acct 241 ch 3

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acct 241 ch 3
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2010-08-04 22:19:05
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acct 241 ch 3
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  1. Which of the following may cause management to intentionally understate profits?
    a. management wants to create "cookie jar" reserves for a rainy day
    b. the company is under scruitiny by tax authorities
    c. the company is suffering a large loss and wants to take a "big bath."
    d. all of the above
    d. all of the above
  2. Which of the following is true.
    a. auditors are responsible for detecting all fraudulent financial reporting.
    b. auditors must specifically consider fraud risk from overstating liabilities.
    c. auditors must specifically consider fraud risk from management override of controls
    d. all of the above are true
    • c. auditors must specifically consider fraud risk from management
    • override of controls
  3. Auditors would perform the following steps in which order?
    a. set audit risk; assess risk of material misstatement; calculate detection risk
    b. set audit risk; determine detection risk; assess risk of material misstatement
    c. assess risk of material misstatement; determine detection risk; calculate audit risk
    d. assess risk of material misstatement; assess audit risk; determine detection risk
    • a. set audit risk; assess risk of material misstatement; calculate
    • detection risk
  4. Which of the following is not required by SAS No. 99, "Consideration of Fraud in a Financial Statement Audit"?
    a. Conduct a continuing assessment of the risk of material misstatement due to fruad throughout the audit
    b. conduct a discussion by the audit team of the risks of material misstatement due to fraud
    c. conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor
    d. conduct inquireies of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud
    • d. conduct inquireies of the audit committee as to their views about the
    • risks of fraud and their knowledge of any fraud or suspected fraud
  5. Inspection of tangible assets provides evidence for which assertion?
    A. occurrence
    B. existence
    C. completeness
    D. rights and obligations
    B. existence
    (this multiple choice question has been scrambled)
  6. The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated is referred to as
    A. audit risk
    B. detection risk
    C. business risk
    D. information risk
    A. audit risk
    (this multiple choice question has been scrambled)
  7. If results from the auditor's tests of controls induce the auditor to change the assessed level of control risk for inventory from .2 to .4 and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk?
    A. detection risk would increase from .3 to .6
    B. detection risk would decrease from .4 to .2
    C. detection risk would not change since audit risk and inherent risk do not change.
    D. a change in detection risk cannot be calculated because audit risk and inherent risk values are not given.
    B. detection risk would decrease from .4 to .2
    (this multiple choice question has been scrambled)
  8. The auditor has assessed the risk of material misstatement to determine the acceptable level of detection risk for financial statement assertations for inventory account balances. As the acceptable level of detection risk decreases, which of the following adjustments to the accounts receivable audit program would the audit team normally make?
    A. change the timinf of the confirmation process to an interim date
    B. change the sampling method from random to convenience sampling.
    C. increase the sample size of the confirmations
    D. change the nature of substantive tests to more efficient procedures, such as using negatvie rather than posititve confirmations
    C. increase the sample size of the confirmations
    (this multiple choice question has been scrambled)
  9. Which of the following factors best define the materiality of audit risks?
    a. volume of transactions, degree of system integration, years since last audit, significant management turnover, value of assets at risk, average value per transaction, & results of last audit
    b. degree of system integration, significant management turnover, results of last audit
    c. volume of transactions, value of assets at risk & average value per transaction
    d. years since last audit, significant management turnover & average value per transaction
    • c. volume of transactions, value of assets at risk & average value
    • per transaction
  10. With respect to management's accounting estimates, auditors are not for
    a. determining the reasonableness of estimates
    b. determining that estimates are presented in conformity with GAAP
    c. determining that estimates are adequately disclosed in the financial statements
    d. all of the above
    d. all of the above
  11. Auditors are not responsible for accounting estimates with respect to:
    A. making the estimates
    B. determining that estimates are presented in conformity with GAAP
    C. determining the reasonableness of estimates
    D. determining that estimates are adequately disclosed in the financial statements
    A. making the estimates
    (this multiple choice question has been scrambled)
  12. AICPA auditing standards do not require auditors of financial statements to:
    A. report all finding of errors and frauds to police authorities
    B. assess the risk of occurrence of errors and frauds
    C. understand the nature of errors and frauds
    D. design audits to provide reasonable assurance of detecting errors and frauds
    A. report all finding of errors and frauds to police authorities
    (this multiple choice question has been scrambled)
  13. The risk that the auditors’ own work will lead to the decision that material misstatements do not exist in the financial statements, when in fact such misstatements do exist, is:
    A. inherent risk
    B. audit risk
    C. control risk
    D. detection risk
    D. detection risk
    (this multiple choice question has been scrambled)
  14. Auditors are responsible for the quality of the work related to management and control of:
    A. inherent risk
    B. control risk
    C. relative risk
    D. detection risk
    D. detection risk
    (this multiple choice question has been scrambled)
  15. The auditors assessed a combined inherent risk and control risk at 0.50 and said they wanted to achieve a 0.05 risk of failing to detect misstatements in an account equal to the $17,000 tolerable misstatement assigned to the account. What detection risk do the auditors plan to use for planning the remainder of the audit work?
