Chapter 4

LO 4-1

100

Enterprise risk management is the responsibility of: a) Company management b) External auditors c) Company's insurance providers d) All of the above

a) Company management

200

Failure to meet company objectives is a result of a) information risk b) audit risk c) business risk d) inherent risk

c) business risk

300

Auditing standards do not require auditors of financial statements to: a) Understand the nature of errors and frauds b) Assess the risk of occurrence of errors and frauds c) Design audits to provide reasonable assurance of detecting errors and frauds d) Report all errors and frauds found to police authorities

d) Reporting errors to police authorities is unneccessary

400

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? a) Inventory b) COGS c) Bad debt expense d) Accounts receivable

d) Accounts receivable

500

BONUS: answer this question correctly for the opportunity at a second question for 500 points One of the typical characteristics of management fraud is: a) Falsification of docs in order to misappropriate funds from an employer b) Victimization of investors through the use of materially misleading financial statements c) Illegal acts committed by management to evade laws and regulations d) Conversion of stolen inventory to cash deposited in a falsified bank account

b) Management fraud victimizes users of the financial statements

LO 4-3

100

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as: a) Inherent risk b) Control risk c) Detection risk d) Risk of material misstatement

d) Risk of material misstatement

200

The risk of material misstatements is composed of which audit risk components? a) Inherent and control risk b) Control risk and detection risk c) Inherent and detection risk d) Inherent, control, and detection risk

a) Inherent and control risk

300

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is: a) Audit risk b) Inherent risk c) Control risk d) Detection risk

d) this is the definition of detection risk

400

The auditors assessed risk of material misstatement at .5 and said they wanted to achieve a .05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? a) .2 b) .1 c) .75 d) .00

b). .1

500

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from .4 to 1.0 and audit risk (.05) and inherent risk remain constant the acceptable level of detection risk most likely to a) Change from .1 to .04 b) Change from .2 to .3 c) Change from .25 to .1 d) be unchanged

c) This change is most reasonable (.25 to .1)

LO 4-4

100

It is acceptable under GAAS for an audit team to a) assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work b) assess control risk at zero and perform a minimum of detection work c) assess inherent risk at zero and perform a minimum of detection work d) decide that audit risk can be 40%

a) assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work

200

Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions? a) Exercising more professional skepticism b) Carefully avoiding conducting interviews with people in the fraud-rich areas c) Performing procedures such as inventory observation and cash counts on a surprise, unannounced basis d) Studying management's selection and application of accounting principles more carefully

c) Performing procedures such as inventory observation and cash counts on a surprise, unannounced basis

300

Analytica procedures are generally used to produce evidence from a) Confirmations mailed directly to the auditors by client customers b) Physical observation of inventories c) Relationships among current financial balances and prior balances, forecasts, and non-financial data d) Detailed examination of external, external-internal, and internal documents

c) Relationships among current financial balances and prior balances, forecasts, and non-financial data

400

Which of the following relationships between types of analytical procedures and sources of information are most logical? (Type of analytical procedure, Source of information) a) Comparison of current account balances with prior periods, physical production statistics b) comparison of current account balances with expected balances, Company's budgets and forecasts c) Evaluation of current account balances with relation to predictable historical patterns, Published industry ratios d) Evaluation of current account balances in relation to non-financial information, Company's own comparative financial statements

b) Comparison of current account balances with expected balances--company's budgets and forecasts

500

Analytical procedures can be used in which of the following ways: a) as a means of overall review at the end of an audit b) as "attention-directing" methods when planning an audit at the beginning c) as substantive audit procedures to obtain evidence during an audit d) all of the above

d) all of the above

LO 4-5

100

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a) Key factors that are consistent with prior periods b) assumptions that are similar to industry guidelines c) Measurements that are objective and not susceptible to bias d) Evidence of a conservative systematic bias

d) Evidence of a conservative systematic bias

200

Analytical procedures used when planning an audit should concentrate on: a) weaknesses in the company's internal control activities b) Predictability of account balances based on individual transactions c) Management assertions in financial statements d) Accounts and relationships that can represent specific potential problems and risks in the financial statements

d) Accounts and relationships that can represent specific potential problems and risks in the financial statements

300

When a company that sells its products for a (gross) profit increases its sales by 15 percent and its COGS by 7 percent, the COGS ratio will a) increase b) decrease c) remain unchanged d) not be able to be determined with the information provided

b) Decrease

400

auditors are not responsible for accounting estimates with respect to... a) Making the estimates b) determining the reasonableness of estimates c) determining that estimates are presented in conformity with GAAP d) determining that estimates are adequately disclosed in the financial statements

a) Making the estimates

500

An audit committee is a) composed of internal auditors b) Composed of members of the audit team c) composed of members of a company's board of directors who are not involved with day-to-day operations of the company d) A committee composed of persons not associating in any way with the client or the board of directors

c) Composed of members of a company's BOD not involved with day-to-day operations of the company

LO 4-6 to 4-7

100

An audit strategy contains: a) Specifications of auditing standards relevant to the financial statements being audited b) specifications of procedures that auditors believe appropriate for the financial statements under audit c) Documentation of the assertions under audit, the evidence obtained, and the conclusions reached d) reconciliation of the account balances in the financial statements with the account balances in the client's general ledger

b) This is what is in an audit plan/program/strategy

200

Under the Private Securities Litigation Reform Act, independent auditors are required to first a) report in writing all instances of noncompliance they believe have a material effect on financial statements if the board of directors doesn't first report to the SEC b) report in writing all instances of noncompliance to the client's board of directors c) report clearly inconsequential noncompliance to the audit committee of hte client's board of directors d) resign from teh audit engagement and report the instances of noncompliance to the SEC

a) report in writing all instances of noncompliance they believe have a material effect on financial statements if the board of directors doesn't first report to the SEC

300

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a) Recommend remedial actions to the audit committee b) Evaluate the effect of the noncompliance on the financial statements c) Determine whether to contact law enforcement officials d) Auditors must design tests to detect all noncompliance that directly affects the financial statements

b) Evaluate the effect of the noncompliance on the financial statements

400

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? a) The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud b) Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements c) Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected d) Auditors must design tests to detect all noncompliance that directly affects the financial statements

c) Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected

500

Auditors perform analytical procedures in the planning stage of an audit for the purpose of a) Deciding the maters to cover in an engagement letter b) Identifying unusual conditions that deserve more auditing effort c) Determining which of the financial statement assertions are the most important for the client's financial statements d) Determining the nature, timing, and extent of audit procedures for auditing the inventory

b) Identifying unusual conditions that require more auditing effort