Auditing: Chapter 4 Practice Quiz

Front 1

Themajor emphasis in GAAS related to consideration of fraud in a financialstatement audit (SAS 99) is on:

A. Employeemisappropriation of assetsB. Managementfraud

C. Clientfraud on customers

D. Employeeembezzlement

Back 1

B. Management fraud

Front 2

Managementfraud generally refers to

A. Unintentionalmistakes

B. Illegalacts

C. Intentionaldistortions of financial statementsD. Violationsof GAAS

Back 2

C. Intentional distortions of financial statements

Front 3

Accordingto auditing standards, external auditors' responsibilities for indirect illegalacts do not include

A. Designingaudit procedures to detect illegal acts in the absence of specific informationbrought to the auditors' attention

B. Performingaudit procedures when specific information indicates that possible illegal actsmay have a material indirect effect on financial statements

C. Consideringthe qualitative materiality of known and suspected illegal acts

D. Obtainingwritten management representations concerning the absence of violations of lawsand regulations

Back 3

A. Designing audit procedures to detect illegal acts in the absence of specific information brought to the auditors' attention

Front 4

Certainconditions and circumstances are often present with management fraud. Which ofthe following is not such a condition or circumstance?

A. Unfavorableindustry conditions

B. Lackof working capital

C. Highliquidity

D. Slowcustomer collections

Back 4

C. High liquidity

Front 5

Whenfraud risk is significant, and management cooperation is unsatisfactory, theauditors will most likely

A. Performextended audit procedures

B. Consultwith fraud examiners

C. Reportdirectly to the Securities and Exchange Commission within one day

D. Withdrawfrom the engagement

Back 5

D. Withdraw from the engagement

Front 6

Whichof the following statements best describes auditors' responsibility to detecterrors and frauds?

A. Auditorsshould design an audit to provide reasonable assurance of detecting errors andfrauds that are material to the financial statements

B. Auditorsare responsible to detect material errors, but have no responsibility to detectmaterial frauds that are concealed through employee collusion or managementoverride of the internal control structure

C. Auditorshave no responsibility to detect errors and frauds unless analytical proceduresor tests of transactions identify conditions causing a reasonably prudentauditor to suspect that the financial statements were materially misstated

D. Auditorshave no responsibility to detect errors and frauds because an auditor is not aninsurer and an audit does not constitute a guarantee

Back 6

A. Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements

Front 7

Theprobability that an audit team will give an inappropriate opinion on financialstatements best describes

A. Auditrisk

B. Inherentrisk

C. Controlrisk

D. Detectionrisk

Back 7

A. Audit risk

Front 8

Ifcontrol risk increases, and all other risks in the audit risk model stayconstant except the one referred to below, which of the following statements iscorrect?

A. Detectionrisk will decrease

B. Inherentrisk will increase

C. Auditrisk will decrease

D. Detectionrisk will increase

Back 8

A. Detection risk will decrease

Front 9

Lookingat vendors' invoices for particular information is an example of

A. Physicalobservation

B. Confirmation

C. Inspectionof documents

D. Scanning

Back 9

C. Inspection of documents

Front 10

If anauditor were to use 7% of income before taxes as a basis for materiality, itwould be an example of judgment based on

A. Absolutesize

B. Relativesize

C. Natureof the item

D. Cumulativeeffects

Back 10

B. Relative size

Front 11

Intesting the existence assertion for an asset, an auditor ordinarily works fromthe

A. Financialstatements to the potentially unrecorded items

B. Potentiallyunrecorded items to the financial statement

C. Accountingrecords to the supporting evidence

D. Supportingevidence to the accounting records

Back 11

C. Accounting records to the supporting evidence

Front 12

Indetermining whether transactions have been recorded, the direction of the audittesting should be from the

A. Generalledger balances

B. Adjustedtrial balance

C. Originalsource documents

D. Generaljournal entries

Back 12

C. Original source documents

Front 13

Auditorsshould design the written audit program so that

A. Allmaterial transactions will be selected for substantive testing

B. Substantivetests prior to the balance sheet date will be minimized

C. Theaudit procedures selected will achieve specific audit objectives

D. Eachaccount balance will be tested under either tests of controls or tests of transactions

Back 13

C. The audit procedures selected will achieve specific audit objectives

Front 14

In designing writtenaudit programs, an auditor should establish specific audit objectives thatrelate primarily to the

A. Timing of audit procedures

B. Cost-benefit of gathering techniquesC. Selected audit techniques

D. Financial statement assertions

Back 14

D. Financial statement assertions

Front 15

Therisk of material misstatement differs from detection risk in that it

A. Arisesfrom the misapplication of audit procedures

B. May beassessed in either quantitative or nonquantitative terms

C. Existsindependently of the financial statement audit

D. Can bechanged at the auditor's discretion

Back 15

C. Exists independently of the financial statement audit

Front 16

The acceptable levelof detection risk is inversely related to the

A. Assurance provided by substantive testsB. Risk of misapplying audit proceduresC. Preliminary judgment about materiality levelsD. Risk of failing to discover materialmisstatements

Back 16

A. Assurance provided by substantive tests

Front 17

Inconsidering materiality for planning purposes, an auditor believes thatmisstatements aggregating $10,000 would have a material effect on an entity'sincome statement, but that misstatements would have to aggregate $20,000 tomaterially affect the balance sheet. Ordinarily, it would be appropriate todesign audit procedures that would be expected to detect misstatements thataggregate

A. $10,000

B. $15,000

C. $20,000

D. $30,000

Back 17

A. $10,000

Front 18

What assurance doesthe auditor provide that errors, frauds, and direct effect illegal acts thatare material to the financial statements will be detected?

