Exam 2 Audit Practice

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

	A.	Consider the likelihood of assessing the risk of incorrect rejection too low.
	B.	Project sampling risk at the maximum for tests covering the remaining period.
	C.	Ascertain that accounts receivable are immaterial to the financial statements.
	D.	Assess the difficulty in controlling the incremental audit risk.

D.	Assess the difficulty in controlling the incremental audit risk.

Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?

	A.	Inherent.
	B.	Control.
	C.	Detection.
	D.	Sampling.

C.	Detection.

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:

	A.	Reflects management's philosophy and operating style.
	B.	Affects management's financial statement assertions.
	C.	Provides adequate safeguards over access to assets.
	D.	Enhances management's decision-making processes.

B.	Affects management's financial statement assertions.

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

I.	Financial statement accounts likely to contain a misstatement.
II.	Conditions that require extension of audit tests.

	A.	I only.
	B.	II only.
	C.	Both I and II.
	D.	Neither I nor II.

C.	Both I and II.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

	A.	Large amounts of liquid assets that are easily convertible into cash.
	B.	Low growth and profitability as compared to other entities in the same industry.
	C.	Financial management's participation in the initial selection of accounting principles.
	D.	An overly complex organizational structure involving unusual lines of authority.

D.	An overly complex organizational structure involving unusual lines of authority.

Which of the following is not a primary characteristic associated with audit risk?

	A.	Before an opinion is provided for an audit, audit risk should be reduced to an appropriately low level.
	B.	It is a risk that the auditor may fail to detect a client’s deceptive practices which may result in a misstatement of the financial statements.
	C.	Audit risk arises because the auditor obtains only reasonable assurance that the client’s financial statements are not materially misstated.
	D.	It is the risk associated with the auditor failing to appropriately modify an audit opinion when the client’s financial statements contain material misstatements.

B.	It is a risk that the auditor may fail to detect a client’s deceptive practices which may result in a misstatement of the financial statements.

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

	A.	An estimate of the standard deviation of the population's recorded amounts is not required.
	B.	The auditor rarely needs the assistance of a computer program to design an efficient sample.
	C.	Inclusion of zero and negative balances generally does not require special design considerations.
	D.	Any amount that is individually significant is automatically identified and selected.

C.	Inclusion of zero and negative balances generally does not require special design considerations.

An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?

	A.	Observing inventory counts on an unannounced basis.
	B.	Requesting that management more closely monitor the inventory function.
	C.	Assigning more experienced personnel to the engagement.
	D.	Requesting that inventory be counted on a date close to the end of the reporting period.

B.	Requesting that management more closely monitor the inventory function.

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

	A.	Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
	B.	Financial statements are presented fairly, in all material respects, in conformity with GAAP.
	C.	Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
	D.	Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

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

Inappropriate journal entries and other adjustments often have certain unique identifying characteristics. On which of the following unique characteristics should an auditor's testing focus?

	A.	Journal entries posted to accounts with reconciled differences
	B.	Journal entries that are preformatted with account numbers
	C.	Journal entries and other adjustments posted at the end of a reporting period
	D.	Journal entries posted to frequently used accounts

C.	Journal entries and other adjustments posted at the end of a reporting period

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

		Increase in tolerable misstatement	Increase in assessed level of control risk
	A.	Increase sample size	Increase sample size
	B.	Increase sample size	Decrease sample size
	C.	Decrease sample size	Increase sample size
	D.	Decrease sample size	Decrease sample size

C.

Decrease sample size

Increase sample size

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?

	A.	Procedures performed to assess independence and the ability to perform the engagement.
	B.	The understanding of the terms of the engagement, including scope, fees, and resource allocation.
	C.	Other audit procedures to be performed to comply with generally accepted auditing standards.
	D.	Issues with management integrity that could affect the decision to continue the audit engagement.

C.	Other audit procedures to be performed to comply with generally accepted auditing standards.

An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely would reduce the:

	A.	Planned reliance on the prescribed control.
	B.	Assessed level of control risk.
	C.	Planned reliance on substantive tests.
	D.	Tolerable rate of deviations.

A.	Planned reliance on the prescribed control.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

	A.	The audit committee is active in overseeing the entity's financial reporting policies.
	B.	External policies established by parties outside the entity affect its accounting practices.
	C.	Management is dominated by one individual who is also a shareholder.
	D.	Internal auditors have direct access to those charged with governance.

C.	Management is dominated by one individual who is also a shareholder.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

	A.	When the assessed level of control risk over the sale is low.
	B.	When the assessed level of detection risk over the sale is high.
	C.	When the combined assessed level of inherent and control risk over the sale is moderate.
	D.	When the combined assessed level of inherent and control risk over the sale is high.

D.	When the combined assessed level of inherent and control risk over the sale is high.

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider:

		The average dollar value of the check requests	The allowable risk of assessing control risk too low
	A.	Yes	Yes
	B.	Yes	No
	C.	No	Yes
	D.	No	No

C.

