Chapter 9

Question 1

9-25 a

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?

1. The entity’s management places no emphasis on meeting publicized earnings projections
2. Significant differences between the physical inventory count and the accounting records are not investigated.
3. Monthly bank reconciliations ordinarily include several large outstanding checks
4. Cash transactions are electronically processed and recorded, leaving no paper audit trail

Answer 1

2. Significant differences between the physical inventory count and the accounting records are not investigated.

Question 2

9-25 b

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?

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

Answer 2

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

Question 3

9-25 c

Prior to, or in conjunction with the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

1. Presumptive
2. Judgmental
3. Criticizing
4. Questioning

Answer 3

4. Questioning

Question 4

9-26 a

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as:

1. Audit Risk
2. Detection Risk
3. Inherent Risk
4. Sampling Risk

Answer 4

3. Inherent Risk

Question 5

9-26 b

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as:

1. Sampling Risk
2. Inherent Risk
3. Control Risk
4. Detection Risk

Answer 5

4. Detection Risk

Question 6

9-26 c

Inherent risk and control risk differ from planned detection risk in that they:

1. Arise from the misapplication of audit procedures
2. May be assessed in either quantitative or non quantitative terms
3. Exist independently of the financial statement audit
4. Can be changed at the auditor’s discretion

Answer 6

3. Exist independently of the financial statement audit

Question 7

9-27 a

Which of the following does not increase the need for sufficient appropriate audit evidence?

1. A lower acceptable level of detection risk
2. An Increase in the assessed control risk
3. A lower acceptable audit risk
4. A decrease in the assessed inherent risk

Answer 7

4. A decrease in the assessed inherent risk

Question 8

9-27 b

As lower acceptable levels of both audit risk and materiality are established, the auditors should plan more work on individual accounts to:

1. Find smaller misstatements
2. Find larger misstatements
3. Increase the performance materiality in the accounts
4. Increase inherent risk in the accounts

Answer 8

1. Find smaller misstatements

Question 9

9-27 c

An auditor may compensate for a high assessed level of control risk by increasing the:

1. level of detection risk
2. extent of tests of controls
3. Preliminary judgment of acceptable audit risk
4. Extent of substantive tests

Answer 9

4. Extent of substantive tests

Question 10

9-28 a

Which of the following procedures would a CPA most likely perform during the planning stage of the audit?

1. Evaluate the reasonableness of management’s allowance for doubtful accounts
2. Determine areas where there is a higher risk of material misstatement
3. Evaluate the significance of uncorrected misstatements
4. Confirm a sample of accounts reveivable.

Answer 10

2. Determine areas where there is a higher risk of material misstatement

Question 11

9-28 b

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk?

1. The furniture industry has experienced overall increase in demand
2. Modern Home recently engaged in a complex derivative transaction.
3. Modern Home experienced an increase in working capital.
4. Modern Home purchased expensive new equipment in the current year.

Answer 11

2. Modern Home recently engaged in a complex derivative transaction.

Question 12

9-28 c

After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor’s desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned?

• Auditor’s Desired Level of Detection Risk
• Overall Level of Audit risk
  1. Decrease
  Same
  2. Increase
  Same
  3. Same
  Higher
  4. Decrease
  Lower

Answer 12

1. Decrease
   Same

this is the book answer but Dr. DeBerry didn’t like this answer (probably won’t be on the test then?)