Question 1

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

Accepted Answer

A)  Account risk. 
B)  Control risk. 
C)  Detection risk. 
D)  Inherent risk. 
A)  Account risk. 
B)  Control risk. 
C)  Detection risk. 
D)  Inherent risk.

Question 2

Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.

Accepted Answer

A) True 
 B)False

Question 3

Engagement letters are used by most auditors in performing professional services.
a. Describe the purpose of an engagement letter.
b. List four items that are normally included in an engagement letter.

Accepted Answer

a. The purpose of an engagement letter i

Question 4

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should:

Accepted Answer

A)  Engage financial experts familiar with the nature of the business entity. 
B)  Obtain a knowledge of matters that relate to the nature of the entity's business. 
C)  Refer a substantial portion of the audit to another CPA who will act as the principal auditor. 
D)  First inform management that an unqualified opinion cannot be issued. 
A)  Engage financial experts familiar with the nature of the business entity. 
B)  Obtain a knowledge of matters that relate to the nature of the entity's business. 
C)  Refer a substantial portion of the audit to another CPA who will act as the principal auditor. 
D)  First inform management that an unqualified opinion cannot be issued.

Question 5

When a company has changed auditors, according to the Professional Standards:

Accepted Answer

A)  The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. 
B)  The predecessor must always respond fully to all inquiries made by the successor auditor. 
C)  The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. 
D)  The successor may choose not to attempt any communication with the predecessor auditor. 
A)  The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. 
B)  The predecessor must always respond fully to all inquiries made by the successor auditor. 
C)  The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. 
D)  The successor may choose not to attempt any communication with the predecessor auditor.

Question 6

Which of the following would be least likely to be considered an audit planning procedure?

Accepted Answer

A)  Use an engagement letter. 
B)  Develop the overall audit strategy. 
C)  Perform the risk assessment. 
D)  Develop the audit plan. 
A)  Use an engagement letter. 
B)  Develop the overall audit strategy. 
C)  Perform the risk assessment. 
D)  Develop the audit plan.

Question 7

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

Accepted Answer

A)  Account risk. 
B)  Control risk. 
C)  Detection risk. 
D)  Inherent risk. 
A)  Account risk. 
B)  Control risk. 
C)  Detection risk. 
D)  Inherent risk.

Question 8

The substantive approach to an audit is appropriate for many small businesses.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is correct concerning requirements about auditor communications about fraud?

Accepted Answer

A)  Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. 
B)  All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. 
C)  Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. 
D)  The auditor has no responsibility to disclose fraud outside the entity under any circumstances. 
A)  Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. 
B)  All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. 
C)  Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. 
D)  The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Question 10

As a part of the planning process, auditors develop an audit strategy, an audit plan, and a time budget.
a. Describe an audit strategy and explain its purpose.
b. Describe an audit plan and explain its purpose.
c. Describe a time budget and explain its purpose.

Accepted Answer

a. The overall audit strategy involves d

Question 11

Which of the following topics is not normally included in an engagement letter?

Accepted Answer

A)  The auditors' preliminary assessment of internal control. 
B)  The auditors' estimate of the fee for the engagement. 
C)  Limitations on the scope of the engagement. 
D)  A description of responsibility for the detection of fraud. 
A)  The auditors' preliminary assessment of internal control. 
B)  The auditors' estimate of the fee for the engagement. 
C)  Limitations on the scope of the engagement. 
D)  A description of responsibility for the detection of fraud.

Question 12

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

Accepted Answer

A)  Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. 
B)  Management's disregard for internal control. 
C)  The existence of related party transactions. 
D)  Management's attempt to meet earnings per share growth rate goals. 
A)  Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. 
B)  Management's disregard for internal control. 
C)  The existence of related party transactions. 
D)  Management's attempt to meet earnings per share growth rate goals.

