Chapter 3 Deck 3

Question 1

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

Answer 1

Analytical procedures performed during planning often use data aggregated at a high level.

Question 2

What is audit risk?

Answer 2

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

Question 3

Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?

Answer 3

Bearer bonds represent the highest risk of misappropriation of assets by an entity because they are unregistered with no records kept of the owner(s) or transactions involving ownership. Historically, bearer bonds have been used to facilitate money laundering, tax evasion, and to conceal business transactions.

Question 4

What is the primary objective of the fraud brainstorming session?

Answer 4

The primary objective of the fraud brainstorming session is to assess the potential for material misstatement due to fraud.

Question 5

Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer?

Answer 5

It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles because there is a high degree of management judgment and subjectivity

Question 6

The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with?

Answer 6

The auditor should obtain an understanding of the entity and its environment sufficient to assess the risk of material misstatement and to design and perform further audit procedures.

Question 7

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Answer 7

A requirement during planning is to perform analytical procedures, which involve comparisons of recorded amounts to expectations.

Question 8

Analytical procedures used in planning an audit should focus on?

Answer 8

the analytical procedures used in planning the audit should focus on (a) enhancing the auditor’s understanding of the client’s business and the transactions and events that have occurred since the last audit date, and (b) identifying areas that may represent specific risks relevant to the audit.

Question 9

The objective of performing analytical procedures in planning an audit is to identify the existence of?

Answer 9

The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.

Question 10

Of the following nonfinancial information, what would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Answer 10

When performing analytical procedures, the auditor considers relevant nonfinancial information, which generally is related to financial data in some way. For example, a relationship might exist between the square footage of selling space and the level of sales.

Question 11

When the auditor’s risk assessment is based on the effective operation of controls, the audit will most likely involve?

Answer 11

When the auditor’s risk assessment is based on the effective functioning of internal control, the auditor should identify specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions.

Question 12

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

Answer 12

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports the planned level of assurance at the relevant assertion level.

Question 13

What is a large criteria that should be taken into account when considering the design of internal control?

Answer 13

The concept of reasonable assurance recognizes that the cost of an entity’s internal control should not exceed the benefits that are expected to be derived. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Question 14

The ultimate purpose of assessing control risk is to?

Answer 14

contribute to the auditor’s evaluation of the risk that material misstatements exist in the financial statements.

Question 15

In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the:

Answer 15

No - Yes. In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented. The auditor is not required to obtain knowledge about the “operating effectiveness of controls” as part of obtaining an understanding of internal control.

Question 16

Who is responsible for establishing, maintaining, and monitoring the entity’s internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change?

Answer 16

Management

Question 17

Which of the following services performed by another entity would not be considered to be part of the client’s information system?

Answer 17

Services performed by another organization are not considered to be part of the client’s information system if the services provided are limited to executing transactions that are specifically authorized by the client.

Question 18

Which of the following represents an inherent limitation of internal controls?

Answer 18

An inherent limitation of internal control exists when, although good controls are instituted, management can override those controls. When the CEO requests a check with no purchase order, this is an example of management override.

Question 19

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent’s internal controls?

Answer 19

Reports on internal control placed in operation and its operating effectiveness produced by the agent’s own auditor would be an efficient means of obtaining information about the transfer agent’s internal controls.

Question 20

An auditor should obtain sufficient knowledge of an entity’s information system relevant to financial reporting to understand the?

Answer 20

The auditor should obtain sufficient knowledge of the client’s information system relevant to financial reporting to understand the types of transactions processed, and how the transactions are initiated, recorded and summarized. Included in the information system relevant to financial reporting is the preparation of significant accounting estimates.