AUDIT

An independent audit aids in the communication of economic data because the audit. Confirms the exact accuracy of management’s financial representations. B) Lends credibility to the financial statements. C) Guarantees that financial data are fairly presented. D) Assures the readers of financial statements that any fraudulent activity has been corrected.

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?. A) Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. B) Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements. C) A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor’s work. D) An entity may have a poorly designed internal control system.

Information asymmetry. A) Refers to an imbalance of information among stockholders in a company. B) Refers to an imbalance of information between the auditor and the management of the company. C) Refers to an imbalance of information between stockholders and the management of the company. D) Refers to an imbalance of information between the auditor and the stockholders of the company.

Which of the following best describes the primary reason an independent auditor reports on financial statements?. A) To give stockholders some assurance that any fraudulent activities will be detected. B) To identify a poorly designed internal control structure that may produce unreliable financial statements. C) To provide expertise to management, which may not be totally knowledgeable of the applicable financial reporting framework. D) To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

Financial statement users’ demand for assurance is similar to that of a potential home buyer who hires a building surveyor in that. A) The buyer [or user] pays directly for this assurance in both situations. B) There are often information asymmetry and conflicts of interest. C) The cost of obtaining information is not relevant. D) Independence is not relevant in either situation.

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor’s decision when reporting on the financial statements as a whole relates most closely to which major audit concept?. A) Materiality. B) Audit risk. C) Management assertions. D) Reasonable assurance.

Audit evidence. A) May only be gathered from parties external to the auditee to be reliable. B) May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information. C) May only be gathered from computerized sources to avoid human error. D) to the underlying accounting data.

Audit risk. A) Can be completely eliminated through appropriate sampling of transactions. B) Is the risk that a 'clean' opinion will be issued when, in reality, the financial statements are materially misstated. C) Is what creates the demand for an audit. D) Is the risk that a company may hire an incompetent auditor.

For what primary purpose does the auditor obtain an understanding of the entity and its environment?. A) To determine the audit fee. B) To decide which facts about the entity to include in the audit report. C) To plan the audit and determine the nature, timing, and extent of audit procedures to be performed. D) To limit audit risk to an appropriately high level.

Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting?. A) Understanding a client’s system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely. B) Understanding a client’s system of internal control can help the auditor make valuable recommendations to management at the end of the engagement. C) Understanding a client’s system of internal control can help the auditor sell consulting services to the client. D) Understanding a client’s system of internal control is not a required part of the audit process.

The examination of all of an entity’s transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?. A) A decrease in the materiality level. B) A decrease in the desired level of assurance. C) An assessment that the account being audited is high risk. D) An increase in the desired level of assurance.

An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit?. A) Gaining an understanding of the auditee’s industry. B) Client acceptance. C) Consideration of internal control systems. D) Auditing business processes and related accounts.

Which of the following statements best describes the role of materiality in a financial statement audit?. A) Materiality refers to the 'material' from which audit evidence is developed. B) The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. C) The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. D) The level of materiality has no bearing on the amount of evidence the auditor must gather.

Preliminary engagement activities include. A) Understanding the client and the client’s industry. B) Determining audit engagement team requirements. C) Ensuring the independence of the audit team and audit fi rm. D) All of the above.

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider it to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor’s opinion. Which kind of audit opinion would an auditor most likely issue under these circumstances?. A) Unmodified opinion. B) Qualified opinion due to departure from the applicable financial reporting framework. C) Adverse opinion. D) No opinion at all.

The study and practice of auditing is unlike other areas in accounting because it. A) Requires the memorization of formulas and patterns. B) Requires the knowledge of the applicable financial reporting framework. C) Requires common sense and some creativity. D) Is required by law for all companies.

Which of the following is generally NOT considered one of the five business processes or cycles?. A) Information technology. B) Revenue [or sales]. C) Financing. D) Inventory management.

Which of the following is NOT a typical responsibility for an associate/staff level auditor?. A) Assisting in the development of the audit plan. B) Performing the audit procedures assigned to them. C) Preparing adequate and appropriate documentation of completed work. D) Informing the senior about any auditing or accounting problems encountered.