Question 13

The auditors' understanding established with a client should be established through a(an):

Accepted Answer

A)  Oral communication with the client. 
B)  Written communication with the client. 
C)  Written or oral communication with the client. 
D)  Completely detailed audit plan. 
A)  Oral communication with the client. 
B)  Written communication with the client. 
C)  Written or oral communication with the client. 
D)  Completely detailed audit plan.

Question 14

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Accepted Answer

A)  Only use certified public accountants on the engagement. 
B)  Place increased emphasis on the audit of objective transactions rather than subjective transactions. 
C)  Supervise members of the audit team less closely and rely more upon judgment. 
D)  Use less predictable audit procedures. 
A)  Only use certified public accountants on the engagement. 
B)  Place increased emphasis on the audit of objective transactions rather than subjective transactions. 
C)  Supervise members of the audit team less closely and rely more upon judgment. 
D)  Use less predictable audit procedures.

Question 16

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

Accepted Answer

A)  Inability to generate positive cash flows from operations, while reporting large increases in earnings. 
B)  Management's lack of interest in increasing the dividend paid on common stock. 
C)  Large amounts of liquid assets that are easily convertible into cash. 
D)  Inability to borrow necessary capital without obtaining waivers on debt covenants. 
A)  Inability to generate positive cash flows from operations, while reporting large increases in earnings. 
B)  Management's lack of interest in increasing the dividend paid on common stock. 
C)  Large amounts of liquid assets that are easily convertible into cash. 
D)  Inability to borrow necessary capital without obtaining waivers on debt covenants.

Question 17

Which of the following is not a required source of information for the auditors' assessment of fraud risk?

Accepted Answer

A)  Discussion among audit team members. 
B)  Fraud risk factors. 
C)  Results of tests of controls. 
D)  Inquiry of management and others. 
A)  Discussion among audit team members. 
B)  Fraud risk factors. 
C)  Results of tests of controls. 
D)  Inquiry of management and others.

Question 18

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: $$\begin{array} { | l | c | c | } 
\hline & \text { Incentive } & \text { Opportunity } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 19

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

Accepted Answer

A)  Low turnover of senior management. 
B)  Extreme degree of competition within the industry. 
C)  Capital structure including various operating subsidiaries. 
D)  Sales goals in excess of any of the preceding three years. 
A)  Low turnover of senior management. 
B)  Extreme degree of competition within the industry. 
C)  Capital structure including various operating subsidiaries. 
D)  Sales goals in excess of any of the preceding three years.

Question 20

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

Accepted Answer

A)  A material amount would significantly alter the "total mix" of information made available to an investor. 
B)  Materiality cannot be used as a basis for interpreting federal securities laws. 
C)  A material amount is that at which an individual's decision would be changed. 
D)  Materiality is composed of quantitative and not qualitative aspects. 
A)  A material amount would significantly alter the "total mix" of information made available to an investor. 
B)  Materiality cannot be used as a basis for interpreting federal securities laws. 
C)  A material amount is that at which an individual's decision would be changed. 
D)  Materiality is composed of quantitative and not qualitative aspects.

Exam 6: Planning the Audit; Linking Audit Procedures to Risk

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.

Engagement letters are used by most auditors in performing professional services. a. Describe the purpose of an engagement letter. b. List four items that are normally included in an engagement letter.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should:

When a company has changed auditors, according to the Professional Standards:

Which of the following would be least likely to be considered an audit planning procedure?

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

The substantive approach to an audit is appropriate for many small businesses.

Which of the following is correct concerning requirements about auditor communications about fraud?

As a part of the planning process, auditors develop an audit strategy, an audit plan, and a time budget. a. Describe an audit strategy and explain its purpose. b. Describe an audit plan and explain its purpose. c. Describe a time budget and explain its purpose.

Which of the following topics is not normally included in an engagement letter?

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

The auditors' understanding established with a client should be established through a(an):

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

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

Which of the following is not a required source of information for the auditors' assessment of fraud risk?

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive Opportunity A. Yes Yes B. Yes No C. No Yes D. No No

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

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