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ACCT 460 Chapter 5
Auditing 460
50
Accounting
04/23/2010

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Term
1) Account Balances (Accounts)
2) Classes of transactions and events (Transactions)
3) Presentation and Disclosure (Disclosures)
Definition
Concerning Financial Statement Assertions, management must make explicit or implicit assertions about what three things?
Term
1) Inherent
2) Control
3) Detection
Definition
Audit Risk is the risk of material misstatement times the risk that the auditors will fails to detect the misstatement; It can also consist of ____ risk X ____ risk X ____ risk.
Term
Inherent Risk
Definition
Risk of a material misstatement occurring in an assertion assuming no related internal controls
Term
Control Risk
Definition
Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company's internal control
Term
Detection Risk
Definition
Risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exiist
Term
1) The client and its environment
2) The particular financial statement element
Definition
Inherent risk is influenced by two factors; what are these factors?
Term
1) Effectiveness of the design and operation of the client's internal controls related to financial statement preparation
Definition
Control risk is influenced by what factor?
Term
1) Effectiveness of the audit procedures selected
2) Auditors' application of the controls selected
Definition
Detection risk is influenced by what two factors?
Term
b) Auditors strive to appropriately assess inherent risk and control risk and minimize detection risk
Definition
Which of the following statements is correct?
a) Auditors strive to appropriately assess inherent risk and detection risk and minimize control risk
b) Auditors strive to appropriately assess inherent risk and control risk and minimize detection risk
c) Auditors strive to appropriately assess detection risk and minimize inherent risk and control risk
d) Auditors strive to appropriately assess detection risk and control risk and minimize inherent risk
Term
c) 4%
Definition
Auditors have assessed risk for a certain assertion as: Inherent risk (50%) and Control risk (40%); Auditors have performed audit procedures that they believe have a 20% risk of failing to detect a material misstatement. Given this situation, how much material misstatement has occurred and escaped both the client's controls and auditors' detection?
a) 2%
b) 8%
c) 4%
d) 20%
Term
f) From knowledgeable independent sources within the client company
Definition
Which of the following is not included in reliability of the auditor's evidence?
a) From knowledgeable independent sources outside the client company
b) Generated internally through a process with effective controls
c) Obtained directly by the auditor rather than indirectly or through inference
d) Documented rather than oral
e) Original documents rather than copies
f) From knowledgeable independent sources within the client company
Term
a) Client representations - management representation letter
Definition
Which of the following is an example of audit evidence with low reliability?
a) Client representations - management representation letter
b) Physical - Inventory observation
c) Documentary (External) - Cutoff Bank Statement
d) Documentary (Internal) - Sales invoice
Term
c) Accounts Receivable confirms, Lawyers' letters
Definition
Which of the following is an example of Third-party representations (audit evidence)?
a) Observe inventory
b) Management representation letter
c) Accounts Receivable confirms, Lawyers' letters
d) Ledgers and journals
e) None of the above
Term
a) Analytical procedures
Definition
Which of the following is an example of data interrelationships (audit evidence)?
a) Analytical procedures
b) Test math accuracy
c) Invoices
d) Ledgers and journals
Term
1) Audit planning
2) Final review
Definition
Analytical Procedures are required by auditing standards to be performed during 1) ____ ____ and 2) ____ ____
Term
c) Misstatement of sales and accounts receivable; misstatement of cost of goods sold and inventory
Definition
Which of the following is a possible misstatement when comparing the client's gross profit percentage to published industry averages?
a) Misclassification of research and development expenses
b) Understatement of liabilities; misstatement of interest expense
c) Misstatement of sales and accounts receivable; misstatement of cost of goods sold and inventory
d) Misstatement of sales; misstatement of inventory
Term
a) Misstatement of inventory; inventory obsolescence problem
Definition
Which of the following is a potential misstatement when comparing inventory levels for the current year to those of prior years?
a) Misstatement of inventory; inventory obsolescence problem
b) Misclassification of research and development expenses
c) Misstatement of sales or accounts receivable; misstatement of the allowance for uncollectible accounts
d) Understatement of liabilities; misstatement of interest expense
Term
d) All of the above
Definition
SAS 57 requires auditors to determine which of the following?
