A3

Question 1

What is the highest risk of a material misstatement arising from misappropriations of assets?

Answer 1

a large number of bearer bonds on hand

(they are unregistered with no records kept of the owners of transactions involving ownership)

Question 2

What is the most important factor concerning the auditor’s “responsibility” when detecting errors and fraud?

Answer 2

the risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements

Question 3

Who should the fraud inquiries be conducted with?

Answer 3

-management
-internal audit (if applicable)
-audit committee

Question 4

T/F: The disclosure of fraudulent activities to parties other than the client’s senior management and those charged with governance is not ordinarily part of the auditor’s responsibility.

Answer 4

true

Question 5

T/F: The auditors are required to report any acts of fraud regardless of materiality.

Answer 5

false - they’re only required to report material misstatements due to fraud or fraud involving senior management

Question 6

What is a factual misstatement?

Answer 6

a misstatement for which there is no doubt

Question 7

T/F: Inherent risk, control risk, and detection risk can all be assessed in nonquantitative terms.

Answer 7

true

Question 8

T/F: Examples of inherent risk include things that are outside failures in control activities.

Answer 8

true

Question 9

The acceptable level of detection risk is inversely related to _________.

Answer 9

assurance provided by substantive tests

Question 10

Control risk should be assessed in terms of ________.

Answer 10

financial statement assertions

(NOT specific controls)

Question 11

What should the auditor do when control risk is assessed at the maximum level?

Answer 11

1. document it
2. perform more substantive tests

Question 12

A reduction in control risk would result in a _______ substantive testing sample size.

Answer 12

lower

Question 13

If an auditor decides not to perform tests of controls, what would have been the likely reason?

Answer 13

it would have been inefficient (not cost beneficial) to perform tests of controls that would result in a reduction in planned substantive tests

Question 14

What is the objective of using tests of details as tests of controls?

Answer 14

to ensure that the controls are operating effectively

Question 15

When the auditor’s risk assessment is based on the effective functioning of internal control, what should the auditor do?

Answer 15

1. identify specific internal controls relevant to specific assertions
2. utilize less extensive substantive tests with smaller sample sizes

Question 16

What’s an example of information that would likely raise a question about the occurrence of noncompliance with laws and regulations?

Answer 16

the discovery of unexplained payments made to government employees

(be aware of answer choices that are just internal control deficiencies)

Question 17

When would an auditor withdraw from an engagement due to acts of noncompliance?

Answer 17

1. when an auditor can no longer rely on management’s representations due to employees’ actions
2. when the client refuses to accept the auditor’s modified report
3. management fails to take the appropriate remedial actions (even if the act of noncompliance is immaterial)

Question 18

What is the auditor’s primary concern in regards to related parties?

Answer 18

that they’re disclosed correctly in the F/S

Question 19

What procedures would an auditor perform regarding related party transactions?

Answer 19

1. focus on evaluating the Company’s procedures for identifying related party transactions, authorizing and approving transactions, and accounting for and disclosing relationships and transactions
2. understanding the business purpose and effect on the F/S

Question 20

T/F: A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

Answer 20

true

Question 21

T/F: An auditor’s risk assessment affects the reliability of evidence.

Answer 21

false - the auditor’s risk assessment affects the nature, timing, and extent of audit procedures but does not determine the reliability of evidence

Question 22

What financial ratio analysis would indicate possibly unrecorded liabilities?

Answer 22

a decrease in AP compared to total liabilities

Question 23

What is the purpose of analytical procedures in the planning stage of the audit?

Answer 23

1. identify unusual transactions
2. enhance understanding of the client’s business

Question 24

When would analytical procedures likely be used as substantive tests?

Answer 24

1. for accounts that are predictable year over year
2. for data produced through a standard cost system where variances between actual and budget are already produced (external evidence)

Question 25

What things would the auditor consider when deciding to use analytical procedures versus tests of details?

Answer 25

1. nature of the assertion tested 2. predictability of the relationship 3. availability and reliability of data used to develop the expectation 4. precision of the expectation

Question 26

What is the completeness assertion?

Answer 26

to determine whether transactions have been recorded (start with the original source documents)

Question 27

What would the auditor do if they discovered unusual relationships in performing analytical procedures during the overall review stage of the audit?

Answer 27

perform additional tests of details

Question 28

What is an advantage of statistical sampling?

Answer 28

measure the sufficiency (not appropriateness) of audit evidence b/c it helps the auditor limit audit risk and sampling risk to acceptable levels by quantifying them

Question 29

T/F: Statistical sampling still requires judgment in determining sample sizes.

Answer 29

true -tolerable rate -allowable risk of assessing control risk too low

Question 30

What is nonsampling risk?

Answer 30

-when an auditor fails to recognize misstatements in documents examined -includes all aspects of audit risk that are not due to sampling -always present and cannot be measured

Question 31

What is sampling risk?

Answer 31

-when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population -the sample is not representative of the population

Question 32

What is audit risk?

Answer 32

uncertainty in applying audit procedures to specific risks

Question 33

What are examples of nonsampling risk?

Answer 33

1. auditor selecting inappropriate auditing procedures (audit risk) 2. using inappropriate audit evidence 3. failure by the auditor to recognize misstatements in documents examined (sampling risk)

Question 34

T/F: In tests of controls, population size has essentially no effect on sample size unless the population is small.

Answer 34

true

Question 35

If the sample deviation rate and allowance for sampling risk exceed the upper deviation rate, what should the auditor do?

Answer 35

reduce the planned reliance on the prescribed control

Question 36

When would the auditor increase the preliminary assessment of control risk?

Answer 36

when the tolerable rate is LESS than the upper deviation rate

Question 37

What would an auditor do if they discover an unexpectedly high number of deviations during procedures performed on an attribute test?

Answer 37

increase the assessed risk of material misstatement

Question 38

What is precision in statistical sampling?

Answer 38

calculating the possible error in either direction

Question 39

A lower risk of incorrect acceptance requires a ________.

Answer 39

greater sample size

Question 40

How do you calculate projected misstatement?

Answer 40

net misstatement $ amount * (total population / # of samples) ex. overstatement of $3,700 ; understatement of $200 -- net misstatement = $3,500 overstated sample is chosen every 20th item $3,500 * 20 = $70,000 (compare this to the tolerable misstatement)

Question 41

When would you use ratio estimation (a type of variable sampling)?

Answer 41

when the calculated audit amounts are approximately proportional to the client's book amounts

Question 42

How would variability and incorrect acceptance affect sample size?

Answer 42

1. variability has a direct relationship with sample size 2. the risk of incorrect acceptance has an inverse relationship with sample size

Question 43

T/F: There is no change in total assets when an entity removes fully depreciated machinery from its books.

Answer 43

true