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Audit > A3 > Flashcards

A3 Flashcards

Risk, Evidence, and Sampling

1
Q

Although documentation that is lost may be a result of error, the auditor should approach lost documentation with:

A

a heightened risk that fraud may have occurred

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2
Q

an employee buying an for personal, not business use is an example of:

A

an abusive purchase

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3
Q

when client cannot provide documentation on material asset purchased recently, the auditor will need to evaluate a situation with a heightened sense that fraud could have occurred and will need to obtain other corroborating evidence from doing WHAT to get comfortable with the balance?

A

inspect the actual asset, review payment of item

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4
Q

________ is required to include a description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud

A

audit documentation

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5
Q

The auditor should determine whether and to what extent fraud risk factors are present during the ______ stage of the audit

A

planning

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6
Q

What factor would heighten an auditor’s concern about the risk of fraudulent financial reporting?

A

overly complex organization structure involving unusual lines of authority

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7
Q

(financial/nonfinancial) management’s participation in the selection of accounting principles might heighten the auditor’s concern

A

non financial. financial Is expected to participate in those activities.

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8
Q

What factor would heighten an auditor’s concern about the risk of misappropriation of assets?

A

large amounts of liquid assets that are easily convertible into cash

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9
Q

During _____ stage of the audit, the auditor should consider the assessment of the risk of material misstatement

A

every

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10
Q

During the ______ stage of the audit, the auditor should consider whether the results of any of the audit procedures affect the assessment of the risk of material misstatement due to fraud

A

overall review

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11
Q

The auditor should consider the implications of an act of noncompliance with laws and regulations in relation to other aspects of the audit, particularly in:

A

the reliability of the management representation letter

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12
Q

An auditor’s concern about he risk of ______ would be heightened if the entity were unable to generate cash flows from operations, but still reported substantial earnings growth

A

fraudulent financial reporting

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13
Q

It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles because there is:

A

a high degree of management judgement and subjectivity

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14
Q

An auditor who initially detects fraud doesn’t make the legal determination of whether fraud has occurred. The legal determination is determine by:

A

someone who specializes in law

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15
Q

The disclosure of fraudulent activities to parties other than the client’s senior management and those charged with governance is:

A

not the auditor’s responsibility

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16
Q

What kinds of fraud should be reported to those charged with governance?

A
  1. fraud that causes a material misstatement of the FS

2. fraud involving senior management

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17
Q

Missing or unavailable documents or electronic evidence MAY be indicative of

A

an intentional material misstatement in the entity’s FS

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18
Q

An auditor prepares an unmodified opinion on FS that are materially misstated due to fraud. The auditor will be considered to have met her responsibility provided the audit was:

A

planned and performed appropriately, including a specific assessment of the risk of material misstatement due to fraud

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19
Q

If the auditor becomes aware of managements interest in maintaining the entity’s earnings trend by using aggressive accounting practices, this would be indicative of:

A

an attitude conducive to fraud

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20
Q

Frequent disputes between management and the auditor is a fraud risk factor that would heighten an auditors concern about the risk of MM arising from:

A

fraudulent financial reporting

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21
Q

management’s excessive interest in maintaining or increasing the stock price and earnings trend is a fraud risk factor that would heighten an auditors concern about the risk of MM arising from:

A

fraudulent financial reporting

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22
Q

a lack of independent checks is a fraud risk factor that would heighten an auditors concern about the risk of:

A

misappropriation of assets

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23
Q

A high turnover of senior management is a fraud risk factor that would heighten an auditors concern about the risk of:

A

fraudulent financial reporting

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24
Q

The reevaluation of fraud risk might cause the auditor to increase the sample size using:

A

non-random statistical methods

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25
Q

Bearer bonds represent the highest risk of misappropriation of assets by an entity because:

A

they are unregistered with no records kept of the owners or transactions involving ownership. (historically they have been used to facilitate money laundering, tax evasion, and to conceal business transactions)

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26
Q

Having a large number of inventory items with low sales prices may result in asset misappropriation if:

A

the inventory items are easy to steal

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27
Q

The primary objective of the fraud brainstorming session is:

A

to assess the potential for material misstatement due to fraud

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28
Q

any indication of fraud (even immaterial fraud) the auditor finds should be discussed with:

A

an appropriate level of management at least one level above those involved

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29
Q

Excessive pressure on management to meet financial targets is a fraud risk factor that would heighten an auditor’s concern about the risk of:

A

intentional manipulation of FS

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30
Q

The lack of supporting document of transactions calls into question:

A

the occurrence of the transactions under examination

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31
Q

Receiving significantly fewer confirmation responses that expected implies some AR’s:

A

may be fictitious

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32
Q

Clerical errors listed on an exception report would be a control over data processing that would:

A

tend to minimize the risk of MM

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33
Q

The definition of fraud is:

A

an intentional act that results in a material misstatement in FS that are the subject of an audit

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34
Q

The definition of error is:

A

an unintentional misapplication of accounting principles relating to amounts, classifications, manner of presentation, or disclosure

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35
Q

If risk factors are identified, then the auditor should:

