Section E Question Sets (copy)

The more complex the client’s operations and its internal controls, the more experienced the auditor who performs the work needs to be.

True

A material weakness is a deficiency where there is more than a remote possibility that a misstatement that is less than material, but still significant enough that it should be reported to those charged with governance.

False

Which of the following procedures would an auditor most likely use to identify unusual year-end transactions?

Performing analytical procedures.

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

Management places substantial emphasis on meeting earnings projections.

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

Transactions selected for testing are not supported by proper documentation.

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect?

Two employees, who work in different departments, are circumventing an internal control.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

During the Year 2 audit of ABC Corporation, the auditor discovered that there was a material illegal payment made by management to a foreign official. The auditor is least likely to disclose this information when:

Confirming with the bank clerk the balance of ABC Corporation's bank accounts.

If specific information comes to an auditor's attention that implies the existence of possible acts of noncompliance with laws and regulations that could have a material, but indirect effect on the financial statements, the auditor should next:

Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

Management had frequent disputes with the auditor on accounting matters

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

Year-end adjustments by the entity that significantly affect financial results.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

The entity's industry is experiencing declining customer demand.

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 mind-set that the audit team should maintain during this discussion?

Questioning.

Risks relevant to financial reporting can arise due to which of the following circumstances?

Rapid growth in the entity's operations.

If an auditor's risk assessment is based on the effective operation of controls, the auditor will likely:

Identify specific internal controls that are likely to detect or prevent material misstatements.

An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment?

Perform tests of details of transactions to detect material misstatements in the financial statements.

Which of the following is a category of fraud?

yes to both

Fraudulent financial reporting yes
Misappropriation of assets yes

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in the auditing standards?

Misappropriation of an asset or groups of assets.

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.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

The prospective client is unwilling to make all financial records available to the CPA.

In planning an audit engagement, which of the following is a factor that affects the independent auditor's judgment as to the quantity, type, and content of working papers?

The anticipated nature of the auditor's report

Which of the following matters does an auditor usually communicate to management?

Arrangements involving a predecessor auditor.

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Make a preliminary judgment about materiality.

Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff?

The fee to be paid by the client.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

none of the above

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

Selecting a sample of vendors' invoices for comparison to receiving reports.

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

Extent of tests of details

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

Detection

As the acceptable level of detection risk decreases, the assurance directly provided from:

Substantive tests should increase

Inherent risk and control risk differ from detection risk in that the

Exist independently of the financial statement audit.

Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year-end?

Detection.

Which of the following is true?

If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk

what identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures

the acceptable level of detection risk decreases, and the extent of substantive procedures increases

in an engagement to examine management’s discussion and analysis, which of the following best defines control risk

the risk of material misstatements in the MD&A presentation will not be prevented in a timely manner

what describes why a properly designed and executed audit may not detect a material misstatement due to fraud

audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collisiion

what is the definition of fraud in an audit of financial statements

an intentional act that results in a material misstatement in financial statements that are the subject of an audit

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 misstatements

an auditor uses the assessed level of control risk to

determine the acceptable level of detection risk for financial statement assertions

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

substantive test to restrict detection risk for significant transaction classes

what risks may be assessed in nonquantitative terms

control risk

detection risk

inherent risk

what should the auditor do when control risk is assessed at the maximum level

document the assessment

a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client’s internal control is called

inherent risk

detection risk differs from both control risk and inherent risk in that detection risk

can be changed at the auditor’s discretion

what is not correct regarding an auditor’s decision that a lower acceptable audit risk is appropriate

less evidence is accumulated

as the acceptable level of detection risk increases, an auditor may change the

timing of substantive test from year-end to an interim date

as the acceptable level of detection risk decrease, the assurance directly provided from

substantive test should increase

what should the auditor do if the assessed level of fraud risk is high

attempt to reduce detection risk

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

extent of test of details

what type of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date

detection risk

when the inherent risk is high, there will need to be

more evidence accumulated by the auditor

what risk components may be assessed in nonquantitative terms

control risk

detection risk

inherent risk

what type of risk most likely would increase if AR are confirmed three months before year-end

detection risk

as a result of control testing, a CPA has decided to reduce control risk. what is the impact on substantive testing sample size if all other factors remain constant

the sample size would be lower

the acceptable level of detection risk is inversely related to the

assurance provided by substantive tests

a measure of how willing the auditor is to accept that the financial statements may be materiality misstated after the audit is completed and an unqualified opinion has been issued is the

acceptable audit risk

what is an example of an inherent risk that an auditor should consider

technological developments that my render inventory obsolete

inherent risk and control risk differ from detection risk in that they

exist independently of the financial statement audit

which of the following procedures would a CPA most likely include in planning a financial statement audit

