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Auditing Theory > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Misstatements are usually considered __________ if the combined uncorrected errors and fraud in financial statements would likely have changed or influenced the decisions of a reasonable person using the statements.

A

Material

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2
Q

__________ is a measure of the level of certainty that the auditor has obtained at the completion of the audit.

A

Assurance

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3
Q

The concept of reasonable, but not absolute, assurance indicates that the auditor is:

A

Not an insurer or guarantor of the correctness of financial statements.

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4
Q

Which of the following statements best describes the reason why an independent auditor reports on financial statements?

A) A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
B) Different interests may exist between the company preparing the statements and the persons using the statements.
C) A misstatements of account balances may exist and is generally corrected as the result of the independent auditor’s work.
D) Poorly designed internal controls may be in existence.

A

B) Different interests may exist between the company preparing the statements and the persons using the statements.

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5
Q

Because of the the risk of material misstatement, an audit should be planned and performed with an attitude of:

A) objective judgment
B) independent integrity
C) professional skepticism
D) impartial conservatism

A

C) professional skepticism

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6
Q

The major reason why an independent auditor gathers audit evidence is to:

A) form an opinion on financial statements
B) detect fraud
C) evaluate management
D) assess control risk

A

A) form an opinion on financial statements

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7
Q

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?

A) Misappropriation of an asset or group of assets
B) Clerical mistakes in the accounting data underlying the financial statements
C) Mistakes in the application of accounting principles
D) Misinterpretation of facts that existed when the financial statements were prepared

A

A) Misappropriation of an asset or group of assets

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8
Q

What assurance does the auditor provide that errors and fraud are material to the financial statements will be detected?

A) Errors: Limited / Fraud: Negative
B) Errors: Reasonable / Fraud: Reasonable
C) Errors: Limited / Fraud: Limited
D) Errors: Reasonable / Fraud: Limited

A

B) Errors: Reasonable / Fraud: Reasonable

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9
Q

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

A) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.
B) An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
C) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.
D) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

A

A) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

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10
Q

An auditor reviews aged accounts receivable to assess the likelihood of collection to support management’s assertion about account balances of:

A) existence
B) completeness
C) valuation and allocation
D) rights and obligations

A

C) valuation and allocation

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11
Q

An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of:

A) occurrence
B) completeness
C) accuracy
D) classification

A

B) completeness

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12
Q

In the audit of accounts payable, an auditor’s procedures will most likely focus primarily on management’s assertion about account balances of:

A) existence
B) completeness
C) valuation and allocation
D) classification and understandability

A

B) completeness

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13
Q

Examine a staple of duplicate sales invoices to determine whether each one has a shipping document attached.

A

Occurrence

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14
Q

Add all customer balances in the accounts receivable trial balance and agree the amount to the general ledger.

A

Detail tie-in

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15
Q

For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct amount in the receivable sub ledger.

A

Posting and summarization

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16
Q

Inquire of the client whether any accounts receivable balances have been pledged as collateral on long-term data and determine whether all required information is included in the footnote description for a long-term debt.

A

Occurrence and rights

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17
Q

For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal.

A

Completeness

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18
Q

Discuss with credit department the likelihood of collection of all accounts as of December 31, 2013 with a balance greater than $100,000 and greater than 90 days old as of year-end.

A

Realizable value

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19
Q

Examine sales invoices for the last five sales transactions recorded in the sales journal in 2013 and examine shipping documents to determine they are recorded in the correct period.

A

Cutoff

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20
Q

For a sample of customer accounts receivable balances for December 31, 2013, examine subsequent cash receipts in January 2014 to determine whether the customer paid the balance due.

A

Existence & Realizable value

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21
Q

Determine whether all risks related to accounts receivable are adequately disclosed.

A

Completeness

22
Q

Foot the sales journal for the month of July and trace postings to the general ledger.

A

Posting and summarization

23
Q

Send letters to a sample of accounts receivable customers to verify whether they have and outstanding balance at December 31, 2013.

A

Existence

24
Q

Determine whether long-term receivables and related party receivables are reported separately in the financial statements.