A

document them

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36
Q

Investigation of risk factors occur:

A

after the planning stage of the audit

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37
Q

hedging activities:

A

highly sophisticated transactions. fraud risk increases

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38
Q

If the assessed level of fraud risk is high, the auditor should attempt to reduce:

A

detection risk

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39
Q

audit risk is comprised of:

A

risk of MM and detection risk

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40
Q

Audit risk is the risk that:

A

the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated

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41
Q

The auditor uses the assessed level of control risk and inherent risk to determine:

A

the assessed risk of MM which affects the acceptable level of detection risk for financial statement assertions

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42
Q

As the acceptable level of detection risk decreases, the assurance provided from substantive tests should:

A

increase

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43
Q

As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. The auditor should do one or more of the following:

A
  1. change the nature of substantive tests from a less effective to a more effective procedure
  2. change the timing of the tests (performing at year end instead of interim)
  3. change the extent of substantive tests (using a larger sample size)
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44
Q

Control risk should be assessed in terms of:

A

financial statement assertions

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45
Q

In assessing control risk, The auditor identifies internal controls relevant to specific financial statement assertions, and then:

A

performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions

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46
Q

A factual misstatement is:

A

a misstatement which there is no doubt

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47
Q

Projected misstatements are:

A

the auditor’s best estimate of misstatements (both identified and estimate of unidentified) in the population, based on the auditors projection of the audit sample to the entire population

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48
Q

The risk of MM and detection risk may be assessed in:

A
  1. quantitive terms (percentages)

2. nonquantitive terms (minimum or maximum)

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49
Q

The existence of audit risk is recognized by the statement in the standard report that:

A

the auditor obtained reasonable assurance about whether the FS are free of material misstatement

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50
Q

The acceptable level of detection risk is inversely related to:

A

the assurance provided by substantive tests

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51
Q

Regardless of the assessed level of control risk, the auditor would perform:

A

substantive tests to restrict detection risk for significant transaction classes

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52
Q

Dual purpose tests are often performed because:

A

they increase audit efficiency

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53
Q

Inherent risk and control risk differ from detection risk:

A

in that they exist independently of the audit of FS, whereas detection risk is related to the auditor’s procedures and can be changed at the auditor’s sole discretion

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54
Q

A misstatement that involves an estimate or accounting policy is considered a:

A

judgmental misstatement (subjective decisions)

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55
Q

______ is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls

A

inherent risk

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56
Q

______ is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion

A

detection risk

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57
Q

_____ is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity’s internal control

A

control risk

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58
Q

The auditor would consider confirming a large complex sale when the risk of MM is:

A

high. then detection risk is low and the auditor would perform more reliable auditing procedures

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59
Q

The nature of tests to be applied on a particular engagement is:

A

a matter of the auditor’s professional judgement

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60
Q

Analytical procedures can be very efficient in obtaining assurance, especially when potential misstatements are not:

A

apparent from an examination of detailed evidence or when such detail is unavailable

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61
Q

Sampling risk arises from the possibility that when a tests of controls or a substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions that would have been reached had:

A

the test been applied to all items in the account balance or class of transactions

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62
Q

______ is a risk resulting from significant conditions, events, circumstances, actions, or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies

A

business risk (exists independently of audit)

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63
Q

The ultimate purpose of assessing control risk is:

A

to contribute to the auditor’s evaluation of the risk that material misstatements exist in the FS

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64
Q

technological developments that may render inventory obsolete is an example of what risk?

A

inherent risk

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65
Q

Inaccurate physical inventory count is an example of what risk?

A

control risk

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66
Q

An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do?

A

document their own understanding of the internal controls (they have to anyways)

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67
Q

An auditor of a nonissuer should design test of details to ensure:

A

that sufficient audit evidence supports the planned level of assurance at the relevant assertion level

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68
Q

Test of controls would support the planned level of:

A

control risk

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69
Q

While performing interim audit procedures of AR, numerous unexcepted errors are found resulting in a change of risk assessment. what should the auditor do?

A

Perform testing at year-end and utilize more experienced audit team members to perform those tests

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70
Q

negative confirmations provide (more/less) assurance than positive confirmations

A

less

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71
Q

Numerous unexpected errors may result in the auditor (increasing/decreasing) the dollar threshold of vouching customer invoices

A

decreasing

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72
Q

Audit evidence that was obtained in prior audits about the effective design or operation of internal controls:

A

may be considered by the auditor in assessing control risk in the current audit

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73
Q

The auditor is _______ to document the assessment of risk and the basis for the assessment

A

required

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74
Q

Some risk assessment procedures performed to obtain an understanding of internal control may provide evidence about:

A

operating effectiveness, even if they were not intended for that purpose

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75
Q

After obtaining an understanding the entity and its environment, including its internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor

A

performs tests of controls to obtain evidence supporting this assessment

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76
Q

Assessing risk based on the effective operation of controls involves:

A
  1. identifying specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions
  2. performing tests of such controls to evaluate their effectiveness
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77
Q

If the audit effort required to perform tests of controls exceeds the potential reduction in substantive testing:

A

tests of controls will not be performed because doing so would reduce audit efficiency

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78
Q

The objective of tests of details used as tests of controls is:

A

to evaluate whether an internal control operated effectively

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79
Q

The objective of tests of details of transactions performed as substantive tests is:

A

to detect material misstatements in the FS

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80
Q

Are Analytical procedures always necessary in a FS audit?