The principles underlying an audit conducted in accordance with the ISAs include all of the following except. A) The auditor should maintain professional skepticism and exercise professional judgement throughout the planning and performance of the audit. B) The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements. C) The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement. D) The auditor should have appropriate competence and capability to perform the audit.

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the. A) Senior management. B) External auditors. C) Internal audit department. D) Shareholders.

Which of the following is considered an example of a compliance audit?. A) The examination a company’s claims that its product is superior to that of a competitor on specific dimensions. B) The examination of a school district networked computer system. C) The examination of a company’s adherence to government-mandated safety provisions. D) The examination of a company’s financial statements.

Which of the following best describes the relationship between management and the board of directors?. A) Management reports to the board of directors. B) The board of directors reports to management. C) Neither group is accountable to the other. D) Both groups report directly to the shareholders.

Which of the following best describes 'mid-tier' audit firms?. A) Audit firms where about 80% of their clients are publicly traded companies. B) International network firms. C) Generally regional in their practices. D) Generally local in their practices (such as large metropolitan areas).

Which of the following organizations affect the environment that external auditors work in?. A) The International Accounting Standards Board (IASB). B) The International Ethics Standards Board for Accountants (IESBA). C) The International Auditing and Assurance Standards Board (IAASB). D) All of the above.

Which of the following primarily shapes the context in which auditing takes place?. A) The International Auditing and Assurance Board (IAASB). B) International Accounting Standards Board (IASB). C) The entity’s business environment. D) Legislation passed by Parliament (or similar legislative body).

Operational auditing is oriented primarily toward. A) Future improvements to accomplish the goals of management. B) The accuracy of data reflected in management’s financial records. C) Verification that an entity’s financial statements are fairly presented. D) Past protection provided by existing internal control.

Which of the following statements best describes management’s and the external auditor’s respective levels of responsibility for a company’s financial statements?. A) Management and the external auditor share equal responsibility for the fairness of the entity’s financial statements in accordance with the applicable financial reporting framework. B) Neither management nor the external auditor has significant responsibility for the fairness of the entity’s financial statements in accordance with the applicable financial reporting framework. C) Management has the primary responsibility to ensure that the company’s financial statements are prepared in accordance with the applicable financial reporting framework, and the auditor provides reasonable assurance that the statements are free of material misstatement. D) Management has the primary responsibility to ensure that the company’s financial statements are prepared in accordance with the applicable financial reporting framework, and the auditor provides a guarantee that the statements are free of material misstatement.

Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions?. A) To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity’s information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed. B) To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity’s information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. C) To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity’s information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed. D) To achieve its business processes, a business formulates objectives, which are carried out through the entity’s strategies. The entity’s information and internal control systems must be designed to ensure that the entity’s strategies are properly executed, captured, and processed.

Which of the following factors most likely would cause an independent auditor to decide not to accept a new audit engagement?. A) The auditor's lack of understanding of the prospective client’s internal audit function’s audit plan. B) Management's disregard of its responsibility to maintain an adequate internal control environment. C) The auditor's inability to determine whether related party transactions were consummated on terms equivalent to arm’s-length transactions. D) Management's refusal to permit the auditor to perform substantive tests before the year-end.

Which of the following statements is correct with regard to the predecessor- successor communications?. A) The successor auditor has no responsibility to contact the predecessor auditor. B) The successor auditor should obtain permission from the entity before contacting the predecessor auditor. C) The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact. D) The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s B). A) Awareness of the consistency in the application of accounting principles between periods. Evaluation of all matters of continuing accounting significance. C) Opinion of any subsequent events occurring since the predecessor’s audit report was issued. D) Understanding as to the reasons for the change of auditors.

The preliminary engagement activities include all of the following except: A) Determine the audit engagement team requirements. B) Ensure that the audit team is independent. C) Ensure that there is an independent audit committee. D) Ensure that the audit firm is independent.

When establishing an understanding with the entity regarding the terms of the engagement, all of the following should be discussed, except: A) The engagement letter. B) The internal audit function. C) The audit committee. D) The agreed upon limits on auditor liability for an improper audit.

Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?. A) They provide documentation of management’s responsibility for the financial statements. B) They document the audit fees and deadlines that have been agreed upon. C) They communicate and clarify the expectations and responsibilities of both the auditee and the auditor. D) They help to limit auditor liability in the event of misunderstandings.

A written understanding between the auditor and the entity concerning the auditor’s responsibility for the discovery of non-compliance with laws and regulations is usually set forth in a(n). A) Internal control letter. B) Letter of audit inquiry. C) Management letter. D) Engagement letter.

Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?. A) The competence and objectivity of the internal audit function. B) The materiality or significance of the accounts examined by the internal audit function. C) The audit risk associated with the accounts examined by the internal auditors. D) The nature of the audit software documentation used by the internal auditors.

Which of the following would most likely indicate the existence of related parties?. A) Failing to write down inventory to market value just before year-end. B) Depending on one or a few products for nearly all of a firm’s operating revenues. C) Borrowing money at an interest rate substantially below the prevailing market rate of interest. D) Selling goods to a major customer of your main competitor.

For which laws and regulations does the auditor have the same responsibility as that for errors and fraud?. A) Laws and regulations that have an indirect effect on the determination of financial statement amounts. B) Laws and regulations that have a material but indirect effect on the determination of financial statement amounts. C) Laws and regulations that have a direct and material effect on the financial statements. D) Laws and regulations that have a direct and material effect on the financial statements as well as laws and regulations that have material but indirect effect on the determination of financial statement amounts.

During the initial planning phase of an audit, an independent auditor most likely would D). A) Identify specific internal control activities that are likely to prevent fraud. B) Evaluate the reasonableness of the entity’s accounting estimates. C) Discuss the timing of the audit procedures with the entity’s management. Inquire of the entity’s lawyer if it is probable that any unrecorded claims will be asserted.

When planning an audit, an auditor should. A) Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. B) Determine overall materiality for audit purposes. C) Conclude whether changes in compliance with prescribed internal controls justify reliance on them. D) Prepare a preliminary draft of the management representation letter.

Which of these statements concerning non-compliance with laws and regulations by clients is correct?. A) An auditor’s responsibility to detect non-compliance with laws and regulations that have a direct and material effect on the financial statements is the same as that for errors and fraud. B) An audit in accordance with the international standards on auditing normally includes audit procedures specifically designed to detect non-compliance with laws and regulations that have an indirect but material effect on the financial statements. C) An auditor considers non-compliance with laws and regulations from the perspective of the reliability of management’s representations rather than their relation to audit objectives derived from financial statement assertions. D) An auditor has no responsibility to detect non-compliance with laws and regulations by clients that have an indirect effect on the financial statements.

The engagement partner reviews the work of engagement team members to evaluate which of the following?. A) The work was performed and documented. B) The objectives of the procedures were achieved. C) The results of the work support the conclusions reached. D) All of the above are correct.

Which of the following would NOT be a typical supervisory activity for an audit?. A) Perform detailed testing of the accounts payable account. B) Inform engagement team of the nature, timing, and extent of audit procedures. C) Review the work of other engagement team members. D) Evaluate the results of the work and whether it supports the conclusions reached.

Tests of controls include all of the following except: A) Inspection of documents, files, etc. B) Analytical procedures. C) Walk-throughs. D) Observation.

A dual-purpose test is. A) A procedure that provides evidence about two different account balances at the same time. ) A procedure that serves as both a test of control and a substantive test of transactions. C) A procedure that provides evidence about two different accounting periods at the same time. B D) A procedure that serves as both a substantive test of transactions and a substantive test of balances.

The concept of materiality as it applies to a financial statement audit. A) Relates primarily to the audit fees involved. B) Generally involves less professional judgement for public companies. C) Is determined, in part, based on how financial statement users may be influenced in making decisions. D) Relates primarily to the quantity of audit procedures performed.

According to the text, the first step in applying materiality to an audit is. A) To determine performance materiality for each account balance. B) To determine a materiality level for the overall financial statements. C) To aggregate the misstatements found in each account and determine their overall affect on the financial statements. D) To ask management what constitutes a material amount in their business.

