A3 - Risk Evidence And Sampling Flashcards
Primary objective of procedures performed to obtain an understanding of entity and its environment is to provide auditor
A) knowledge necessary for risk assessment and audit planning
B) audit evidence to use in assessing inherent risk
C) basis for issuing opinion on FS
D) evaluation of the consistency of application of management policy
A) knowledge necessary for risk assessment and audit planning
When government establishes a “fixed price” for a good to meet the economic objective of price stability and product affordability, what are the anticipated long term effects on consumers and producers
A) consumers to buy more and producers to make less
B) consumers to buy more and producers to make more
C) consumers to buy less and producers to make more
D) consumers to buy less and producers to make less
A) consumers to buy more and producers to make less
Leading economic indicators of business cycles are:
A) number of employees on payroll, total industrial production, and manufacturing and trade sales in constant dollars
B) ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by bank, and ratio of consumer investment credit outstanding
C) manufactures new orders for consumer goods in constant dollars, number of new building permits, and Change in manufacturer infilled orders for durable goods in constant dollars
D) results of decisions requiring clear knowledge of the state of the economy
C) manufactures new orders for consumer goods in constant dollars, number of new building permits, and Change in manufacturer infilled orders for durable goods in constant dollars
Which statement is correct concerning analytical procedures used in planning an audit?
A) often replace the tests of controls that are performed to assess control risk
B) usually use financial and non financial data aggregated at high level
C) usually involve the comparison of assertions developed by management to ratios calculated by an auditor
D) often used to develop an auditors preliminary judgment about materiality
B) usually use financial and non financial data aggregated at high level
Audit firm is in planning phase of new retail client audit. Which analytical procedure would most likely not be performed during planning phase of audit?
A) obtaining selected client financial ratios and comparing to industry average
B) comparing clients current year same store sales with budgeted amounts
C) reviewing financial statement and disclosures for unusual transactions or unexpected balances
D) comparing current year sales per store square foot with prior year
C) reviewing financial statement and disclosures for unusual transactions or unexpected balances
When performing analytical procedures in planning stage, auditor most likely would develop expectations by reviewing
A) unaudited information from internal quarterly reports
B) various account assertions in planning memorandum
C) comments in prior years management letter
D) control risk assessment relating to specific financial assertions
A) unaudited information from internal quarterly reports
Which represents the procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and probability of unauthorized access occurring?
A) disaster recovery plan
B) systems assessment
C) risk assessment
D) test of control
C) risk assessment
In understanding the entity and environment, auditor would ordinarily consider how the entity addresses each, EXCEPT:
A) changes in filing requirements for property tax assessment appeals
B) introduction of new product lines that increase product liability]
C) new regulatory requirements tha increase legal exposure
D) new accounting requirements that increase risk of improper implementation
A) changes in filing requirements for property tax assessment appeals
ANYTHING THAT WOULD AFFECT RISK ASSESSMENT
The trough of a business cycle is generally characterized by
A) shortages of essential raw materials and rising costs
B) increase purchase power and increase capital investments
C) unused productive capacity and unwillingness to risk investments
D) declining purchasing power and unused productive capacity
C) unused productive capacity and unwillingness to risk investments
TROUGH: economic low point with no positive indicators
Projections indicate that the economy is entering a slowdown. What is expected outcome?
A) inflationary pressures
B) increase demand for credit
C) wage hikes
D) drop in interest rates
D) drop in interest rates
In trying to predict how long the economy will be in current recovery phase before entering an “expansionary phase”, economists will look at indicatiors, EXCEPT
A) prices for material used in production
B) building permits for new home construction
C) data regarding new claims for unemployment
D) length of time, on average, that job seekers are unemployed
D) length of time, on average, that job seekers are unemployed
THIS IS A LAGGING INDICATOR
Which economic indicators tends to occur as a result of economic activity?
A) manufacturing and trade sales
B) building permits for residences
C) average duration of unemployment
D) average new unemployment claims
C) average duration of unemployment
Which most accurately describes the normal sequence of business cycle?
A) expansion, contraction, trough and peak
B) expansion, peak, contraction and trough
C) peak, contraction, expansion, and trough
D) trough, contraction, expansion, and peak
B) expansion, peak, contraction and trough
EPCT
Which condition is most true during a recession?
A) output (GDP) will be increasing
B) natural rate of unemployment will increase dramatically
C) potential output will exceed actual output
D) actual output will exceed potential output
C) potential output will exceed actual output
Which of the following statements is correct regarding an economy at peak of business cycle?
A) economy at the natural rate of unemployment
B) incomes will be stable
C) rate of inflation will decrease
D) economy will be in static equilibrium
A) economy at the natural rate of unemployment
Variations between business cycles most likely are attributable to which factors?
A) duration and intensity
B) comparative advantage
C) opportinity costs
D) law of diminishing returns
A) duration and intensity
To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
A) reevaluate the client’s control environment
B) review prior year audit documentation and the permanent file for the client
C) read specialized industry journals
D) perform test of details of transactions and balances
B) review prior year audit documentation and the permanent file for the client
Economic indicators are often used to try to predict or explain economic activity. Which of the following is NOT an example of leading economic indicator?
A) manufacturing and trade sales
B) building permits for residential properties
C) price changes of materials
D) orders for goods
A) manufacturing and trade sales
Auditor is considering internal control in an automated environment. Under these circumstances, auditor would need to focus on automated controls for all of the following reasons except
A) even manual controls may be dependent to some extent on effective functioning of automated controls
B) much of the information used in monitoring the internal control system may be provided through use of IT
C) more efficient and cost effective to focus on automated controls rather than manual controls
D) unauthorized access to data, systems, or programs create an additional control risk
C) more efficient and cost effective to focus on automated controls rather than manual controls
Which is necessary in a financial statement audit?
A) understanding of internal control relevant to each of an entity operating units
B) understanding of internal control relevant to each of an entity business functions
C) understanding of internal control relevant to an entity’s financial reporting objective
D) understanding of internal control relevant to an entity compliance objective
C) understanding of internal control relevant to an entity’s financial reporting objective
Which would be considered a detective control over standing data?
A) access and authorization control
B) reconciliation of changes to the data
C) change control
D) read only rights
B) reconciliation of changes to the data
DETECTION CONTROL IS ANYTHING THAT INVOLVES REVIEWING CHANGES
Manual controls would most likely be more unit able than automated controls for which of the following?
A) large, unusual, or non recurring transactions
B) high volume transactions that require additional calculations
C) situations with routine errors that can be predicted and corrected
D) circumstances that require a high degree of accuracy
A) large, unusual, or “non recurring” transactions
Auditor was testing whether shipments were made only to credit worthy customers. Client informed auditor that the IT system would not print bills of lading for customers that were on credit hold. Auditor would most likely perform?
A) select sample of customers, attempt to print bills of lading, and verify with IT that only a few are on credit hold
B) attempt to print a bill of lading for one customer on credit hold and verify with IT that this control cannot be overridden without approval
C) review recent shipments for a sample of customers on credit hold and verify with the accounting manager that all shipments were shipped by due. date
D) review the customer files for the names of all customers on credit hold and verify with accounting manager that no shipments were made to these customers after they were listed on credit hold
B) attempt to print a bill of lading for one customer on credit hold and verify with IT that this control cannot be overridden without approval
Which constitutes a potential risk associated with use of IT in an entity’s system of internal control?
A) reduction in ability to monitor the entity’s activities
B) facilitation of additional analysis
C) reduction in circumvention of controls
D) unauthorized changes to systems
D) unauthorized changes to systems