A

yes, the planning process and overall review stage of the audit must include them

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81
Q

Are tests of operating effectiveness of controls always necessary in a FS audit?

A

No, only performed wen the auditor’s risk assessment is based on the assumption that controls are operating effectively or if substantive procedures alone are insufficient

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82
Q

True or false: An audit of the FS is a cumulative process.

A

true

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83
Q

True or false: Audit documentation should be sufficient to show that accounting records agree or reconcile with the FS

A

true

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84
Q

True or false: The basis of the auditor’s decision not to perform tests of controls concurrently with obtaining an understanding of internal control should be documented

A

false, auditor is not required to evaluate operating effectiveness as part of obtaining an understanding internal control so its not required to document the basis for the decision

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85
Q

As part of understanding internal control, an auditor is not required to:

A

obtain knowledge about operating effectiveness of internal control

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86
Q

attorneys’ responses to the auditor’s inquires are a part of a:

A

substantive test

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87
Q

Obtaining letters of representation corroborating inventory pricing is a:

A

substantive test

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88
Q

Inquiry, inspection, observation, recalculation, and reperformance are:

A

tests that may be used to evaluate the operating effectiveness of a control (test of controls)

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89
Q

The amount of time budgeted to complete the audit should not be a primary factor in determining the extent of consideration of the client’s internal controls. why?

A

if more time is needed to adequately consider internal control, then the budget should be revised

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90
Q

True or false: the expected deviation rate would affect the extent of the auditor’s consideration of the client’s internal controls

A

true

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91
Q

If it would take less time or be more efficient to perform substantive tests then test of controls, and if there is no other reason to test controls (no high degree of electronic processing), the auditor:

A

wouldn’t test controls

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92
Q

Evidence concerning proper segregation of duties is generally obtained through;

A

inspection and observation

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93
Q

Recalculation related to a control would help the auditor obtain:

A

evidence of the control’s effectiveness

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94
Q

Recalculation of the balance of accounts is a:

A

substantive procedure

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95
Q

Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the FS level is an example of:

A

an overall response

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96
Q

Assigning more experienced staff or those with specialized skills to high-risk areas is considered:

A

an overall response to risk assessed at the FS level

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97
Q

An appropriate response to an identified business risk associated with plans for a new product line is for the auditor to:

A

analyze the newly identified risk in conjunction with other know business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit

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98
Q

an unsuccessful new product may affect the risks of material misstatement related to:

A

the valuation of inventory

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99
Q

Business risks often affect:

A

risk of MM at the FS level

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100
Q

If interim substantive procedures for an account identified no exceptions, then the auditor does not need to:

A

test details for the entire year under audit at year-end

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101
Q

Substantive procedures include:

A

test of details and substantive analytical procedures

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102
Q

An auditor should reconcile year-end balances to interim dates. This procedure is performed as part of:

A

roll-forward procedures

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103
Q

Specific account balances, classes of transactions, and disclosures relate to:

A

responding to risks at the relevant assertion level (lower than FS level)

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104
Q

The control environment is pervasive and reflects the overall tone of the organization. Therefore, the auditor is most likely to focus on the highest level of risk of material misstatement, which is assessed at the:

A

financial statement level

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105
Q

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing and extent of:

A

substantive tests to be performed

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106
Q

Attribute tests, compliance tests, and tests of controls are all tests that assist the auditor in:

A

assessing control risk and determining the final assessed risk of material misstatement

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107
Q

Before performing substantive tests at an interim date, an auditor should consider whether the amounts of the year-end balances selected for interim testing are:

A

reasonably predictable with respect to amount, relative significance and composition

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108
Q

A letter of audit inquiry to the client’s legal counsel relates to:

A

pending or threatened litigation matters that existed at the balance sheet date and for a period thereafter

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109
Q

The auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the client’s lawyer to corroborate this information. Included in this letter is:

A

either an identification of the omission of any pending or threatened litigation, claims, and assessments OR a statement that the list of such matters is complete

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110
Q

Evaluating deviations from historical patterns assists an auditor in determining if:

A

a recorded estimate is reasonable

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111
Q

The auditor should view related party transactions within the framework of existing pronouncements, placing primary emphasis on:

A

the adequacy of disclosure

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112
Q

After identifying the occurrence of a related party transaction, the auditor should:

A

apply the procedures considered necessary to obtain satisfaction concerning the purpose and nature of the transaction and its effect on the FS

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113
Q

Unusual nonrecurring transactions near year-end are characteristic of:

A

related party transactions

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114
Q

Compensating balance arrangements may be maintained by or for:

A

related parties

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115
Q

related party transactions typically relate to transactions with:

A

affiliates, owners, or management

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116
Q

Transactions based on terms that are significantly different from those that would be expected in an arm’s length transaction, may be indicative of:

