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WorksheetsCHAPTER 3-5
Total questions: 62
Worksheet time: 31mins
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagemement?
The client has already completed the inventory count
The CPA lacks an understanding of the prospective client's industry
The CPA is unable to review the predecessor auditor's documentation
The client is unwilling to make all financial records availiable
The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the
Management representation
Auditor's report
Engagement Letter
Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted?
The entity has no formal written code of conduct
The integrity of the entity's management is suspect
There is evidence of management override of controls at times.
Management fails to modify controls for changes in conditions
The use of analytical procedures is required during the planning stage
True
False
The use of analytical procedures is required during substantive testing
True
False
The use of analytical procedures is required during the completion stage
True
False
Audit documentation
Provides evidence that the audit was performed in accordance with GAAS
Is unnecessary if the auditor expresses an adverse opinion
Is the property of the client
Serves as a substitute for the client's accounting records
Detection risk differs from both control risk and inherent risk in that detection risk:
Should be assessed in non - qualitative terms
Exists independently of the financial statement audit
Arises from risk factors relating ti fraud
Can be changed at the auditor's discretion
As the acceptable level of detection risk increases, an auditor may
Decrease substantive testing
Postpone the planned timing of substantive tests
Lower the assessed level of control risk
An auditor assesses control risk because it
Provides assurance that the materiality levels are appropriate
Is relevant to the auditor's understanding of the control environment
Affects the level of detection risk that the auditor may accept
Indicates to the auditor where the inherent risk may be the greatest
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
The anticipated sample size of the planned substantive tests
The entity's anualized financial statements
The results of the internal control questionnaire
The contents of the management representation letter
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective the auditor would
Increase the extent of tests of controls
Increase the level of detection risk
Increase the level of inherent risk
Increase the extent of tests of details
The audit plan usually cannot be finalized until the
Understating of the entity and its environment has been completed.
Engagement letter has been signed by the auditor and the client.
Control deficiencies have been communicated to the Board.
Search for unrecorded liabilities has been performed and documented.
Which of the following procedures should an auditor most likely include in the planning of an audit of financial statements?
Determining the need for specialized skills.
Inquiring of the client's lawyer about litigation and claims
Obtaining a written representation letter from management
Determining whether necessary controls have been implemented
Which of the following increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
Inherent risk
Control Risk
Detection Risk
Sampling Risk
Some account balances are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
Audit risk
Sampling risk
Detection risk
Inherent risk
Which of the following is a factor in the control environment?
Segregation of duties
Information processing
Performance reviews
Management's philosophy and operating style
Which of the following is a component of internal control?
Financial reporting
Operating effectiveness
Risk Assessment
Organizational Structure
Which of the following does not reduce the need for sufficient appropriate audit evidence?
A lower acceptable level of detection risk
A decrease in the assessed control risk
A higher acceptable audit risk
A decrease in the assessed inherent risk
A rectangle on a flow chart typically depicts
Computer process
Document or report
Data
Manual process
The responsibility to establish maintain and monitor internal controls is that of the entity's
Management
Internal Auditors
External Auditors
According to the auditing standards, which of the following terms identifies a requirement for audit evidence?
Resonable
Adequate
Disconfirming
Appropriate
Which of the following is an inherent limitation in internal control?
Incompatible duties
Faulty human judgement
Lack of segregation of duties
Lack of audit commitee
To obtain audit evidence about control risk, an auditor selects from a variety of techniques including:
Inquiry
Analytical procedures
Recalculation
Confirmation
Which of the following is not a component of internal control?
Control environment
Control Activities
Monitoring
Inherent risk
Which of the following would provide the least assurance about the effectiveness of an internal control activity?
Inquiry of client personnel
Preparation of a system flowchart
Inspection of documents and reports
Observation of client personnel
As part of understanding internal control, an auditor is required to obtain knowledge about the operating effectiveness of internal control
True
False
The auditor faces a risk that the audit will not detect material misstatements. To minimize this risk, the auditor relies primarily on
Test of controls
Internal control
Substative tests
Statistical analysis
During the audit of internal controls, the auditor discovered a material weakness in internal control. The auditor most likely will express a(n)
Qualified opinion on internal control
Adverse opinion on internal control
Adverse opinion on the financial statements
Disclaimer of opinion on the finanicial staements
A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include
Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily.
