Deck 5: Overview of the Audit Process

Question 1

Understandability is defined as the quality of information that allows users to perceive its significance.

Answer 1

True

Question 2

The completeness assertion relates primarily to possible overstatements in the financial statements.

Answer 2

False

Question 3

Many auditors have provided assurance on financial information included in registration statements as small companies have gone public.

Answer 3

True

Question 4

The overall objective of a financial statement audit is the expression of an opinion on whether the client's financial statements are presented fairly, in all material respects, in conformity with GAAS.

Question 5

The existence or occurrence assertion, by its nature, extends only to physical assets such as cash and inventory.

Question 6

When sampling is used, the auditors must project unknown misstatements on the population as a whole.

Question 7

Business risks are the operational approaches by which management intends to achieve its objectives.

Question 8

Assertions regarding consistency in the application of accounting principles are included in assertions about completeness.

Question 9

Financial statements include explicit and implicit management assertions.

Question 10

The existence assertion pertains to whether items included in inventory are valid but does not extend to whether the reported dollar amount is the correct amount for the inventory items.

Question 11

In the financial statements, management implicitly asserts that the components are properly presented and accompanying disclosures are adequate.

Question 12

If an entity is planning to go private and to repurchase a significant portion of equity form existing owners, management may have an incentive to overstate earnings.

Question 13

The audit has value because an audit provides reasonable assurance to financial statement users that the financial statements are free of material misstatements.

Question 14

The rights and obligations assertion pertains only to balance sheet components.

Question 15

Reasonableness of management's accounting estimates is covered by the existence or occurrence assertion.

Question 16

In the professional standards, audit risk is defined as the risk that the auditor will appropriately modify his or her opinion on financial statements that do not contain a material misstatement.

Question 17

When the auditor has sufficient competent evidence for each assertion in a material account balance or transaction class, the auditor has completed that portion of the audit and moves on to the next task.

Question 18

The performance of tests of controls is required in a financial statement audit.

Question 19

Procedures to obtain an understanding of the internal control structure are required in every financial statement audit.

Question 20

The process of making judgments about the accounts likely to contain material misstatement and obtaining reasonable assurance about fair presentation in the financial statements involves six distinct phases.

Question 21

If reported sales for 20X0 erroneously include sales that occurred in 20X1, the assertion violated on the 20X0 statements would be:

A) existence or occurrence
B) completeness
C) valuation or allocation.
D) presentation and disclosure
E) rights and obligations

Question 22

The concept of materiality is defined by the Financial Accounting Standards Board in terms of the judgment of the:

A) auditor.
B) preparer.
C) FASB members.
D) users.
E) AICPA members.

Question 23

Which one of the following is among the three components of audit risk?

A) incurrence risk
B) occurrence risk
C) rejection risk
D) acceptance risk
E) control risk

Question 24

Substantive tests provide evidence as to the fairness of management's financial statement assertions.

Question 25

For a particular assertion, control risk is the risk that:

A) a material misstatement will occur in the accounting process.
B) controls will not detect a material misstatement that occurs.
C) audit procedures will fail to detect a weak control system.
D) the prescribed control procedures will not be applied uniformly.
E) an immaterial misstatement will occur in the accounting process.

Question 26

CPAs who perform audit services also provide a variety of other services to clients.

Question 27

The primary communication of audit findings is contained in the auditor's report on financial statements.

Question 28

The auditor might approach unaudited information showing decreased profit margins with a higher level of professional skepticism when industry factors point to an increased level of competitiveness and declining industry margins.

Question 29

Determining whether amounts are in conformity with GAAP addresses the proper measurement of assets, liabilities, revenues, and expenses which includes all of the following except:

A) the reasonableness of management's accounting estimates.
B) proper application of valuation principles such as cost, net reliable value, market value, and present value.
C) consistency in the application of accounting principles.
D) the reasonableness of management's accounting policies.
E) proper application of the matching principle.

Question 30

Many industries have specific accounting and audit guides.

Question 31

CPAs normally use engagement letters to describe the scope of services and fee arrangements.

Question 32

The completeness assertion would be violated if:

A) fictitious sales transactions were included in accounts receivable.
B) the allowance for doubtful accounts was understated.
C) unbilled shipments had occurred during the period.
D) disclosure in the statements of pledged receivables was inadequate.
E) the balance of accounts payable was overstated.

