A2 - Becker Wrong Answers Flashcards

1
Q

Each of the following identifies one of the principal purposes of an auditor’s communication with those charged with governance, except:

A.	To report timely observations arising from the audit that are relevant to the responsibilities of those overseeing the financial reporting process.

B.	To obtain approval of the planned scope of the audit procedures.

C.	 To provide an overview of the scope and timing of the audit.

D.	 To obtain information relevant to the audit.
A

Choice “B” is correct. Those charged with governance do not provide approval on the planned scope of the audit procedures. The planned audit procedures are the decision of the auditor based on their professional judgment.

Choice “A” is incorrect. Auditors report their observations arising from the audit to those charged with governance. One of the responsibilities of those charged with governance is to oversee the financial reporting process. Therefore, if there is an observation relevant to their responsibility, the auditor should report it timely.

Choice “C” is incorrect. The auditor is required to communicate the planned scope and timing of the audit with those charged with governance.

Choice “D” is incorrect. Auditors communicate those charged with governance to gather information relevant to the audit. This information may inform the auditor’s risk assessment as well as the planned response to those risks.

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2
Q

Which of the following should an auditor do when control risk is assessed at the maximum level?

A.	 Perform fewer substantive tests of details.

B.	 Perform more tests of controls.

C.	 Document the assessment.

D.	 Document the control structure more extensively.
A

Choice “C” is correct. When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures.

Choice “A” is incorrect. When control risk is assessed at the maximum level, more, not fewer substantive tests of details would be performed.

Choice “B” is incorrect. When control risk is assessed at the maximum level, then the testing of controls is typically not required.

Choice “D” is incorrect. All control structure documentation should have been performed prior to assessing the control risk at the maximum level.

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3
Q

Which of the following is a violation of segregation of duties in internal control?

A.	 An employee adds vendors and makes changes to a vendor master file.

B.	 An employee matches invoices to purchase orders and receiving reports, and applies coding of account distributions.

C.	 An employee enters and approves purchase orders.

D.	 An employee receives goods from vendors and signs off on the deliveries.
A

Choice “C” is correct. Segregation of duties is included in the control activities component of the COSO Internal Control—Integrated Framework. Segregation of duties involves making sure that different individuals complete various steps of a process to ensure that no individual has too much control. An employee who enters purchase orders and approves them violates this control because the employee could enter erroneous or fraudulent information that he or she would be approving (versus a different individual, who would be in a much better position to catch errors or fraudulent entries as an independent approver).

Choice “A” is incorrect. Adding vendors and making changes to a vendor master file is essentially part of the same step in a process, so there is less risk with this activity.

Choice “B” is incorrect. Matching invoices to purchase orders and receiving reports, as well as coding account distributions, is acceptable as responsibilities held by one person.

Choice “D” is incorrect. Receiving goods and signing off on deliveries is essentially the same step in a process.

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4
Q

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client’s request is reasonable, the CPA’s review report should:

I.

Refer to the scope limitation that caused the change.

II.

Describe the auditing procedures that have already been applied.

A.	 I only.

B.	 Neither I nor II.

C.	 II only.

D.	 Both I and II.
A

Choice “B” is correct. If the CPA believes the client’s request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation.

Choice “A” is incorrect. The report should not refer to the scope limitation when a client had a justified reason to change the engagement type.

Choice “C” is incorrect. The report should not refer to the auditing procedures already applied when a client had a justified reason to change the engagement type.

Choice “D” is incorrect. The opposite is correct. The report should not refer to the auditing procedures already applied nor to the scope limitation when a client had a justified reason to change the engagement type.

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5
Q

Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?

A.	 Large amounts of liquid assets that are easily convertible into cash.

B.	 Management's lack of interest in increasing the entity's stock trend.

C.	 Inability to generate cash flows from operations while reporting substantial earnings growth.

D.	 Inability to borrow necessary capital without granting debt covenants.
A

Choice “C” is correct. An auditor’s concern about the risk of fraudulent financial reporting would be heightened if the entity were unable to generate cash flows from operations, but still reported substantial earnings growth, since these two occurrences are somewhat inconsistent.