Which of the following is not a qualitative factor that may affect an auditor’s establishment of materiality?. A) Potential for fraud. B) The company is close to violating loan covenants. C) Firm policy sets materiality at four per cent of profit before tax. D) A small misstatement would interrupt an earnings trend.

Performance materiality is. A) The amount of misstatement that management is willing to accept in the financial statements. B) Materiality for the balance sheet as a whole. C) Materiality for the income statement as a whole. D) Materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

When misstatements are greater than overall materiality, the auditor should. A) Require that the auditee adjust the financial statements. B) Issue an unqualified opinion. C) Modify the opinion if the auditee will not adjust the financial statements. D) Both A) and C).

The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards. A) True. B) False.

Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: . A) finance. B) auditing. C) accounting. D) economics.

An accountant: A) must possess expertise in the accumulation of audit evidence. B) must decide the number and types of items to test. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information. D) must have a CCAB (or equivalent professional) qualification.

In "auditing" financial accounting data, the primary concern is with: A) determining whether recorded information properly reflects the economic events that occurred during the accounting period. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements.

The trait that distinguishes auditors from accountants is the: A) auditor's ability to interpret accounting principles generally accepted in the U.K ( or relevant country). B) auditor's education beyond the Bachelor's degree. C) auditor's ability to interpret IFRS/FASB Statements. D) auditor's accumulation and interpretation of evidence related to a company's financial statements.

A correct relationship among the auditor, the client, and the external users is: A) management of a public company hires the independent auditor. B) the audit committee of a private company hires the independent auditor. C) the client provides capital to the external users. D) the external users can rely upon the auditor's report to reduce information risk.

The most common way for users to obtain reliable information is to: A) have an internal audit. B) have an independent audit. C) verify all information individually. D) verify the information with management.

Before engaging in public practice (i.e. selling services to the public rather than acting as an employee) a CCAB-qualified accountant must fulfil all of the following requirements except: A) UK citizenship requirement. B) Relevant professional examination requirement. C) Practicing certificate requirement. D) Experience requirement.

Which of the following services provides the lowest level of assurance on a financial statement?. A) A review. B) An audit. C) Neither service provides assurance on financial statements. D) Each service provides the same level of assurance on financial statements.

CCAB (or CPA) firms are never allowed to provide bookkeeping services for clients. A) True. B) False.

Which one of the following is more difficult to evaluate objectively?. A) Presentation of financial statements in accordance with generally accepted accounting principles. B) Compliance with government regulations. C) Efficiency and effectiveness of operations. all.

Which of the following statements best explains why public accounting, as a profession, promulgates codes of ethics and establishes means for ensuring their observance?. A) Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B) A code of ethics that emphasize excellence in performance over material rewards establish individual reputations for competence and character. C) A code of ethics is established so that users of accounting services know what to expect and accounting professionals know what behaviours are acceptable, and so that discipline can be applied when necessary. D) A requirement for a profession is to establish a code of ethics that primarily stress responsibility to entities and colleagues.

Rick, an independent practitioner, must make an ethical judgement related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using. A) A utilitarian perspective. B) A rights-based approach. C) A justice-based perspective. D) Prohibitions in the IESBA Code of Ethics.

During the audit of Moon Co., the auditor disagrees with management’s estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance?. A) Moon management has the right to make company estimates. B) Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. C) Accounts Receivable as stated by Moon Co. might turn out to be fully collectible. D) The interests of Moon Co., the auditor, and the public should be weighed equally in the decision.

Which of the following organizations sets the international Code of Ethics, including independence requirements, for accountants?. A) IAASB. B) IESBA. C) IASB. D) IFAC.

The IESBA Code of Ethics contains both fundamental ethical principles and a. A) List of violations that would cause the automatic suspension of a practitioner’s license. B) Conceptual framework (threats and safeguards) supplemented with prohibitions to comply with the fundamental principles. C) Description of practitioner procedures for responding to an inquiry from a trial board. D) List of specific crimes that would be considered as acts discreditable to the profession.

