPA to decide not to accept a new
audit engagement?
The CPA's lack of understanding of the prospective client's internal auditor's
computer-assisted audit techniques.
Management's disregard of its responsibility to maintain an adequate control
environment.
The CPA's inability to determine whether related party transactions were
consummated on terms equivalent to arm's-length transactions.
Management's refusal to permit the CPA to perform substantive procedures before the
year-end.
Before accepting an engagement to audit a new client, a CPA is required to obtain
An understanding of the prospective client's industry and business.
The prospective client's signature on the engagement letter.
A preliminary understanding of the prospective client's control environment.
The prospective client's consent to make inquiries of the predecessor auditor, if any.
Which of the following situations would most likely require special audit planning?
Some items of factory and office equipment do not bear identification numbers.
Depreciation methods used on the client's tax return differ from those used on the
books.
Assets costing less than $500 are expensed even though the expected life exceeds one
year.
Inventory is comprised of precious stones.
During the initial planning phase of an audit, a CPA most likely would
Identify specific internal control activities that are likely to prevent fraud.
Evaluate the reasonableness of the client's accounting estimates.
Discuss the timing of the audit procedures with the client's management.
Inquire of the client's attorney as to any unrecorded claims.
An auditor is required to establish an understanding with a client regarding the responsibilities
for each engagement. This understanding generally includes
Management's responsibility to guarantee that there are no material misstatements due
to fraud.
The auditor's responsibility to plan and perform the audit to provide reasonable, but
not absolute, assurance of detecting material errors or fraud.
Management's responsibility for providing the auditor with an assessment of the risk
of material misstatement due to fraud.
The auditor's responsibility for the fairness of the financial statements.
A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of illegal acts is usually set forth in a(n)
Client representation letter.
Letter of audit inquiry.
Management letter.
Engagement letter.
Engagement letters include all of the following except:
A list of additional services that will be provided.
A list of adjusting journal entries.
Information about the audit fee.
Arrangements involving the use of specialists.
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulations.
The factors to be considered in setting preliminary judgments about materiality.
Management's liability for illegal acts committed by its employees.
The auditor's responsibility to guarantee accuracy of the financial statements.
To provide for the greatest degree of independence in performing internal audit functions, an
internal auditor most likely should report to the
Vice-President - Finance.
Corporate controller.
Audit committee of the board of directors.
Corporate stockholders.
All of the following refer to an internal auditor's competence except:
The party in the entity to which the internal auditor reports.
The quality of internal audit documents and reports.
Professional certification.
Supervision and review of internal audit activities.
An independent auditor might consider the appropriateness of the procedures performed by the
internal auditors because
They are employees whose work must be reviewed during substantive testing.
They are employees whose work might be relied upon.
Their work impacts the cost/benefit tradeoff in evaluating inherent limitations.
Their degree of independence may be inferred by the nature of their work.
As generally conceived, the audit committee of a publicly held company should be made up of
Representatives of the major equity interests (preferred stock, common stock).
The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
Representatives from the client's management, investors, suppliers, and customers.
Members of the board of directors who are not officers or employees.
To emphasize auditor independence from management, publicly traded corporations are required
to
Appoint a partner of the CPA firm conducting the examination to the corporation's
audit committee.
Establish a policy of discouraging social contact between employees of the
corporation and the independent auditors.
Request that a representative of the independent auditor be on hand at the annual
stockholders' meeting.
Have the independent auditor report to an audit committee of independent members of
the board of directors.
An auditor obtains knowledge about a new client's business and its industry in order to
Make constructive suggestions concerning improvements to the client's internal
control.
Develop an attitude of professional skepticism concerning management's financial
statement assertions.
Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
Understand the events and transactions that may have an effect on the client's
financial statements.
Which of the following is an example of a related party transaction?
An action is taken by the directors of Company A to provide additional compensation
for vice presidents in charge of the principal business functions of Company A.
A long-term agreement is made by Company A to provide merchandise or services to
Company B, a long-time, friendly competitor.
A short-term loan is granted to Company A by a bank that has a depositor who is a
member of the board of directors of Company A.
A nonmonetary exchange occurs whereby Company A exchanges property for similar
property owned by Company B, an unconsolidated subsidiary of Company A.
An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in
an office building owned by a shareholder. This finding likely indicates the existence of
Management fraud.
Related party transactions.
Window dressing.
Weak internal control.
Which of the following would not necessarily be a related party transaction?
Sales to another corporation with a similar name.
Purchases from another corporation that is controlled by the corporation's chief
stockholder.
Loan from the corporation to a major stockholder.
Sale of land to the corporation by the spouse of a director.
The existence of a related party transaction may be indicated when another entity
Sells real estate to the corporation at a price that is comparable to its appraised value.
Absorbs expenses of the corporation under audit.
