Test 1 Quizzes Flashcards
Why does demand for auditing exist in a free-market economy, even if it were not required by regulation?
Due to the nature of the agency relationship between an absentee owner and a manager
Due to a natural conflict of interest between the absentee owner and a manager
Due to the information asymmetry that exists between the absentee owner and manager
All of the above
All of the above
The auditing standards used to guide the conduct of the audit are
- implicitly referred to in the opening paragraph
- explicitly referred to in the opening paragraph
- implicitly referred to in the scope paragraph
- explicitly referred to in the scope paragraph
explicitly referred to in the scope paragraph
Which of the following is the best definition for financial statement auditing?
- A systematic process of reporting and communicating economic assertions in accordance with established criteria.
- A systematic process of objectively obtaining and evaluating evidence to determine and communicate whether economic assertions are reported in accordance with established criteria.
- Any independent professional service that improves the quality of information, or its context, for decision makers.
- None of the above definitions even comes close to capturing the essential components.
systematic process of objectively obtaining and evaluating evidence to determine and communicate whether economic assertions are reported in accordance with established criteria.
Following are five of the phases in the financial statement audit process. Select the item (a-d) that places the phases in the proper order.
I. Consider and audit internal control
II. Evaluate results and issue the audit report
III. Client acceptance/continuance
IV. Audit business processes and related accounts
V. Plan the audit
III V I IV II
Which of the following statements is correct concerning the concept of materiality?
Materiality is determined by reference to formal guidelines established in professional standards.
Materiality depends only on the dollar amounts listed on a client’s financial statements.
Materiality depends on the nature of the client, and not on the dollar amounts listed on a client’s financial statements.
No formal requirements exist for determining materiality—it is a matter of professional judgment.
No formal reqs exist
The audit committee of a publicly held company should be made up of
members of the board of directors who are not officers of employees
Operational Auditing is oriented primarily toward
future improvements to accomplish the goals of mgt
T/F
Tests of details of balances emphasize the ending balances in the general ledger.
True
T/F
Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk further from the planned level and increasing reliance on substantive tests.
False
T/F
Tests of controls are required on any audit of a private company where the auditor believes the controls are either inappropriately designed or the implementation of the control is ineffective.
False
T/F
Substantive tests of transactions emphasize the verification of dollar amounts of transactions recorded in the journals and then posted in the general ledger.
True
Which of the following risks can be controlled by the auditor? Engagement risk for a particular client Inherent risk for a particular client Control risk for a particular client Detection risk for a particular client
Detection risk for a particular client
When is a duty to disclose fraud to parties other than the client’s senior management and its audit committee most likely to exist?
- when the amt is material
- when the fraud results from misappropriation of assets
- in response to inquiries from a successor auditor
- when a line manager rather than a lower-level employee commits the fraudulent act
in response to inquiries from a successor auditor
Which of the following are qualitative factors that may affect the evaluation of audit findings?
Whether the misstatement involves the concealment of an unlawful transaction.
Whether the misstatement masks a change in earnings or trends.
Whether intentional misstatements are part of actions to “manage” earnings
All of the above
All of the above
Assume you are planning an audit and you determine that you can tolerate a higher level of audit risk for the client than you originally anticipated. Thus, you must adjust the audit plan to obtain a higher amount of reasonable assurance from the audit evidence.
False
Which of the following financial ratios is not typically used to determine short-term liquidity?
Quick Ratio
Current Ratio
Times Interst Eearned
Opearationg Cash Flow Ratio
Times Int Earned
T/F
Using the Assurance Bucket analogy from the text, riskier assertions for an account would have larger buckets than the buckets for assertions with less risk.
True
T/F
In a typical company, the Profit Margin will be greater than the Gross Profit Percentage.
False
T/F
In a typical company, the Profit Margin will be greater than the Gross Profit Percentage.
False
Internal Control is a process designed to provide reasonable assurance regarding the achievement of which objective?
- Effectiveness and efficiency of operations
- Reliability of fin. reporting
- Compliance with applicable laws and regs
- All are correct
All of the above
T/F
A properly designed and functioning internal audit department is often used to “monitor” the operating effectiveness of internal control.
True
T/F
Management override of internal control is one of the limitations of an entity’s internal control system.
True
Which of the following audit tests would be regarded as a test of controls?
- Detailed tests of the items making up the balance in a given general ledger account.
- Vouching inventory pricing to vendors’ invoices.
- Tests of the signatures on canceled checks to verify that the signer is authorized to sign checks.
- Physically inspecting additions to property, plant, and equipment.
Test of signatures
Which of the following examples of audit evidence concerning proper implementation of segregation of duties generally is the most reliable?
- Inspection of copies of documents originally prepared by a third party, but which contain the initials of those applying client controls
- Observation by the auditor of the employees performing control activities when the employees are not aware of the auditor’s observation
- Preparation of a flowchart of duties performed and available personnel.
- Making inquiries of coworkers about the employee who applies control activities.
Observation by the auditor of the employees performing control activities when the employees are not aware of the auditor’s observation
Analytical procedures used in planning an audit should primarily focus on identifying
Material weaknesses in the internal control structure.
The predictability of financial data from individual transactions
The various assertions that are embodied in individual accounts.
Areas that may represent risks the auditor should attend to in the audit.
Areas that may represent risks the auditor should attend to in the audit
In the audit of financial statements, an auditor’s primary consideration regarding an internal control policy or procedure is whether the policy or procedure
- Reflects management’s philosophy and operating style.
- Increases the likelihood that management’s assertions are fairly stated.
- Provides adequate safeguards over access to assets.
- Enhances management’s decision-making processes.
Increases the likelihood that management’s assertions are fairly stated.
When an auditor increases the assessed level of control risk from the level initially planned because tests of controls indicate that certain control procedures are not operating effectively the auditor would most likely increase the
- Extent of tests of details.
- Level of inherent risk.
- Extent of tests of controls.
- Level of detection risk.
Extent of test of details
Entity-level controls can have a pervasive effect on the entity’s ability to meet the control criteria. Which one of the following is not an entity-level control?
- Controls to monitor results of operations
- Managements risk assessment process
- Controls to monitor the inventory-taking process
- Period-end financial reporting process
Controls to monitor the inventory taking process
A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires the auditor to
Trace a transaction from each major class of transactions from origination through the entity’s information system until it is reflected in the entity’s fin reports
T/F
In planning the audit of Internal Control over Financial Reporting, the auditor uses the same materiality considerations that are used in planning the audit of the financial statements
True
According to the text, all of the following are indicators of a material weakness except
- The commission of fraud by senior management.
- A restatement of previous year financial statements to correct a material misstatement.
- An ineffective audit committee.
- The finding of a “known error” in the current year audit that is not material to the financial statements.
The finding of a “known error” in the current year audit that is not material to the financial statements.
Which of the following statements concerning control deficiencies is true?
- All sig defic. are material weaknesses
- All control deficiencies are sig defics.
- The auditor should communicate to mgt, in writing,all control deficiencies in IC that were identified
- An auditor must report all sig defics. and mater weaknesses to PCAOB
The auditor should communicate to mgt, in writing,all control deficiencies in IC that were identified
