2. Assessing Risk and Developing a Planned Response

Question 1

Performance materiality

Answer 1

Is the auditor’s acknowledgment that the aggregate of uncorrected and undetected misstatements may exceed set materiality levels.
(defined as the amount or amounts (not one amount) set by the auditor at less than (not higher) materiality for the financial statements as a whole.)

Question 2

hash total

Answer 2

is a numeric total with meaning only as a control. For instance, the total of social security numbers might be checked from one payroll period to another. Sum total of invoice numbers, has no meaning.

Question 3

In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning

Answer 3

Control and distribution of unclaimed checks

Question 4

When an auditor of a parent non-issuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except

Answer 4

Whether there has been any turnover of the component’s board members

Question 5

According to US GAAS, when conflicts in the guidance among the sources of an entity’s applicable financial reporting framework exist,

Answer 5

the source with the highest authority prevails.

Question 6

Required preliminary engagement activities include all of the following except:

• Performing quality control procedures related to the continuance of the client relationship and the specific audit engagement
• Evaluating compliance with relevant ethical requirements
• Establishing an understanding of the terms of the engagement
• Consideration of factors that are significant in directing the engagement team’s efforts

Answer 6

The auditor should consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts when establishing the OVERALL AUDIT strategy, rather than during the earlier preliminary stage.

Question 7

Management is in a unique position to perpetrate fraud because of management’s ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Management override

Answer 7

Is presumed to be present in all entities

Question 8

When determining whether related-party transactions have been properly accounted for in the financial statements, the auditor should be most concerned that

Answer 8

The financial statements recognize the substance of the transactions

Question 9

An auditor would most likely be concerned with which of the following controls in a distributed data processing system?

Answer 9

Access controls

Question 10

Regarding fraud, the discussion should include

Answer 10

exchange of ideas or brainstorming among the engagement team members about how and where the entity’s financial statements might be susceptible to material misstatement due to fraud; how management could perpetrate and conceal fraudulent financial report­ing; and how assets of the entity could be misappropriated.

Question 11

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that

Answer 11

Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.

Question 12

According to US GAAS, regarding materiality considerations in group audits

Answer 12

A threshold for misstatements is determined in addition to component materiality.

Question 13

When is timely, i.e., as soon as practicable, communication of matters involving noncompliance with laws and regulations to those charged with governance required?

Answer 13

When the noncompliance is believed to be intentional and its effect on the financial statements is material

Question 14

Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should

Answer 14

Prepare a duplicate listing of checks received

Question 15

Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the

Answer 15

Receiving clerk

Question 16

What makes a financial statement assertion relevant to an audit conducted in accordance with US GAAS?

Answer 16

It has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated.

Question 17

A test of controls

Answer 17

Tests the operating effectiveness of controls

Question 18

A company has an internal audit function and is in a regulated industry. Which of the following groups should the auditor approach to inquire about the risks of fraud within the entity?

Answer 18

Management, internal audit, and audit committee

Question 19

To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Answer 19

Canceled checks

Question 20

An integrated test facility (ITF) processes

Answer 20

fictitious data with real data in order to test computer con­trols; client personnel are unaware of the testing

Question 21

When commenting in a comfort letter on information other than audited financial statements, an auditor should

Answer 21

Describe the criteria specified by the the underwriter or requesting party

Question 22

The financial accounting standards (and the organizations that are authorized or recognized to promulgate them) to be used by nonissuers for preparing financial statements in accordance with a general-purpose framework include all of the following except

Answer 22

US Generally Accepted Auditing Standards (GAAS), issued by the American Institute of Certified Public Accountants (AICPA)

Question 23

When there are numerous property and equipment transactions during the year, an auditor planning to assess the risk of material misstatement at a low risk level must perform.

Answer 23

Tests of controls and limited tests of current year property and equipment transactions.