Audit exam 1

What is the role of professional skepticism in an auditor’s work?

to apply a critical mindset and question the info and representations provided by management

For which of the following assertions related to accounts receivable would an auditor's initial assessment of risk of material misstatement be increased if the auditor discovers that client management does not regularly review the collectability of accounts receivable balances?

Valuation

which of the following best describes assurance services?

independent professional services that improve the quality of info for decision makers

GAAP are

standards that guide the conduct of an audit examination

Which of the following is the essential purpose of an audit function

determination of whether the client’s F/S assertions are fairly stated

All of the following statements are true regarding auditing standards except 

Departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances

The concept of ____ recognizes that a GAAS audit may fail to detect all material misstatements

Reasonable assurance

Which of the following best defines an attestation service?

A service provided by an independent party to issue a report on the reliability of a statement made by another party

Which of the following best describes the primary role and responsibility of independent external auditors.

Express an opinion on the fairness of a company’s annual F/S and footnotes

 In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the 

Financial Statement assertions

Audit evidence is usually considered sufficient when

there is enough quantity to afford a reasonable basis for an opinion on F/S

Which management assertion is concerned with ensuring that all recorded transactions actually took palace and are valid 

Existence assertion

In testing the completeness assertion for a liability account, an auditor ordinarily works from the 

potentially unrecorded items to the F/S

Choose the answer which best describes the relationship between the attribute given for a financial statement account and the likely reliance on substantive analytical procedures for that account within an audit.

Direct, Inverse, Direct

Before accepting an engagement to audit a new client, an auditor is required to

make inquiries of the predecessor auditor after obtaining the consent of the prospective client

Which of the following are components of the risk material misstatement (RMM) and can be expressed in both quantitative and qualitative terms?

Control Risk (Yes)

Detection Risk (No)

Inherent Risk (Yes)

Before accepting an engagement to audit a new client, a CPA is required to obtain 

the prospective client’s consent to make inquiries of the predecessor, if any

As it relates to audit evidence, appropriateness refers to

quality of evidence gathered

Which of the following describes the relationship between an increase or decrease in one of the following and how the auditor will assess the level of materiality to be used in an audit 

Audit Risk: Direct 

Detection Risk: Direct 

Inherent Risk: Inverse

Control risk is

the probability that a material misstatement could not be prevented or detected by the entity’ internal control policies and procedures

Which of the following management assertions is an auditor most likely testing if the audit objectives state that all inventory on hand is reflected in the ending inventory balance?

inventory is complete

When would it not be appropriate to apply analytical procedures in an audit of financial statements?

performing tests of controls

An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to 

give an opinion on the fair presentation of Camden’s F/S in conformity with the applicable financial reporting framework (eg, GAAP, IFRS)

What type of evidence would provide the highest level of assurance in an attestation engagement?

evidence obtained from independent sources

Which of the following statements best reflects the auditor's responsibility regarding fraud considerations in a financial statement audit 

auditors must plan and perform the audit to obtain reasonable assurance about whether the F/S are free from material misstatement whether due to fraud or error

The underlying conditions that create demand by users for reliable information include:

• transactions that are numerous and complex.

• users separated from accounting records by distance and time.

• financial decisions that are important to investors and users.

• decisions that are time sensitive.

Information risk refers to the risk that:

the  client's financial statements may be materially false and misleading.

Operational auditing refers to the study of business operations for the purpose of making recommendations for which of the following?

Effective and efficient use of resources

Assurance services involve which of the following?

• Relevance and reliability

• Nonfinancial information and traditional financial statements

• Electronic databases and printed reports

Professional skepticism dictates that when management makes a statement to the auditors, the auditors should:

corroborate the statement with other documentary evidence whenever possible.

The primary responsibility for an organization’s financial statements rests with:

management

The audit objective that all transactions and accounts that should be presented in the financial statements are included is related to which financial statement assertion?

Completeness

Which of the following best describes the main reason that independent auditors report on management’s financial statements?

The management team that prepares the statements and the persons who use the statements may have conflicting interests.

The audit objective that all footnotes have been included in the annual report is related most closely to which financial statement assertion?

Presentation and disclosure

Which of the following is a management financial statement assertion about fixed assets that relates to "valuation and allocation"?

Fixed asset depreciation has been correctly calculated.

Which of the following would be considered an assurance engagement?

• Giving an opinion on a prize promoter’s claims about the amount of sweepstakes prizes awarded in the past.

• Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles.

• Giving an opinion on the fair presentation of a newspaper’s circulation data.

• Giving assurance about the average drive length achieved by golfers with a client’s golf balls.

In an attestation engagement, a CPA practitioner is engaged to:

prepare a written report containing a conclusion about the reliability of a management assertion

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because:

they generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements.

