First Preboards (General)

Question 1

Define control risk.

Answer 1

The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.

Question 2

Define detection risk.

Answer 2

The risk that the auditor will not detect a material misstatement.

Question 3

Define inherent risk.

Answer 3

The susceptibility of material misstatement assuming there are no related internal controls.

Question 4

Analyze:

1. A well-designed system of internal control environment ensures the achievement of an entity’s control objectives
2. An inherent limitation to internal control is the fact that controls can be circumvented by management override.
3. A well-designed and operated internal control environment should detect collusion.
4. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

Answer 4

1. False
2. True
3. False
4. False

Question 5

An internal auditor is prohibited from auditing areas where they were recently assigned. In this case, the auditor may be said to be _______.

Answer 5

Objective

Question 6

(T/F) Audit risk is a function of the risk of material misstatement and detection risk.

Answer 6

True. RMM = IR x CR

AR = IR x CR x DR or RMM x Dr

Question 7

(T/F) The company’s F/S include a number of last minute material adjustments would be ordinarily considered a fraud risk factor.

Answer 7

True.

Question 8

“Further audit procedures” include which of the ff?

Risk assessment procedures?
Substantive testing?
Test of controls?

Answer 8

No. Yes. Yes.

Question 9

An abnormal fluctuation in gross profit for sales and inventories would most likely be identified in the planning phase by the use of…

Answer 9

Analytical procedures.

Question 10

(T/F) Inspection of management’s engagement letter is likely to be a test of control.

Answer 10

False.

Question 11

(T/F) In planning an audit, an auditor’s knowledge about the design of relevant controls should be used to document the assessed level of control risk.

Answer 11

False. Should be used to identify the types of potential misstatements that could occur. Take note na PLANNING PHASE pa lang ituu.

Question 12

(T/F) Reasonable assurance is a high, but not absolute, level of assurance.

Answer 12

True.

Question 13

What are the five internal control components of the COSO Framework?

Answer 13

[KEY: CRCIM}

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring

Question 14

What are sub-elements of the Control Environment?

Answer 14

Integrity and Ethical Values
Commitment to Competence
Board of Directors and Audit Committee
Management’s Philosophy and Operating Style
Organizational Structure
Assignment of Authority and Responsibility
Human Resource Policies and Procedures

Question 15

(T/F) When a purchasing employee and and outside vendor participate in a kickback scheme, this is a failure, rather than a limitation of internal control.

Answer 15

False. This is a limitation, rather than a failure, of internal control.

Question 16

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the F/S. How should the audit team address the audit procedures to the increased risk?

Answer 16

1. Review client’s procedures over safeguarding of inventory.
2. Physical count AT YEAR-END.

Question 17

(T/F) In a review engagement, the practitioner would most likely inquire of management regarding maturities, interest rates, and collateral on notes payable, rather than performing confirmations with the lender.

Answer 17

True.

Question 18

(T/F) The amount of audit work would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment.

Answer 18

False. The complexity and size of an entity would most likely influence the form and extent of auditor’s documentation of an entity’s internal control environment.

Question 19

(T/F) For efficiency, the auditor would most likely rely on an internal auditor’s work for F/S amounts judged by the auditor to require little or no subjectively evaluated evidence.

Answer 19

True.

Question 20

(T/F) The control environment would be considered the foundation for the other components of internal control.

Answer 20

True.

Question 21

(T/F) For small business clients, emphasizing ethical behavior through oral communication and management example best demonstrates management integrity in the absence of a written code of conduct.

Answer 21

True.

Question 22

(T/F) Sending confirmations to customers is an appropriate test for existence assertion of A/R.

Answer 22

True.

Question 23

(T/F) During an audit, an auditor should perform TOC to obtain sufficient appropriate evidence about the operating effectiveness of relevant controls if substantive procedures alone cannot provide sufficient appropriate evidence.

Answer 23

True.

Question 24

(T/F) Analytical procedures used in planning an audit should focus on enhancing the auditor’s understanding of the client’s business.

Answer 24

True.

Question 25

Which of the two would most likely cause a CPA to decide not to accept a new audit engagement?

1. Management’s disregard of its responsibility to maintain an adequate internal control environment.
2. Management’s refusal to permit the CPA to perform substantive tests before year-end.

Answer 25

1

Question 26

Which of the ff would an auditor most likely perform to test controls relating to completeness of cash receipts from cash sales for a retail outlet?

A. Observe consistency of employees’ use of cash registers and tapes
B. Inquire about employees’ access to recorded but undeposited cash
C. Trace deposits in the cash receipts journal to the cash balance in the general ledger
D. Compare the cash balance in the general ledger to the bank confirmation.

Answer 26

A.

Question 27

(T/F) In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are reasonable in the circumstances.

Answer 27

True.

Question 28

(T/F) An auditor may achieve audit objectives related to particular assertions by performing analytical procedures.

Answer 28

True.

Question 29

(T/F) An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support the assertion of existence.

Answer 29

False. Valuation.

Question 30

An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the following except:
A. Employee collusion
B. Falsified documentation
C. Need to apply professional judgment in evaluating fraud risk factors
D. Professional skepticism

Answer 30

D.

Question 31

The most reliable type of audit evidence that an auditor can obtain is
A. Physical examination by the auditor
B. Calculations by the auditor from company records
C. Confirmations received directly from third parties
D. External documents

Answer 31

A.

Question 32

What disclosure needs to be made for entities unlikely to continue as a going concern?

Answer 32

Make sure there is adequate disclosure and appropriately modify the report because the company does not appear to have the ability to continue as a going concern.

Question 33

(T/F) When the internal auditor’s work includes verification of the mathematical accuracy of invoices, the independent auditor may consider this to determine the NTE of his procedures.

Answer 33

True.

Question 34

(T/F) The successor auditor should contact the predecessor auditor regardless of whether the prospective client authorizes contact.

Answer 34

False. The successor auditor should obtain permission from the client to contact the predecessor auditor.

Question 35

(T/F) Ceteris paribus, a decrease in the amount of tolerable misstatement would most likely cause the auditor to perform the planned auditing procedures closer to the balance sheet date.

Answer 35

True.

Question 36

Explain the concept of reasonable assurance with regards to consideration of internal control.

Answer 36

Cost of internal control should not exceed the benefits expected to be derived therefrom

Question 37

The auditor looks for an indication on duplicate sales invoices to see if the invoices have been verified. This is an example of ________.

Answer 37

A test of control.