determine the extent of involvement of the client’s internal auditors

an auditor should design the written audit plan so that

the audit procedures selected will achieve specific audit objectives

prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. what matters do the auditor and management agree upon at this time

the coordination of the assistance of the client’s personnel in data preperation

what procedures would an auditor most likely include in the planning phase of a financial statement audit

obtain an understanding of the entity’s risk assessment process

what factor would generally not be taking into account when determining the extent of supervision needed for the staff

the fee paid by the client

what would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement

matters that may facilitate the evaluation of financial reporting consistency between the current and prior years

what factor most likely would influence an auditor’s determination of the audibility of an entity’s financial statements

the adequacy of the accounting record

early appointment of the independent auditor will enable

a more efficient audit to be planned

the in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

how the results of various auditing procedures performed by the assistants should be evaluated

in planning an audit engagement, what factor affects the independence auditor’s judgement as to the quantity, type, and content of working papers

the anticipated nature of the auditor’s report

during the initial planning phase of an audit, the auditor most likely would

discuss the timing of the audit procedures with the client’s management

what factors would a CPA ordinarily consider in the planning stage of an audit engagement

financial statement accounts likely to contain a misstatement

conditions that require extension of audit test

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

timing of inventory observation procedures to be performed

what factor most likely would cause a CPA to not accept a new audit engagement

the prospective client is unwilling to make all financial records available to the CPA

prior to commencing field work, an auditor usually discusses the general audit strategy with the client’s management. what details do management and the auditor usually agree upon at this time

the schedules and analyses that the client’s staff should prepare

what procedures would a CPA most likely perform in planning a financial statement audit

compare financial information with nonfinancial operating data

what is true about the timing of predecessor/successor communications

they can occur both before and after the auditor accepts the engagement

what procedure would an auditor least likely perform in planning a financial statement audit

selecting a sample of vendors’ invoices for comparison in receiving reports

which of the following would a successor auditor ask the predecessor audit to provide after accepting an audit engagement

matters that may facilitate the evaluation of financial reporting consistency between the current and prior years

the senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to

give guidance to the staff regarding both technical and personnel aspects of the audit

what matters does an audit usually communicate to management

arrangements involving a predecessor auditor

what procedure would an auditor most likely perform in the planning stage of an audit

make a preliminary judgement about materiality

analytical procedures used in planning an audit should focus on

enhancing the auditor’s understanding of the client’s business

proper supervision of assistants is required for all the following reasons

ensure the work performed by assistants is consistent with the conclusions presented in the report and adequate to accomplish the objectives of the engagement

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stay informed regarding significant accounting and auditing questions, new developments, and material problems

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what is not a role of the risk assessment in an integrated audit of a nonissuer

concluding on the effectiveness of a given control

if an auditor’s risk assessment is based on the effectiveness operation of controls, the auditor will likely

identify specific internal controls that are likely to detect or prevent material misstatements

fraud risk factors are events or conditions that indicate

an incentive or pressure to perpetrate fraud

an oppotunity to carry out the fraud

an attitude or rationalization that justifies the fraudulent action

what, if material, is a fraud as defined in the AS

misappropriation of an asset or groups of assets

what factor most likely would heighten an auditor’s concern about the risk of material misstatement arising from the misappropriation of assets

the entity’s fixes assets lack ownership identification

what characteristic most likely would heighten an auditor’s concern about the RoMM in an entity’s F/S

entity’s industry is experiencing declining customer demand

what is least indicative of fraudulent activity

bank reconciliation has no outstanding checks or deposits older than 15 days

what mind-set should the audit team maintain during information-gathering procedures for an audit

questioning

risk relevant to financial reporting can arise due to which of the following circumstances

rapid growth in the entity’s operations

what factor 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

what event most likely woudl indicate the existence of related parties

selling real estate at a price significantly different from appraised value

what is most correct regarding error and fraud

an error is unintentional, where as fraud is intentional

the objective of performing analytical procedures in planning an audit is to identify the existence of

unusual transactions and events

what are two categories of fraud

fraudulent financial reporting

misappropriation of assets

what is not a step in making an auditor’s risk assessment that is based on the assumption that control are operating effectively

perform tests of details of transactions to detect material misstatements in the financial statements

an auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. what type of audit procedure was performed

analytical procedures

what is true regarding the risk assessment component of internal control

an auditor evaluates an entity’s risk assessment to understand how management addresses risk relevant to financial reporting

what factor most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting

year-end adjustments by the entity that significantly affect financial results

what is most indicative of fraudulent activity

three people were absent the day the auditor's handed out the paychecks and have not picked them up four weeks later