In which of the following situations would a practicioner’s independence be considered impaired according to the IESBA Code of Ethics? 1. The practitioner has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The practitioner has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The practitioner owns a commercial building and leases it to an audit entity. The rental income is material to the practitioner. A) 1 and 2. B) 2 and 3. C) 1 and 3. D) 1, 2, and 3.

A practitioner is aware that a client has ‘skimmed’ unrecorded cash receipts and thus not reported them to the tax authorities. If the accountant signs the entity’s tax return after preparing the return, he/she would be violating which fundamental principle(s) of IESBA Code of Ethics?. A) Confidentiality. B) Integrity and Objectivity. C) Independence. D) Professional Competence and Due Care.

Without first receiving consent from the client, a practitioner should not disclose confidential client information contained in its working papers to (a). A) Another entity looking for benchmarking information. B) Quality assurance inspection team. C) Public disciplinary body. D) Successor auditor on certain audit matters (if not prohibited by law).

A violation of the IESBA Code of Ethics is most likely to occur when a practitioner. A) Issues an unmodified opinion on an entity’s financial statements when fees for the prior year audit have not been paid. B) Has served as an honorary member of the board of directors of a charitable organization for which he or she audits the financial statements. C) Arranges with a financial institution to collect notes issued by a client in payment of fees due. D) Compiles the financial statements of an entity that employs the practitioner’s spouse as a bookkeeper.

Which of the following is not considered a self-interest threat?. B) A member of the audit team has a direct financial interest in the audit client. C) The practitioner has a loan under normal lending term from an audit client that is a bank. D) A member of the audit team has entered into employment negotiations with the audit client. A) The firm have undue dependence on total fees from an audit client.

Which of the following is considered safeguard in the work environment for practitioners?. A) Regulatory monitoring of the profession. B) Corporate governance regulations. C) Firm policies and procedures that enable the identification of interests or relationships between the firm and clients. D) Educational, training and experience requirements for entry into the profession.

A practitioner, while performing an audit, strives to achieve independence in appearance in order to. A) Reduce risk and liability. B) Perform an efficient and effective audit. C) Become independent of mind. D) Maintain public confidence in the profession.

For which of the following services is an auditor not required to be independent?. A) Financial statement audits. B) Financial statement reviews. C) Any assurance service. D) A compilation of financial statements.

IESBA Code of Ethics prohibits certain interests and relationship for audits of public interest entities (PIEs). Which of the following interests and relationship is not prohibited?. A) Financial interests in the client. B) Contingent audit fees. C) A key audit partner serving for up to seven years. D) Partners/employees serving as a client director or officer.

Which of the following legal situations would be considered most likely to impair the auditor’s independence?. A) An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be fi led. B) Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. C) Actual litigation by the auditor against the present management, alleging management fraud or deceit. D) Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

A violation of the profession’s ethical standards is least likely to occur when a CPA. A) Purchases another practitioner’s accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period. B) Receives a percentage of the amounts invested by the practitioner’s audit entities in a tax shelter with the entities’ knowledge and approval. C) Has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The practitioner often refers his audit entities to the data processing company. D) Perform internal audit services for the audit client.

IESBA Code of Ethics prohibits certain services for audits of public interest entities (PIEs). Which of the following services is not prohibited?. A) Provide accounting and bookkeeping services. B) Recruiting directors/officers, or senior management who will have significant influence over accounting records or financial statements. C) Provide services involving the design or implementation of IT systems that are not related to the entity’s financial reporting. D) Assuming a management responsibility.

Which of the following is not an element of a system quality control as defined by ISQC 1?. A) Monitoring. B) Human resources. C) Reliability. D) Engagement performance.

One of a practitioner firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through. A) A system of quality control. B) A system of peer review. C) Continuing professional education. D) Compliance with reporting standards.

Audit risk is typically considered and assessed: A) At the assertion level. B) At the account balance level. C) For the financial statements as a whole. D) All of the above.