A

related party involvement

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117
Q

selling real estate at a price significantly different from appraised value, may be indicative of:

A

related party involvement

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118
Q

In order to determine the existence of related parties the auditor must first:

A

request that management provide a list of related parties

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119
Q

The auditor should design the audit to provide _____ assurance that direct effect acts of noncompliance are detected

A

reasonable

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120
Q

Because of the nature of acts of noncompliance with laws and regulations having an indirect effect on the FS, the auditor provides ____ assurance that such acts will be detected

A

no

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121
Q

An auditor concludes that management has been involved in noncompliance with a certain law and that this fact has not been properly accounted for or disclosed. the auditor should withdraw from the engagement if:

A

client refuses to accept the auditor’s report as modified for the noncompliance. the auditor should also notify in writing those charged with goverance

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122
Q

The auditor may conclude that withdrawal is necessary if the client doesn’t take remedial action that the auditor considers necessary in the circumstances, even when the act of noncompliance is:

A

not material to the FS

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123
Q

If specific information concerning a possible act of noncompliance with laws and regulations comes o the auditor’s attention, the auditor should:

A

apply additional audit procedures to determine whether an act of noncompliance with laws and regulations has in fact occurred

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124
Q

an illegal payment of an otherwise immaterial amount could be material if:

A

theres a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue

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125
Q

the audit should be designed to identify material misstatements due to acts of noncompliance with laws and regulations, but acts of noncompliance with laws and regulations that relate to operating aspects rather than accounting aspects may not directly affect he financial statements and therefore:

A

they may be less likely to be discovered by the auditor

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126
Q

Information that may raise a question concerning possible noncompliance with laws and regulations include unusually large payments made to:

A

cash, bearer, purchase cashiers checks, transfer funds to numbered accounts

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127
Q

Conflict of interest statements require management to disclose:

A

any relationships with related organizations that do business with the entity

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128
Q

Regarding a nonissuer’s compliance with laws and regulations, an auditor performing an audit of the entity’s FS is responsible for:

A

obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework

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129
Q

the auditor’s direct personal knowledge obtained through ______________ is one of the most reliable forms of evidence

A

observation, examination, inspection, or recalculation

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130
Q

Strong, effective internal controls improve:

A

the reliability of data

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131
Q

Shipping documents and receiving reports are internally-generated evidence, since:

A

they are created by the client rather than received from independent sources outside the enterprise

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132
Q

Vendor invoices, bills of lading, customer purchase orders, packing slips are external evidence, since

A

they are received from independent sources outside the enterprise

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133
Q

Reliability of audit evidence is enhanced by:

A

a satisfactory internal control structure

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134
Q

The amount of corroborative evidence obtained refers to:

A

the sufficiency of the evidence

135
Q

In the great majority of cases, the auditor finds it necessary to rely on evidence that is _____ rather than _______.

A

persuasive, conclusive

136
Q

The measure of the sufficiency of audit evidence lies:

A

in the auditor’s judgement

137
Q

The difficultly and expense of obtaining audit evidence concerning an account balance is not a valid basis for omitting the test when:

A

there is no acceptable alternative procedure

138
Q

An auditor is required to communicate significant deficiencies to management and those charged with governance, and a disclaimer of opinion on:

A

the effectiveness of controls would be included in this communication. (not a part of the auditor’s report on the FS)

139
Q

most reliable audit evidence is directly connected to:

A

actual knowledge obtained from procedures performed by the auditor

140
Q

most reliable evidence to least reliable:

A
  1. actual knowledge
  2. external
  3. internal
141
Q

The objective of analytical procedures used in the overall review stage of the audit is:

A

to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statements presentation

142
Q

the objective of tests of details of transactions performed as substantive tests is to:

A

detect material (dollar) misstatements in the FS

143
Q

The objective of tests of controls is:

A

attaining assurance about the reliability of the information system relevant to financial reporting

144
Q

Total debt / total assets indicates the the portion of assets financed by creditors, which is a meaningful ratio to calculate during;

A

the final audit review

145
Q

Analytical procedures applied during the final review stage should be used to:

A

determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit

146
Q

_______ generally involve comparison of recorded amounts to auditor expectations

A

analytical procedures

147
Q

The purpose of applying analytical procedures during the overall review stage of an audit is to:

A
  1. evaluate the overall FS presentation
  2. assess the conclusions reached
  3. assist in forming an opinion on whether the FS as a whole are free of MM
148
Q

relationships among income statement accounts tend to be more predictable than balance sheet accounts because:

A

they represent transactions over a period of time rather than at one point in time

149
Q

relationships involving transactions subject to management discretion (travel and entertainment are less predictable) are:

A

less predictable

150
Q

When an analytical procedure is used as the principal substantive test of a significant FS assertion, the auditor is required to:

A

document both the auditor’s expectation and the factors considered in developing that expectation

151
Q

the auditor relies on _______ to achieve audit objectives related to particular assertions

A

substantive tests

152
Q

An auditor’s analytical procedures are facilitated when an entity uses a standard cost system with variance reports because:

A

the comparison of actual to budget will already have been performed. management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have.