No

Yes

In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

	A.	Determine the effectiveness of general controls over classes of transactions characterized by high transaction volume.
	B.	Perform substantive procedures for all relevant assertions related to each significant class of transactions.
	C.	Discuss strategies to eliminate such risks with top management or those with equivalent authority and responsibility.
	D.	Consider whether risk assessment procedures are appropriate given preliminary levels of materiality and tolerable misstatement.

B.	Perform substantive procedures for all relevant assertions related to each significant class of transactions.

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:

	A.	Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.
	B.	Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.
	C.	When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk.
	D.	Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.

B.	Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

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

	A.	Tests of controls to determine the effectiveness of internal control.
	B.	Analytical procedures to verify the design of internal control.
	C.	Substantive tests to restrict detection risk for significant transaction classes.
	D.	Dual purpose tests to evaluate both the risk of material misstatement and preliminary control risk.

C.	Substantive tests to restrict detection risk for significant transaction classes.

The senior auditor most likely would have a supervisory responsibility to explain to the staff assistants:

	A.	That fraud is not to be reported to those charged with governance.
	B.	How the results of various auditing procedures performed by the assistants should be evaluated.
	C.	What benefits may be attained by the assistants' adherence to established time budgets.
	D.	Why certain documents are being transferred from the current file to the permanent file.

B.	How the results of various auditing procedures performed by the assistants should be evaluated.

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

	A.	Expected deviation rate.
	B.	Upper deviation rate.
	C.	Risk of incorrect acceptance.
	D.	Risk of incorrect rejection.

A.	Expected deviation rate.

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

	A.	Financial statements to the potentially unrecorded items.
	B.	Potentially unrecorded items to the financial statements.
	C.	Accounting records to the supporting evidence.
	D.	Supporting evidence to the accounting records.

C.	Accounting records to the supporting evidence.

Which of the following statements regarding control risk is true?

	A.	If control risk is assessed at a high level, an auditor is not required to document the basis for this assessment.
	B.	If control risk is assessed at a low level, an auditor is not required to document the basis for this assessment.
	C.	If control risk is assessed at a high level, substantive testing is likely to be more heavily emphasized in the audit process.
	D.	If control risk is assessed at a low level, substantive testing is likely to be more heavily emphasized in the audit process.

C.	If control risk is assessed at a high level, substantive testing is likely to be more heavily emphasized in the audit process.

Katie, senior accountant at Top CPA Firm, is auditing Laminate Floors for the year ended Year 6. Katie expects a high likelihood of uncorrected and undetected misstatements. Based on firm guidelines, Katie should use 1 percent of revenue as the benchmark to calculate overall materiality. Firm guidelines require performance materiality to be calculated by multiplying the overall materiality by either 80 percent (for low likelihood of uncorrected and undetected misstatements) or 60 percent (for high likelihood of uncorrected and undetected misstatements).

Selected financial information from Laminate Floors:

	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Revenue	$300,000	$400,000	$250,000	$375,000	$1,325,000

Based on the information above, determine the appropriate performance materiality that Katie should use.

	A.	$7,950
	B.	$10,600
	C.	$13,250
	D.	$21,200

A.

$7,950

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:

	A.	Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.
	B.	Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.
	C.	When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk.
	D.	Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.

B.	Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

	A.	Extent of tests of details.
	B.	Level of inherent risk.
	C.	Extent of tests of controls.
	D.	Level of detection risk.

A.	Extent of tests of details.

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?

	A.	Procedures performed to assess independence and the ability to perform the engagement.
	B.	The understanding of the terms of the engagement, including scope, fees, and resource allocation.
	C.	Other audit procedures to be performed to comply with generally accepted auditing standards.
	D.	Issues with management integrity that could affect the decision to continue the audit engagement.

C.	Other audit procedures to be performed to comply with generally accepted auditing standards.

The Internal Control—Integrated Framework contains objectives that cover each of the following, except:

	A.	Ensuring all applicable laws and regulations are followed.
	B.	The transparency of internal and external financial reporting.
	C.	The safeguarding of the entity’s assets against potential losses.
	D.	High-level goals established by leadership to develop the entity’s mission.

D.	High-level goals established by leadership to develop the entity’s mission.

Inherent risk and control risk differ from detection risk in which of the following ways?

	A.	Inherent risk and control risk are calculated by the client.
	B.	Inherent risk and control risk exist independently of the audit.
	C.	Inherent risk and control risk are controlled by the auditor.
	D.	Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

B.	Inherent risk and control risk exist independently of the audit.

An effective internal control system may be compromised by all of the following, except:

	A.	The application of fewer than 20 principles.
	B.	External events that cannot be controlled by the entity.
	C.	Management collusion and subsequent override of established controls.
	D.	Inevitable human errors that result in a major internal control deficiency.

A.	The application of fewer than 20 principles.

Testlet 1

55:51

End Test

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Overview

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36

AICPA Authored

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

	A.	Tolerable deviation rate.
	B.	Risk of incorrect acceptance.
	C.	Nature and cause of deviations.
	D.	Population size.

A.	Tolerable deviation rate.

In designing written audit programs, an auditor should establish specific audit objectives that are based on:

	A.	Financial statement assertions.
	B.	Specific audit procedures.
	C.	The timing of audit procedures.
	D.	The planning of the audit.