Borrows from the corporation at a rate of interest which equals the current market
rate.
Lends to the corporation at a rate of interest which equals the current market rate.
In the context of an audit of financial statements, substantive procedures are audit procedures
that
May be eliminated under certain conditions.
Are primarily designed to discover significant subsequent events.
May be either tests of details of transactions, tests of details of account balances, or
analytical procedures.
Will increase proportionately with an increase in the auditor's reliance on internal
control.
Which of the following is not an audit procedure that is commonly used in performing tests of
controls?
Inquiring.
Observing.
Confirming.
Inspecting.
Tolerable misstatement is
Materiality allocated to an assertion.
Materiality for the balance sheet as a whole.
Materiality for the income statement as a whole.
Materiality allocated to a specific account.
Which of the following would an auditor most likely use in determining the auditor's planning
materiality?
The anticipated sample size for planned substantive procedures.
The entity's annualized interim (i.e. quarterly) financial statements.
The results of the internal control questionnaire.
The contents of the management representation letter.
Which of the following is not a qualitative factor that may affect an auditor's establishment of
materiality?
Potential for fraud.
The company is close to violating loan covenants.
Firm policy sets materiality at 4% of pretax income.
A small misstatement would interrupt an earnings trend.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
The misstatement hides a failure to meet analysts' expectations.
The misstatement is less than 5% of pretax income.
The misstatement increases management's compensation.
The misstatement changes a small amount of profit to a small reported loss.
In assessing the competence of an internal auditor, an independent CPA most likely would obtain
information about the
Quality of the internal auditor's work.
Organization's commitment to integrity and ethical values.
Influence of management on the scope of the internal auditor's duties.
Organizational levels to which the internal auditor reports.
Which of the following procedures would an auditor most likely include in the initial planning of
a financial statement audit?
Perform detailed testing of the individual balance sheet accounts.
Examining documents to detect illegal acts having a material effect on the financial
statements.
Considering whether the client's accounting estimates are reasonable in the
circumstances.
Determining the extent of involvement of the client's internal auditors.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff
assistants
That immaterial fraud is not to be reported to the client's audit committee.
How the results of various auditing procedures performed by the assistants should be
evaluated.
How the overall audit strategy will allow the firm to reach a sufficiently low level of
audit risk.
How overall materiality was selected.
Which of the following audit procedures would be least likely to disclose the existence of related
party transactions of a client during the period under audit?
Reading "conflict-of-interest" statements obtained by the client from its management.
Scanning accounting records for large transactions at or just prior to the end of the
period under audit.
Reading minutes of the Board of Directors meetings for authorization or discussion of
material transactions.
Confirming purchases and sales transactions with the vendors and/or customers
involved.
A dual-purpose test
Simultaneously tests debits and credits.
Is a procedure completed by both the internal and external auditors.
Is useful to both the entity and the auditor.
Is both a substantive test of transactions and a test of controls.
The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
Methods of statistical sampling to be used in confirming accounts receivable.
Pending legal matters to be included in the inquiry of the client's attorney.
Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
Timing of the audit.
The audit client's board of directors and audit committee refused to take any action with respect
to an immaterial illegal act which was brought to their attention by the auditor. Because of their
failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was
primarily due to doubts concerning
Adequate financial statement disclosures.
Compliance with the statutory laws and regulations.
Scope limitations resulting from their inaction.
The integrity of management.
Which of the following procedures would an auditor most likely include in the initial planning of
an examination of financial statements?
Assess the need for the use of specialists in the audit.
Inquiring of the client's attorney as to any claims that are likely to be asserted.
Perform detailed testing of the individual financial statement accounts.
Determining whether necessary internal controls procedures are being applied as
prescribed.
An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by
Scanning the general journal for unusual entries.
Performing a revenue cutoff test at year-end.
Tracing a sample of journal entries to the general ledger.
Examining documentary evidence of sales returns and allowances recorded after yearend.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the following
requirement(s):
Each member of the committee must be a board member and shall be independent.
The audit committee must preapprove all audit and nonaudit services.
The audit committee must establish and maintain procedures to handle all issues that
relate to accounting, internal control, and auditing.
All of the above.
Which of the following is a general audit test?
Fee assessment procedures.
Tests of controls.
Preparation of corporate tax returns.
Active testing procedures.
Which of the following arranges the general types of audit tests in the order they are normally
performed in an audit?
Substantive procedures, tests of controls, and risk assessment procedures.
Substantive procedures, risk assessment procedures, and tests of controls.
Risk assessment procedures, tests of controls, and substantive procedures.
Risk assessment procedures, substantive procedures, and tests of controls.
Which of the following relatively small misstatements most likely would have a material effect
on an entity's financial statements?
An illegal payment to a foreign official that was not recorded.