Choice “A” is incorrect. Large amounts of liquid assets that are easily convertible into cash would heighten an auditor’s concern about misappropriation of assets, not about fraudulent financial reporting.

Choice “B” is incorrect. Management’s excessive interest in increasing the stock price and earnings trend is a fraud risk factor; lack of such interest would not cause concern.

Choice “D” is incorrect. The need to grant debt covenants when borrowing capital is an ordinary occurrence that would not heighten the auditor’s concern.

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6
Q

In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:

A.	 Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.

B.	 Auditor, as a result of the specialist's findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.

C.	 Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements.

D.	 Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
A

Choice “B” is correct. When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.

Choice “A” is incorrect. Lack of client familiarity with the specialist does not affect the auditor’s report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist’s qualifications.
Choice “C” is incorrect. The auditor must understand the form and content of the specialist’s findings in relation to the representations in the financial statements to be able to review the specialist’s work. However, this does not affect whether or not the auditor refers to the specialist in the auditor’s report.
Choice “D” is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.

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7
Q

Strand Inc.’s auditors have identified a major deficiency in regard to its controls. As a result of the deficiency, Strand:

A.	Must reestablish its operating and compliance objectives.

B.	Cannot claim compliance with the requirements of an effective system of internal control.

C.	Cannot achieve any of its established objectives.

D.	Must restate its financial statements.
A

Choice “B” is correct. A major control deficiency implies that an entity cannot claim that it has met the requirements of an effective system of internal control.

Choice “A” is incorrect. A company will not have to reestablish its operating and compliance objectives just because of a major deficiency in its system of internal control.

Choice “C” is incorrect. A major deficiency makes it less likely (but not impossible) that a company can achieve its established objectives.

Choice “D” is incorrect. There is no requirement that a company with a major deficiency must restate its financial statements.

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8
Q

An auditor assesses control risk because it:

A.	Is relevant to the auditor's understanding of the control environment.

B.	Provides assurance that the auditor's materiality levels are appropriate.

C.	Affects the level of detection risk that the auditor may accept.

D.	Indicates to the auditor where inherent risk may be the greatest.
A

Choice “C” is correct. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions.
.
Choice “A” is incorrect. The auditor assesses control risk after obtaining an understanding of internal control. Assessment is not required to obtain an understanding of the control environment or any of the other four components of internal control.

Choice “B” is incorrect. Assessment of control risk is unrelated to assessments of materiality levels.
Choice “D” is incorrect. Inherent risk is assessed independently of any consideration of relevant controls. Control risk does not affect inherent risk.

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9
Q

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

A.	The CPA's lack of understanding of the entity's operations and industry.

B.	Management's unwillingness to make all financial records available to the CPA.

C.	The CPA's inability to review the predecessor auditor's working papers.

D.	Management reputation for failing to provide schedules to prior auditors on a timely basis.
A

Choice “B” is correct. A CPA most likely would not accept a new audit engagement if management is unwilling to make all financial records available to the CPA. This is a precondition for the audit.

Choice “A” is incorrect. A CPA could still accept a new audit engagement even if the CPA lacks an understanding of the entity’s operations and industry. However, the CPA will need to obtain the required level of knowledge (e.g., attending accounting conferences).

Choice “C” is incorrect. A CPA could still accept a new audit engagement even if the CPA is unable to review the predecessor auditor’s workpapers. Although review of the predecessor auditor’s workpapers are helpful in an initial audit, it is not a required procedure.

Choice “D” is incorrect. A CPA could still accept a new audit engagement even if management has a reputation for failing to provide schedules to prior auditors on a timely basis. Although it is helpful when management is timely when providing schedules, this is not a precondition for the audit. The auditor most likely would plan the engagement to allot more time for this audit or give management earlier deadlines than needed.

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10
Q

The nature and extent of a CPA firm’s quality control policies and procedures depend on:

The CPA
firm’s size

The nature
of the CPA
firm’s practice

Cost-benefit
considerations

A.
No

Yes

Yes

B.	 Yes

Yes

Yes

C.	 Yes

No

Yes

D.	 Yes

Yes

No

A

Choice “B” is correct. The nature and extent of a CPA firm’s quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations.

