Quiz
Audit Midterm 2
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Questions in this quiz (63)
1A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the
- AA) inherent risk.
- BB) acceptable audit risk.
- CC) statistical risk.
- DD) financial risk.
2Initial audit planning involves four matters. Which of the following is not one of these?
- AA) Develop an overall audit strategy.
- BB) Request that bank balances be confirmed.
- CC) Schedule engagement staff and audit specialists.
- DD) Identify the client's reason for the audit.
3A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company’s financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the
- AA) management letter requested by the auditor.
- BB) engagement letter.
- CC) audit Plan.
- DD) audit Strategy for the client.
4The audit team gathers information about a new client's business and industry in order to obtain:
- AA) an understanding of the clients internal control system for financial reporting.
- BB) an understanding of how economic events and transactions have an effect on the company's financial statements.
- CC) information about control risk.
- DD) information regarding whether the company is engaging in financial statement fraud.
5An auditor should examine minutes of the board of directors' meetings
- AA) through the date of the financial statements.
- BB) through the date of the audit report.
- CC) only at the beginning of the audit.
- DD) on a test basis.
6Related party
- AA) transactions must be disclosed in the footnotes even if the amounts are immaterial.
- BB) disclosures include the nature of the related party relationship and a description of the transaction.
- CC) transactions are considered arm's-length transactions.
- DD) disclosures are required only for public companies.
7Which of the following is most correct with respect to the use of analytical procedures?
- AA) Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption.
- BB) Analytical procedures must be used throughout the audit.
- CC) Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved.
- DD) Analytical procedures are performed by studying plausible relationships between financial and non financial data.
8One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.
- ATrue
- BFalse
9If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2:
- AA) material.
- BB) insignificant.
- CC) significant.
- DD) relevant.
10The scope paragraph of the standard unqualified auditor's report states that "...the standards require that we plan and perform the audit to obtain ____________ assurance about whether the financial statements are free of material misstatement." What type of assurance is given?
- AImmediate
- BLimited
- CReasonable
- DAbsolute
11When dealing with audit risk,
- AA) auditors cannot accept any level of risk in performing the audit function.
- BB) most risks that auditors encounter are relatively easy to measure.
- CC) the audit risk model is only used for classes of transactions.
- DD) the audit risk model helps the auditor to decide how much and what types of evidence to accumulate.
12If planned detection risk is reduced, the amount of evidence the auditor accumulates will
- AA) increase.
- BB) decrease.
- CC) remain unchanged.
- DD) be indeterminate.
13Auditors typically rely on internal controls of their private company clients
- AA) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.
- BB) only if the controls are determined to be effective.
- CC) only if the client asks an auditor to test controls.
- DD) only if the controls are sufficient to increase control risk to an acceptable level.
14Section 404 of the Sarbanes-Oxley Act requires that public companies issue an internal control report.
- ATrue
- BFalse
15When a company designs and implements internal controls, cost of the controls is not a valid consideration.
- ATrue
- BFalse
16To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.
- ATrue
- BFalse
17In an audit of a nonpublic company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.
- ATrue
- BFalse
18An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as
- AA) collusion.
- BB) a material weakness.
- CC) a control deficiency.
- DD) a significant deficiency.
19In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because
- AA) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
- BB) the class of transaction is where most fraud schemes occur.
- CC) account balances are less important to the auditor then the changes in the account balances.
- DD) classes of transactions tests are the most efficient manner to compensate for inherent risk.
20Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the
- AA) adequacy of the computer system.
- BB) proper implementation by management.
- CC) ability of the internal audit staff to maintain it.
- DD) competency and dependability of the people using it.
21Which of the following statements is most correct with respect to separation of duties?
- AA) A person who has temporary or permanent custody of an asset should account for that asset.
- BB) Employees who authorize transactions should not have custody of related assets.
- CC) Employees who open cash receipts should record the amounts in the subsidiary ledgers.
- DD) Employees who authorize transactions should have recording responsibility for these
22Which of the following deals with ongoing or periodic assessment of the quality of internal control by management?
- AA) verifying activities
- BB) monitoring activities
- CC) oversight activities
- DD) management activities
23Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality.
- AA) risk assessment policy
- BB) monitoring policy
- CC) control environment
- DD) system of control activities
24When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be
- AA) tracing.