A piece of obsolete office equipment that was not retired.
A petty cash fund disbursement that was not properly authorized.
An uncollectible account receivable that was not written-off.
Which of the following is the most important qualitative factor that auditors should consider
when making materiality judgments?
A misstatement exceeded five percent of net income.
The auditor also provides consulting services to the audit client.
The misstatement will cause the client to fail to meet an earnings forecast.
The audit committee is not well-educated about the accounting principle in question.
Which element(s) is/are pervasive to the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
The elements of materiality and audit risk.
The element of internal control.
The element of corroborating evidence.
The element of reasonable assurance.
Which of the following statements is not correct about materiality?
The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with GAAP, while other matters are
not important.
An auditor considers materiality for the aggregate level of misstatements that could be
material to any one of the financial statements individually.
Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments.
An auditor's consideration of materiality is influenced by the auditor's perception of
the needs of a reasonable person who will rely on the financial statements.
Engagement risk is
The risk of issuing an incorrect audit opinion.
The auditor's risk of loss from events arising in connection with financial statements
audited and reported upon.
The overall risk of material misstatement.
The risk of the client's financial failure.
Client risk as defined in the text is
The auditor's risk of loss from events arising in connection with financial statements
audited and reported upon.
The overall risk of material misstatement.
The risk that audit procedures will fail to detect material misstatements.
The risk of the client's financial failure.
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misappropriation of assets for the benefit of management.
Misinterpretation by management of facts that existed when the financial statements
were prepared.
Preparation of records by employees to cover a fraudulent scheme.
Intentional omission of the recording of a transaction to benefit a third party.
When assessing the risk of material misstatement, auditors evaluate the reasonableness of an
entity's accounting estimates. An auditor normally would be concerned about assumptions that
are
Susceptible to bias.
Consistent with prior periods.
Insensitive to variations.
Similar to industry guidelines.
Which of the following characteristics most likely would heighten an auditor's concern about the
risk of intentional manipulation of financial statements?
Turnover of senior accounting personnel is low.
Insiders recently purchased additional shares of the entity's stock.
Management places substantial emphasis on meeting earnings projections.
The rate of change in the entity's industry is slow.
Which of the following is a known misstatement?
A management estimate that is outside the range of reasonable outcomes determined
by the auditor.
A fixed asset being recorded at the incorrect cost.
A projected misstatement resulting from errors found during sampling.
Difference in judgment between the auditor and management.
Engagement risk can be eliminated by
Establishing policies for client acceptance and continuance.
Lowering audit risk.
Lowering materiality.
Engagement risk cannot be eliminated.
The achieved (actual) level of audit risk
Can always be accurately assessed by the auditor.
Should be greater than or equal to acceptable audit risk.
Can never be known with certainty.
Is the same for all audit clients.
An auditor knows that an audit client operating in an industry in which common stock is valued
based on the price-earnings ratio will soon make an initial public offering. All of the following
are true except:
Materiality should be reduced.
Risk of material misstatement should increase.
Detection risk should increase.
Audit risk should increase.
The risk that an auditor will conclude, based on substantive procedures, that a material error does
not exist in an account balance when, in fact, such an error does exist is referred to as
Sampling risk.
Detection risk.
Nonsampling risk.
Inherent risk.
The risk of material misstatement differs from detection risk in that it
Arises from the misapplication of auditing procedures.
May be assessed in either quantitative or qualitative terms.
Exists independently of the actions of the auditor.
Can be changed at the auditor's discretion.
All of the following are inherent risk factors that are pervasive to the financial statements except:
Highly complex significant transactions.
Non-routine transactions.
Classes of transactions are not processed systematically.
Supplies inventory is difficult to count.
When an auditor increases the assessed level of risk of material misstatement because certain
control procedures were determined to be ineffective, the auditor would most likely increase the
Extent of tests of controls.
Level of detection risk.
Extent of substantive tests.
Level of inherent risk.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of risk of material misstatement 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
Decrease amount of substantive testing.
Decrease detection risk.
Increase detection risk.
Increase materiality levels.
The risk of material misstatement includes which of the following?
Detection risk.
Audit risk.
Inherent risk.
Nonsampling risk.
An auditor learns that a client employee in control of inventory gets divorced and is responsible
for paying a large amount of child support. All of the following for the audit of inventory likely
are true except:
Fraud risk increases.
The risk of misappropriation of assets increases.
Risk of material misstatement increases.
Detection risk increases.
Which of the following audit risk components may be assessed in qualitative terms?
Risk of material misstatement.
Detection risk.
Neither risk of material misstatement nor detection risk.
Both risk of material misstatement and detection risk.
When an entity moves into a significant new line of business, all of the following increase
except:
Client risk.
Acceptable audit risk.
Risk of material misstatement.
Entity business risk.