Choice “A” is incorrect. The size of the CPA firm should be one of many considerations when establishing procedures to management engagement quality.

Choice “C” is incorrect. The nature and complexity of the CPA firm’s practice should be one of many considerations when establishing procedures to management engagement quality.

Choice “D” is incorrect. The cost-benefit considerations of management engagement quality should be one of many considerations.

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11
Q

When assessing an internal auditor’s competence, a CPA ordinarily obtains information about all of the following, except:

A.	 Educational level and professional experience.

B.	 The audit plan and audit procedures.

C.	 Access to information about related parties.

D.	 Quality of audit documentation.
A

Choice “C” is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor’s competence.

Choice “A” is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client’s practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor’s educational level and professional experience.
Choice “B” is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.

Choice “D” is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.

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12
Q

Edward was recently hired to be an internal auditor at Retail Co. His first assignment is to create a visual depiction of the entire revenue process. His manager noted that Edward should indicate whether processes are manual or automated and to label current controls and identify potential control deficiencies. Which documentation technique should Edward utilize?

A.	 Process narrative

B.	 System interface diagram

C.	 Flowchart

D.	 Data flow diagram
A

Choice “C” is correct. Flowcharts visualize not only the logical flow of data through a process but also the physical aspects of that flow. This includes the form in which the information flows through the process and whether actions taken on the document are done manually or through the use of computers.

Choice “A” is incorrect. Narratives are written descriptions, not visual depictions of a process.

Choice “B” is incorrect. System interface diagrams focus on the interfacing of clients and systems and do not depict the physical flow of information.

Choice “D” is incorrect. Data flow diagrams depict the logical flow of data but do not detail the physical aspects of the process.

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13
Q

If differences of opinion arise between the engagement partner and the engagement quality control reviewer, then the engagement partner should:

A.	 Withdraw from the engagement when permissible under law or regulation.

B.	 Follow the firm's policies and procedures for resolving differences of opinion.

C.	 Discuss the differences of opinion with the entity's management and issue a modified auditor's report.

D.	 Issue a disclaimer of opinion and report the issue to the entity's audit committee.
A

Choice “B” is correct. A difference of opinion between the engagement partner and engagement quality control partner would not be a basis to modify the opinion or withdraw from the engagement. One of the policies and procedures that a firm should establish under a system of quality control is a means to resolve differences of opinion; therefore, the engagement team should follow the firm’s policies and procedures for resolving those differences.

Choice “A” is incorrect. Withdrawing from the engagement would be the last step the accountant would perform after exhausting all other attempts to resolve the differences. The engagement team would follow the firm’s policies and procedures for resolving differences first.

Choice “C” is incorrect. Prior to raising the matter to the audit committee, the accountant should attempt to resolve the differences using the firm’s policies and procedures. The accountant would likely also discuss the difference with management prior to those charged with governance. The type of modified auditor’s report would then depend on the materiality of the differences and pervasiveness of the issue.

Choice “D” is incorrect. A disclaimer of opinion is issued when the engagement team is not able to obtain sufficient appropriate audit evidence and the issue is material and pervasive. A difference of opinion between the engagement partner and engagement quality control reviewer may not be indicative of either of those issues, and the engagement team should try to resolve the differences internally first by following the firm’s policies and procedures.

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14
Q

Which of the following factors would least likely affect the nature and extent of audit documentation?

A.	 The extent to which judgment was required in performing the specific audit procedures.

B.	 The content of the representation letter.

C.	 The nature of the specific audit procedures.

D.	 The risk of material misstatement.
A

Choice “B” is correct. The content of the representation letter will generally not affect the nature and extent of audit documentation. Factors affecting the nature and extent of audit documentation include:

  • The risk of material misstatement;
  • The extent to which judgment was required in performing the work and evaluating the results;
  • The nature of the specific auditing procedure;
  • The significance of the evidence obtained;
  • The nature and extent of any exceptions identified;
  • The need to document conclusions that may not be obvious.
  • The size and complexity of the entity; and
  • The audit methodology and tools used.

