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Auditing: Chapter 6

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company.
False
Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.
False
Preliminary arrangements with clients should be set forth in the management letter.
False
An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements.
False
The auditors’ tests of controls are designed to substantiate the fairness of specific financial statement accounts.
False
At least a portion of the auditors’ consideration of internal control usually is performed at an interim date rather than at the balance sheet date.
True
The substantive approach to an audit is appropriate for many small businesses.
True
Confirming a bank account establishes existence but not rights to the cash balance.
False
The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.
True
Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.
True
Which of the following factors most likely would cause a CPA to not accept a new audit engagement
The prospective client is unwilling to make financial records available to the CPA.
Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting
An overly complex organizational structure involving unusual lines of authority
Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement
Management’s disregard for internal control
Which of the following matters is generally included in an auditor’s engagement letter
Limitations of the engagement
Which of the following would heighten an auditor’s concern about the risk of fraudulent financial reporting
Inability to generate positive cash flows from operations, while reporting large increases in earnings
To best test existence, an auditor would sample from the
General ledger to source documents
The auditors’ understanding established with a client should be established through a (an)
Written communication with the client
Which of the following would be least likely to be considered an audit planning procedure
Perform the risk assessment
While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and
Consider the likelihood that the risks could result in material misstatements
Which of the following is correct concerning requirements about auditor communications about fraud
Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved
A predecessor auditor will ordinarily initiate communication with the successor auditor
Neither prior nor subsequent to the successor’s acceptance of the engagement
Which measure of materiality (or both) considers quantitative considerations
planning and evaluation
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted
It is unlikely that sufficient evidence is available to support an opinion on the financial statements
In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor
Negative cash flows from investing
Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to
Errors and misappropriation of assets
Which of the following is not one of the assertions made by management about an account balance
Relevance
The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management
The Professional Standards on changing auditors
Which of the following procedures is not performed as a part of planning an audit engagement
Confirmation of all major accounts
The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as
Inherent risk
Which of the following is least likely to be considered a financial statement audit risk factor
Management operating and financing decisions are dominated by top management
Which of the following is an example of fraudulent financial reporting
Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold
Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting
Extreme degree of competition within the industry
Which of the following conditions identified during the audit increases the risk of employee fraud
Inventory items of small size, but high value
Which of the following statements is accurate about “fraud risk factors” considered when conducting an audit
Factors whose presence often have been observed in circumstances where frauds have occurred
Which of the following is not an example of a likely adjustment in the auditors’ overall audit approach when significant risk is found to exist
Increase the assessed level of detection risk
Which of the following is least likely to be required on an audit
Make a legal determination of whether fraud has occurred
Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement
Substantive tests of details and substantive analytical procedures
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting
Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices
A successor auditor is required to attempt communication with the predecessor auditor prior to
Accepting the engagement
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts
Allowance for doubtful accounts
The risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as
Detection risk
Which of the following statements is correct regarding the auditor’s determination of materiality
The auditors’ planning level of materiality may be disaggregated into smaller “tolerable misstatements” for the various accounts
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is
The auditors’ preliminary estimate of the smallest amount of misstatement that would be material to any one of the client’s financial statements
Which of the following topics is not normally included in an engagement letter
The auditors’ preliminary assessment of internal control
Which of the following is most likely to be an overall response to fraud risks identified in an audit
Use less predictable audit procedures
Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance
Legality
Tests for unrecorded assets typically involve tracing from
Source documents to recorded journal entries
Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries
Completeness
Determining that receivables are presented at net-realizable value is most directly related to which management assertion
Valuation
Which of the following is not a general objective for the audit of asset accounts
Establishing proper liabilities relating to assets
Which of the following is not used by auditors to establish the completeness of recorded assets
Vouching transactions
To test for unsupported entries in the journals, the direction of audit testing should be to the
Original source documents
A form filed with the SEC when a company changes auditors is a
Form 8-K
Which of the following is least likely to render material a quantitatively small misstatement material
Arises from an item not capable of precise measurement
Which of the following is not a required source of information for the auditors’ assessment of fraud risk
Results of tests of controls
Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control
Examining physical controls over assets
Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in
An engagement letter
The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered
Prior-year working papers of the predecessor auditors
The auditors will not ordinarily initiate discussion with the audit committee concerning the
Details of the procedures which the auditors intend to apply
Which statement is correct relating to a potential successor auditor’s responsibility for communicating with the predecessor auditors in connection with a prospective new audit client
The successor auditors should obtain permission from the prospective client to contact the predecessor auditors
Which of the following situations would most likely require special audit planning by the auditors
Inventory is comprised of precious stones
When planning an audit, an auditor should
Make preliminary judgments about materiality levels for audit purposes
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should
Obtain a knowledge of matters that relate to the nature of the entity’s business
With respect to the auditor’s planning of a year-end audit, which of the following statements is always true
It is an acceptable practice to carry out parts of the examination at interim dates
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the
Integrity of management
The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on
Substantive procedures
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of
Analytical procedures
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s
Understanding as to the reasons for the change of auditors
Which of the following is least likely to be included in an auditor’s inquiry of management while obtaining information to identify the risks of material misstatement due to fraud
Are all financial reporting operations at one location
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of
Completeness
Individuals who commit fraud are ordinarily able to rationalize the act and also have an
Incentive
PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality
A material amount would significantly alter the “total mix” of information made available to an investor
Which of the following is correct concerning the PCAOB’s concept of a significant account
In deciding whether an account is a significant account one does not consider the effect of internal control

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