A2 Final Review Flashcards
What procedure would an auditor be least likely to do to gain an initial understanding of a client’s business or industry?
A. Review AICPA accounting and auditing guides.
B. Tour client facilities.
C. Ask questions of client personnel.
D. Vouch accounting records for recurring transactions recorded just after the
balance sheet date.
Choice “D” is correct. Vouching accounting records for recurring transactions would be
used to identify related party transactions but would not be part of the process to gain an initial understanding of a client’s business.
Choice “A” is incorrect. Reviewing AICPA accounting and auditing guides would assist in gaining industry knowledge.
Choice “B” is incorrect. Touring client facilities would help an auditor gain knowledge of the client’s business.
Choice “C” is incorrect. Asking questions of client personnel would help an auditor gain
knowledge of the client’s business.
In every audit when assessing risks due to fraud, there is a presumption that which of the following risks exist?
A. Fraudulent financial reporting and misappropriation of assets
B. Improper revenue recognition and management override of controls
C. Pressures, opportunities, and rationalizations
D. Errors and weak internal control environment
Choice “B” is correct. In every audit, there is a presumption that there is risk of both improper revenue recognition and management override of controls. Both risks should
be addressed by the auditor in evaluating the overall fraud risk.
Choice “A” is incorrect. Fraudulent financial reporting and misappropriation of assets represent the two categories of fraud rather than fraud risks presumed to exist in every
audit.
Choice “C” is incorrect. Pressures, opportunities, and rationalization represent conditions generally present when fraud occurs rather than fraud risks presumed to
exist in every audit.
Choice “D” is incorrect. Errors are an unintentional misstatement or omission (rather than a fraud risk), and a client’s control environment must be assessed through control
testing rather than a presumption that the environment is weak.
Analytical procedures used in planning an audit should focus on:
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 audit evidence.
Explanation
Choice “C” is correct.
Analytical procedures used in planning the audit should focus on enhancing the auditor’s understanding of the client’s business and the transactions and events that have occurred since the last audit date.
Choice “A” is incorrect. Analytical procedures used in planning do not reduce tests of
controls or substantive tests.
Choice “B” is incorrect. Analytical procedures used in planning are not designed to
identify material misstatements.
Choice “D” is incorrect. Audit evidence has not yet been gathered during the planning
process, so its adequacy cannot be assessed.
The FASB issues new guidance on accounting for financing leases, which is effective for the year under audit. This new guidance applies to the entity. The result of new guidance
may result in the auditor:
A. Increasing the assessment of inherent risk.
B. Decreasing the assessment of inherent risk.
C. Increasing the assessment of control risk.
D. Decreasing the assessment of control risk.
Choice “A” is correct. An increase in inherent risk may result when the transactions are more likely to be recorded incorrectly. Application of new accounting pronouncements
increases the risk that transactions may be recorded incorrectly because the guidance may not be applied correctly.
Choice “B” is incorrect. Application of new accounting pronouncements is likely to increase, not decrease, the assessment of inherent risk.
Choice “C” is incorrect. An increase in control risk may occur when controls appear not to be designed or implemented correctly.
Choice “D” is incorrect. A decrease in the assessment of control risk occurs when controls appear to be designed and implemented.
As the acceptable level of detection risk increases, an auditor may:
A. Change the nature of substantive tests from a less effective to a more effective procedure.
B. Postpone the planned timing of substantive tests from interim dates to year-end.
C. Lower the assessed level of inherent risk.
D. Select a smaller sample size.
Choice “D” 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 “A” 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.
Choice “B” 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 “C” 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.
Which one of the following is a true statement about the required risk assessment
discussion?
A. The discussion about the susceptibility of the entity’s financial statements to material misstatement must be held separately from the discussion about the susceptibility of the entity’s financial statements to fraud.
B. The discussion should involve all members who participate on the audit team, including the engagement partner.
C. The discussion should include consideration of the risk of management override of controls.
D. The risk assessment discussion should occur during the overall review stage of the audit.
Choice “C” is correct.
The required risk assessment discussion should include consideration of the risk of management override of controls.
Choice “A” is incorrect. The discussion about the susceptibility of the entity’s financial
statements to material misstatement may be held concurrently from the discussion
about the susceptibility of the entity’s financial statements to fraud.
Choice “B” is incorrect. The discussion must involve all “key” members who participate
on the audit team, including the engagement partner.
Choice “D” is incorrect. The risk assessment discussion is required to occur at the start
of the audit, during the planning phase.
