Question 1

The amount of estimation uncertainty is affected by the nature of which of the following?
A)Accounting estimate
B)Auditing estimate
C)Management bias
D)Accounting disclosure

Accepted Answer

The amount of estimation uncertainty is affected by the nature of accounting estimate, as it involves making judgments and assumptions about future events or outcomes. Auditing estimate refers to the auditor's evaluation of the reasonableness of accounting estimates, which is different from the nature of the estimate itself. Management bias and accounting disclosure may impact the reliability of the estimate but do not directly affect estimation uncertainty.

Question 2

If the client has well-designed, implemented, and documented controls over the preparation of accounting estimates, then an appropriate risk response would be _______.
A)to focus this audit time on another area, and conclude there is no material risk in this area
B)to test the operating effectiveness of the controls
C)to test the operating effectiveness of the assertions
D)to obtain written representation from management to this effect, which negates the need for any testing

Accepted Answer

The appropriate risk response in this scenario would be to test the operating effectiveness of the controls to confirm that they are working as intended and effectively mitigating any risks associated with the preparation of accounting estimates. While it may be tempting to focus audit time on another area or rely solely on written representation from management, testing the controls provides the necessary evidence to support the effectiveness of the controls and reduce the overall audit risk. Testing the operating effectiveness of the assertions may also be necessary, but this would be in addition to, rather than instead of, testing the controls.

Question 3

In order to evaluate management's estimation process, _______.
A)auditors use the knowledge gained about the industry and the applicable financial reporting framework during risk assessment
B)auditors use the knowledge gained about other industries and the applicable financial reporting framework during risk assessment
C)auditors compare management estimates with other management estimates at other companies
D)the auditors ask the internal audit function to review and come to a conclusion which can be included in the audit report

Accepted Answer

Auditors use the knowledge gained about the industry and the applicable financial reporting framework during risk assessment to evaluate management's estimation process. This helps them to gain an understanding of the key drivers of the business and the potential risks associated with the estimates, as well as the requirements of the relevant accounting standards. Comparing management estimates with those of other companies or asking the internal audit function to review and come to a conclusion is not a necessary or typical part of evaluating management's estimation process.

Question 4

Examples of causes of misstatements include which of the following?
A)Intentional or unintentional omission of an amount or disclosure
B)Incorrect accounting estimate caused by a misinterpretation of facts or by management bias
C)Inappropriate selection of accounting policies
D)All of these answer choices are correct.

Accepted Answer

All of the answer choices are examples of causes of misstatements. Intentional or unintentional omissions, incorrect accounting estimates, and inappropriate selection of accounting policies can all result in misstatements in financial statements.

Question 5

Examples of substantive procedures performed to test the reasonableness of accounting estimates include:
A)Inquiry about the method of measurement
B)Inquiry about assumptions used by management
C)Recalculate the accounting estimate
D)All of these answer choices are correct

Accepted Answer

All of these substantive procedures are commonly used to test the reasonableness of accounting estimates. Inquiry about the method of measurement and assumptions used by management can provide insight into the reasonableness of the estimate. Recalculating the accounting estimate helps auditors to verify the accuracy of the estimate. Hence, all the answer choices are correct.

Question 6

All substantive audit procedures performed _______.
A)are approved by client management beforehand
B)are documented in the working papers
C)are documented in invoices sent to the client's legal counsel
D)should be done before any testing of internal control

Accepted Answer

Substantive audit procedures must be documented in the working papers, which serve as evidence of the auditors' work and support their conclusions and opinions. Client management does not approve the audit procedures, and they are not documented in invoices sent to the client's legal counsel. While it is important to perform substantive procedures before issuing an opinion on the financial statements, there is no requirement for them to be done before testing internal control.

Question 7

A misstatement is defined as _______.
A)the auditor incorrectly billing the client for work that was not performed
B)a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework
C)there being no difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework
D)variances that only occur in the interim financial statements

Accepted Answer

A misstatement is a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework. Therefore, option B is the correct definition of a misstatement. Option A refers to incorrect billing practices and is not related to misstatements in financial statements. Option C is incorrect because if there is no difference between what is reported in the financial statements and what is required, then there is no misstatement. Option D is incorrect because misstatements can occur in both interim and annual financial statements.

Question 8

In which of the following misstatements is there no doubt because there is no element of judgment involved?
A)Factual misstatements
B)Projected misstatements
C)Accumulated misstatements
D)Auditing misstatements

Accepted Answer

Factual misstatements are errors or omissions in the financial statements that can be objectively verified and do not involve any element of judgment. This is in contrast to projected misstatements, which involve estimates and assumptions, accumulated misstatements that result from several small misstatements that add up over time, and auditing misstatements that arise from errors and issues related to the audit process.

Question 9

Management bias is defined as _______.
A)a lack of neutrality by management in the preparation and fair presentation of information
B)evidence of neutrality by management in the preparation and fair presentation of information
C)management hiring selectively for certain key positions
D)management 'opinion' shopping' among auditors for their desired opinion

Accepted Answer

Management bias refers to a lack of neutrality by management in the preparation and fair presentation of information. This means that management may intentionally or unintentionally provide incomplete, inaccurate or misleading information that is not neutral and unbiased. This can lead to a misrepresentation of the company's financial health or performance, which can have significant implications for investors, stakeholders and the organization itself.

Question 10

An example of possible management bias would be _______.
A)changes in the method of making the accounting estimate that are based on subjective assumptions
B)using management's own assumptions for fair value estimates when they are inconsistent with readily observable market assumptions
C)selecting or developing significant assumptions that yield an estimate more favorable for management's objectives
D)All of these answer choices are correct.