A.	Financial statement assertions.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed 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:

	A.	Decrease substantive testing.
	B.	Decrease detection risk.
	C.	Increase inherent risk.
	D.	Increase materiality level

B.	Decrease detection risk.

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

	A.	Consider the likelihood of assessing the risk of incorrect rejection too low.
	B.	Project sampling risk at the maximum for tests covering the remaining period.
	C.	Ascertain that accounts receivable are immaterial to the financial statements.
	D.	Assess the difficulty in controlling the incremental audit risk.

D.	Assess the difficulty in controlling the incremental audit risk.

Which of the following statements is most accurate regarding the existing control activities component of the Integrated Framework?

	A.	Policies are used to put procedures into action.
	B.	Preventive control activities require automated processes.
	C.	Segregation of duties is a critical preventive control activity.
	D.	A detective control activity is designed to identify risks before they occur.

C.	Segregation of duties is a critical preventive control activity.

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:

	A.	Reflects management's philosophy and operating style.
	B.	Affects management's financial statement assertions.
	C.	Provides adequate safeguards over access to assets.
	D.	Enhances management's decision-making processes.

B.	Affects management's financial statement assertions.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

		As a substantive test	In the final review stage
	A.	Yes	Yes
	B.	Yes	No
	C.	No	Yes
	D.	No	No

C.

No

Yes

An auditor's primary consideration in evaluating controls is whether specific controls:

	A.	Affect financial statement assertions.
	B.	Can be classified into one of the five internal control components.
	C.	Improve the efficiency of the client's operations.
	D.	Reduce detection risk to a sufficiently low level.

A.	Affect financial statement assertions.

What procedure would an auditor be least likely to do to gain an initial understanding of a client's business or industry?

	A.	Review AICPA accounting and auditing guides.
	B.	Tour client facilities.
	C.	Ask questions of client personnel.
	D.	Vouch accounting records for recurring transactions recorded just after the balance sheet date.

D.	Vouch accounting records for recurring transactions recorded just after the balance sheet date.

Financial statement assertions include:

	A.	Completeness; existence; occurrence; and risk assessment.
	B.	Valuation, allocation, and accuracy; completeness; and understandability of presentation and classification.
	C.	Information and communication; rights and obligations; existence; and occurrence.
	D.	Understandability of presentation and classification; independence, integrity, and objectivity; and rights and obligations.

B.	Valuation, allocation, and accuracy; completeness; and understandability of presentation and classification.

Which of the following statements is true regarding the risk assessment component of internal control?

	A.	An auditor evaluates an entity's risk assessment because it is a component of overall audit risk in a financial statement audit.
	B.	An auditor's evaluation of an entity's risk assessment may not be applicable to the audit of every entity.
	C.	An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.
	D.	An auditor need not consider an entity's risk assessment because he or she is primarily concerned with audit risk in a financial statement audit.

C.	An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

	A.	To enable the auditor to accurately identify significant deficiencies.
	B.	To assist the auditor to accurately interpret information obtained during an audit.
	C.	To allow the auditor to more accurately perform tests of controls.
	D.	To decide whether it will be necessary to perform analytical procedures.

B.	To assist the auditor to accurately interpret information obtained during an audit.

As part of the information and communication component of the Integrated Framework, a company must:

	A.	Deploy policies and procedures in a timely manner.
	B.	Identify and assess the effect of entity changes on internal controls.
	C.	Ensure that external auditors are aware of significant internal control issues.
	D.	Communicate internal control deficiencies to responsible parties who have the ability to correct them.

D.	Communicate internal control deficiencies to responsible parties who have the ability to correct them.

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

	A.	Turnover of senior accounting personnel is low.
	B.	Insiders recently purchased additional shares of the entity's stock.
	C.	Management places substantial emphasis on meeting earnings projections.
	D.	The rate of change in the entity's industry is slow.

C.	Management places substantial emphasis on meeting earnings projections.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:

	A.	Eliminates the use of certain statistical sampling methods that would otherwise be available.
	B.	Presumes that the auditor will reperform the tests as of the balance sheet date.
	C.	Should be especially considered when there are rapidly changing economic conditions.
	D.	Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

D.

Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

	A.	Determine the effectiveness of general controls over classes of transactions characterized by high transaction volume.
	B.	Perform substantive procedures for all relevant assertions related to each significant class of transactions.
	C.	Discuss strategies to eliminate such risks with top management or those with equivalent authority and responsibility.
	D.	Consider whether risk assessment procedures are appropriate given preliminary levels of materiality and tolerable misstatement.

B.	Perform substantive procedures for all relevant assertions related to each significant class of transactions.

Each of the following principles relates to the risk assessment component of the Internal Control—Integrated Framework, except:

	A.	Specification of objectives.
	B.	Change identification and assessment.
	C.	Consideration for the potential of fraud.
	D.	Accountability for internal control responsibilities.

D.	Accountability for internal control responsibilities.