153
Q

______ involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor

A

analytical procedures

154
Q

To audit the statement of cash flows, the auditor:

A

reconciles the amounts on the statement to amounts on other financial statements

155
Q

the objective of analytical procedures used in the planning stage of the audit is to:

A

assist in planning the nature, timing, and extent of auditing procedures to be performed

156
Q

To determine whether transactions have been recorded (completeness assertion, the auditor should;

A

trace from the source documents to the accounting records (general ledger, trial balance)

157
Q

Testing from the accounting records to the source documents provides evidence of:

A

existence or occurrence

158
Q

Reconciling physical counts to perpetual records and general ledger balances represents:

A

test of details procedure

159
Q

Comparing relationships among data, such as inventory balances to recent sales activities, represents:

A

analytical procedure

160
Q

“The entity holds or controls the rights to assets” and “liabilities are obligations of the entity’ are management assertions that relate to the rights and obligation assertion about:

A

account balances at period end

161
Q

Transactions and events that have been recorded have occurred and pertain to the entity are statements that relate to:

A

the existence and occurrence assertion about transactions and events

162
Q

The statement “transactions and events have been recorded in the proper accounts” relates to:

A

the understandability and classification assertion about transactions and events

163
Q

Amounts and other data related to transactions and events have been recorded appropriately is a statement that relates to:

A

the valuation, allocation an accuracy assertion about transactions and events

164
Q

What is the first step performed in applying analytical procedures?

A

develop an expectation of a balance or ratio by using relationships that are expected to exist

165
Q

Overstatement of sales is detected by what assertion/

A

existence

166
Q

understatement of liabilities is detected by what assertion?

A

completeness

167
Q

Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the:

A

completeness of cash receipts

168
Q

Analytical procedures are not required to be used as a substantive test and are more likely to be used for:

A

accounts that are predictable

169
Q

when evaluating whether and to what extent analytical procedures should be used, the auditor should consider:

A

the nature of the assertion tested, plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation

170
Q

inventory turnover calculation:

A

COGS / average inventory

171
Q

Trading securities are both _________ and ________

A

current and quick assets

172
Q

If trading securities are sold at their carrying value, then both total current assets and total quick assets:

A

remain constant since one type of current or quick asset is traded for another

173
Q

rate of return on assets calculation

A

net income / average total assets

174
Q

accounts receivable turnover ratio

A

net credit sales / average accounts receivable

175
Q

average number of days sales in inventory

A

365 / inventory turnover

176
Q

Which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?

A

balance sheet

177
Q

liquidity ratios and coverage ratios focus on;

A

balance sheet account balances

178
Q

the statement of retained earnings is:

A

a reconciliation of the retained earnings account

179
Q

income statement information is primarily used for:

A

profitability analysis

180
Q

The statement of cash flows assesses:

A

cash inflows and cash outflows

181
Q

quick ratio

A

quick assets / current liabilities

182
Q

since quick assets (or current assets) are less than current liabilities, when each is decreased by the same amount, the percentage decrease of quick (or current) assets will be ______ than that of the current liabilities. resulting in the quick ratio (or current ratio) ______.

A

greater, decrease.

183
Q

since quick assets (or current assets) are more than current liabilities, when each is decreased by the same amount, the percentage decrease of quick (or current) assets will be ______ than that of the current liabilities. resulting in the quick ratio (or current ratio) ______.

A

less, increasing

184
Q

acid test ratio

A

current assets excluding inventory and prepaid expenses / current liabilities

OR

cash equivalents + marketable securities + AR / CL

185
Q

average number of days in AR

A

365 / AR turnover

186
Q

In order for the inventory turnover to increase, either cost of sales must ____ or average inventory must ______.

A

increase, decrease

187
Q

If cost of sales increased and sales remained constant, the gross profit percentage would ______

A

decrease

188
Q

accounts payable turnover

A

purchases / average AP

189
Q

the sample size in an attribute sampling application is affected by:

A

the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate

190
Q

If the auditor assesses control risk too low then the true population deviation rate exceeds the auditor’s tolerable rate while:

A

the auditors estimate of the maximum deviation rate was less than the tolerable rate

191
Q

Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to:

A

the effectiveness of an audit in detecting an existing MM

192
Q

the efficiency of the audit is related to;

A

the risk of incorrect rejection and the risk of assessing control risk too high

193
Q

To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider:

A

the tolerable rate of deviation from the controls being tested, the likely rate of deviations and the allowable risk of assessing risk too low

194
Q

Erroneously concluding that an account balance is materially misstated is an example of:

A

incorrect rejection

195
Q

If the auditor had concluded that an account was fairly presented when, in fact, it was not, it would be an example of;

A

incorrect acceptance

196
Q

Attribute sampling is used to:

A

test controls

197
Q

Authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period are terms in identifying which option is a;

A

test of controls

198
Q

Account balance, amount, valuation, presentation, and disclosure are more likely to relate to:

A

substantive tests

199
Q

statistical sampling helps the auditor to measure the sufficiency of the audit evidence because:

A

the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level

200
Q

nonsampling errors relate to:

A

improper evaluation of evidence by the auditor and are not dependent on the sampling method used

201
Q

______ can be reduced to a relatively low level with non-statistical sampling

A

audit risk

202
Q

By using statistical sampling, the auditor can quantify sampling risk to assist in;

A

limiting it to a level considered acceptable

203
Q

Statistical sampling provides the auditor with a better measure of:

A

the sufficiency of the evidence found

204
Q

account balance assertions

A

Completeness, valuation, existence, rights and obligations (CVER)

205
Q

transactions and events assertions

A

completeness, cutoff, valuation, existence/occurence, understandability (COVEU)

206
Q

presentation and disclosure

A

completeness, valuation, rights and obligations and occurrence, understandability (CVRU)

207
Q

completeness procedures

A

tracing, analytical review, observation

208
Q

cutoff procedures

A

analyze transactions before and after year-end for proper accounting period recognition

209
Q

valuation, allocation, and accuracy procedures

A

inspection, footing, independent recalculation, reconciliation

210
Q

existence / occurrence

A

confirmation, observation, inspection, and examination, vouching

211
Q

rights and obligations procedures

A

inspection

212
Q

understandability and classification

A

inspection, review, inquiry of management

213
Q

liquidity ratios

A

working capital, current ratio (WC ratio), acid-test ratio, cash ratio

214
Q

working capital

A

CA - CL

215
Q

Cash ratio

A

cash equivalents + marketable securities / CL

excluding AR and inventory

216
Q

activity ratios

A

AR turnover, AR turnover in days, inventory turnover, inventory turnover in days, operating cycle, working capital turnover, total asset turnover, AP turnover, days in AP

217
Q

operating cycle

A

AR turnover in days + inventory turnover in days

218
Q

working capital turnover

A

sales / average working capital

219
Q

total asset turnover

A

net sale / average total assets

220
Q

profitability ratios

A

net profit margin, return on total assets, return on investment, return on common equity, net operating margin percentage, gross profit margin percentage, operating cash flow per share

221
Q

net profit margin

A

net income / net sales

222
Q

return on total assets

A

net income / average total assets

OR

net profit margin * total asset turnover

223
Q

return on investment

A

net income + interest expense (1- tax rate) / average of total long-term liabilities and equity

224
Q

return on common equity

A

net income - preferred dividends / average common equity

225
Q

net operating margin percentage

A

operating income / net sales

226
Q

gross profit margin percentage

A

gross profit margin / net sales

227
Q

operating cash flow per share

A

operating cash flow / common shares outstanding

228
Q

investor ratios

A

degree of financial leverage, earnings per share, price/earnings ratio, dividend payout ratio, dividend yield, book value per share

229
Q

degree of financial leverage

A

earnings before interest and taxes / earnings before taxes

230
Q

earnings per share

A

net income - preferred dividends / weighted average number of common shares outstanding

231
Q

price / earnings ratio

A

market price per share / diluted earnings per share

232
Q

dividend payout ratio

A

dividends per common share / diluted earnings per share

233
Q

dividend yield

A

dividends per common share / market price per common share

234
Q

book value per share

A

total stockholder’s equity - preferred stock / numbers of common shares outstanding

235
Q

long-term debt paying ability ratios

A

debt / equity ratio, debt ratio, times interest earned, operating cash flow / total debt

236
Q

debt / equity ratio

A

total liabilities / common stockholders equity

237
Q

debt ratio

A

total liabilities / total assets

238
Q

times interest earned

A

earnings before taxes and interest / interest

239
Q

operating cash flow / total debt

A

operating cash flow / total debt

240
Q

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods provide an objective basis for:

A

quantitatively evaluating sample risk

241
Q

deviations from pertinent control activities at a given rate would ordinarily be expected to result in

A

misstatements at a lower rate

242
Q

In test of controls, ________ has virtually no effect on sample size unless the _______ is small

A

population size, population

243
Q

The sample size for a test of controls varies directly with the ________ and inversely with the _______.

A

deviation rate, tolerable rate

244
Q

If the auditor expects more errors, he or she would increase sample size, conversely, if:

A

the tolerable rate of deviation increases, not as many items need to be selected

245
Q

as a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. the most likely explanation for this situation is:

A

the deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate

246
Q

If the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, the auditor would assess control risk at a ______ level

A

higher (than appropriate)

247
Q

Stratified sampling, ratio estimation, and variables sampling are used in:

A

substantive testing

248
Q

the sum of the percentage of the errors and the allowance for sampling risk equals:

A

upper deviation rate

249
Q

_______ is used to determine whether a given account balance is reasonable

A

variable sampling

250
Q

______ is used to test the attributes or characteristics of each item in a sample

A

attribute sampling

251
Q

the risk of assessing control risk too ____ is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control

A

high

252
Q

the risk of assessing control risk too ____ is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control

A

low

253
Q

if the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be ________, because:

A

understated, the control will be less effective than sample results would indicate

254
Q

_____ is used to estimate a rate of occurrence, and often involves a yes-no question.

A

attribute sampling

255
Q

the auditor’s allowable risk of assessing control risk too low has an inverse relationship with _______ when planning a sample for a test of controls

