AUD exam 2 quiz questions

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter each of the three independent variables and planned evidence: The client’s management materially decreased long-term contractual debt

Control Risk: N

Inherent risk: N

Acceptable Audit Risk: I

Planned Evidence: D

The company changed from a privately held company to a publicly held company:

Control Risk: N

Inherent Risk: N

Acceptance Audit Risk: D

Planned evidence: I

The auditor decided to set assessed control risk at maximum (it was previously below the maximum)

Control Risk: I

Inherent Risk: N

Acceptable Audit Risk: N

Planned evidence: I

The client acquired a new subsidary located in Italy (assuming control risk holding)

Control Risk: N

Inherent RIsk: I

Acceptable Audit Risk: N

Planned evidence: I

The client began selling products online to customers through its Web page during the year under audit. The online customer ordering process is not integrated with the company’s accounting system. Client sales staff print out customer order info and enter that data into the sales acct system.

Control Risk: I

Inherent Risk: I

Acceptable Audit Risk: N

Planned evidence: I

The risk of material misstatement is the product of inherent risk and control risk

true

Audit risk is

The risk of issuing an incorrect audit opinion

Which of the following is detection risk factor

choosing a sample that is not representative of its population

which of the following will increase detection risk

the auditor decides to increase the overall level of acceptable audit risk

Which of the following in an indicator of an opportunity to engage in fraudulent financial reporting

A number of the company’s account balances are based on significant estimates that involves subjective judgement

Which of the following is an indicator of attitudes / rational

a member of management has been accused of illegal acts at another entity that they control.

assume that the planned level of acceptable audit risk in each of the following circumstances is 0.05. Under which of the following circumstances would an auditor need to gather the least audit evidence

Inherent risk= .5 Control Risk= .4

a written understanding between the auditor and the entity set forth in an

engagement letter

Which of the following procedures is performed BEFORE accepting a prospective client

making inquires of third parties regarding management integrity

Tolerable misstatement is also called performance materiality by AICPA

True

An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materiallly misstated.

document the errors and the conclusion that the finanical statments are free from material misstatement

tolerable misstatement is

materiality used to establish a scope for the audit procedures for the indiviudal account balance

an auditor has determined a $10 million materially level for a client’s balance sheet and a $3 million materiality level for the client’s income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of

$3 million or more

which of following would an auditor most likely use in determining the auditor’s overall materiality

the entity’s annualized interim (i.e. quarterly) financial statements

which of the following is not a qualitative factor that may affect an auditor’s establishment of materiality

firm policy sets materiality at 4% of pretax income

which of the following is not a concern as go whether a misstatement is qualitively material

the misstatement is less then 5% of pretax income

which of the following relatively small misstatements most likely would have a material effect on an entity’s financal statements

an illegal payment to a foriegn official that was not recorded

which of following is the most important qualitive factor that auditors should consider when making materiality judgement?

the misstatement will cause the client to fail to meet an earnings forecast.

the concept of materiality as it applies to a financial statement audit

is determined, in part based on how financial statement users may be influenced in making decisions

according to text, the first step in applying materiality to an audit

to determine a materiality level for the overall financial statement

Hawkins requested permission to communicate with the predecessor auditor & review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the:

integrity of management

In assessing whether to accept a client for an audit engagement, a CPA should consider:

the current fin health of the prospective client, the integrity of management, the CPA’s overall engagement risk.

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a neccessary procedure because the predecessor may be able to provide the successor with info that will assist the successor in determining:

whether the engagement should be accepted

which of the following would most likely cause the auditor to decline to accept an audit engagement?

the auditor discovers evidence that the prospective client’s management may have been engaged in illegal acts at other companies that it controls

a written understanding between the auditor and the entity concerning the auditor’s responsibility for fruad is usually set forth in an

engagement letter

Which of the following procedures is performed BEFORE accepting a prospective client

making inquires of third parties regarding management integrity

evaluating a prospective client requires the following steps:

determine if the firm is independent of the client

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

competence and objectivity

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

members of the board of directors who are not officiers or employees

managements attitude towards aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when

which of the following is not addressed during the process of obtaining an understanding of internal controls

what objectives of controls are of primary interest to an auditor performing a financial statement audit?

which of the following is a valid reason to not test internal controls in a given area?

which of the follwing is the primary reason an external financial auditor evaluates internal controls?

which of the following statements regarding the monitoring component of the COSO internal control framework is NOT correct?

An auditor performs the following test of controls: select a sample of invoices. obtain copies of invoices, corresponding sales orders, and packing slips. Compare all 3 documents and make sure that sales quantities and selling prices match. What assertion does this test of controls most closely relate to?

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

which of the following is NOT part of the control environment

which of the following statements about internal control is correct?

monitoring is a major component of the COSO internal Control- integrated framework. Which of the following is not correct in how the company an implement the monitoring component

which of the following is a design deficiency in internal control?

a Client’s customer management system sends an automated email each time a customer master record is modified. The customer has to confirm the change by responding to the email. A member of the billing management team must review the response to confirm that the change was authorized by the customer. Why is this control important?

Which of the following best explains why an auditor on a non-public company would test the operating effectiveness of a control procedure?

Which of the following procedures isn’t used by auditors to obtain an understanding of internal controls?

which of the following is not addressed during the process of obtaining an understanding of internal controls?

the auditor identified a material misstatement in the financial statement that wasn’t detected by management of the company?

The auditor was unable to obtain any evidence about the operting effectiveness of interal control over financial reporting

The auditor identified several significant deficiences in interal control. Bc of these significant defciencies, the auditor believes that there is a reasonable possibility that internal control will not prevent or detect material misstatemnt on a timely basis

The auditor determined that a deficiency in internal control exists that will not prevent or detect a material misstatement in the fin statements?

during interim testing, the auditor identified and communicated to managment a sig. control def. Managment immmediately corrected the def and the auditor was able to sufficently test the newly instirired interal control beore the end of the fiscal period

As a result of performing tests of controls, the auditor identified a sig def in internal control over fin reporting. However, the auditor doesn’t believe that it represents a material weakness in internal control.