What requirements are usually necessary to become licensed as a certified public accountant?

Successful completion of the Uniform CPA Examination.

Experience in the accounting field.

Education.

The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the:

Government Accountability Office (GAO)

Jones, CPA, is planning the audit of Rhonda’s Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda’s representation in this regard:

is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

The Sarbanes–Oxley Act of 2002 generally prohibits public accounting firms from:

acting in a managerial decision-making role for an audit client.

auditing the firm’s own work on an audit client.

providing tax consulting to an audit client without audit committee approval.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that:

a potential conflict of interest always exists between the auditor and the management of the enterprise under audit.

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of:

operational auditing

The primary difference between operational auditing and financial auditing is that in operational auditing:

the operational auditor is seeking to help management use resources in the most effective manner possible.

According to the AICPA, the purpose of an audit of financial statements is to:

enhance the degree of confidence that intended users can place in the financial statements.

The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

Bookkeeping services.

Internal auditing services.

Valuation services.

Independent auditors of financial statements perform audits that reduce:

information risk faced by investors.

The primary objective of compliance auditing is to:

determine whether client personnel are following laws, rules, regulations, and policies.

Performance audits usually include:

Economy and efficiency audits.

Program audits.

The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about:

Valuation or allocation

The risk to investors that a company’s financial statements may be materially misleading is called:

Information risk

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?

Cutoff

Audit Strategy

the auditor establish and overall audit strategy that sets the scope, timing, and direction of the audit and guides the development of audit plan

Materiality

is an amount or disclosure which would effect a decision made by a leader of the financial statements

Audit plan

the auditor should develop and document an audit plan that includes a description of:

• The planned nature, timing and extent of the risk assessment procedures

• The planned nature, timing, and extent of tests of controls and substantive procedures

Inherent Risk

the probability that a material misstatement (error/fraud) will occur, independent of internal control

Control risk

the probability that a material misstatement (error/fraud) will not be prevented or detected by a firm’s internal controls

detection risk

the risk that the audit will fail to detect that material misstatement

audit risk

the risk that an inappropriate opinion will be issued when the F/S are materially misstated

With respect to the concept of materiality, which of the following statements is correct?

Materiality is a matter of professional judgment.

Permanent Files

info of continuing audit significance

~ Example: key contacts, bylaws, organization chart, royalty and bond agreements

Current files

includes the entire engagement admin file for the year under audit and all documentation that is sufficient to support all conclusions on the audit

Prior to relying on the work of internal auditors, external auditors should consider internal auditors’ ____ & _____

objectivity ; competence

Error

unintentional misstatements or omissions of amounts or disclosures in F/S

Fraud

Intentional  misstatements or omissions of amounts or disclosures in F/S

Defalcation

another term for misappropriation of assets

One of the typical characteristics of management fraud is:

victimization of investors through the use of materially misleading financial statements.

Analytical procedures are generally used to produce evidence from:

relationships among current financial balances and prior balances, forecasts, and nonfinancial data

Analytical procedures used when planning an audit should concentrate on:

accounts and relationships that can represent specific potential problems and risks in the financial statements

Under the Private Securities Litigation Reform Act (the Act), independent auditors are required to first:

report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:

evaluate the effect of the noncompliance on the financial statements

Which of the following may cause management to intentionally understate profits?

• Management wants to create "cookie jar" reserves for a rainy day.

• The company believes its income tax expense is too high.

• The company is suffering a large loss and wants to take a "big bath.”

Which of the following is true?

Auditors must specifically consider fraud risk from management override of controls.

Auditors would perform the following steps in which order?

Set audit risk; assess risk of material misstatement; calculate detection risk.

Which of the following is not required by AU-C 240, “Consideration of Fraud in a Financial Statement Audit”?

Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Analytical procedures are performed in the following order:

develop an expectation; define a significant difference; compare expectation with recorded amount; investigate significant differences.

The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated is referred to as:

audit risk

If results from the auditor’s tests of controls induce the auditor to change the assessed level of control risk for inventory from low to moderate and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk?

detection risk would decrease

The auditor has assessed the risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions for inventory account balances. As the acceptable level of detection risk decreases, which of the following adjustments to the accounts receivable audit program would the audit team normally make?

Increase the sample size of the confirmations.

Which of the following would not cause auditors to increase their assessment of inherent risk?

The client’s controller is an expert in application of accounting standards.

With respect to management’s accounting estimates, auditors are responsible for:

• determining the reasonableness of estimates.

• determining that estimates are presented in conformity with GAAP.

• determining that estimates are adequately disclosed in the financial statements

Auditors would be responsible for designing audit procedures to detect noncompliance with which of the following laws and regulations?

Federal income tax laws

The audit strategy should not take into account:

the audit fee agreed to by the audit committee.