A

sample size

256
Q

as the auditor is willing to accept a greater deviation rate, a ______ sample size can be used

A

smaller

257
Q

as the tolerable deviation rate increases, and sample size ____

A

decreases

258
Q

When determining the sample size for a test of controls, the auditor should consider the:

A

expected deviation rate, the tolerable deviation rate, and the allowable risk of assessing control risk too low

259
Q

consideration should be given to the qualitative aspects of deviations, including:

A

the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit

260
Q

____ refers to uncertainty in applying audit procedures to specific risks

A

audit risk

261
Q

_____ includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective

A

nonsampling risk

262
Q

Examples of nonsampling risk:

A

the auditor selecting inappropriate auditing procedures, using inappropriate audit evidence, and failure by the auditor to recognize misstatements in documents examined

263
Q

If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management’s review and approval of timesheets, then the auditor would:

A

increase the assessed risks of MM (increase control risk)

264
Q

____ is a nonstatisical technique that involves the auditor selecting items without any conscious bias in the selection of the population

A

haphazard sampling

265
Q

haphazard sampling is different from random sampling because:

A

random sampling involves utilizing computer software or number tables to select items for sampling, which guarantees that each item in the population has an equal chance of being selected. haphazard sampling might result in unconscious bias

266
Q

stratified nonstatistical sampling doesn’t allow the auditor to quantify sampling risk because:

A

every item in the population doesn’t have an equal chance of being selected

267
Q

_______ is a nonstatistical technique which involves selecting items in the population that are clustered together

A

block sampling

268
Q

Statistical approaches allow auditors to:

A

quantify sampling risk

269
Q

Selection of every twentieth item results in a sample that is:

A

5%

270
Q

The sample size in a variables sampling application is affected by:

A

the variability in the population (generally represented by the standard deviation), the acceptable level of risk (risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement

271
Q

the auditor would be likely stratify when the standard deviation is ____

A

high

272
Q

The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of:

A

some characteristic related to the specific audit objective

273
Q

an increase in tolerable misstatement results in a _____ sample size

A

smaller

274
Q

an increase in assessed level of control risk leads to a ______ sample size

A

larger

275
Q

ratio estimation is most effective if:

A

there is a correlation between book values and audit amounts

276
Q

_______ is normally used to estimate a numerical measurement of a population

A

variables sampling

277
Q

_______ is a type of attribute sampling used when testing controls

A

stop or go sampling

278
Q

_____ involves the grouping of transactions sharing some characteristic (such as recorded amounts)

A

stratification

279
Q

the goal of stratification is to ensure selection of items for which potential misstatements may individually ________ tolerable misstatement

A

equal or exceed

280
Q

By stratifying the sample, the auditor can:

A

examine each of the unusually large transactions and also reduce the sample size

281
Q

qualitative aspects might include whether deviations are indicative of:

A

error or fraud

282
Q

When planning a particular sample for a substantive test of details, the auditor should consider:

A

how much monetary misstatement in the account might exist without causing the FS to be materially misstated (tolerable misstatement), and the expected size and frequency of misstatements

283
Q

inclusion of negative balances requires special design considerations with _______, but it does not require special design considerations with _______

A

PPS sampling, classical variables sampling

284
Q

If no errors are expected, ______ generally requires a smaller sample than other methods

A

PPS sampling

285
Q

the primary objective of probability proportional to sample size:

A

to identify overstatement errors

286
Q

_______ emphasizes larger items, which are more likely to be selected for the sample

A

PPS sampling

287
Q

a stratified sample generally is more efficient than an unstratified sample since:

A

the population is classified in a manner that emphasizes the higher dollar value items. the result is an estimate having a desired level of precision with a smaller sample size

288
Q

In _______, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan

A

PPS sampling

289
Q

The inputs for PPS sampling are:

A

tolerable misstatement, risk of incorrect acceptance, and the recorded amount of the population being sampled

290
Q

In PPS sampling, the sampling interval is calculated:

A

recorded amount of the population (not the number of physical units) / the sample size

291
Q

Overstated units have a _____ probability of sample selection than units that are understated because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount

A

higher

292
Q

The statistical concept of _____ is used to describe the auditor’s evaluation of sampling results by calculating the possible error in either direction

A

precision

293
Q

______ is the auditor’s best estimate of the error in the total population based upon evaluating the actual error rate in the sample results

A

projected error

294
Q

_____ is a measure of the variability of a frequency distribution about its mean

A

standard deviation

295
Q

_____ measures how frequently the procedure used will yield differences between the estimated value and the population value

A

reliability

296
Q

_______ is a special case of sampling for attributes (errors) where the auditor’s initial estimate of error occurrence is zero or near zero.

