33 questions
The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except:
Inquiries of management and others
Compute the level of detection risk
Analytical procedures
Observation and inspections
Gaining an understanding of the client and its environment includes all of the following areas except:
Regulatory issues unique to the industry.
The entity's application of accounting policies.
The audit fee and timeline for completion of the work.
The entity's business risks.
Which of the following statements is FALSE related to the auditor's responsibility to document its risk assessment?
The level of risk must be set quantitatively - inherent risk 60%.
High risk areas identified by the auditor should be documented.
The documentation may include the use of questionnaires.
All of the above statements are FALSE.
To exercise due professional care, means an auditor should .........
Examine all available corroborating evidence supporting management's assertions.
Design the audit to detect all instances of illegal acts.
Critically review work performed and judgment exercised by those assisting in the audit.
Attain the proper balance of professional experience and formal education.
Which of the following best describes the fiduciary relationship between management and the board of directors?
Management reports to the board of directors.
The board of directors reports to management.
Neither group is accountable to the other.
Both groups report directly to the shareholders.
The examination of all of a client'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 decrease in the materiality level.
An assessment that the account being audited is high risk.
An increase in the desired level of assurance.
A decrease in the desired level of assurance.
The concept of materiality as it applies to a financial statement audit:
Is determined based on how financial statement users may be influenced in making decisions.
Relates primarily to the audit fees involved.
Generally involves less professional judgment for public companies.
Relates primarily to the quantity of audit procedures performed.
Which of the following best describes the primary reason an independent auditor reports on financial statements?
To give shareholders some assurance that any fraudulent activities will be detected.
To identify a poorly designed internal control structure that may produce unreliable financial statements.
To provide expertise to clients, which may not be totally knowledgeable of prevailing IFRS.
To add credibility where appropriate, since the client may not be perceived as objective with respect to its own financial statements.
Audit evidence:
May only be gathered from parties external to the client to be reliable.
May only be gathered from the client to be reliable since the client is the most knowledgeable source of information.
May only be gathered from computerized sources to avoid human error.
Can be gathered from many sources and is not limited to the underlying accounting data.
The disclosure of fraud to parties other than the client's senior management and its audit committee ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality. However, the auditor has a duty to disclose the information to parties outside the entity in all of the following circumstances except:
A court subpoena in conjunction with a fraud investigation.
A Security Exchange Commission analyst inquiry regarding future profit projections.
A successor auditor makes inquiries in determining whether to accept the client.
To comply with legal or regulatory requirements.
Which of the following statements best describes an auditor's responsibility to detect errors, fraud, and illegal acts?
The auditor should study and evaluate the client's internal control system and design the audit to provide reasonable assurance of detecting all errors and fraud.
The auditor should consider the types of errors and fraud that could occur and determine whether the necessary internal controls are prescribed and are being followed.
The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.
The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and determine whether the necessary internal controls are prescribed and are being followed satisfactorily.
An auditor's evaluation of the reasonableness of a client's investment loss reserve would normally be made during which phase of the audit?
Gaining an understanding of the client's industry.
Client acceptance/ pre-conditions planning.
Consideration of internal control systems.
Auditing business processes and related accounts.
Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with client sales transactions?
Billings are made using the percentage-of-completion method of revenue recognition.
The nature of the credit authorization process.
Some invoices are normally billed prior to shipments [which occur at a later date].
The conditions of the sale allow for a right of return or the right to modify the purchase agreement.
The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation.
True
False
The Public Interest Oversight Board (PIOB) was formally established in 2005 to oversee the auditing and assurance, ethics, and education standard-setting activities of the International Federation of Accountants (IFAC). The objective of the PIOB is to increase the confidence of investors and others that the public interest activities of the IFAC are properly responsive to the public interest.
True
False
The PIOB oversees those committees of IFAC that have public interest responsibilities, namely:
-International Auditing and Assurance Standards Board (IAASB)
-International Accounting Education Standards Board (IAESB)
-International Ethics Standards Board for Accountants (IESBA)
True
False
Which of the following factors is least likely to represent an opportunity to commit fraud?
The existence of highly complex transactions.
The audit committee is ineffective.
Poor internal controls over cash transactions.
Operating losses causing hostile takeover possible.
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
Financial statements are presented fairly, in all material respects, in conformity with IFRS.
Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.
Which of the following is considered an example of a compliance audit?
The examination of a company's financial statements.
The examination of a school district networked computer system.
The examination of a company's adherence to government-mandated safety provisions.
The examination a company's claims that its product is superior to that of a competitor on specific dimensions.
Which of the following audit phases would generally be conducted before all of the others listed below?
Evaluation of audit evidence.
Consideration of internal control systems.
Gaining an understanding of the client's industry.
Auditing business processes and related accounts.
Which of the following audit assertions is generally of greatest importance in the audit of inventory?
Completeness
Presentation and Disclosure
Rights and Obligations
Existence
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?
Audit assertions
Reasonable assurance
Audit risk
Materiality
Which of the following best describes the relationship between attestation services and audit services?
Attestation is a subset of auditing that improves the quality of information for decision makers.
Auditing is a subset of attestation and focuses on providing clients with advisory services and decision support.
Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.
Attestation is a subset of auditing that provides more assurance than does an audit engagement.
Assurance services differ from auditing services in that:
Assurance services are more narrow in scope than audit services.
Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.
Assurance services are limited to economic events or actions, and audit services are not similarly limited.
Audit services do not improve the quality of information as do assurance services.
Which of the following would be classified as an error?
Intentional omission of the recording of a transaction to benefit a third party.
Preparation of records by employees to cover a fraudulent scheme.
Misappropriation of assets for the benefit of management.
Misinterpretation by management of facts that existed when the financial statements were prepared.
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 did occur, is known as:
Detection risk.
Inherent risk.
Business risk.
Audit risk.
One of your clients recently upgraded the accounting system from a medium-scale package to a complex resource planning system. This installation took place over nine months of the year and is nearly 100% complete by year end. Which of the following best describes the main affect of this event on the audit risk model for the current year?
It will likely increase risk of material misstatement.
It will likely decrease risk of material misstatement.
It will likely decrease detection risk.
It will likely increase detection risk.
An "integrated audit" includes:
A special audit related to management fraud.
A financial statement audit and an audit of internal control over financial reporting.
A financial statement audit and a special audit related to management fraud.
A special audit related to management fraud and an audit of internal control over financial reporting.
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:
External auditors
Senior management
Internal audit department
Shareholders
The study and practice of auditing is unlike other areas in accounting because it:
Requires the memorisation of formulas and patterns.
Requires the knowledge of IFRS.
Requires common sense and some creativity.
Is required by law for all companies in the country.
Audit risk:
Can be completely eliminated through appropriate sampling of transactions.
Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.
Is what creates the demand for an audit.
Is the risk that a company may hire an incompetent auditor.
The examination of all of a client'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 decrease in the materiality level.
A decrease in the desired level of assurance.
An assessment that the account being audited is high risk.
An increase in the desired level of assurance.
Gaining an understanding of the client and its environment includes all of the following areas except:
Regulatory issues unique to the industry.
The entity's application of accounting policies.
The audit fee and timeline for completion of the work.
The entity's business risks.