- BB) vouching.
- CC) performing a walkthrough.
- DD) testing controls.
25Narratives, flowcharts, and internal control questionnaires are three common methods of
- AA) testing the internal controls.
- BB) documenting the auditor's understanding of internal controls.
- CC) designing the audit manual and procedures.
- DD) documenting the auditor's understanding of a client's organizational structure.
26You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control?
- AA) The company's audit committee has experienced unusual turnover of members.
- BB) The company's CFO was indicted for embezzling from the company.
- CC) Bank reconciliations are done monthly.
- DD) The CEO retired after twenty years of service to the company.
27The auditor must communicate:
- AA) only material weaknesses in internal control to those charged with governance.
- BB) both significant deficiencies and material weaknesses in internal control to those charged with governance.
- CC) any significant deficiencies in internal control to those charged with governance using a management letter.
- DD) issues regarding internal control to those charged with governance in writing within 90 days following the audit report release.
28Which of the following represents a correct statement regarding internal control testing?
- AA) When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits, auditing standards require tests of the controls' effectiveness at least every other year.
- BB) The greater the risk, the less audit evidence the auditor should obtain that controls are operating effectively.
- CC) The auditor uses control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit.
- DD) Testing of internal controls can only be performed by the auditor at the end of the fiscal year.
29A control available in a small company, which may be necessitated because of lack of competent personnel, is:
- AA) a wider segregation of duties.
- BB) a voucher system.
- CC) fewer transactions to process.
- DD) the owner-manager's direct involvement in the control process.
30Which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control?
- AA) lack of expertise
- BB) Reduced importance
- CC) Limited resources
- DD) Limited available guidance
31The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.
- ATrue
- BFalse
32Fraud is more prevalent in large businesses than small businesses and not-for-profit organizations.
- ATrue
- BFalse
33The pressure to do "whatever it takes" to meet goals is one of the main reasons why financial statement fraud occurs.
- ATrue
- BFalse
34Management and the board of directors are responsible for setting the "tone at the top."
- ATrue
- BFalse
35Because fraud perpetrators are often knowledgeable about audit procedures, auditors should incorporate unpredictability into the audit plan.
- ATrue
- BFalse
36Which of the following best defines fraud in a financial statement auditing context?
- AA) Fraud is an unintentional misstatement of the financial statements.
- BB) Fraud is an intentional misstatement of the financial statements.
- CC) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality.
- DD) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.
37In the fraud triangle, fraudulent financial reporting and misappropriation of assets
- AA) share little in common.
- BB) share most of the same risk factors.
- CC) share the same three conditions of the fraud triangle.
- DD) share most of the same conditions of the fraud triangle.
38Which of the following questions is the auditor not required to ask company management when assessing fraud risk?
- AA) Does management have knowledge of any fraud or suspected fraud within the company?
- BB) What is the nature of the fraud risks identified by management?
- CC) Is management using all assets effectively?
- DD) What internal controls have been implemented to address the fraud risks?
39Since IT systems can often initiate transactions automatically, proper authorization depends on software procedures and accurate master files used to make the authorization decision.
- ATrue
- BFalse
40One potential disadvantage of IT systems is the reduction or elimination of source documents, which reduces the visibility of the audit trail.
- ATrue
- BFalse
41Knowledge of both general and application controls is crucial for auditors in understanding how accounting information is recorded and reported.
- ATrue
- BFalse
42The objective of the test data approach is to determine whether the client's computer programs can correctly process valid and invalid transactions.
- ATrue
- BFalse
43Parallel testing is used when old and new systems are operated simultaneously in all locations.
- ATrue
- BFalse
44The continued integration of IT in accounting systems can impact a company by:
- AA) increasing the costs of handling a large amount of data.
- BB) increasing the number of manual controls needed.
- CC) giving management higher-quality information more quickly than a manual system, thus helping management in their decision making process.
- DD) decreasing the segregation of duties.
45Old and new systems operating simultaneously in all locations is a test approach known as:
- AA) pilot testing.
- BB) horizontal testing.
- CC) integrative testing.
- DD) parallel testing.
46When purchasing software or developing in-house software,
- AA) cost should be the only factor.
- BB) extensive testing of the software is generally not required.
- CC) a team of both IT and non-IT personnel should be involved in the decision process.
