cpa audit review ch3 review 1

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Joens1313
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279362
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cpa audit review ch3 review 1
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2014-07-21 00:22:31
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cpa audit review ch3
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cpa audit review ch3 review 1
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  1. Would the following factor most likely heighten an auditor’s concern about the risk of fraudulent financial reporting?

    An overly complex organizational structure involving unusual lines of authority.
    Yes -- An overly complex organizational structure involving unusual lines of authority.

    Certain risk factors are related to misstatements arising from fraudulent reporting. One of the risk factors relating to the opportunity to commit fraud is an overly complex organizational structure involving numerous or unusual legal entities or managerial lines of authority.
  2. In a financial statement audit, is inherent risk evaluated to help an auditor assess the following?

    The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.
    Yes ---  The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls. 

    Control risk and inherent risk are the components of the risk of material misstatement (RMM). The auditor determines the appropriate level of detection risk based on the assessment of RMMs and the acceptable level of audit risk. Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or in the aggregate, before consideration of any related controls.
  3. True of False --- An auditor’s analytical procedures most likely would be facilitated if the entity uses a standard cost system that produces variance reports.
    True --- Uses a standard cost system that produces variance reports.

    A comparison of anticipated results, such as budgets or forecasts prepared by management, with actual results is an analytical procedure. Thus, the use of standard costs and variance analysis facilitates the application of analytical procedures.
  4. Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?

    A.A petty cash fund disbursement that was not properly authorized.

    B.A piece of obsolete office equipment that was not retired.

    C.An uncollectible account receivable that was not written off.

    D.An illegal payment to a foreign official that was not recorded.
    D.An illegal payment to a foreign official that was not recorded.

    The auditor’s response to detected illegal acts is to consider the effects on the financial statements and the implications for other aspects of the audit. The reliability of management’s representations is particularly important. Failure to record an illegal payment creates doubt regarding management’s integrity and therefore its other representations and assertions in the financial statements.
  5. An auditor compares this year’s revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that

    A.Fourth quarter payroll taxes were not paid.

    B.The client changed its capitalization policy for small tools this year.

    C.This year’s provision for uncollectible accounts is inadequate because of worsening economic conditions.

    D.An increase in property tax rates has not been recognized in the client’s accrual.
    B.The client changed its capitalization policy for small tools this year.

    Investigating changes in revenues and expenses should detect unusual events, transactions, etc., that have an impact on the income statement accounts. A change in the capitalization policy for tools in the current year would probably have a significant effect on small tools expense.
  6. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
    D.Ratio analysis.

    Using analytical procedures, the auditor develops expectations about (predictions of) recorded balances or ratios. In analyzing relationships among balance sheet accounts, comparisons of one balance sheet account with another, or ratio analysis, would be particularly appropriate.

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