The existence of audit risk is recognized by the statement in the audit report that the auditor. A) Obtains reasonable assurance about whether the financial statements are free of material misstatement. B) Assesses the accounting principles used and evaluates the overall financial statement presentation. C) Realizes that some matters, either individually or in the aggregate, are important, while other matters are not important. D) Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with sales transactions?. A) Billings are made using the percentage-of-completion method of revenue recognition. B) The nature of the credit authorization process. C) Some invoices are normally billed prior to shipments [which occur at a later date]. D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

Risk of material misstatement refers to a combination of which two 'client' components of the audit risk model? D). A) Audit risk and inherent risk. B) Audit risk and control risk. C) Inherent risk and control risk. Control risk and detection risk.

The risk that an auditor’s procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does exist, is known as: A) Audit risk. B) Detection risk. C) Inherent risk. D) Business risk.

One of your clients recently upgraded their accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the entity’s fiscal year and is nearly 100 per cent complete by the balance sheet date. Which of the following best describesthe main effect of this event on the audit risk model for the current year?. A) It will likely increase the risk of material misstatement. B) It will likely decrease the risk of material misstatement. C) It will likely decrease the audit risk. D) It will likely increase the detection risk.

The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except: A) Inquiries of management and others. B) Compute the level of detection risk. C) Analytical procedures. D) Observation and inspections.

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?. A) Turnover of senior accounting personnel is low. B) Insiders recently purchased additional shares of the entity’s stock. C) Management places substantial emphasis on meeting earnings projections. D) The rate of change in the entity’s industry is slow.

Which of the following is a misappropriation of assets?. A) Classifying inventory held for resale as supplies. B) Investing cash and earning a 3 per cent rate of return as opposed to paying off a loan with an interest rate of 7 per cent. C) An employee of a consumer electronics store steals 12 CD players. D) Management estimates bad debt expense as 2 per cent of sales when it actually expects bad debts equal to 10 per cent of sales.

Which of the following would be classified as an error?. A) Misinterpretation by management of facts that existed when the financial statements were prepared. B) Misappropriation of assets for the benefit of management. C) Preparation of records by employees to cover a fraudulent scheme. D) Intentional omission of the recording of a transaction to benefit a third party.

Which of the following represents a factual misstatement?. A) A misstatement that management knows about, but the auditor does not. B) A misstatement found by the auditor that is due to incorrect pricing on a sales invoice. C) A misstatement arising from the differences between the auditor’s estimate and management’s estimate of the allowance for doubtful accounts. D) A misstatement based on an auditor’s projection of an error found in a sample.

Which of the following factors is least likely to represent an opportunity to commit fraud?. A) The audit committee is ineffective. B) Poor internal controls over cash transactions. C) The existence of highly complex transactions. D) Operating losses make a hostile takeover imminent.

When is a duty to disclose fraud to parties other than the client’s senior management and those charged with governance most likely to exist?. A) When the amount is material. B) When the fraud results from misappropriation of assets rather than fraudulent financial reporting. C) In response to inquiries from a successor auditor. D) When a line manager rather than a lower-level employee commits the fraudulent act.

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?. A) Whether management has ever intentionally violated the securities laws. B) Whether management has any knowledge of fraud that has been perpetrated on or within the entity. C) Management’s attitudes toward regulatory authorities. D) Management’s attitude about hiring ethical employees.

Which of the following is an example of fraudulent financial reporting?. A) Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. B) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. C) An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. D) An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

If risk of material misstatement is higher than originally anticipated, the auditor may respond by: A) Increasing supervision. B) Reducing control risk. C) Reducing inherent risk. D) None of the above.

If the auditor determines that a material misstatement may be due to fraud, the auditor should do all of the following except: A) Attempt to obtain evidence to determine whether the misstatement was, in fact, due to fraud. B) Discuss the findings with an appropriate level of management. C) Alert the authorities. D) Suggest that management consult with legal counsel.

If acceptable audit risk is set at low and the assessed risk of material misstatement is high, then detection risk must be: A) High. B) Moderate. C) Low. D) Cannot determine detection risk from the information given.

Which of the following statements is false as it relates to the auditor’s responsibility to document the risk assessment?. A) The documentation may include the use of questionnaires. B) Management’s response to high-risk areas identified by the auditor should be included in the documentation. C) The level of risk must be set quantitatively (i.e. inherent risk is 60 per cent). D) All of the above are false.