Question 1

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of:

Accepted Answer

A)  the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit.
B)  a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit.
C)  a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.
D)  controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.E) A) and B)
F) A) and C)

Question 2

Which of the following would not be considered an analytical procedure?

Accepted Answer

A)  Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages.
B)  Developing the current year's expected net sales based on the sales trend of similar entities within the same industry.
C)  Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.
D)  Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.E) C) and D)
F) A) and B)

Question 3

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

Accepted Answer

A)  Detection risk will decrease.
B)  Inherent risk will increase.
C)  Audit risk will decrease.
D)  Detection risk will increase.E) A) and C)
F) A) and B)

Question 4

Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"?

Accepted Answer

A)  Conduct a continuing assessment of the risks of material misstatement due to fraud 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 inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.E) B) and C)
F) All of the above

Question 5

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Accepted Answer

A)  decrease substantive testing.
B)  decrease detection risk.
C)  increase inherent risk.
D)  increase materiality levels.E) B) and C)
F) None of the above

Question 6

Experience has shown that the many large fraudulent transactions can be found in:

Accepted Answer

A)  systematic processing of large volumes of day-to-day ordinary transactions.
B)  payroll fraudsters' mistakes in using unissued Social Security numbers.
C)  petty cash embezzlements.
D)  non-routine, nonsystematic journal entries.E) A) and B)
F) C) and D)

Question 7

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:

Accepted Answer

A)  elements of audit risk whereas detection risk is not.
B)  changed at the auditor's discretion whereas detection risk is not.
C)  considered at the individual account-balance level whereas detection risk is not.
D)  functions of the client and its environment whereas detection risk is not.E) None of the above
F) B) and C)

Question 8

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Accepted Answer

A)  Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.
B)  Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure.
C)  Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.
D)  Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.E) None of the above
F) B) and D)

Question 9

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors.Required:Describe the broad purposes of analytical procedures.Identify the sources of information from which an auditor develops expectations.

Accepted Answer

a. Analytical procedures are used for th...

Question 10

Analytical procedures are most appropriate when testing which of the following types of transactions?

Accepted Answer

A)  Payroll and benefit liabilities.
B)  Acquisitions and disposals of fixed assets.
C)  Operating expense transactions.
D)  Long-term debt transactions.E) A) and B)
F) A) and C)

Question 11

The risk of material misstatement differs from detection risk in that it:

Accepted Answer

A)  arises from the misapplication of audit procedures.
B)  may be assessed in either quantitative or non-quantitative terms.
C)  exists independently of the financial statement audit.
D)  can be changed at the auditor's discretion.E) C) and D)
F) A) and D)

Question 12

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Accepted Answer

A)  extent of substantive tests of details.
B)  level of inherent risk.
C)  extent of tests of controls.
D)  level of detection risk.E) A) and D)
F) B) and C)

Question 13

Managing business risk is the responsibility of:

Accepted Answer

A)  the auditors.
B)  management.
C)  the SEC.
D)  the PCAOB.E) A) and B)
F) A) and C)

Question 14

If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%)  and inherent risk remain constant, the acceptable level of detection risk:

Accepted Answer

A)  would most likely change from 10% to 5%.
B)  would most likely change from 20% to 40%.
C)  would most likely change from 30% to 15%.
D)  would be unchanged, because the auditor has control over detection risk.
E)  cannot be determined because inherent risk is not given.F) C) and D)
G) A) and E)

Question 15

Sources of financial and nonfinancial data do not include:

Accepted Answer

A)  financial account information for comparable prior periods.
B)  nonfinancial information such as physical production statistics.
C)  company budgets and forecasts.
D)  Bureau of Labor statistics.E) None of the above
F) A) and C)

Question 16

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely:

Accepted Answer

A)  perform extended audit procedures.
B)  consult with fraud examiners.
C)  report directly to the Securities and Exchange Commission within one day.
D)  withdraw from the engagement.E) C) and D)
F) B) and C)

Question 17

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,

Accepted Answer

A)  income would be overstated.
B)  income would be understated.
C)  income would not be misstated.
D)  accounts receivable would be understated.E) A) and B)
F) B) and C)

Question 18

The purpose of an audit strategy is:

Accepted Answer

A)  to provide a defense against litigation.
B)  to gain an understanding of the client.
C)  to comply with securities law.
D)  to set the scope, timing, and direction for auditing each relevant assertion.E) A) and D)
F) A) and C)

Question 19

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

Accepted Answer

A)  an error in recording amortization of the excess of the investor's cost over the investment's underlying book value.
B)  the investee's decision to reduce cash dividends declared per share of its common stock.
C)  an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities.
D)  a substantial fluctuation in the price of the investee's common stock on a national stock exchange.E) All of the above
F) A) and C)

Question 20

While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?

Accepted Answer

A)  There is a broad indication of misappropriation of assets.
B)  There is an indication of theft of the entity's assets.
C)  There is an indication of embezzling receipts.
D)  There is a broad indication of financial reporting fraud.E) B) and C)
F) None of the above

Exam 4: Management Fraud and Audit Risk

Correct Answer
verified
a. Analytical procedures are used for th...
View Answer

Which of the following would not be considered an analytical procedure?

Correct Answer
verified

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,

Correct Answer
verified

Analytical procedures are most appropriate when testing which of the following types of transactions?

Correct Answer
verified

Sources of financial and nonfinancial data do not include:

Correct Answer
verified

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

Correct Answer
verified

Managing business risk is the responsibility of:

Correct Answer
verified

The purpose of an audit strategy is:

Correct Answer
verified

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:

Correct Answer
verified

The risk of material misstatement differs from detection risk in that it:

Correct Answer
verified

Experience has shown that the many large fraudulent transactions can be found in:

Correct Answer
verified

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Correct Answer
verified

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Correct Answer
verified

Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"?

Correct Answer
verified

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of:

Correct Answer
verified

Correct Answer
verified

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Correct Answer
verified

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

Correct Answer
verified

If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk:

Correct Answer
verified

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely:

Correct Answer
verified

Exam 4: Management Fraud and Audit Risk

Correct Answerverifieda. Analytical procedures are used for th...View AnswerShow Answer

Which of the following would not be considered an analytical procedure?

Correct AnswerverifiedShow Answer

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,

Correct AnswerverifiedShow Answer

Analytical procedures are most appropriate when testing which of the following types of transactions?

Correct AnswerverifiedShow Answer

Sources of financial and nonfinancial data do not include:

Correct AnswerverifiedShow Answer

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Managing business risk is the responsibility of:

Correct AnswerverifiedShow Answer

The purpose of an audit strategy is:

Correct AnswerverifiedShow Answer

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:

Correct AnswerverifiedShow Answer

The risk of material misstatement differs from detection risk in that it:

Correct AnswerverifiedShow Answer

Experience has shown that the many large fraudulent transactions can be found in:

Correct AnswerverifiedShow Answer

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Correct AnswerverifiedShow Answer

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Correct AnswerverifiedShow Answer

Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"?

Correct AnswerverifiedShow Answer

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

Correct AnswerverifiedShow Answer

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

Correct AnswerverifiedShow Answer

If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk:

Correct AnswerverifiedShow Answer

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely:

Correct AnswerverifiedShow Answer

Correct Answer
verified
a. Analytical procedures are used for th...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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