exam 2 back of chapter questions

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?

Significant differences between the physical inventory count and the accounting records are not investigated.

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?

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

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

Questioning

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

inherent risk.

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as

detection risk.

Inherent risk and control risk differ from planned detection risk in that they

exist independently of the financial statement audit.

Which of the following does not increase the need for sufficient appropriate audit evidence?

A decrease in the assessed inherent risk

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to

find smaller misstatements.

An auditor may compensate for a high assessed level of control risk by increasing the:

extent of substantive tests.

Which of the following procedures would a CPA most likely perform during the planning stage of the audit?

Determine areas where there is a higher risk of material misstatement.

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk?

Modern Home recently engaged in a complex derivative transaction.

After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor’s desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned?

Auditor’s Desired Level of Detection Risk: decrease

Overall Level of Audit Risk: same

Which action regarding fraud is an activity related to performance of risk assessment procedures?

Discussions among the engagement team members regarding the risks of material misstatement due to fraud.

Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?

Unusual discrepancies exist between the entity’s records and confirmation replies.

Which of the following statements reflects an auditor’s responsibility for detecting fraud?

An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

When fraud risk factors are identified during an audit, the auditor’s documentation should include

The Risk Factors Identified: yes

The Auditor’s Response to The Risk Factors Identified: yes

If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first

make the investigation necessary to determine whether fraud has actually occurred.

Which of the following is least likely to suggest to an auditor that the client’s management may have overridden internal control?

Differences are always disclosed on a computer exception report.

Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.

Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?

Understating the sales journal

An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that

fictitious credit sales have been recorded during the year

While performing a preliminary assessment for a new client audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with management, the auditor concludes that the company’s operational staff is too lean and that internal controls in several operational functions may be currently insufficient to accommodate this rapid growth. About which of the following fraud risk factors related to the client would the auditor have the greatest concern?

Opportunity

Which one of the following is a true statement about the required fraud risk assessment discussion?

The discussion should include consideration of the risk of management override of controls.

Which of the following circumstances would most likely cause an auditor to suspect that there are material misstatements in an entity’s financial statements?

The auditor identifies an inappropriate valuation method that is widely applied by the entity.

Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure?

Incompatible duties

Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components?

Control environment

Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component?

Monitoring

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system

does not require as stringent a set of internal controls.

Which of the following is generally not considered a category of IT general controls?

Controls that determine whether a vendor number matches the preapproved vendors in the vendor database

Which of the following is an example of an application control?

The sales system automatically computes the total sale amount and posts the total to the sales journal file.

Which of the following situations is not an example of an inherent limitation of internal control?

A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

Which of the following factors are included in an entity’s control environment?

Participation of Those Charged With Governance, Integrity and Ethical Values, Integrity and Ethical Values

Which of the following correctly describes an internal control component?

Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.

An internal control deficiency may be defined as a condition in which material misstatements would ordinarily not be timely detected by

employees in normal course of assigned functions.

Which of the following is an example of an operation deficiency in internal control?

Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.

A material weakness in internal control represents a control deficiency that

results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will

decrease planned detection risk.

An auditor uses assessed control risk to

determine the acceptable level of detection risk for financial statement assertions.

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the

risk that material misstatements exist in the financial statements.

As general IT controls weaken, the auditor is most likely to

expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit.

Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the

completeness of input.

An auditor will use the test data approach to obtain certain assurances with respect to the

procedures contained within the program.

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client’s internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result?

The auditor may reduce the amount of substantive procedures performed.

When assessing control risk, an auditor is required to document the auditor’s:

Understanding of the Entity’s Control Environment, Basis for the Auditor’s Risk Assessment

Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of Portico Industries, a nonpublic company. Two of these conditions are considered to be material weaknesses. Which best describes Jefferson’s communication requirements?

Communicate all five significant deficiencies to Portico’s management and those charged with governance, distinguishing between material weaknesses and significant deficiencies.