A

discovery sampling

297
Q

Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless:

A

the cost and effort of selecting additional sample items is low

298
Q

After identification of misstatements in the sample, the next step is to:

A

project the detected error to the entire population

299
Q

mean-per unit estimation

A

average value * accounts

300
Q

ratio estimation

A

(audited value / book value) * total value

301
Q

difference estimation

A

total value - (((book value - audited value)/sample) * accounts)

302
Q

related party transactions provide an opportunity to:

A

commit fraud because of the uniqueness and complexity of the transactions

303
Q

When management’s promotions, compensation, or other rewards are inconsistent with expectations it may pressure management to:

A

misappropriate assets

304
Q

Significant bank accounts in tax-haven jurisdictions for which there appears to be no clear business justification creates an opportunity to:

A

fraudulently report

305
Q

Management’s attitude of having excessive interest in maintaining or increasing the entity’s stock price may result in:

A

management fraudulently reporting so stock price increases

306
Q

If management has significant financial interests in the entity, this may create excessive:

A

pressure for management to ensure that the entity performs well resulting in fraudulent reporting

307
Q

Failure of management to correct known deficiencies on a timely basis may reflect that:

A

management disregards controls (attitude/rationalization) which could allow fraudulent reporting

308
Q

year to year change

A

Y2 - Y1 / Y1

309
Q

If a larger percentage of sales occurred during the last month of the year, as compared to the prior year, the total sales figure would not change, but the receivable balance at year end would:

A

be larger in year 2 than year 1

310
Q

management has declined to disclose something material to the FS. what key words should be used to search the codification?

A

inadequate disclosure

311
Q

an auditor obtained a copy of the companys accounting manual and read the section on inventory to prepare for the physical inventory observation. what is the type of audit procedure?

A

inspection

312
Q

the auditing firms computer-assisted audit specialist obtained an electronic billing file from the company and checked the accuracy of the summarized billings file. what is the type of audit procedure?

A

recalculation

313
Q

the auditor obtained the company’s aging of AR and independently created the aging of certain accounts

A

reperformance

314
Q

checking the accuracy of the file is a form of:

A

recalculation

315
Q

independent re-creation of client documentation is a form of:

A

reperformance

316
Q

agreed sales invoices to credit files to determine whether the customer had a credit file and had been approved for credit. audit procedure performed?

A

reperformance

317
Q

reviewed board of director minutes for authorization of new debt financing. audit procedure performed? classification of procedure?

A

inspection, test of controls. because the auditor is looking for evidence of authorization

318
Q

selected various voucher packages that had been approved and matched the invoice, purchase order, and receiving report. audit procedure performed? classification of procedure?

A

reperformance, test of controls, auditor is verifying that the accounting department matched the reports

319
Q

reperformance involves:

A

the independent execution of procedures that were originally performed as part of the entity’s internal control

320
Q

the reliability of data increases when:

A

an entity has a strong internal control, the data comes from external resources, the analytical uses reliable nonfinancial data and the data has been subjected to auditing procedures

321
Q

an auditor is allowed to perform reasonablness testing on interrelated accounts. however, when an account is ____ on another account, then the _____ account should not be sued to create the expectation for the ____ account

A

dependent, dependent, independent

322
Q

an auditor is allowed to perform reasonablness testing on interrelated accounts. ____ account can be used to test the completeness of ____ account

A

independent, dependent

323
Q

example of a projected misstatement:

A

sampling,

324
Q

example of judgemental misstatement:

A

believes the misstatement is (no facts or sample)

325
Q

Nonsampling risk:

A
  • always present and cannot be measured
  • the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices
  • can arise because an auditor failed to recognize misstatements in documents examined
326
Q

methods used by auditor to limit sampling risk?

A
  • evaluate the sample results
  • evaluate the sample through random sample selection
  • ensure that sample items have an equal probability of being selected
  • select a representative sample from the pop
327
Q

according to PCAOB standards, relevance of audit evidence depends on:

A
  • timing of audit procedure
  • whether the audit procedure is meant to test for understatement or overstatement
  • whether the design of the audit procedure directly tests the assertions
328
Q

according to PCAOB standards, reliability of audit evidence depends on:

A

-the circumstances under which the audit evidence is gathered

329
Q

Financial statement assertions recognize by PCAOB standards for issuer audits:

A

CEO aproved

  • completeness
  • existence
  • occurrence
  • allocation
  • presentation
  • rights
  • obligations
  • valuation
  • e
  • disclosure
330
Q

an account has minimal activity during the year. What audit procedures would the auditor use?

A

test of details

331
Q

the client’s improper disclosure of derivative activity would pertain to:

A

assertion level risk

332
Q

financial statement risks have a direct impact on:

A
  • FS taken as whole

- many relevant assertions as well

333
Q

four attributes used by the auditor to identify material misstatement as a result of client fraud:

A

(focus on current years audit)

  • the likelihood of the risk
  • pervasivenesss of the risk (impact FS as a whole or specific transactions, accounts, or assertions)
  • type of risk (misappropriation of assets or fraudulent reporting)
  • significance of the risk (lead to a MM?)
334
Q

during the planning phase of the audit, the auditor obtains an understanding of the IC system by considering:

A
  • types of M that may occur
  • risks that M may occur
  • factors that influence the design of tests of controls and substantive tests
  • assessment of IC
  • judgements about materiality
  • the complex of entit’s operations and systems
  • use of manual vs computized procedures

Audit (7 decks)

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