Which of the following procedures would not be used to obtain an understanding of the entity
and its environment?
Observe entity operations.
Reperform entity processes.
Verify proper valuation of inventory subject to technological obsolescence.
Review prior year's audit documentation.
Which of the following is not an important consideration in an auditor's evaluation of an entity's
business risk?
The specific business risks an entity faces that may result in financial statement errors
and fraud.
Business risk factors that impact the ability of the entity to be profitable and survive.
Audit standards include many entity business risk factors that identify circumstances
that increase the likelihood of material misstatements.
Audit standards require the auditor to evaluate the entity's business risk in order to
provide suggestions to improve the entity's profitability.
Which of the following is a source of detection risk?
Unstable business environment.
Poor client controls.
A non-representative sample.
Inherent risk assessed too high.
In general, material frauds perpetrated by which of the following are most difficult to detect?
Internal auditor.
Keypunch operator.
Cashier.
Controller.
Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entity's financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than
expected.
Audit trails of computer-generated transactions exist only for a short time.
The chief financial officer does not sign the management representation letter until the
last day of the auditor's field work.
Management consults with other accountants about significant accounting matters.
The primary responsibility for preventing fraud in an organization lies with
The audit committee of the board of directors.
The internal audit staff.
The external auditor.
The organization's management.
Which of the following is not a misstatement of the financial statements?
The client uses different inventory accounting methods for internal and external
reporting.
A departure from GAAP.
The footnote for pensions is omitted.
A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as
opposed to 13% of sales as determined by the controller.
All of the following represent an increased opportunity for management to commit fraud except:
Significant related party transactions.
The auditor's relationship with management is strained.
Management is dominated by a single person.
The financial statements included highly subjective estimates.
The auditor can respond to an increased risk of fraud by doing all of the following except:
Heavily emphasizing the importance of professional skepticism.
Assigning more experienced personnel to the audit.
Increasing detection risk.
Taking steps to obtain more reliable evidence.
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the
fraud is not sufficiently material to affect the audit opinion. The auditor should probably
Disclose the fraud to the appropriate level of the client's management.
Disclose the fraud to appropriate authorities external to the client.
Discuss with the client the additional audit procedures that will be needed to identify
the exact amount of the fraud.
Modify the audit program to include tests specifically designed to identify the fraud
and its impact on the financial statements.
The acceptable level of detection risk is inversely related to the
Extent of the substantive procedures.
Risk of misapplying auditing procedures.
Planning materiality.
Risk of failing to discover material misstatements.
As the acceptable level of detection risk decreases, an auditor may change the
Timing of tests of controls by performing them at an interim date rather than at yearend.
Nature of substantive procedures from less effective to more effective procedures.
Timing of tests of controls by performing them at several dates rather than at one
time.
Assessed level of risk of material misstatement to a higher amount.
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive procedures should increase.
Substantive procedures should decrease.
Tests of controls should increase.
Tests of controls should decrease.
Increased fraud risk could also result in all of the following except:
Lower detection risk.
Higher inherent risk.
Lower control risk.
Higher client risk.
The objectives of the engagement partner's communication with the audit team include
Maintaining an adversarial atmosphere between the auditor and management.
Complying with SEC rules.
Complying with FASB rules.
Emphasizing the importance of professional skepticism.
The auditor is most likely to presume that a high risk of a fraud exists if
The entity is a multinational company that does business in numerous foreign
countries.
The entity does business with several related parties.
Inadequate segregation of duties places an employee in a position to perpetrate and
conceal theft.
Inadequate employee training results in lengthy EDP exception reports each month.
Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting?
Inability to generate cash flows from operations while reporting substantial earnings
growth.
Management's lack of interest in increasing the entity's earnings trend.
Large amounts of liquid assets that are easily converted into cash.
Inability to borrow necessary capital without granting debt covenants.
A properly planned and performed audit may fail to detect a material misstatement resulting
from fraud because
Audit procedures that are otherwise effective may be ineffective for fraud that is
concealed through collusion.
An audit is planned and performed to provide reasonable assurance of detecting
material misstatements caused by errors but not by fraud.
The factors considered in assessing control risk indicated an increased risk of error
but only a low risk of fraud in the financial statements.
The auditor did not consider factors influencing audit risk for account balances that
have effects pervasive to the financial statements taken as a whole.
Which of the following is correct concerning required auditor communications about fraud?
Fraud that involves senior management should be reported directly by the auditor to
the audit committee regardless of the amount involved.
Fraud with a material effect on the financial statements should be reported directly by
the auditor to the Securities and Exchange Commission.
Any requirement to disclose fraud outside the entity is the responsibility of
management and not that of the auditor.
The professional standards provide no requirements related to the communication of
fraud, but the auditor should use professional judgment in determining
communication responsibilities.