EXAM 1

Question 1

What is the challenge of inventory?

Answer 1

always moving

Question 2

What are the 5 primary management assertions ?

1) E_____/O____
2) C_____
3) V_____
4) R____/O_____
5) P_____ & D____

Answer 2

1) Existence/Occurrence
2) Completeness
3) Valuation
4) Rights/Obligations
5) Presentation & Disclosure

Question 3

Define Existence/Occurrence

Definition: asserting they 1) ____ (ex. ____)
-key assertion: how do they know they 2) ____, is it 3) ____

-relevant to any 4) _____ and ____ accts (5) _____)
-can be 6) ____ than it should be

-existence pertains to 7) _____
-occurrence pertains to 8) ____

-Existence/Occurrence are 9) ____

Answer 3

1) actually have it (ex. inventory)
2) have it
3) real?
4) assets and revenues
5) overstatement
6) MORE
7) balance sheet
8) income statement
9) overstated

Question 4

Define Completeness

Definition: 1) ____ anything ____ (everything is ___)

-relevant to 2) ____ and ____ (3) _____)
-can be 4) ____than it should be

Completeness is 5) ____

Answer 4

1) didn’t leave anything out (everything is there)
2) liabilities and expenses
3) understatement
4) LESS
5) understatement

Question 5

Define Valuation

Definition: 1) ___ where the value 2) ___?
-accts that have 3) _____, what accts would have 4) ____ (ex. 5) ____ for _____)

-6) ____ is ___ assertion for valuation
-cash equivalent, international cash those would be important to valuation in that case

Answer 5

1) accuracy
2) come from
3) estimations
4) estimations
5) allowance for doubtful accts
6) cash is not

Question 6

Define Rights/Obligations

-Rights = 1) _____
-is this yours, do you have the 2) ___ to the assets?

-Obligations = is this my 3) ____?
-should it be on my 4) _____

Answer 6

1) ownership
2) rights
3) debt
4) balance sheet

Question 7

Define Presentation/Disclosure

-Presentation: did you do the 1) ______/_____ right?

-Disclosure: did we 2) _____ that we need to do?
-client is asserting they did disclosed everything stated in the notes

Answer 7

1) statements/formatting
2) disclose everything

Question 8

What are the 4 components of risk (a persuasive concept) ?

1) ______ Risk
2) ______ _____ Risk
3) ______ Risk
4) ______ Risk

Answer 8

1) Business Risk
2) Financial Reporting Risk
3) Engagement Risk
4) Audit Risk

Question 9

Define Business Risk

risk that affects the 1) _____ and 2) p _____ _____ of organizational 3) ____

Answer 9

1) operations
2) protentional outcomes
3) activities

Question 10

Define Financial Reporting Risk

risk that relates to the 1) ____ of _____ and the 2) _____ of the financial data in an organization’s 3) _____ ______

Answer 10

1) recording of transactions
2) presentation
3) financial statements

Question 11

Define Engagement Risk

risk that auditors encounter by being associated with a 1) ___ ____, including loss of 2) ___, the 3) _____ of the client to 4) ___ the auditor, or financial 5) ___

Answer 11

1) particular client
2) reputation
3) inability
4) pay
5) loss

Question 12

Define Audit Risk

risk that auditor may provide an 1) _____ ____ on 2) ____ _____ financial statements

Answer 12

1) unqualified opinion
2) materially misstated

Question 13

What are the elements of communication with the previous auditor?

-required by 1) ____
-2) ___ of management
-3) ____ on accounting or auditing
-predecessors’ understanding of reason for 4) ___
-any issues related to 5) ____,____ or matters related to 6) ____ control

Answer 13

1) standard
2) integrity
3) disagreements
4) change
5) fraud, illegal acts
6) internal

Question 14

Engagement Letter

-the auditor and client should have 1) ____ of the audit process

-the auditor should prepare an engagement letter to clarify the 2) ___ and ____ of each party and to summarize

Answer 14

1) mutual understanding
2) responsibilities and expectations

Question 15

What’s the audit formula?

Answer 15

AR = IR x CR x DR

AR = Audit Rick
IR = Inherent Risk
CR = Control Risk
DR = Detection Risk

Question 16

if the auditor accepts a client with high risk engagement risk
-the auditor must conduct a more 1) ____ audit
-the auditor does this by setting audit risk at 2) ____ ____

Answer 16

1) rigorous
2) low level

Question 17

Define Inherent Risk

1) _____ of transactions to be recorded in 2) ____, without considering 3) ____ control

Inherent Risk is at the account level is higher for some items
-4) ____ transactions: more likely to be misstated than simple transactions
-5) ____ balances: more likely to be misstated than fact based balances
-6) ____ issues: frequently with estimate issues
-7) ____ of transactions
-8) _____ end activity
-inherent risk is a 9) ____ by the auditor

Answer 17

1) susceptibility
2) error
3) internal
4) Complex
5) Estimated
6) Valuation
7) Volume
8) Significant year end
9) subjective judgement

Question 18

Define Control Risk

risk that 1)___ ___ ____ system will 2) ____ to 3) _____ a misstatement

Answer 18

1) client internal control
2) fail
3) prevent/detect

Question 19

Define Detection Risk

risk that 1) ____ procedures will 2) ___ to 3) ____ material misstatements

Answer 19

1) auditors
2) fail
3) detect

Question 20

Define Materiality

the magnitude of 1) o___ or mi____ of accounting information that in light of surrounding circumstances makes it probable that the 2) j____of a reasonable person 3) __ on the information would have been 4) ch___ or in___ by the omission or misstatement

Answer 20

1) omission or misstatement
2) judgment
3) relying
4) changed or influenced

Question 21

Materiality

-it’s a 1) _____ determination

-the 2) ____ amount you set for materiality, the 3) ____ ____ you do
-if you set it as $1, you will look at 4) ____ transaction
-if materiality is $1 million you will look at 5) ____

-most firms have 6) ____ for setting materiality (as a percentage)

Answer 21

1) money value determination
2) lower dollar
3) more work
4) every
5) fewer
6) guidelines

Question 22

What are the 3 uses of materiality

Answer 22

-financial statement materiality

-performance materiality (tolerable misstatement)

-clearly trivial (de minimis)

Question 23

Define financial statement materiality

def: “how much 1) ____ _____ _____can you 2) ___ with for a 3) ____ ____”

-set 4) ___, use it 5) ___

-6) u_____ impact on 7) ____ statements in total

Answer 23

1) total error misstatement
2) live
3) good opinion
4) first
5) last
6) ultimate
7) financial

Question 24

Define Performance Materiality (tolerable misstatement)

used to determine extent of 1) ____ for an account (ex. sample size)

reduced amount of 2) ____ ____ scope

Answer 24

1) testing
2) conservative testing

Question 25

Define Clearly Trivial (De Minimis)

-used in 1) _____ 2) in____ item selection

Answer 25

1) evaluating
2) individual

Question 26

Define evidence

1) ____, competent 2) ____ matter is to be obtained through audit 3) _____ performed to afford a 4) ____ basis for an 5) ____ regarding the financial statements

Answer 26

1) sufficient
2) evidential
3) procedures
4) reasonable
5) opinion

Question 27

What are 3 qualities of evidence

Answer 27

-sufficiency
-apprrioatie
-audit procedures