Choice “A” is incorrect. The extent to which judgment was applied in the performance of audit procedures would be a consideration when determining the nature and extent of audit documentation. More documentation may be necessary when signficant judgment was applied.

Choice “C” is incorrect. The nature of specific auditing procedures would be a consideration when determining the nature and extent of audit documentation. More complex procedures may require additional documentation.

Choice “D” is incorrect. The risk of material misstatement would be a consideration when determining the nature and extent of audit documentation. More documentation may be necessary in areas with higher assessed risk.

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15
Q

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?

A.	 There are significant differences between the entity's forecasted financial statements and the financial statements to be audited.

B.	 The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.

C.	 The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

D.	 There have been substantial inventory write-offs just before the year-end in each of the past four years.
A

Choice “C” is correct. An auditor may question the integrity of management if the auditor is not permitted to have access to sensitive information regarding the salaries of senior management. The auditor should have access to all information that is relevant to the preparation and fair presentation of the financial statements

Choice “A” is incorrect. Significant differences between the entity’s forecasted financial statements and the financial statements to be audited does not necessarily raise questions about the integrity of management. There may be valid reasons for the differences (e.g., product sold better than anticipated, unexpected increase in expenses, etc.).

Choice “B” is incorrect. The existence of related party transactions does not typically raise questions about the integrity of management. Management may engage in related party transactions as part of business operations.

Choice “D” is incorrect. Substantial inventory write-offs just before year-end in each of the past four years does not necessarily raise questions about the integrity of management. The inventory write-offs appear to be consistent year over year and may be a characteristic of the business (e.g., obsolescence or spoilage of inventory).

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16
Q

Which of the following statements is most accurate regarding audit documentation requirements?

A.	 If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed.

B.	 If an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the working papers.

C.	 If different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the working papers.

D.	 The auditor should document findings that could result in a modification of the auditor's report.
A

Choice “D” is correct. The auditor should document findings that could result in a modification of the auditor’s report.

Choice “A” is incorrect. If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment and original assessment should be documented. The auditor should also address responses to the new risk.

Choice “B” is incorrect. On their own, oral explanations do not represent adequate support for the work the auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation.

Choice “C” is incorrect. If alternative audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should be documented in the working papers.

17
Q

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client’s request is reasonable, the CPA’s review report should:

I.

Refer to the scope limitation that caused the change.

II.

Describe the auditing procedures that have already been applied.

A.	 I only.

B.	 II only.

C.	 Both I and II.

D.	 Neither I nor II.
A

Choice “D” is correct. If the CPA believes the client’s request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation.

Choice “A” is incorrect. The report should not refer to the scope limitation when a client had a justified reason to change the engagement type.

Choice “B” is incorrect. The report should not refer to the auditing procedures already applied when a client had a justified reason to change the engagement type.

Choice “C” is incorrect. The opposite is correct. The report should not refer to the auditing procedures already applied nor to the scope limitation when a client had a justified reason to change the engagement type.

18
Q

If differences of opinion arise between the engagement partner and the engagement quality control reviewer, then the engagement partner should:

A.	 Withdraw from the engagement when permissible under law or regulation.

B.	 Follow the firm's policies and procedures for resolving differences of opinion.

C.	 Discuss the differences of opinion with the entity's management and issue a modified auditor's report.

D.	 Issue a disclaimer of opinion and report the issue to the entity's audit committee.
A

Choice “B” is correct. A difference of opinion between the engagement partner and engagement quality control partner would not be a basis to modify the opinion or withdraw from the engagement. One of the policies and procedures that a firm should establish under a system of quality control is a means to resolve differences of opinion; therefore, the engagement team should follow the firm’s policies and procedures for resolving those differences.

Choice “A” is incorrect. Withdrawing from the engagement would be the last step the accountant would perform after exhausting all other attempts to resolve the differences. The engagement team would follow the firm’s policies and procedures for resolving differences first.

Choice “C” is incorrect. Prior to raising the matter to the audit committee, the accountant should attempt to resolve the differences using the firm’s policies and procedures. The accountant would likely also discuss the difference with management prior to those charged with governance. The type of modified auditor’s report would then depend on the materiality of the differences and pervasiveness of the issue.