During planning, the auditor learns the company engages in multiple hedging activities. This knowledge may result in the auditor:
A. Increasing the assessment of inherent risk.
B. Decreasing the assessment of inherent risk.
C. Increasing the assessment of control risk.
D. Decreasing the assessment of control risk.
Choice “A” is correct. An increase in inherent risk may result when the entity engages in transactions that are more likely to be recorded incorrectly. Hedging transactions
often involve estimates and complex calculations and, therefore, are more likely to be recorded incorrectly than other simpler transactions.
Choice “B” is incorrect. Complex transactions are likely to increase, not decrease,
inherent risk.
Choice “C” is incorrect. An increase in control risk may occur when controls appear not
to be designed or implemented correctly.
Choice “D” is incorrect. A decrease in the assessment of control risk occurs when
controls appear to be designed and implemented.
After making a preliminary assessment of the risk of material misstatement during planning
and beginning to apply audit procedures, an auditor determines that this risk is actually
higher than anticipated. Which would be the most likely effect of this finding on the auditor’s
desired level of detection risk and the overall level of audit risk, as compared to the levels
originally planned?
Auditor’s Desired Level of Detection Risk / Overall Level of Audit Risk
A. Decrease Same
B. Increase Same
C. Same Higher
D. Decrease Lower
Choice “A” is correct.
The auditor would initially have planned the audit to achieve a low level of audit risk. If the risk of material misstatement increased, the auditor would need to reduce detection
risk to achieve the same low level of audit risk as initially planned.
Choice “B” is incorrect. The increase in the risk of material misstatement results in an increase in overall audit risk. Increasing detection risk would only exacerbate this
problem by increasing audit risk even further.
Choice “C” is incorrect. If the auditor does not modify the desired level of detection risk, it is true that the overall level of audit risk will increase, but this is not the most likely
situation. An auditor who discovers a higher risk than initially anticipated would need to develop an appropriate response to offset this increase in risk, so that an overall low
level of audit risk could still be attained.
Choice “D” is incorrect. Assuming that the auditor had already planned the audit to achieve an appropriately low level of audit risk, the auditor would most likely revise
audit procedures in an attempt to achieve the same low level of audit risk as initially planned. Although it is possible that the auditor would reduce detection risk enough to
actually lower overall audit risk, this is not the most likely response to the scenario described.
Which of the following is not one of the six financial statement assertions made by management regarding transactions and events, account balances, and related disclosures?
A. Accountability
B. Completeness
C. Existence
D. Obligations
Choice “A” is correct. Accountability is not one of the six financial statement assertions.
Choice “B” is incorrect. Completeness is an assertion that states that all transactions have been recorded and included in the financial statements.
Choice “C” is incorrect. The existence assertion states that account balances exist and have been recorded and disclosed.
Choice “D” is incorrect. The obligations assertion indicates that liabilities are the
obligations of the entity.
MCQ-09806
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A. A written audit plan setting forth the procedures necessary to accomplish the audit objectives.
B. The basis for the auditor’s decision to perform tests of controls concurrently with obtaining an understanding of internal control.
C. The auditor’s understanding of the entity’s control activities that help ensure achievement of management’s objectives.
D. The assessment of the risks of material misstatement at both the financial
statement and relevant assertion levels
Choice B is Correct
The auditor is not required to evaluate operating effectiveness as part of understanding internal control, and therefore, need not document the basis for this decision.
Choice “A” is incorrect. A written audit plan setting forth the procedures necessary to accomplish the audit objectives is required to be documented.
Choice “C” is incorrect. An auditor should document key elements of the understanding
of the entity and its environment, including each of the five components of internal
control. The five components include the entity’s control activities.
Choice “D” is incorrect. The assessment of the risks of material misstatement at both
the financial statement and relevant assertion levels are required to be documented.
An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely accomplish this objective?
A. Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.
B. Compare accounts receivable turnover (net credit sales / average gross receivables) in the current year to that achieved in the prior year.
C. Use common size analysis to compare recorded sales to sales recorded by other companies in the same industry.
D. Select large individual sales recorded during the year and review supporting documentation.
Choice “A” is correct.
Tracing from source documents (evidence of shipments) to the accounting records (sales journal) provides evidence of completeness. If the auditor finds a shipment that
was not recorded, this would indicate a lack of completeness of sales.
Choice “B” is incorrect. Accounts receivable turnover may vary from year to year based
on changes in the level of credit sales and receivables. With more than one factor
affecting this ratio, however, it is not the most likely means of detecting an
understatement in sales.
