Question 1

An auditor assesses the risk of material misstatement because it:

Accepted Answer

A) is relevant to the auditor's understanding of the control environment. 
B) provides assurance that the auditor's overall materiality levels are appropriate. 
C) indicates to the auditor where inherent risk may be the greatest. 
D) affects the level of detection risk that the auditor may accept. 
A) is relevant to the auditor's understanding of the control environment. 
B) provides assurance that the auditor's overall materiality levels are appropriate. 
C) indicates to the auditor where inherent risk may be the greatest. 
D) affects the level of detection risk that the auditor may accept. D

Question 2

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

Accepted Answer

A) audit risk. 
B) inherent risk. 
C) control risk. 
D) detection risk. 
A) audit risk. 
B) inherent risk. 
C) control risk. 
D) detection risk. A

Question 3

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should:

Accepted Answer

A) consider the matter a scope limitation. 
B) perform additional audit procedures to investigate the matter further. 
C) intensify the audit with the expectation of detecting management fraud. 
D) withdraw from the engagement. 
A) consider the matter a scope limitation. 
B) perform additional audit procedures to investigate the matter further. 
C) intensify the audit with the expectation of detecting management fraud. 
D) withdraw from the engagement. B

Question 4

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU-C 240) is on:

Accepted Answer

A) employee misappropriation of assets. 
B) management fraud. 
C) client fraud on customers. 
D) employee embezzlement. 
A) employee misappropriation of assets. 
B) management fraud. 
C) client fraud on customers. 
D) employee embezzlement.

Question 5

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?

Accepted Answer

A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited. 
B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable. 
C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited. 
D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable. 
A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited. 
B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable. 
C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited. 
D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable.

Question 6

Auditors use brainstorming:

Accepted Answer

A) to heighten the audit team's awareness of fraud potential. 
B) to heighten management's awareness of fraud potential. 
C) to determine detection risk. 
D) to set materiality. 
A) to heighten the audit team's awareness of fraud potential. 
B) to heighten management's awareness of fraud potential. 
C) to determine detection risk. 
D) to set materiality.

Question 7

Horizontal analysis refers to:

Accepted Answer

A) the trend of income from year to year of persons suspected of fraud. 
B) changes of financial statement numbers and ratios across several years. 
C) financial statement amounts expressed each year as a proportion of a base amount. 
D) the change in a suspect's net worth from the beginning to the end of a period. 
A) the trend of income from year to year of persons suspected of fraud. 
B) changes of financial statement numbers and ratios across several years. 
C) financial statement amounts expressed each year as a proportion of a base amount. 
D) the change in a suspect's net worth from the beginning to the end of a period.

Question 8

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Accepted Answer

A) Move detailed analytical procedures from year end to interim. 
B) Increase the dollar threshold of vouching customer invoices. 
C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. 
D) Use more experienced audit team members to perform year-end testing. 
A) Move detailed analytical procedures from year end to interim. 
B) Increase the dollar threshold of vouching customer invoices. 
C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. 
D) Use more experienced audit team members to perform year-end testing.

Question 9

External auditors are responsible:

Accepted Answer

A) for authenticating documents. 
B) for reporting immaterial frauds to a level of management at least one level above the people involved. 
C) for finding all intentional misstatements concealed by collusion. 
D) for reporting all frauds to outside agencies or parties. 
A) for authenticating documents. 
B) for reporting immaterial frauds to a level of management at least one level above the people involved. 
C) for finding all intentional misstatements concealed by collusion. 
D) for reporting all frauds to outside agencies or parties.

Question 10

Analytical procedures are one type of evidence gathering procedure. According to auditing standards, there are five general forms of analytical procedures. Auditing standards also provide examples of five sources of information for analytical procedures.Required:Describe three of the five general forms of analytical procedures. For each form, describe a typical source of the information for the form. For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

Accepted Answer

The five general forms of analytical pro

Question 11

This question tests your ability to perceive the place(s) where various potential problems may exist and the type of problem (overstatement or understatement) that may exist. It asks that you supply the words or descriptions that complete the analysis begun by applying analytical procedures.Required:For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason (i.e., potential overstatement or understatement of _______).If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same.If the current year inventory is larger than last year and the current year gross margin (profit) is larger.If current year long-term liabilities are larger than last year and the interest expense is the same.If current year fixed assets are larger and current depreciation expense is the same as last year.

Accepted Answer

The collectability of accounts receivabl

Question 12

The acceptable level of detection risk is inversely related to the:

Accepted Answer

A) assurance provided by substantive tests. 
B) risk of misapplying audit procedures. 
C) preliminary judgment about materiality levels. 
D) risk of failing to discover material misstatements. 
A) assurance provided by substantive tests. 
B) risk of misapplying audit procedures. 
C) preliminary judgment about materiality levels. 
D) risk of failing to discover material misstatements.