Consideration of whether sufficient appropriate audit evidence may be obtained to afford a reasonable basis for an opinion.
Consideration of whether internal control is sufficiently effective to permit a reduction in the extent of required substantive tests.
Consideration of the business reputation of the client’s principal owners, key management, related parties, and those charged with governance.
Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement?
Assess control risk for the assertions embodied in the financial statements.
Prepare a rough draft of the financial statement and of the auditor’s report.
Tour the client’s facilities.
Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.
Which of the following procedures would an auditor most likely perform before auditing the balance sheet?
Confirm with client’s lawyer that all litigation probable of assertion has been disclosed to the auditor.
Determine whether there are any liens or encumbrances on assets that have been pledged as collateral.
Obtain an understanding of the client’s internal control activities.
Consider the client’s plans and ability to meet imminent purchase commitments and cash flow obligations.
Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
Objective judgment.
Integrity.
Professional skepticism.
Impartial conservatism.
In every audit, which of the following must be identified as a potential risk of material misstatement due to fraud?
Collusion.
Falsification of documentation.
Management override of controls.
Improper revenue recognition.
As part of understanding the system of internal control relevant to the audit of a non issuer, an auditor does not need to
Obtain knowledge about the operating effectiveness of the system of internal control.
Determine whether controls have been implemented.
Identify the risks of material misstatement.
Consider factors that affect the risks of material misstatement.
The existence of audit risk is recognized by the statement in the auditor’s report that the auditor
Obtains reasonable assurance about whether the financial statements are free of material misstatement.
Is required to be independent of the client.
Evaluates the accounting policies used.
Is responsible for expressing an opinion on the financial statements.
To obtain an understanding of a continuing client in planning an audit, an auditor most likely would
Read specialized industry journals.
Read internal audit reports.
Reevaluate the risks of material misstatement.
Perform tests of details of transactions and balances.
An auditor most likely obtains an understanding of a new client to
Develop an attitude of professional skepticism concerning management’s financial statement assertions.
Make constructive suggestions concerning improvements to the client’s internal control.
Identify areas of audit emphasis.
Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below?
A = Tests of controls
B = Preparation of a flowchart documenting the understanding of the client’s internal control
C = Substantive procedures
ABC
BCA
BAC
ACB
The acceptable level of detection risk is inversely related to the
Risk of failing to discover material misstatements.
Assurance provided by substantive procedures.
Risk of misapplying auditing procedures.
Preliminary judgment about materiality levels.
The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is
Audit risk.
Control risk.
Detection risk.
Inherent risk.
Inherent risk and control risk differ from detection risk in that they
May be assessed in either quantitative or nonquantitative terms.
Can be changed at the auditor’s discretion.
Exist independently of the financial statement audit.
Arise from the misapplication of auditing procedures.
Which of the following audit risk components may be assessed in nonquantitative terms?
Control Risk: Yes
Detection Risk: Yes
Inherent Risk: No
Control Risk: Yes
Detection Risk: Yes
Inherent Risk: Yes
Control Risk: Yes
Detection Risk: No
Inherent Risk: Yes
Control Risk: No
Detection Risk: Yes
Inherent Risk: Yes
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality for the financial statements as a whole?
The contents of the representation letter.
The anticipated sample size of the planned substantive procedures.
The entity’s year-to-date financial results and position.
The results of the internal control questionnaire.
Which one of the following statements is correct concerning the concept of materiality?
Materiality is determined by reference to AICPA guidelines.
Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
Materiality is a matter of professional judgment.
Materiality depends on the nature of an item rather than the dollar amount.
When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the
Level of inherent risk.
Extent of tests of controls.
Extent of tests of details.
Level of detection risk.