Accepted Answer

All of these answer choices are examples of possible management bias.

Question 11

When auditors are performing substantive procedures and identify misstatements they did not expect, they _______.
A)reconsider their audit strategy and audit plan, and determine if the nature, timing, or extent of internal control testing needs to be modified
B)reconsider their audit strategy and audit plan, and determine if the nature, timing, or extent of substantive procedures need to be modified
C)should seek to obtain written representations from management as to the accuracy of the balances in question
D)should consider withdrawing from the engagement

Accepted Answer

If auditors identify misstatements that they did not expect during substantive procedures, they should reconsider their audit strategy and plan for substantive procedures. This may involve modifying the nature, timing or extent of the procedures. This will help the auditor to obtain sufficient appropriate audit evidence that is necessary for reaching a conclusion about the fairness of the financial statements. Seeking written representations from management and withdrawing from the engagement are not appropriate responses in this situation.

Question 12

A _______ shows the balances of prepaid insurance for each insurance provider.

Accepted Answer

The answer of A _______ shows the balances of prepaid...

Question 13

If testing the operating effectiveness of controls surrounding an estimate alone does not provide sufficient appropriate audit evidence, _______.
A)the auditors should consider increasing the risk and cost associated with the audit
B)auditors also conduct tests of internal controls pertaining to the reasonableness of accounting estimates
C)auditors also conduct substantive procedures on the reasonableness of accounting estimates
D)the auditors should disregard testing of controls completely, and instead focus on substantive testing

Accepted Answer

Auditors conduct substantive procedures on the reasonableness of accounting estimates when testing the operating effectiveness of controls alone does not provide sufficient appropriate audit evidence. This approach helps in obtaining more reliable evidence regarding the accuracy of the estimates made in the financial statements.

Question 14

Two things that auditors do with misstatements during the audit are _______.
A)documenting and accumulating them
B)documenting and referring them to the internal auditors
C)documenting and referring them to senior management
D)accumulating and immediately correcting them

Accepted Answer

Auditors are required to document all misstatements identified during the audit and accumulate them to evaluate their impact on the financial statements. Depending on the materiality and nature of the misstatement, auditors may also need to communicate them to the appropriate level of management for corrective actions. However, immediate correction of misstatements is not the responsibility of auditors as they do not have the managerial authority to change the financial records.

Question 15

A misstatement could occur with _______.
A)an account balance
B)a transaction
C)a classification
D)All of these answer choices are correct

Accepted Answer

A misstatement could occur with any of these items (account balance, transaction, classification), so all of these answer choices are correct.

Question 16

Auditors performing audit procedures related to accounts, assertions, or disclosures that they normally would not test because they are immaterial or considered low risk is an example of an _______.

Accepted Answer

The answer of Auditors performing audit procedures related to accounts,...

Question 17

AU-C Section 450 Evaluation of Misstatements Identiﬁed During the Audit describes misstatements as _______.
A)Factual misstatements
B)Judgmental misstatements
C)Projected misstatements
D)All of these answer choices are correct.

Accepted Answer

AU-C Section 450 Evaluation of Misstatements Identiﬁed During the Audit describes misstatements as both factual misstatements (arising from errors in transactions, records or other sources) and judgmental misstatements (arising from management's application of accounting policies). The section also discusses the concept of projected misstatements (results of extrapolating misstatements identified in a sample to the entire population) and how they should be evaluated during the audit. Therefore, all answer choices are correct.

Question 18

The difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework is called _______.
A)misstatement
B)projected estimate
C)auditing misappropriation
D)accumulated inaccuracy

Accepted Answer

The difference between what is reported and what is required for fair presentation is called a misstatement. This could be due to errors or omissions in the financial statements.

Question 19

A misstatement could occur _______.
A)with an account balance
B)with a transaction
C)with a classification
D)All of these answer choices are correct.

Accepted Answer

A misstatement could occur with an account balance, a transaction, or a classification, so all of these answer choices are correct.

Question 20

When internal controls are strong and the auditor is able to obtain relevant and reliable data, he or she usually considers using audit data analytics (ADA) as a _______.

Accepted Answer

The answer of When internal controls are strong and the...

Quiz 9: Risk Responseperforming Substantive Procedures

The amount of estimation uncertainty is affected by the nature of which of the following?

If the client has well-designed, implemented, and documented controls over the preparation of accounting estimates, then an appropriate risk response would be _______.

In order to evaluate management's estimation process, _______.

Examples of causes of misstatements include which of the following?

Examples of substantive procedures performed to test the reasonableness of accounting estimates include:

All substantive audit procedures performed _______.

A misstatement is defined as _______.

In which of the following misstatements is there no doubt because there is no element of judgment involved?

Management bias is defined as _______.

An example of possible management bias would be _______.

When auditors are performing substantive procedures and identify misstatements they did not expect, they _______.

A _______ shows the balances of prepaid insurance for each insurance provider.

If testing the operating effectiveness of controls surrounding an estimate alone does not provide sufficient appropriate audit evidence, _______.

Two things that auditors do with misstatements during the audit are _______.

A misstatement could occur with _______.

Auditors performing audit procedures related to accounts, assertions, or disclosures that they normally would not test because they are immaterial or considered low risk is an example of an _______.

AU-C Section 450 Evaluation of Misstatements Identiﬁed During the Audit describes misstatements as _______.

The difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework is called _______.

A misstatement could occur _______.

When internal controls are strong and the auditor is able to obtain relevant and reliable data, he or she usually considers using audit data analytics (ADA) as a _______.