Question 13

Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior year's ratios or amounts. For each observed change, select the most likely explanation or explanations from the list of explanations provided. Answers on the list may be selected once, more than once, or not at all.Auditor's observed changes (considered independent of each other).Inventory turnover increased substantially from the prior year. (Select 3 explanations)Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations)Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. (Select 3 explanations)Long term debt increased from the prior year, but interest expense increased a larger than proportionate amount than long term debt. (Select 1 explanation)Operating income increased from the prior year although the entity was less profitable than in the prior year. (Select 2 explanations)Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. (Select 1 explanation)

Accepted Answer

Items shipped on consignment during the

Question 14

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:

Accepted Answer

A) liquidity of the account. 
B) degree of management estimation involved in determining the proper account balance. 
C) related internal control policies and procedures. 
D) complexity of calculations involved. 
A) liquidity of the account. 
B) degree of management estimation involved in determining the proper account balance. 
C) related internal control policies and procedures. 
D) complexity of calculations involved.

Question 15

Management fraud generally refers to:

Accepted Answer

A) unintentional mistakes. 
B) noncompliance. 
C) intentional distortions of financial statements. 
D) violations of GAAS. 
A) unintentional mistakes. 
B) noncompliance. 
C) intentional distortions of financial statements. 
D) violations of GAAS.

Question 16

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

Accepted Answer

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. 
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.

Question 17

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as:

Accepted Answer

A) horizontal analysis. 
B) vertical analysis. 
C) net worth analysis. 
D) expenditure analysis. 
A) horizontal analysis. 
B) vertical analysis. 
C) net worth analysis. 
D) expenditure analysis.

Question 18

Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit?

Accepted Answer

A) Exercise professional skepticism when performing sales testing. 
B) Increase the assessment of control risk for sales. 
C) Increase the assessment of detection risk for sales. 
D) Perform additional substantive sales procedures on a surprise basis. 
A) Exercise professional skepticism when performing sales testing. 
B) Increase the assessment of control risk for sales. 
C) Increase the assessment of detection risk for sales. 
D) Perform additional substantive sales procedures on a surprise basis.

Question 19

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

Accepted Answer

A) the noncompliance is a violation of generally accepted accounting principles. 
B) the client does not take the remedial action that the auditor considers necessary. 
C) the illegal act was committed during a prior year that was not audited. 
D) the auditor has already assessed control risk at the maximum level. 
A) the noncompliance is a violation of generally accepted accounting principles. 
B) the client does not take the remedial action that the auditor considers necessary. 
C) the illegal act was committed during a prior year that was not audited. 
D) the auditor has already assessed control risk at the maximum level.

Question 20

An audit team uses the assessed risk of material misstatement to:

Accepted Answer

A) evaluate the effectiveness of the entity's internal control policies and activities. 
B) identify transactions and account balances where inherent risk is at the maximum. 
C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. 
D) determine the acceptable level of detection risk for financial statement assertions. 
A) evaluate the effectiveness of the entity's internal control policies and activities. 
B) identify transactions and account balances where inherent risk is at the maximum. 
C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. 
D) determine the acceptable level of detection risk for financial statement assertions.

An auditor assesses the risk of material misstatement because it:

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should:

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU-C 240) is on:

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?

Auditors use brainstorming:

Horizontal analysis refers to:

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

External auditors are responsible:

The acceptable level of detection risk is inversely related to the:

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:

Management fraud generally refers to:

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

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as:

Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit?

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

An audit team uses the assessed risk of material misstatement to:

Auditing and Assurance Services

Professional Standards

Engagement Planning

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash 227

Revenue and Collection Cycle 279

Acquisition and Expenditure Cycle 336

Production Cycle 394

Finance and Investment Cycle 443

Completing the Audit 500

Reports on Audited Financial Statements

Filters

Exam 4: Management Fraud and Audit Risk

An auditor assesses the risk of material misstatement because it:

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should:

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU-C 240) is on:

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?

Auditors use brainstorming:

Horizontal analysis refers to:

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

External auditors are responsible:

The acceptable level of detection risk is inversely related to the:

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:

Management fraud generally refers to:

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

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as:

Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit?

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

An audit team uses the assessed risk of material misstatement to:

Auditing and Assurance Services

Professional Standards

Engagement Planning

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash 227

Revenue and Collection Cycle 279

Acquisition and Expenditure Cycle 336

Production Cycle 394

Finance and Investment Cycle 443

Completing the Audit 500

Reports on Audited Financial Statements

Filters