a) All necessary estimates have been developed
b) Estimates are reasonable
c) Estimates are properly accounted for and disclosed
d) All of the above
Term
1) Investments
2) Intangible Assets
3) Derivatives
Definition
Fair Market Values are used for: 1) ____, 2) ____, and 3) ____
Term
d) Effectiveness of internal control
Definition
Which of the following is not a financial statement assertion made by management?
a) Existence of recorded assets and liabilities
b) Completeness of recorded assets and liabilities
c) Valuation of assets and liabilities
d) Effectiveness of internal control
Term
d) A large amount of assets
Definition
Which of the following business characteristics is not indicative of high inherent risk?
a) Operating results that are highly sensitive to economic factors
b) Large likely misstatements detected in prior audits
c) Substantial turnover of management
d) A large amount of assets
Term
a) To increase the efficiency of the audit by eliminating the need for other audit procedures
Definition
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?
a) To increase the efficiency of the audit by eliminating the need for other audit procedures
b) To remind the client's management of its primary responsibility for the financial statements
c) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement
d) To provide evidence in those areas dependent upon management's future intentions
Term
b) The substance of related party transactions may differ from their form
Definition
Which of the following statements best describes why auditors investigate related party transactions?
a) Related party transactions generally are illegal acts
b) The substance of related party transactions may differ from their form
c) All related party transactions must be eliminated as a step in preparing consolidated financial statements
d) Related party transactions are a form of management fraud
Term
c) Copies of sales invoices inspected by the auditors
Definition
Of the following, which is the least reliable type of audit evidence?
a) Confirmations mailed by outsiders to the auditors
b) Correspondence between the auditors and suppliers
c) Copies of sales invoices inspected by the auditors
d) Canceled checks returned in the year-end bank statement directly to the client
Term
b) Unusual transactions
Definition
Analytical procedures are most likely to detect:
a) Weaknesses of a material nature in internal control
b) Unusual transactions
c) Noncompliance with prescribed control activities
d) Improper separation of accounting and other financial duties
Term
c) Confirm the amounts
Definition
Which of the following is not a primary approach to auditing an accounting estimate?
a) Review and test management's process for developing the estimate
b) Review subsequent transactions
c) Confirm the amounts
d) Develop an independent estimate
Term
d) Support the auditors' opinion
Definition
A primary purpose of the audit working papers is to:
a) Aid the auditors by providing a list of required procedures
b) Provide a point of reference for future audit engagements
c) Support the underlying concepts included in the preparation of the basic financial statements
d) Support the auditors' opinion
Term
b) Permanent working paper file
Definition
In what section of the audit working papers would a long-term lease agreement by filed?
a) Current working paper file
b) Permanent working paper file
c) Lead schedule file
d) Corroborating documents file
Term
a) Assist management in illustrating that the financial statements are in accordance with GAAP
Definition
Which of the following is not a function of audit working papers?
a) Assist management in illustrating that the financial statements are in accordance with GAAP
b) Assist audit team members responsible for supervision in reviewing the work
c) Assist auditors in planning future engagements
d) Assist peer reviewers and inspectors in performing their roles
Term
b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements
Definition
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the:
a) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist
b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements
c) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements
d) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist
Term
d) Document the assistant auditor's position and how the difference of opinion was resolved
Definition
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably:
a) Remain silent on the matter since it is an internal matter of the auditing firm
b) Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion
c) Document the additional work required, since all disagreements of this type will require expanded substantive procedures
d) Document the assistant auditor's position and how the difference of opinion was resolved
Term
C) Sufficiency Risk
Definition
Which of the following is not a component of audit risk?
A) Control Risk.
B) Detection Risk.
C) Sufficiency Risk.
D) Inherent Risk.
Term
B) Detection Risk
Definition
Which type of risk does an auditor have control over through substantive auditing procedures?
A) Control Risk.
B) Detection Risk.
C) Sufficiency Risk.
D) Inherent Risk.
Term
A) Control Risk
Definition
Which type of risk does the management of a company have the most control over in the short term?
A) Control Risk.
B) Detection Risk.