Choice “C” is incorrect. Using common size analysis, total revenue is set at 100
percent for each company. Comparison of common size financial statements would not
be useful in trying to identify understatements in credit sales.
Choice “D” is incorrect. If an audit test starts with a selection of recorded sales,
unrecorded sales will not be discovered by this test.
Which of the following statements is true regarding the tolerable misstatement?
A. As the likelihood for uncorrected and undetected misstatements goes up, the tolerable misstatement goes down.
B. As the likelihood for uncorrected and undetected misstatements goes down, the tolerable misstatement goes down.
C. The likelihood of uncorrected and undetected misstatements does not impact the tolerable misstatement.
D. As the overall financial statement materiality goes up, the tolerable misstatement goes down.
Choice “A” is correct. The tolerable misstatement is the application of performance materiality to a particular sampling procedure. The goal of both performance materiality
and tolerable misstatement assessment is to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial
statements as a whole. As such, as the likelihood for undetected misstatements goes up, the tolerable misstatements must go down to keep the overall risk of misstatement to an appropriately low level.
Choice “B” is incorrect. See previous explanation for choice A. The opposite is true. As
the likelihood for uncorrected and undetected misstatements goes down, the tolerable
misstatement goes up, rather than down.
Choice “C” is incorrect. The tolerable misstatement calculation is impacted by the
likelihood of uncorrected and undetected misstatements.
Choice “D” is incorrect. The opposite is true. As the overall financial statement
materiality increases, the tolerable misstatement would increase as well, rather than
decrease.
MCQ-08139
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained from:
A. Discussions with management personnel.
B. External quality reviews of the internal auditor’s work.
C. Previous experience with the internal auditor.
D. The results of analytical procedures.
Choice “D” is correct.
Analytical procedures do not ordinarily provide information about the internal auditor.
Choices “A”, “B”, and “C” are incorrect. Discussions with management personnel,
reviews of the internal auditor’s work, and previous experience could all provide
information relevant to the evaluation of competence and objectivity.
In assessing whether the internal audit function applies a systematic and disciplined approach, the independent auditor most likely would consider the:
A. Adequacy and use of documented internal audit procedures.
B. Organization status of the director of internal audit.
C. Entity’s ability to continue as a going concern for a reasonable period of time.
D. Internal auditor’s assessment of inherent risk is comparable to the independent
auditor’s assessment.
Choice “A” is correct. In assessing whether the internal audit function applies a systematic and disciplined approach, the independent auditor most likely would consider the existence, adequacy, and use of documented internal audit procedures.
Choice “B” is incorrect. The independent auditor most likely would consider the organization status of the director of internal audit when assessing the objectivity of the
internal audit function.
Choice “C” is incorrect. Obtaining information about the entity’s ability to continue as a going concern would not provide information about whether the internal audit function
applies a systematic and disciplined approach.
Choice “D” is incorrect. The comparison of the internal auditor’s assessment of inherent risk to the independent auditor’s assessment would not help the independent
auditor assess whether the internal audit function applies a systematic and disciplined
approach
MCQ-09802
Which of the following procedures is the auditor least likely to perform when an auditor decides to use the work of an auditor’s specialist as audit evidence?
A. Obtain knowledge of the specialist’s qualifications.
B. Refer to the auditor’s specialist in the audit report to indicate a division of
responsibility.
C. Inquire of the entity and the auditor’s specialist about any known interests that
the entity has with the auditor’s external specialist that may affect that specialist’s
objectivity.
D. Review the working papers of the auditor’s specialist.
Choice “B” is correct.
An auditor may not divide responsibility with an auditor’s specialist. If the auditor decides to express a modified opinion as a result of the work performed by the specialist, then the auditor may refer to the specialist and should indicate that the
reference to the specialist does not reduce the auditor’s responsibility for the audit opinion.
Choice “A” is incorrect. When an auditor decides to use the work of an auditor’s specialist as audit evidence, the auditor should evaluate the competence, capabilities,
and objectivity of the specialist. Evaluation of this may be acquired by obtaining knowledge of the specialist’s qualifications.
Choice “C” is incorrect. When an auditor decides to use the work of an auditor’s specialist as audit evidence, the auditor should evaluate the competence, capabilities,
and objectivity of the specialist. Evaluation of this may be acquired by inquiring of the entity and the auditor’s specialist about any known interests that the entity has with the
auditor’s external specialist that may affect that specialist’s objectivity.
Choice “D” is incorrect. The external auditor should verify the adequacy of the work of the auditor’s specialist. This may include reviewing the working papers of the auditor’s
specialist