    A. 0.00.
    B. 0.75.
    C. 0.20.
    D. 0.10.
    D. 0.10.
    (this multiple choice question has been scrambled)
  16. An audit program contains:
    a. specifications of audit standards relevant to the financial statements being audited
    b. specifications of procedures the 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. specifications of procedures the auditors believe appropriate for the
    • financial statements under audit
  17. The revenue cycle of a company generally includes these accounts:
    A. cash notes payable, and capital stock
    B. inventory, general expenses, and payroll
    C. cash, accounts receivable, and sales
    D. inventory, accounts payable, and general expenses
    C. cash, accounts receivable, and sales
    (this multiple choice question has been scrambled)
  18. When auditing the existence assertion for an asset, auditors proceed from the:
    A. general ledger back to the supporting original transaction documents
    B. supporting original transaction documents to the general ledger
    C. financial statement numbers back to the potentially unrecorded items
    D. potentially unrecorded items forward to the financial statement numbers
    A. general ledger back to the supporting original transaction documents
    (this multiple choice question has been scrambled)
  19. If tests of controls induce the auditor to change the assessed level of control risk for fixed assets from 0.4 to 1.0, and audit risk (.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to:
    A. change from .25 to .1
    B. be unchanged
    C. change from .2 to .3
    D. change from .1 to .04
    A. change from .25 to .1
    (this multiple choice question has been scrambled)
  20. When financial statement auditors decide to carry out a response to a particular fraud risk in an account balance of class of transactions, they are most likely to:
    a. exercise more professional skepticism
    b. carefully avoid conducting interviews with people in the fraud-rich areas
    c. perform procedures such as inventory observation and cash counts on a surprise or unannounced basis
    d. study more carefully management’s selection and application of accounting principles
    • c. perform procedures such as inventory observation and cash counts on a
    • surprise or unannounced basis
  21. It is appropriate and acceptable under generally accepted auditing standards for an auditor to:
    a. assess both inherent and control risk at 100 percent 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 percent
    • a. assess both inherent and control risk at 100 percent and achieve an
    • acceptably low audit risk by performing extensive detection work
  22. Confirmations of accounts receivable provide evidence primarily about these two assertions:
    A. rights and obligations and existence
    B. valuation and rights and obligations
    C. existence and completeness
    D. completeness and valuation
    A. rights and obligations and existence
    (this multiple choice question has been scrambled)
  23. If sales and income were overstated by recording a false credit sale at the end of the year, you could find the false “dangling debit” in the:
    A. inventory
    B. accounts receivable
    C. bad debt expense
    D. cost of goods sold
    B. accounts receivable
    (this multiple choice question has been scrambled)
  24. One of the typical characteristics of management fraud is:
    a. falsification of documents in order to steal money 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. victimization of investors through the use of materially misleading
    • financial statements
  25. Under the Private Securities Litigation Reform Act, independent auditors are required to:
    a. report in writing all instances of illegal acts to the client’s board of directors
    b. report to the SEC all instances of illegal acts they believe have a material effect on financial statements if the board of directors does not first report to the SEC
    c. report clearly inconsequential illegal acts to the audit committee of the client’s board of directors
    d. resign from the audit engagement and report the instances of illegal acts to the SEC
    • b. report to the SEC all instances of illegal acts they believe have a
    • material effect on financial statements if the board of directors does
    • not first report to the SEC
  26. With respect to the concept of materiality, which one of the following statements is correct?
    A. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.
    B. Materiality is a matter of professional judgment.
    C. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
    D. Materiality is determined by reference to ACIPA guidelines.
    B. Materiality is a matter of professional judgment.
    (this multiple choice question has been scrambled)
  27. Edison Corporation has a few large accounts receivable that a total $1,400,000. Victor Corporation has a great number of small accounts receivable that also total $1,400,000. The importance of a misstatement in any one account is therefore greater for Edison than for Victor. This is an example of the auditor’s concept of:
    A. relative risk
    B. comparative analysis
    C. reasonable assurance
    D. materiality
    D. materiality
    (this multiple choice question has been scrambled)
  28. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
    A. Auditor judgment.
    B. Materiality.
    C. Inherent risk.
    D. Reasonable assurance
    A. Auditor judgment.
    (this multiple choice question has been scrambled)
  29. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
    A. $15,000
    B. $30,000
    C. $10,000
    D. $20,000
    C. $10,000
    (this multiple choice question has been scrambled)
  30. What assurance does the auditor provide that errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected?
    Errors Fraud Direct-Effect Illegal Acts
    A. Reasonable Reasonable Reasonable
    B. Limited Limited Reasonable
    C. Limited Negative Limited
    D. Reasonable Limited Limited
    A. Reasonable Reasonable Reasonable
    (this multiple choice question has been scrambled)

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