WorksheetsReview of Auditing Theory
Total questions: 35
Worksheet time: 35mins
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive tests should increase.
Substantive tests should decrease.
Tests of controls should increase.
Tests of controls should decrease.
A summary of findings rather than assurance is most likely to be included in a(n):
Agreed-upon procedures report.
Compilation report.
Examination report.
Review report.
The primary goal of the CPA in performing the attest function is to
Detect fraud
Examine individual transactions so that the auditor may certify as to their validity
Determine whether the client's assertions are fairly stated
Assure the consistent application of correct accounting procedures
The attest function:
Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services.
Includes the preparation of a report of the CPA's findings.
Requires consideration of internal control.
Requires a complete review of all transactions during the period under examination.
Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also:
Accuracy.
Evaluation.
Compliance.
Internal control.
The permanent file of an auditor's working papers generally would not include
Bond indenture agreements.
Lease agreements.
Working trial balance.
Flowchart of internal control.
The assessment of the risks of material misstatement at the financial statement level is affected by the auditor's understanding of the control environment. Weaknesses in the control environment ordinarily will lead the auditor to
Have more confidence in internal control and the reliability of audit evidence generated internally within the entity.
Conduct some audit procedures at an interim date rather than at period end.
Modify the nature of audit procedures to obtain more persuasive audit evidence.
Decrease the number of locations to be included in the audit scope.
Which of the following statements is correct concerning an auditor's required communication with those charged with governance of an audit client?
This communication is required to occur before the auditor's report on the financial statements is issued.
This communication should include discussion of any significant disagreements with management concerning the financial statements.
Any significant matter communicated to the audit committee also should be communicated to management.
Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.
Assurance engagement
Is an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.
Is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
Is an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement.
Is an engagement intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the information will meet the needs of an intended user.
The audit working paper that reflects the major components of an amount reported in the financial statements is the
Interbank transfer schedule.
Carryforward schedule.
Lead schedule.
Supporting schedule.
RCM CPA is being engaged to audit the financial statements of JAC Corp. for the first time. Which of the following factors would most likely cause RCM CPA to decline from the engagement?
JAC Corp. has fired its prior auditor.
JAC Corp. is unwilling to make financial records available to RCM CPA.
RCM CPA lacks a thorough understanding of the prospective client's operations and industry.
RCM CPA is unable to review the predecessor auditor's working papers.
___________________ is/are generally included in an auditor's engagement letter.
Limitations of the engagement.
Factors to be considered in establishing preliminary judgments about materiality.
Management's liability for illegal acts committed by its employees.
The auditor's responsibility to obtain negative assurance relating to the occurrence of non-compliance with laws and regulations.
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
Rights.
Completeness.
Existence.
Valuation.
A scope restriction is least likely to result in a(an):
Qualified opinion.
Disclaimer of opinion.
Adverse opinion.
Standard unqualified opinion.
When performing risk assessment, auditors identify risks, relate risks to what could go wrong, consider the magnitude of risks and
Assess the risk of misstatements due to non-compliance with laws and regulations.
Consider the complexity of the transactions involved.
Consider the likelihood that the risks could result in material misstatements.
Determine materiality levels.
Statement 1: Incompatible duties exist when an employee is in a position to perpetuate and conceal errors or fraud. Statement 2: Internal auditors should preferably report to the chief accounting officer of the company. Statement 3: The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.
True, True, True
True, True, False
True, False, False
False, False, True
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor
Obtains reasonable assurance about whether the financial statements are free of material misstatement.
Assesses the accounting principles used and also evaluates the overall financial statement presentation.
Realizes some matters, either individually or in the aggregate, are important while other-matters are not important.
Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
Which of the following types of audit evidence is the most persuasive?
Prenumbered client purchase order forms.
Client work sheets supporting cost allocations.
Bank statements obtained from the client.
Client representation letter.
Which of the following types of audit evidence is the least persuasive?
Prenumbered purchase order forms.
Test counts of inventory performed by the auditor.
Bank statements obtained from the client.
Correspondence from the client's attorney about litigation.
Several risks are inherent in the evaluation of audit evidence that has been obtained through the use of statistical sampling. An example of a beta or Type II error related to sampling risk is the failure to
Properly define the population to be sampled.
Draw a random sample from the population.
Reject the statistical hypothesis that a book value is not materially misstated when the true book value is materially misstated.
Accept the statistical hypothesis that the book value is not materially misstated when the true book value is not materially misstated.
Which of the following would most likely constitute a significant deficiency?
Management's failure to renegotiate unfavorable long-term purchase commitments.
Recurring operating losses that may indicate going concern problems.
Evidence of a lack of objectivity by those responsible for accounting decisions.
Management's current plans to reduce its ownership equity in the entity.
How frequently must an auditor test the operating effectiveness of controls that appear to function as they have in past years and on which the auditor intends to rely?
Quarterly.
Each audit.
At least every second audit.
At least every third audit.
An audit engagement letter least likely includes
A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.
Identification of specific audit procedures that the auditor needs to undertake.
Description of any letters or reports that the auditor expects to submit to the client.
Arrangements concerning the involvement of internal auditors and other client's staff.
Which of the following is least likely to be evidence of operating effectiveness of controls?
Cancelled supporting documents.
Confirmations of accounts receivable.
Records documenting usage of computer programs.
Signatures on authorization forms.
Which of the following is incorrect regarding PSA 315?
This PSA requires the auditor to make risk assessments at the financial statement and assertion levels based on an appropriate understanding of the entity and its environment, including its internal control.
The purpose of this PSA is to establish standards and to provide guidance on obtaining an understanding of the entity and its environment, including its internal control, and on assessing the risks of material misstatement in a financial statement audit.
The requirements and guidance of this PSA are to be applied in conjunction with the requirements and guidance provided in other PSAs.
This PSA discusses the auditor's responsibility to determine overall responses and to design and perform further audit procedures whose nature, timing, and extent are responsive to the risk assessments.
As performance materiality is decreased, the auditor should plan more work on individual accounts to
Find smaller misstatements.
Find larger misstatements.
Increase the tolerable misstatement in the accounts.
Decrease the risk of assessing control risk too low.
What does the audit report date on a standard unqualified report indicate?
the last day of the fiscal period.
the date on which the financial statements were filed with the Securities and Exchange Commission.
the last date on which users may institute a lawsuit against either client or auditor.
the last day of the auditor's responsibility for the review of significant events that occurred subsequent to the date of the financial statements.
What does the first paragraph of a standard unqualified audit report for a public client refer to as?
Introductory paragraph.
Scope paragraph.
Opinion paragraph.
Explanatory paragraph.
Based on the IFAC Code of Ethics for Professional Accountants, threats to independence arise from all of the following except?
Self-interest.
Advocacy.
The audit relationship.
Intimidation.
Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement?
Issue a qualified opinion due to a significant scope limitation.
Auditor should withdraw from the engagement.
Consider whether there is any obligation to report to the board of directors or shareholders the circumstances necessitating withdrawal.
None
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
Accounts receivable.
Interest expense.
Accounts payable.
Travel and entertainment expense.
The relationship between the acceptable level of audit risk and the detection risk that an auditor should allow when performing engagements is
Direct
Inverse
A or B.
These are unrelated.
An auditor decides to increase the assessed level of control risk from that originally planned on the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, what should the auditor do?
Increase substantive testing.
Decrease inherent risk assessment.
Decrease detection risk.
Increase materiality levels.
The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
Sampling risk.
Detection risk.
Nonsampling risk.
Inherent risk.
Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions?
Due care
Competence
Independence
Complex body of knowledge
