audit chapter 6

  1. Listed below are several of the auditors general obj. in performing substantive procedures on an asset account, indicate the gen. objective of each of the following audit procedures
    Observation of the client’s physical inventory primarily provides evidence related to the existence assertion. To a lesser degree it establishes valuation in that damaged or slow-moving inventory items may be identified for possible lower-of-cost-or-market testing. It may also provide evidence about cut-off of purchases and sales.

    Physical inspection of equipment items listed in the plant ledger serves to establish the existence of the assets. It does not, however, establish rights to those assets.

    • Obtaining a listing of inventory and reconciling the total to the general ledger establishes a population to be
    • tested for valuation

    • Tracing shipping documents to recorded sales is designed to establish the completeness
    • of recorded accounts receivable. It also provides evidence about the cut-off of sales transactions.

    Identifying related parties is performed to determine the appropriate financial statement presentation and disclosure of the assets.

    Vouching selected purchases of securities establishes existence of, rights to, and valuation (cost) of the securities. It may also provide some evidence about the cut-off of security transactions.
  2. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent finn. reporting and misappropriation of asstes. Which of the following is a risk factor for misappropriation of assets?
    • 1. Generous performance-based compensation systems
    • 2. Mgmt. preoccupation with increased finn. performance
    • 3. an unreliable accounting system
    • 4. strained relationships btw. mgmt and the auditors
  3. The audit committee of a company must be made up of
    Members of the board of directors who are NOT officers or employees
  4. Which of the following should not normally be included in the engagement letter for an audit?
    • 1. A description of the responsiblities of client personel to provide assistance
    • 2. and indictaion of the amount of the audit fee
    • 3. a description of the limitations of an audit
    • 4. a listing of the clients branch offices selected for testing
  5. Which portions of an audit is least likely to be completed before the balance sheet date?
    • 1. tests of controls
    • 2. issuance of an engagement letter
    • 3. substantive procedures
    • 4. assessment of control risk
  6. Which of the following should the auditors obtain from the predecessor auditors before accepting and audit engagnement?
    • 1. Analysis of B.S accounts.
    • 2. Analysis of income statement acct.
    • 3. All matters of continuing acct. signifcance
    • 4. Facts that might bear on the integrity of mgmt.
  7. As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidary ledger. This test provides evidence as to whether:
    recorded sales have been properly posted to custoemr accounts
  8. The primary objective of testes of details of transactions performed as substantive procedures is to:
    detect material misstatements in the financial statements
  9. The risk taht auditors will conclude based on substantive procedures that a material misstatement does not exist in an account balance when in fact such misstatement does exist is referred to as
    detection risk
  10. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
    materiality and audit risk
  11. Which of the following best describes what is meant by the term "fraud risk factor" ?
    factors often observed in circumstances where frauds have occurred
  12. Three conditions generally are present when fraud occurs. Select the one below that is NOT one of those conditions
    • 1. Incentive or pressure
    • 2. Opportunity
    • 3. Supervisory position
    • 4. attitude
  13. Which of the following is most likely to be an overally response to fraud risks identified in an audit?
    use less predictable audit procedures
  14. Early appointment of the auditor enables preliminary work to be performed by the auditor that benefits the client b/c it permits the audit to be performed in
    a more efficient manner
  15. With respect to the auditors planning of a year end audit, which of the following statements is always true?
    it is an acceptable practice to carry out part of the audit at interim dates
  16. An auditor is req. to est. an understanding with a client regarding the services to be performed for each engagement. this understanding gen. includes?
    The auditors resp. for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in internal control that ocme to the auditors attention.
  17. The scope and nature of an auditors contractual obligaion to a client is ordinarily set forth in the
    engagement letter
  18. An auditors engagement letter most likely will include
    mgmt's acknowledgment of its responsiblity for maintaining internal control
  19. Which of the following factors most likely would cause an auditor to decline a new audit engagement?
    concluding that the entity's mgmt prolly lacks integrity
  20. In assessing whether to accept a client for an audit engagement, a CPA should consider
    both clients business risk and CPA's business risk
  21. Which of the following factors most likely would cause a CPA to reject a new audit engagement?
    The prospective client is unwilling to make all finn. records available to the CPA
  22. Before accepting an engagement to audit a new client and auditor is req. to
    Make inquireies of the predecessor auditor after obtaining the consent of the prospective client
  23. A successor auditor ordinarily should request to review the predecessor's audit documentation relating to
    both contingencies and internal control
  24. Which of the following circumstances would permit and independent auditor to accept an engagement after the close of teh fiscal year?
    Remedy of limitaions resulting from accepting the engagement after the close of the end of the year such as those relating to the existence of physical inventory
  25. Which of the following is most likely the first step an auditor will perform after accepting an initial engagement?
    Tour the clients facilities and reveiw the general records
  26. in designing written audit plans, an auditor should est. specific audit obj. that relate primarily to the
    finn. statement assertions
  27. Which of the following ultimatley determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of and opinion?
    The auditors judgment
  28. Most of the independent auditors work in formulating an opinion on finn. statements consists of
    obtaining and examining evidential matter
  29. Three conditions are gen. present in teh clients organization when fraud occurs. Those conditions include all of the following exept
    • 1. incentive or pressure to comit fraud
    • 2. professional skepticism about the likelihood of fraud
    • 3. opportunity to commit fraud
    • 4. attitude or rationalization about the act of fraud
  30. which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent finn. reporting?
    mgmt. is interested in maintaining the entity's earnings trend by using aggressive acct. practices
  31. which of the follwing statements describes why a property planned and performed audit may not detect material misstatement due to fraud?
    audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion
  32. if an independed audit leading to an opinion on finn. statementss causes the auditor to believe that a material misstatement due to fraud existes, he should first
    consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of mgmt
  33. a CPA disovers a likely fraud during an audit but concludes that its effects if any could not be so material as to affect the opinion. He should
    report the finding to the appropriate rep. of the client with the recommendation that it be pursued to a conclusion
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audit chapter 6
Audit Chapter 6