Chapter Exam (Chapters 1-3) Flashcards
In determining the primary responsibility of the external auditor for an audit of a company’s financial statements, the auditor owes primary allegiance to the management of the client because the auditor is hired and paid by management. T or F?
FALSE
The generally accepted auditing standards of field work include a requirement that the auditors obtain sufficient appropriate audit evidence. T or F?
TRUE
The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:
a. Illegal act has material financial statement implications
b. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements
c. Illegal act has received widespread publicity
d. Management fails to take appropriate corrective action
d
Clerical mistakes in the processing of transactions
Determine if the following is an indication of an Error, Fraud or Noncompliance.
ERROR
Purchasing at prices significantly above or below market price
Determine if the following is an indication of an Error, Fraud or Noncompliance.
NONCOMPLIANCE
Missing documents
Determine if the following is an indication of an Error, Fraud or Noncompliance.
FRAUD
Disrespecting or Harassing other employees or customers
Determine if the following is an indication of an Error, Fraud or Noncompliance.
NONCOMPLIANCE
Misapplication of accounting policies
Determine if the following is an indication of an Error, Fraud or Noncompliance
ERROR
Failure to wear the necessary personal protective equipment (PPE) when undertaking specific tasks
Determine if the following is an indication of an Error, Fraud or Noncompliance
NONCOMPLIANCE
Negative cash flows from operations
Determine if the following is an indication of an Error, Fraud or Noncompliance
FRAUD
Unauthorized alteration of computer files
Determine if the following is an indication of an Error, Fraud or Noncompliance
FRAUD
Omission of an entry to record a bank transfer to cover a cash shortage
Determine if the following is an indication of an Error, Fraud or Noncompliance
FRAUD
Payments without proper documentation
Determine if the following is an indication of an Error, Fraud or Noncompliance
NONCOMPLIANCE
Material misstatements may emanate from inadequacy of accounting records. T or F?
FALSE
The audit committee has the primary responsibility for the fairness of the representations made in the financial statements. T or F?
FALSE
The reason for an independent auditor in gathering evidence is to detect fraud. T or F?
FALSE
A typical objective of an operational audit is to determine whether an entity’s specific operating units are functioning efficiently and effectively. T or F?
TRUE
Which of the following statements best describes an auditor’s responsibility to detect errors
or fraud?
a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain
material misstatements and should design the audit to provide reasonable assurance of detecting errors
and fraud that are material to the financial statements.
b. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions
identify conditions causing a reasonably prudent auditor to suspect that the financial statements were
materially misstated.
c. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit
does not constitute a guarantee.
d. An auditor is responsible to detect material errors, but has no responsibility to detect material fraud that are
concealed through employee collusion or management override of the internal control structure.
a
The primary factor that distinguishes errors from fraud is
a. Whether the misstatement is perpetrated by an employee or by a member of management
b. Whether the misstatement is concealed
c. Whether the underlying cause of misstatement relates to misapplication of accounting principles or to clerical
processing
d. Whether the underlying cause of misstatement is intentional or unintentional
d
The standard of due audit care requires the auditor to
a. Make perfect judgement decisions in all cases
b. Ensure that the financial statements are free from error
c. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision
d. Possess skills clearly above the average for the profession
c
Which of the following is one of the elements of quality control and procedures?
a. Engagement performance
b. Supervision
c. Assurance of proper levels of association
d. Due professional care
a
While performing audit services for their clients, professional accountants have a duty to provide a level of care which is
a. Reasonable
b. Greater than average
c. Superior
d. Guaranteed to be free from error
a
An audit should be designed to provide reasonable assurance of detecting all illegal acts. T or F?
FALSE
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the:
a. Management of the company
b. Partner assigned to the audit engagement
c. Securities and Exchange Commission
d. Auditor in charge of the fieldwork
a
Which of the following responsibilities rests with the management of an entity?
(i) Selecting and adopting the appropriate accounting policies
(ii) Ensuring the financial statements of the entity are fairly presented
(iii) Preparing sustainability reports
(iv) Establishing and maintaining an effective internal control systems
a. (ii) and (iv)
b. (i), (ii) and (iv)
c. (i), (iii) and (iv)
d. (i) and (ii)
b
Although external auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity. T or F?
FALSE
If the client refuses to accept an audit report that is qualified due to noncompliance with laws and regulations, the auditor should withdraw from the engagement and indicate the reasons to the SEC or other regulatory body in writing. T or F?
FALSE
The generally accepted auditing standards include a requirement that the CPAs:
a. Exercise due professional care in the performance of the examination and the preparation of the report
b. Not accept as audit clients companies that compete directly with one another
c. Assume responsibility for any losses to the client from fraud which existed during the audit but was not
detected by the auditors
d. Follow accounting principles adopted by SEC
a
If an illegal act is discovered during the audit of a publicly held company, the auditors should first:
a. Report the act to high level personnel within the client’s organization and to the audit committee
b. Intensify the examination to identify all illegal acts
c. Notify the regulatory authorities
d. Determine who was responsible for the illegal act
a
The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with the external auditor. T or F?
FALSE
Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions?
a. Complex body of knowledge
b. Competence
c. Due professional care
d. Independence
d
Professional skepticism requires auditors to possess an intelligent mind. T or F?
FALSE
Questioning mind