C) Sufficiency Risk.
D) Inherent Risk.
Term
D) The possibility that a material misstatement will occur in any given account before considering internal control.
Definition
Which of the following descriptions best describes inherent risk?
A) Auditors fail to discover a material misstatement in the course of their audit and do not modify their audit opinion.
B) A company's internal control fails to identify a material misstatement in a timely fashion.
C) Auditing procedures fail to find a material misstatement.
D) The possibility that a material misstatement will occur in any given account before considering internal control.
Term
Risk assessment procedures
Definition
____ _____ procedures are designed to obtain an understanding of the client and its environment, including its internal control, to assess the risks of material misstatement
Term
Tests of controls
Definition
____ ____ ____ are designed to test the operating effectiveness of controls in preventing or detecting material misstatements
Term
Substantive procedures
Definition
____ _____ are designed to detect material misstatements of relevant assertions
Term
Further Audit
Definition
Analytical procedures and tests of details are part of the auditors' ____ ____ procedures
Term
d) tests of controls
Definition
Further audit procedures include all but the following:
a) tests of account balances
b) tests of classes of transactions
c) tests of disclosures
d) tests of controls
Term
C) Tests of controls
Definition
Further audit procedures include
A) Risk assessment procedures.
B) Audit planning
C) Tests of controls.
D) Diagrams of transaction cycles
Term
C) Substantive procedures
Definition
Which of the following is a basic procedure used in an audit?
A) Tests of cycles.
B) Risk analytic testing.
C) Substantive procedures.
D) Test of evidential directionality.
Term
D) Obtaining a representation letter signed by top management.
Definition
Auditors must gather "sufficient appropriate audit evidence" to support their audit opinion. Which of the following is least likely to serve as a substitute for performing other audit procedures?
A) The physical observation of the counting of company inventory.
B) Sending letters to debtors or creditors of the company to confirm amounts the company owes or is owed, respectively.
C) Tracing an amount on the financial statements back through the accounting system to the underlying supporting documentation.
D) Obtaining a representation letter signed by top management.
Term
A) Estimation transactions
Definition
The type of transactions that ordinarily have a high inherent risk because they involve management judgments or assumptions are referred to as:
A) Estimation transactions
B) Nonroutine transactions.
C) Routine transactions.
D) Substantive transactions.
Term
D) Replies by company employees to auditor oral inquiries.
Definition
Which of the following ordinarily is considered the weakest form of evidence?
A) Actual physical evidence.
B) Documentary evidence obtained from outside the company.
C) Documentary evidence obtained from inside the company.
D) Replies by company employees to auditor oral inquiries.
Term
D) Vertical analysis.
Definition
Which method of analytical procedure analysis is most useful because many expenses, such as cost of goods sold, might be expected to bear a predictable relationship to net sales?
A) Horizontal analysis.
B) Reasonableness analysis.
C) Trend analysis.
D) Vertical analysis.
Term
C) Comparison of inventory levels over the past 3 years
Definition
One type of analytical procedure is trend analysis. Which of the following is the best example of trend analysis?
A) Comparison of company financial ratios to that of its competitors.
B) Comparison of accounting records to budgeted amounts.
C) Comparison of inventory levels over the past 3 years.
D) Comparison of interest expenses to outstanding loan balances.
Term
B) Confirm estimates directly with outsiders
Definition
Which of the following is not one of the primary approaches auditors use when evaluating the reasonableness of accounting estimates?
A) Review and test management's process of developing estimates.
B) Confirm estimates directly with outsiders.
C) Independently develop an estimate of the amount to compare to management's estimate.
D) Review subsequent events or transactions bearing on the estimate.
Term
C) An experienced auditor
Definition
Audit documentation relating to the A Company audit should be sufficient to allow which type of auditor to understand the audit work performed?
A) Any auditor.
B) Any auditor that works on A Company's audit.
C) An experienced auditor.
D) An experienced auditor with experience on A Company's audit.
Term
C) Documentation completion date
Definition
Documentation may not be deleted from the working papers after the
A) Audit report delivery date
B) Date of the audit report.
C) Documentation completion date.
D) Final day of fieldwork.