Choice “D” is incorrect. A disclaimer of opinion is issued when the engagement team is not able to obtain sufficient appropriate audit evidence and the issue is material and pervasive. A difference of opinion between the engagement partner and engagement quality control reviewer may not be indicative of either of those issues, and the engagement team should try to resolve the differences internally first by following the firm’s policies and procedures.

19
Q

In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:

A.	 Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements.

B.	 Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.

C.	 Auditor, as a result of the specialist's findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.

D.	 Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
A

Choice “C” is correct. When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.

Choice “A” is incorrect. The auditor must understand the form and content of the specialist’s findings in relation to the representations in the financial statements to be able to review the specialist’s work. However, this does not affect whether or not the auditor refers to the specialist in the auditor’s report.

Choice “B” is incorrect. Lack of client familiarity with the specialist does not affect the auditor’s report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist’s qualifications.

Choice “D” is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.

20
Q

Which of the following is a violation of segregation of duties in internal control?

A.	 An employee adds vendors and makes changes to a vendor master file.

B.	 An employee matches invoices to purchase orders and receiving reports, and applies coding of account distributions.

C.	 An employee receives goods from vendors and signs off on the deliveries.

D.	 An employee enters and approves purchase orders.
A

Choice “D” is correct. Segregation of duties is included in the control activities component of the COSO Internal Control—Integrated Framework. Segregation of duties involves making sure that different individuals complete various steps of a process to ensure that no individual has too much control. An employee who enters purchase orders and approves them violates this control because the employee could enter erroneous or fraudulent information that he or she would be approving (versus a different individual, who would be in a much better position to catch errors or fraudulent entries as an independent approver).

Choice “A” is incorrect. Adding vendors and making changes to a vendor master file is essentially part of the same step in a process, so there is less risk with this activity.

Choice “B” is incorrect. Matching invoices to purchase orders and receiving reports, as well as coding account distributions, is acceptable as responsibilities held by one person.

Choice “C” is incorrect. Receiving goods and signing off on deliveries is essentially the same step in a process.

21
Q

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

A.	 Confirm a sample of the entity's accounts payable with known creditors.

B.	 Obtain written representations from management that there are no unrecorded transactions.

C.	 Make a preliminary judgment about materiality.

D.	 Communicate management's initial selection of accounting policies to the audit committee.
A

Choice “C” is correct. During the planning stage of an audit, the auditor should make a preliminary assessment of materiality.

Choice “A” is incorrect. Confirmation procedures are substantive procedures and are not performed during the planning stage of the audit. Also, note that accounts payable are not typically tested through confirmations.

Choice “B” is incorrect. Written representations from management in the form of a representation letter are obtained at the end of the audit and not during the planning stage.

Choice “D” is incorrect. Audit committee communications can take place throughout the audit and not necessarily during the planning stage.

22
Q

1.

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

I.

Financial statement accounts likely to contain a misstatement.

II.

Conditions that require extension of audit tests.

A.	 Neither I nor II.

B.	 Both I and II.

C.	 I only.

D.	 II only.
A

Choice “B” is correct. During the planning stage, the auditor assesses the risk of material misstatement in financial statement accounts. Based on this assessment, the auditor plans the audit procedures to provide reasonable assurance that material misstatements in the financial statements will be detected. Additionally, during the planning stage, conditions may come to the auditor’s attention that indicate a necessary extension of audit tests. The auditor would need to consider this factor in determining the time budget and staffing needs for the engagement.

Choices “C”, “D”, and “A” are incorrect. The auditor would need to consider both factors (financial statement accounts likely to contain a misstatement and conditions that require an extension of audit tests) in planning the audit.

23
Q

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

I.

Financial statement accounts likely to contain a misstatement.

II.

Conditions that require extension of audit tests.

