Question 1

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to:

Accepted Answer

A) evaluate the effect on the financial statements. 
B) determine the reliability of management's representations. 
C) consider whether other similar acts may have occurred. 
D) recommend remedial actions to the audit committee. 
A) evaluate the effect on the financial statements. 
B) determine the reliability of management's representations. 
C) consider whether other similar acts may have occurred. 
D) recommend remedial actions to the audit committee.

Question 2

Auditors would use the enterprise risk model:

Accepted Answer

A) to reduce the client's business risk. 
B) to determine detection risk. 
C) to evaluate management's risk assessment. 
D) to monitor client risk. 
A) to reduce the client's business risk. 
B) to determine detection risk. 
C) to evaluate management's risk assessment. 
D) to monitor client risk.

Question 3

Which of the following statements concerning noncompliance by clients is correct?

Accepted Answer

A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. 
B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. 
C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. 
D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements. 
A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. 
B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. 
C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. 
D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

Question 4

Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.Required:(a) Describe Post's responsibilities on the circumstances described above.(b) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for frauds.(c) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by frauds.

Accepted Answer

(a) If Post discovers that General's fin

Question 5

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

Accepted Answer

A) the probability that related party transactions will recur. 
B) confirming the existence of the related parties. 
C) verifying the valuation of the related party transactions. 
D) the adequacy of the disclosure of the related party transactions. 
A) the probability that related party transactions will recur. 
B) confirming the existence of the related parties. 
C) verifying the valuation of the related party transactions. 
D) the adequacy of the disclosure of the related party transactions.

Question 6

If an auditor encounters significant risks at the client, the auditor should do all of the following except:

Accepted Answer

A) inform the SEC. 
B) perform extended procedures. 
C) include more experienced auditors on the engagement. 
D) perform tests closer to year end. 
A) inform the SEC. 
B) perform extended procedures. 
C) include more experienced auditors on the engagement. 
D) perform tests closer to year end.

Question 7

Which of the following would not likely be found in the minutes of the board of directors?

Accepted Answer

A) Amount of dividends declared. 
B) Approval to pledge assets as security for debts. 
C) Authorization of officers' salaries. 
D) Approval of a new desktop computer for the controller. 
A) Amount of dividends declared. 
B) Approval to pledge assets as security for debts. 
C) Authorization of officers' salaries. 
D) Approval of a new desktop computer for the controller.

Question 8

In the planning stage, analytical procedures are used to:

Accepted Answer

A) identify potential problem areas. 
B) provide direct evidence about the balances in accounts. 
C) determine the mathematical correctness of the financial statements. 
D) perform all of these. 
A) identify potential problem areas. 
B) provide direct evidence about the balances in accounts. 
C) determine the mathematical correctness of the financial statements. 
D) perform all of these.

Question 9

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

Accepted Answer

A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. 
B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. 
C) considering the qualitative materiality of known and suspected noncompliance. 
D) obtaining written management representations concerning the absence of violations of laws and regulations. 
A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. 
B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. 
C) considering the qualitative materiality of known and suspected noncompliance. 
D) obtaining written management representations concerning the absence of violations of laws and regulations.

Question 10

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is:

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.

Question 11

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:

Accepted Answer

A) nature of substantive tests to more effective procedures. 
B) timing of substantive tests, such as performing them at year-end rather than at an interim date. 
C) extent of substantive tests, such as using larger sample sizes. 
D) assurances provided by substantive tests to a lower level. 
A) nature of substantive tests to more effective procedures. 
B) timing of substantive tests, such as performing them at year-end rather than at an interim date. 
C) extent of substantive tests, such as using larger sample sizes. 
D) assurances provided by substantive tests to a lower level.

Question 12

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Accepted Answer

An auditor cannot place comple

Question 13

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?

Accepted Answer

A) Unfavorable industry conditions. 
B) Lack of working capital. 
C) High liquidity. 
D) Slow customer collections. 
A) Unfavorable industry conditions. 
B) Lack of working capital. 
C) High liquidity. 
D) Slow customer collections.

Question 14

Analytical procedures used in planning an audit should focus on:

Accepted Answer

A) reducing the scope of tests of controls and substantive tests. 
B) providing assurance that potential material misstatements will be identified. 
C) enhancing the auditor's understanding of the client's business. 
D) assessing the adequacy of the available evidential matter. 
A) reducing the scope of tests of controls and substantive tests. 
B) providing assurance that potential material misstatements will be identified. 
C) enhancing the auditor's understanding of the client's business. 
D) assessing the adequacy of the available evidential matter.

Question 15

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Accepted Answer

A) Payroll. 
B) Revenue. 
C) Purchasing. 
D) Inventory. 
A) Payroll. 
B) Revenue. 
C) Purchasing. 
D) Inventory.

Question 16

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

Accepted Answer

A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None. 
B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable. 
C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None. 
D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable. 
A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None. 
B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable. 
C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None. 
D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable.

Question 17

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

Accepted Answer

A) The exchange of property for similar property in a nonmonetary transaction. 
B) The discovery of unexplained payments made to government employees. 
C) The presence of several difficult-to-audit transactions affecting expense accounts. 
D) The failure to develop adequate procedures that detect unauthorized purchases. 
A) The exchange of property for similar property in a nonmonetary transaction. 
B) The discovery of unexplained payments made to government employees. 
C) The presence of several difficult-to-audit transactions affecting expense accounts. 
D) The failure to develop adequate procedures that detect unauthorized purchases.

Question 18

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

Accepted Answer

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 applicable financial reporting framework. 
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. 
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 applicable financial reporting framework. 
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.

Question 19

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

Accepted Answer

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

Question 20

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. Understanding and evaluating such relationships are essential to the audit process.The following financial statements were prepared by ABC Manufacturing Co. for the year ended December 31, 2020. Also presented are various financial statement ratios for Holiday as calculated from the prior year's financial statements. Sales represent net credit sales. The total assets and the receivables and inventory balances at December 31, 2020, were the same as at December 31, 2019.
   Required:Items 1 through 9 below represent financial ratios that the auditor calculated during the prior year's audit. For each ratio, calculate the current year's ratio from the financial statements presented above.
 $\begin{array}{lcc}
  \text { Calculations } &12 / 31 / 2020 &12 / 31 / 2019\
 \text { 1. Current ratio } &&2.5\
 \text {  2. Quick ratio} &&1.3\
 \text {3. Accounts receivable turnover  } &&5.5\
 \text {4. Inventory turnover  } &&2.5\
 \text { 5. Total asset turnover } &&1.2\
 \text {  6. Gross margin percentage} &&35\%\
 \text { 7. Net operating margin \% } &&25\%\
 \text {  8. Times interest earned} &&1.03\
 \text {  9. Total debt to equity} &&50\%\
\end{array}$

Accepted Answer

The answer of Analytical procedures are evaluations of financial information...

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to:

Auditors would use the enterprise risk model:

Which of the following statements concerning noncompliance by clients is correct?

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

If an auditor encounters significant risks at the client, the auditor should do all of the following except:

Which of the following would not likely be found in the minutes of the board of directors?

In the planning stage, analytical procedures are used to:

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is:

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?

Analytical procedures used in planning an audit should focus on:

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

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

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

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

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to:

Auditors would use the enterprise risk model:

Which of the following statements concerning noncompliance by clients is correct?

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

If an auditor encounters significant risks at the client, the auditor should do all of the following except:

Which of the following would not likely be found in the minutes of the board of directors?

In the planning stage, analytical procedures are used to:

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is:

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?

Analytical procedures used in planning an audit should focus on:

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

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

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

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