A. Errors: Limited; Frauds: Negative; Directeffect illegal acts: Limited

B. Errors: Limited; Frauds: Limited; Directeffect illegal acts: Reasonable

C. Errors: Reasonable; Frauds: Limited;Direct effect illegal acts: Limited

D. Errors: Reasonable; Frauds: Reasonable;Direct effect illegal acts: Reasonable

Back 18

D. Errors: Reasonable; Frauds: Reasonable; Direct effect illegal acts: Reasonable

Front 19

Experiencehas shown that the many large fraudulent transactions (e.g., WorldCom) can befound in:

A. Systematicprocessing of large volumes of day-to-day ordinary transactions

B. Payrollfraudsters' mistakes in using unissued Social Security numbers

C. Pettycash embezzlements

D. Nonroutine,nonsystematic journal entries

Back 19

D. Nonroutine, nonsystematic journal entries

Front 20

Whichof the following pieces of information discovered by an auditor when performingsubstantive tests of account balances would most likely raise red flags aboutthe possible existence of material fraudulent financial reporting?

A. Papercopies of paid invoices and cancelled checks are microfiched and then destroyed

B. Thecontroller requires that you schedule any audit inquiries for after lunch eachday, not in the morning

C. Thepetty cash fund custodian never takes a vacation

D. Theclient's estimate of the allowance for doubtful accounts is lower than theauditor's independent evaluation of the allowance

Back 20

D. The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance

Front 21

Factorsthat should be considered when evaluating audit risk in a functional areainclude: Volume of transactions. Degree of system integration. Years since last audit. Significant management turnover. (Dollar) value of assets at risk. Average value per transaction. Results of last audit. Factors that best define the materiality of audit risk are

A. 1through 7

B. 2, 4,and 7

C. 1, 5, and 6

D. 3, 4,and 6

Back 21

C. 1, 5, and 6

Front 22

Inthe preparation of an audit program, which of the following items is notessential?

A. Areview of material from prior audits

B. Thepreparation of a budget identifying the costs of resources needed

C. An understandingof controls established by management

D. Assessmentof inherent riskx

Back 22

B. The preparation of a budget identifying the costs of resources needed

Front 23

. Whichof the following is an acceptable response to sales fraud risks identified inan audit?

A. Exerciseprofessional skepticism when performing sales testing

B. Increasethe assessment of control risk for sales

C. Increasethe assessment of detection risk for sales

D. Performadditional substantive sales procedures on a surprise basis

Back 23

D. Perform additional substantive sales procedures on a surprise basis

Front 24

Whichof the following is not required by SAS No. 99, "Consideration of Fraud ina Financial Statement Audit"?

A. Conducta continuing assessment of the risks of material misstatement due to fraudthroughout the audit

B. Conducta discussion by the audit team of the risks of material misstatement due tofraud

C. Conductthe audit with professional skepticism, which includes an attitude that assumesbalances are incorrect until verified by the auditor

D. Conductinquiries of the audit committee as to their views about the risks of fraud andtheir knowledge of any fraud or suspected fraud

Back 24

D. Conduct inquiries of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud

Front 25

Whenan auditor increases the planned assessed level of control risk because certaincontrol procedures were determined to be ineffective, the auditor would mostlikely increase the

A. Extent of substantive tests ofdetailsB. Levelof inherent risk

C. Extentof tests of controls

D. Levelof detection risk

Back 25

A. Extent of substantive tests of details

Front 26

For each of thefollowing statements or phrases, indicate by letter the professional standardto which it relates:

A. SAS 99: "Consideration of Fraud in a Financial StatementAudit"

B. SAS 54: "Illegal Acts by Clients"

C. SAS 57: "Auditing Accounting Estimates"

D. SAS 114 "The Auditor's Communication with Those Charged withGovernance"

___1. Disagreements with management on significant accounting and auditingmatters.___2. Investigate large and unusual transactions, particularly those that occurat or near year-end.

___3. Make inquiries about management's policies and procedures for compliancewith laws and regulations.

___4. Evaluate the net realizable value of inventory

Back 26

1. D, SAS 114 "The Auditor's Communication with Those Charged with Governance"

2. A, SAS 99: "Consideration of Fraud in a Financial Statement Audit"

3. B, SAS 54: "Illegal Acts by Clients"

4.C, SAS 57: "Auditing Accounting Estimates"

Front 27

Foreach of the following statements, indicate, by letter, the term it bestdescribes or typifies. A. Embezzlement or defalcation

B. Management fraud

C. Errors

D. White-collar crime

___1. A bookkeeper inadvertently recorded depreciation by transposing numbersin a journal entry.

___2. An employee in a supermarket takes home bags of fresh fruit each daywithout paying for them.

___3. Misdeeds done by people who steal with a pencil or computer terminal.

___4. A type of fraud involving employees or nonemployees wrongfully takingmoney or property entrusted to their care.

___5. The controller changed the journal entry for estimating bad debt expenseto a smaller number to hide the poor results from extending credit to high riskcustomers. This made income materially higher than it otherwise would havebeen.

Back 27

1.C, Errors

2. A, Embezzlement or defalcation

3. D, White-collar crime

4. A, Embezzlement or defalcation

5.B, Management fraud