- DD) the librarian and the IT manager should be the only ones involved in the decision process.
47The most important output control is
- AA) distribution control, which assures that only authorized personnel receive the reports generated by the system.
- BB) review of data for reasonableness by someone who knows what the output should look like.
- CC) control totals, which are used to verify that the computer's results are correct.
- DD) logic tests, which verify that no mistakes were made in processing.
48Analytical procedures are normally designed at the account level, whereas tests of controls and substantive tests of transactions are normally designed at the transaction-related objective level.
- ATrue
- BFalse
49The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk.
- ATrue
- BFalse
50Tests of controls provide evidence about the likelihood for misstatements in a client’s financial system.
- ATrue
- BFalse
51When designing an audit program for tests of details of balances, the auditor should make assumptions about inherent risk and control risk, and predictions concerning the outcome of tests of controls, substantive tests of transactions, and analytical procedures.
- ATrue
- BFalse
52The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency.
- ATrue
- BFalse
53Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests?
1. risk assessment procedures
2. tests of controls
3. substantive tests of transactions
4. substantive analytical procedures
5. tests of details of balances- AA) 1, 2, and 3
- BB) 3, 4, and 5
- CC) 2, 3, and 5
- DD) 2, 3, and 4
54The purpose of tests of controls is to provide reasonable assurance that the
- AA) accounting treatment of transactions and balances is valid and proper.
- BB) internal control procedures are functioning as intended.
- CC) entity has complied with GAAP disclosure requirements.
- DD) entity has complied with requirements of quality control.
55Which of the following is true?
- AA) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.
- BB) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts.
- CC) Tests of details of balances focus on the auditor's understanding of internal controls.
- DD) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.
56A system walkthrough is primarily used to help the auditor
- AA) test the ending account balances.
- BB) test the details of transactions.
- CC) determine whether internal controls have been properly implemented.
- DD) determine whether the audit engagement should be accepted.
57Analytical procedures
- AA) involve comparisons of recorded amounts to expectations developed by management.
- BB) are only performed during the planning stage of the audit.
- CC) are required to be performed when auditing an account balance.
- DD) provide substantive evidence.
58In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?
- AA) substantive analytical procedures
- BB) risk assessment procedures
- CC) tests of controls
- DD) tests of details of balances
59Which of the following is generally not included in the "evidence mix"?
- AA) tests of controls
- BB) substantive tests of transactions
- CC) risk assessment procedures
- DD) tests of details of balances
60The document that details the specific audit procedures for each type of test is the
- AA) audit strategy.
- BB) audit program.
- CC) audit procedure.
- DD) audit risk model.
61In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities. List the activities below.
[blank_start]Perform final analytical procedures.[blank_end]
[blank_start]Evaluate the going-concern assumption[blank_end]
[blank_start]Obtain a client representation letter[blank_end]
Read information in the annual report to make sure that it is consistent with the financial statements.- APerform final analytical procedures.
- BEvaluate the going-concern assumption
- CObtain a client representation letter
62Why do auditors use the audit risk model when planning an audit?
Auditors use the audit risk model to help them decide how much and what types of evidence to accumulate for each relevant audit objective.
PDR _ __AAR¬¬¬____
IR x CR
[blank_start]PDR = Planned Detection Risk[blank_end]
[blank_start]IR = Inherent Risk[blank_end]
[blank_start]CR = Control Risk[blank_end]
[blank_start]AAR = Acceptable Audit Risk[blank_end]- APDR = Planned Detection Risk
- BIR = Inherent Risk
- CCR = Control Risk
- DAAR = Acceptable Audit Risk
63Control activities help assure that the necessary actions are taken to address risks to the achievement of the company’s objectives. List the five types of control activities.
• [blank_start]Adequate separation of duties[blank_end]
• Proper [blank_start]authorization of transactions and activ[blank_end]ities
• [blank_start]Adequate documents and records[blank_end]
• [blank_start]Physical control over assets and records[blank_end]
• [blank_start]Independent checks on performance[blank_end]- AAdequate separation of duties
- Bauthorization of transactions and activ
- CAdequate documents and records
- DPhysical control over assets and records
- EIndependent checks on performance
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- Description
- Audit chapter 8-13
- Author
- Isabel Robles
- Language
- English
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