A.	 Neither I nor II.

B.	 Both I and II.

C.	 I only.

D.	 II only.
A

Choice “B” is correct. During the planning stage, the auditor assesses the risk of material misstatement in financial statement accounts. Based on this assessment, the auditor plans the audit procedures to provide reasonable assurance that material misstatements in the financial statements will be detected. Additionally, during the planning stage, conditions may come to the auditor’s attention that indicate a necessary extension of audit tests. The auditor would need to consider this factor in determining the time budget and staffing needs for the engagement.

Choices “C”, “D”, and “A” are incorrect. The auditor would need to consider both factors (financial statement accounts likely to contain a misstatement and conditions that require an extension of audit tests) in planning the audit.

24
Q

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

A.	 Level of detection risk.

B.	 Extent of tests of controls.

C.	 Level of inherent risk.

D.	 Extent of tests of details.
A

Choice “D” is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk.

Choice “A” is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response.

Choice “B” is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.

Choice “C” is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion.

25
Q

As the acceptable level of detection risk increases, an auditor may:

A.	 Select a smaller sample size.

B.	 Lower the assessed level of inherent risk.

C.	 Postpone the planned timing of substantive tests from interim dates to year-end.

D.	 Change the nature of substantive tests from a less effective to a more effective procedure.
A

Choice “A” is correct.
As the acceptable level of detection risk increases, the assurance that must be provided by substantive tests can decrease. Therefore, the auditor may reduce the sample size.

Choice “B” is incorrect. Although inherent risk affects the level of detection risk, detection risk does not affect the level of inherent risk. Inherent risk exists independently of the audit.

Choice “C” is incorrect. As the acceptable level of detection risk increases, the assurance that must be provided by substantive tests can decrease. Changing the timing of substantive tests from interim to year-end provides more assurance and is more likely to result from a decrease (not increase) in detection risk.

Choice “D” is incorrect. As the acceptable level of detection risk increases, the level of assurance required from substantive tests decreases. Changing the nature of substantive tests from a less effective to a more effective procedure provides more assurance and is more likely to result from a decrease (not increase) in detection risk.

26
Q

Which of the following should an auditor do when control risk is assessed at the maximum level?

A.	 Document the assessment.

B.	 Document the control structure more extensively.

C.	 Perform more tests of controls.

D.	 Perform fewer substantive tests of details.
A

Choice “A” is correct. When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures.

Choice “B” is incorrect. All control structure documentation should have been performed prior to assessing the control risk at the maximum level.

Choice “C” is incorrect. When control risk is assessed at the maximum level, then the testing of controls is typically not required.

Choice “D” is incorrect. When control risk is assessed at the maximum level, more, not fewer substantive tests of details would be performed.

27
Q

What are the parts of the fraud triangle?

A

.The fraud triangle represents the three primary factors that lead to fraud in the workplace. The factors include pressure/motivation, opportunity, and rationalization. Pressure/motivation, both internal and external, creates the incentive to commit fraud. Opportunity stems from poor internal controls, lack of duty segregation, and a weak control environment. Rationalization represents the justification of actions by fraud perpetrators.

28
Q

Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?

A.	 A lack of competition in the entity's industry, accompanied by increasing profit margins.

B.	 Management's disclosure of unresolved litigation and contingent liabilities.

C.	 The audit committee's approval of the initial selection of accounting principles.

D.	 Year-end adjustments by the entity that significantly affect financial results.
A

Choice “D” is correct. Year-end adjustments recorded by the entity that significantly affect financial results would most likely heighten an auditor’s concern about the risk of fraudulent financial reporting.

Choice “A” is incorrect. A lack of competition in the entity’s industry, accompanied by increasing profit margins, is unlikely to heighten an auditor’s concern about the risk of fraudulent financial reporting. An auditor would expect that a lack of competition may result in an increase in profit margins.

Choice “B” is incorrect. Management’s disclosure of unresolved litigation and contingent liabilities is unlikely to heighten an auditor’s concern about the risk of fraudulent financial reporting. This is a disclosure required by GAAP in the financial statements.

Choice “C” is incorrect. The audit committee’s approval of the initial selection of accounting principles is unlikely to heighten an auditor’s concern about the risk of fraudulent financial reporting. Evidence of this additional oversight on significant accounting matters most likely would decrease the risk of fraudulent financial reporting.