audit 2

An auditor’s engagement letter most likely will include

• A request for permission to contact the client’s lawyer for assistance in identifying litigation, claims and assessments

• A reminder that management is responsible for illegal acts committed by employees

• The auditor’s preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting

• Management’s acknowledgment of its responsibility for such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement

Which of the following statements is true with regard to the relationship among audit risk, audit evidence and materiality?

• Aggregate materiality thresholds should not change under conditions of changing risk levels

• The lower the inherent risk and control risk, the lower the aggregate materiality threshold

• Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk

• Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence

There is an inverse relationship that exists between acceptable level of detection risk and the

• Risk of failing to discover material misstatements

• Assurance provided by substantive tests

• Preliminary judgments about materiality levels

• Risk of misapplying audit procedures

Which of the following is most likely to be considered a risk assessment procedure relating to internal control?

• Confirm accounts receivable.

• Perform a test of a control relating to payroll.

• Take test counts of the year-end inventory.

• Trace a transaction through the information system relevant to financial reporting.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:

• segregation of incompatible functions is necessary to ascertain that internal control is effective.

• employment of competent personnel provides assurance that the objectives of internal control will be achieved.

• establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.

• costs of internal control should not exceed the benefits expected to be derived from internal control.

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

• noncapitalizable expenditures for repairs and maintenance have been properly charged to expense

• expenditures for property and equipment have not been charged to expense

• noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period

• expenditures for property and equipment have been recorded in the proper period

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?

• Compare the physical quantities of slow-moving items with corresponding quantities in the prior year

• Observe merchandise and raw materials during the client’s physical inventory taking

• Review management’s inventory representations letter for accuracy

• Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?

• Increase.

• Remain the same

• Decrease.

• Indeterminate, depends upon exact change being made.

When using sampling for tests of controls, which of the following audit consequences may follow?

• If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.

• If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high.

• If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests.

• If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?

• When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated.

• The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.

• When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account.

• When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.