After testing a client’s internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client’s internal controls. Under these circumstances, the auditor most likely would
Issue a qualified opinion of this finding as part of the auditor’s report.
Increase the assessment of control risk and increase the extent of substantive tests.
Withdraw from the audit because the internal controls are ineffective.
Issue a disclaimer of opinion about the internal controls as part of the auditor’s report.
Detection risk differs from both control risk and inherent risk in that detection risk
Should be assessed in nonquantitative terms.
Arises from risk factors relating to fraud.
Can be changed at the auditor’s discretion.
Exists independently of the financial statement audit.
An auditor assesses the risks of material misstatement because they
Provide assurance that the auditor’s materiality levels are appropriate.
Affect the level of detection risk that the auditor may accept.
Indicate to the auditor where inherent risk may be the greatest.
Are relevant to the auditor’s understanding of the control environment.
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
The risk that the internal control system will not detect a material misstatement of a financial statement assertion.
The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.
The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.
The internal audit department’s objectivity in reporting to the audit committee a material misstatement of a financial statement assertion it detects.
Which of the following is a definition of control risk?
The risk that the auditor will not detect a material misstatement.
The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
The risk that the auditor’s assessment of internal controls will be at less than the maximum level.
The susceptibility of material misstatement assuming there are no related internal control policies or procedures.
When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except
The cost of correcting the misstatements.
The effect of uncorrected misstatements related to prior periods.
The size and nature of the misstatements.
The particular circumstances of each misstatement.
When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except
The cost of correcting the misstatements.
The effect of uncorrected misstatements related to prior periods.
The size and nature of the misstatements.
The particular circumstances of each misstatement.
Which of the following procedures is considered a test of controls?
An auditor interviews and observes appropriate personnel to determine segregation of duties.
An auditor reviews the entity’s check register for unrecorded liabilities.
An auditor evaluates whether a general journal entry was recorded at the proper amount.
An auditor reviews the audit working papers to ensure proper sign-off.
To obtain evidence about the operating effectiveness of controls, an auditor selects tests from a variety of methods, including
Inquiries.
Analytical procedures.
Calculations.
External confirmations.
To obtain evidence about the effectiveness of controls, an auditor ordinarily selects tests from a variety of methods, including
Comparison.
External confirmations.
Analysis.
Reperformance.
Which of the following is least likely to indicate the need to increase the assurance provided by substantive testing?
A decrease in the assessed inherent risk.
An increase in the assessed control risk.
A lower acceptable audit risk.
A lower acceptable level of detection risk.
For certain controls, such as assignment of authority and responsibility, documentary evidence may not exist. An auditor would most likely test the controls by
Inspection and vouching.
Computer-assisted methods and corroboration.
Observation and inquiry.
Confirmation and recomputation.
After obtaining an understanding of internal control for the audit of a nonissuer’s financial statements, an auditor decided not to perform tests of controls. The auditor most likely decided that
A reduction in the assessed risks of material misstatement is justified for certain financial statement assertions.
The assessed inherent risk exceeded the assessed control risk.
Performing only substantive procedures would effectively reduce audit risk to an acceptably low level.
The available evidence obtained through tests of controls would not support higher assessed risks of material misstatement.
As the acceptable level of detection risk increases for a given audit risk, an auditor may change the
Assessed level of control risk from a low level to a high level.
Timing of substantive procedures from year end to an interim date.
Assurance provided by tests of controls by using a larger sample size than planned.
Nature of substantive procedures from a less effective to a more effective procedure.
Which of the following combinations of audit procedures provides the least assurance?
Inquiry and recalculation.
Inquiry and observation.
Inquiry and reperformance.
Inquiry and inspection.
The auditor of a nonissuer would most appropriately use reperformance to obtain audit evidence for which of the following purposes?
To test the operating effectiveness of a bank reconciliation control.
To determine whether the aging categories on the aged accounts payable trial balance are accurate.
To test whether the amount of FICA tax withheld from an employee’s paycheck is appropriate.
To determine the mathematical accuracy of the extended cost amount shown on an invoice sent to a customer.