Question 33

Which one of the following assertions is not made by management in placing an item in the financial statements?

A) existence or occurrence
B) direct controls
C) rights and obligations
D) presentation and disclosure
E) completeness

Question 34

Which of the following would not be an important factor in understanding an entity's industry, regulatory environment and other external factors?

A) The competitive environment.
B) The political environment.
C) Relevant accounting pronouncements.
D) Technological developments.
E) The nature of the entity.

Question 35

The final key element of the audit involves communication of findings.

Question 36

Many elements of financial statements involve accounting estimates that are unrelated to business performance.

Question 37

Inherent risk is defined in terms of:

A) a total absence of controls.
B) an ideal set of controls.
C) the existing controls.
D) the standard controls for the client's industry.
E) a full set of controls.

Question 38

The rights and obligations assertion applies to:

A) current liability items only.
B) revenue and expense items only.
C) both income statement and balance sheet items.
D) assets that are not owned by the company.
E) balance sheet items only.

Question 39

Which of the following would not be an important aspect of basic financial statement assertions about presentation and disclosure:

A) Occurrence and rights and obligations.
B) Completeness.
C) Understandability.
D) Internal control.
E) Valuation.

Question 40

An understanding of the business and industry assists the auditor in understanding important information system issues for a client.

Question 41

Which one of the following reports serves as the primary communication of audit findings?

A) the auditor's report on internal controls.
B) the auditor's report on financial statements
C) the auditor's report on disagreements with management.
D) the auditor's report on significant audit adjustments.
E) the auditor's report on consultation with other accountants.

Question 42

The professional standards identify five categories of assertions made by management that are contained in the financial statements. If any of these assertions is a misrepresentation, the statements could be materially misstated. The categories of assertions identified by the profession are:
A.Existence or occurrence
B.Completeness
C.Rights and obligations
D.Valuation or allocation
E.Presentation and disclosure
Following is a list of errors encountered during the conduct of an audit.
REQUIRED: Using the letters given above, indicate the assertion that is being misrepresented by each listed error.
1.A short-term loan obtained from the bank was not recorded.
2.The current portion of long-term debt was excluded from the current liabilities
section of the balance sheet.
3.The fact that certain inventories were pledged as collateral on a bank loan was
not mentioned in the statements.
4.Reported sales include transactions from the subsequent period.
5.A number of shipments were made that were never billed.
6.Clerical errors were made in the compilation of the physical inventory count.
7.Several fictitious sales were booked during the period.
8.Legal title has not been obtained to a truck purchased from a private party.
9.Some of the inventory is obsolete, with no current market.
10.Accrued liabilities include the utility bills of the owner.
11.The allowance for doubtful accounts was understated because of the failure to
properly age the receivables at year-end.
12.The disposal of several pieces of machinery was never recorded.
13.Utility bills for the current period were recorded and paid in the following
period.
14.A piece of land, carried as an investment, has been written up to reflect current
appraisals of the property.
15.The subsidiary accounts receivable ledger is out of balance with the control
account.

Question 43

Identify and define the components of the audit risk model.

Question 44

Following are definitions of related types of risk.
REQUIRED: For each of the following, indicate the type of risk that is defined. Use the following codes:
A:Audit Risk
C:Control Risk
I:Inherent Risk
D:Detection Risk
1.The risk that a material misstatement that could occur in an assertion will not be
prevented or detected on a timely basis by the entity's internal controls.
2.The risk that the auditor may unknowingly fail to appropriately modify his or
her opinion on financial statements that contain a material misstatement.
3.The risk that the auditor will not detect a material misstatement that exists in an
assertion.
4.The susceptibility of an assertion to a material misstatement assuming that there
are no related internal controls.

Question 45

Which of these is not a risk factor?

A) Inherent risk.
B) Control risk.
C) Detection risk.
D) Assurance risk.
E) All of the above are risk factors.

Question 46

Which of these is not a category of substantive tests?

A) Initial procedures.
B) Tests of details of balances.
C) Tests of details of disclosures.
D) Tests of internal controls.
E) Tests of details of transactions.