ACCT 4400 EXAM 2 ch 3-7 Review Quiz questions

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s:

A. understanding as to the reasons for the change of auditors.

A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n):

A. engagement letter.

If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors’:

C. competence and objectivity.

During the initial planning phase of an audit, a CPA most likely would:

D. discuss the timing of the audit procedures with the entity’s management.

As generally conceived, the audit committee of a publicly held company should be made up of:

A. members of the board of directors who are not officers or employees.

When planning an audit, an auditor should:

C. determine overall materiality for audit purposes.

Correct

Which of these statements concerning illegal acts by clients is correct?

A. 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.

The engagement partner and manager review the work of engagement team members to evaluate which of the following?

A. All of these are correct.

Tolerable misstatement is:

D. materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

Which of the following would an auditor most likely use in determining overall materiality when planning the audit?

C. the entity’s income before taxes for the period-to-date (e.g., six months)

Which of the following concepts are pervasive in the application of auditing standards?

D. materiality and audit risk

The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor:

B. obtains reasonable assurance about whether the financial statements are free of material misstatement.

Risk of material misstatement refers to a combination of which two components of the audit risk model?

D. 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:

B. find smaller errors.

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?

D. Management places substantial emphasis on meeting earnings projections.

Which of the following is a misappropriation of assets?

C. 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?

B. whether management has any knowledge of fraud that has been perpetrated on or within the entity

Which of the following is an example of fraudulent financial reporting?

C. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

When is a duty to disclose fraud to parties other than the entity’s senior management and its audit committee most likely to exist?

A. in response to inquiries from a successor auditor

Which of the following is correct concerning required auditor communications about fraud?

C. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?

B. comparing a sample of shipping documents to the sales journal

In testing the existence assertion for an asset, an auditor ordinarily works from the:

C. accounting records to the supporting documents.

Which of the following statements concerning audit evidence is correct?

D. The measure of the reliability of audit evidence lies in the auditor’s judgment.

Which of the following types of audit evidence is the least reliable?

B. prenumbered purchase order forms prepared by the entity

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?

D. computations made by the auditor

The assurance bucket is filled with all of the following types of evidence except:

B. the audit report.

The permanent file section of the working papers that is kept for each audit client most likely contains:

B. narrative descriptions of the entity’s accounting system and control procedures.

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n):

B. lead schedule.

The primary objective of final analytical procedures is to:

B. assist the auditor in assessing the validity of the conclusions reached on the audit.

The substantive analytical procedure known as trend analysis is best described by:

C. the examination of changes in an account over time.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?

D. all of these are correct.

Monitoring is a major component of the COSO Internal Control—Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component?

C. The independent auditor can serve as part of the entity’s control environment and continuous monitoring.

After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions (i.e., plan to follow a substantive strategy) because the auditor:

D. believes the internal controls are unlikely to be effective.

Regardless of the assessed level of control risk, an auditor would perform some:

A. substantive procedures to restrict detection risk for significant transaction classes.

Assessing control risk below high (i.e., planning to follow a reliance strategy) involves all of the following except:

B. concluding that controls are ineffective.

Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control?

D. inquiry of entity personnel

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by:

D. observation by the auditor of the employees performing control activities.

Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee because they represent:

B. significant deficiencies in the design or operation of the internal control.

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus?

A. general controls

An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s:

A. understanding of the system.

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity’s annual report. It also requires auditors to report on the effectiveness of ICFR for large public companies. Which of the following statements concerning these requirements is false?

C. The auditor should provide recommendations for improving internal control in the audit report.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a:

B. deficiency in operation.

Entity-level controls can have a pervasive effect on the entity’s ability to meet the control criteria. Which one of the following is not an entity-level control?

D. controls to require authorization of inventory purchases.

Which of the following controls would most likely be tested during an interim period?

C. controls that operate on a continuous basis

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment?

B. self-assessment processes in conjunction with entity-level controls

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to:

D. trace a transaction from each major class of transactions from origination through the entity’s information system until it is reflected in the entity’s financial reports.

When auditors report on the effectiveness of internal control “as of” a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?

C. the walkthrough of the control system conducted at interim

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity’s internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah’s internal control?

B. a disclaimer of opinion

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?

B. an unqualified report

In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily’s accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor’s report indicates that there are no material weaknesses in the foreign subsidiary’s ICFR. What should Emily do?

A. Accept the other auditor’s opinion after evaluating the auditor’s work and make reference to the other auditor’s report in her audit opinion.

Which of the following statements concerning control deficiencies is true?

B. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit

A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may:

A. access information stored on computer files while having a limited understanding of the entity’s hardware and software features.

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an

account balance does not exist when, in fact, a misstatement does exist, is known as:

b) Detection risk.

Increased fraud risk could result in all of the following except:

d) lower control risk.

Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory?

d) Existence.

Which of the following presumptions is correct regarding the reliability of audit evidence?

a) Information obtained directly from the company is considered to be the most reliable

type of evidence.

b) To be reliable, evidence should be convincing rather than simply persuasive.

c) Reliability generally refers to the amount and relevance of corroborative audit evidence

obtained.

d) An effective internal control system provides increased assurance with regard to the

reliability of audit evidence.

d) An effective internal control system provides increased assurance with regard to the

reliability of audit evidence.

According to the reliability hierarchy by evidence type as presented in the text, an example of audit

evidence with a high level of reliability is:

b) Observation.

Tracing is used primarily to test which of the following assertions about classes of transactions?

b) completeness

For nonpublic companies with preliminary control risk assessments set at high or maximum, auditors

are likely to:

b) Complete little or no tests of controls.

The auditor must report the following to both the audit committee and others charged with

governance:

a) Significant deficiencies and material weaknesses.

Proper segregation of functional responsibilities in an effective system of internal control calls for

separation of the functions of:

a) authorization, recording, and custody.