ACC653 Ch 7 - Arens

• Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?

• • The entity’s management places no emphasis on meeting publicized earnings projections.

• • Significant differences between the physical inventory count and the accounting records are not investigated.

• • Monthly bank reconciliations ordinarily include several large outstanding cheques.

• • Cash transactions are electronically processed and recorded, leaving no paper audit trail.

2. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

• • Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

• • An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.

• • The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.

• • The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

3. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

• • Presumptive

• • Judgmental

• • Criticizing

• • Questioning

• Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

• 1. audit risk.

• • detection risk.

• • inherent risk.

• • sampling risk.

• Which of the following does not increase the need for sufficient appropriate audit evidence?

• • A lower level of detection risk

• • An increase in the assessed control risk

• • A lower audit risk

• • A decrease in the assessed inherent risk

2. As lower levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to

• • find smaller misstatements.

• • find larger misstatements.

• • increase the performance materiality in the accounts.

• • increase inherent risk in the accounts.

3. Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could

• • decrease detection risk.

• • increase materiality levels.

• • decrease substantive testing.

• • increase inherent risk.

The risk that an auditor's procedures will lead to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist is referred to as

• acceptable audit risk.

• inherent risk.

• control risk.

• planned detection risk.

How much control does the auditor have over inherent risk?

• The auditor adjusts the controls that are considered (high level of control).

• The auditor considers inherent risk for the business as a whole (some control).

• The auditor assesses the factors that make up inherent risk (no control).

• The auditor calculates inherent risk values as a residual (no control).

Auditors' responsibility relating to fraud risk is

• detecting any type of fraud that occurred during the reporting period.

• detecting fraud only if it is above the planning materiality level.

• not an issue because the auditor is not responsible for detecting fraud.

• making inquiries of management about fraud and considering fraud risks.