A

Classification and understandability

25
Q

What are the six characteristics of professional skepticism?

A
  1. Questioning mindset
  2. Suspension of judgment
  3. Search for knowledge
  4. Interpersonal understanding
  5. Autonomy
  6. Self-esteem
26
Q

Fraudulent financial reporting harms users by:

A

Providing them incorrect financial statement information for their decision making.

27
Q

When assets are misappropriated, stockholders, creditors, and others are harmed because:

A

Assets are no longer available to their rightful owners.

28
Q

Typically, fraudulent financial reporting is committed by __________.

A

Management

29
Q

Theft of assets is perpetrated by __________ and the amounts are often __________.

A

Employees; immaterial

30
Q

A common way to divide an audit is to keep closely related types (or classes) of transactions and account balances in the same segment. This is called __________.

A

Cycle approach

31
Q

What are the five cycles?

A
  1. Sales and collection cycle
  2. Acquisition and payment cycle
  3. Payroll and personnel cycle
  4. Inventory and warehousing cycle
  5. Capital acquisition and repayment cycle
32
Q

Auditors found that, generally, the most efficient and effective way to conduct audits is to:

A

Obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.

33
Q

For any given class of transactions, several audit objectives must be met before the auditor can conclude that the transactions are properly recorded. These are called __________.

A

Transaction-related audit objectives

34
Q

Several audit objectives must be met for each account balance. These are called __________.

A

Balance-related audit objectives

35
Q

Audit objectives that relate to the presentation and disclosure of information in the financial statements are called __________.

A

Presentation and disclosure-related audit objectives

36
Q

__________ are implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements.

A

Management assertions

37
Q

Management assertions are directly related to the financial reporting framework used by the company (usually GAAP or IFRS), as they are part of the:

A

Criteria that management uses to record and disclose accounting information in financial statements.

38
Q

International auditing standards and AICPA classify assertions into three categories:

A
  1. Assertions about classes of transactions and events for the period under audit
  2. Assertions about account balances at period end
  3. Assertions about presentation and disclosure
39
Q

Define Occurrence

A

Transactions and events that have OCCURRED and pertain to the entity

40
Q

Define Completness

A

All transactions and events (also assets, liabilities, equity interests, disclosures) should have been RECORDED.

41
Q

Define Accuracy

A

Amounts and other data relating to recording transactions and events have been recorded appropriately.

Keyword: CORRECT

42
Q

Define Classification

A

Transactions and events have been recorded in the proper accounts

Keywords: APPROPRIATE or CLASSIFIED

43
Q

Define Cutoff

A

Transactions and events that have been recorded in the correct accounting period (i.e. CORRECT DATE or PROPER PERIOD)

44
Q

Define Existence

A

Asset, liabilities, and equity interests EXIST

45
Q

Define Valuation and Allocation

A

Assets, liabilities, and equity interests are included in the financial statements at APPROPRIATE (or CORRECT) amounts and any resulting valuation adjustments are APPROPRIATELY recorded

46
Q

Define Rights and Obligations

A

The entity holds or controls the rights to assets, and liabilities are the obligation of the ENTITY

47
Q

Auditors evaluate the client’s recording of transactions by verifying the monetary amounts of transactions, a process called __________.

A

Substantive tests of transactions

48
Q

__________ consist of evaluations of financial information through analysis of plausible relationships among financial and non-financial data.

A

Analytical procedures

49
Q

__________ are specific procedures intended to test for monetary misstatements in the balances in the financial statements.

A

Tests of details of balances

50
Q

Audit procedures to test the effectiveness of controls in support of a reduced assessed control risk is called __________.

A

Test of controls

51
Q

The Sarbanes-Oxley Act requires the __________ of public companies to certify the quarterly and annual financial statements submitted to the SEC.

A

chief executive officer (CEO) and the chief financial officer (CFO)

52
Q

What are the four phases of the financial statement audit?

A
  1. Plan and design audit approach
  2. Perform tests of controls and substantive tests of transactions
  3. Perform analytical procedures and tests of details of balances
  4. Complete the audit and issue and audit report

Auditing Theory (6 decks)

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