Question 1

A predecessor auditor will ordinarily initiate communication with the successor auditor: $\begin{array}{lcc}&\begin{array}{c}
\text { Prior to the } \
\text { Successor's Acceptance } \
\text { of the Engagement }
\end{array} & \begin{array}{c}
\text { Subsequent to the } \
\text { Successor's Acceptance } \
\text { of the Engagement }
\end{array} \
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

The answer of A predecessor auditor will ordinarily initiate communication...

Question 2

Which of the following is least likely to be considered a financial statement audit risk factor?

Accepted Answer

Management dominance by top management is common and does not inherently increase audit risk, unlike the other options which indicate potential instability or lack of historical data.

Question 3

Which of the following is least likely to be required on an audit?

Accepted Answer

While auditors may investigate potential fraud and bring concerns to the attention of management, the legal determination of fraud is a responsibility of the appropriate legal and regulatory authorities. A, C, and D are all common audit procedures to ensure the accuracy and completeness of financial statements.

Question 4

When a company has changed auditors,according to the Professional Standards:

Accepted Answer

The successor auditor is responsible for initiating contact with the predecessor auditor to inquire about matters related to the client's integrity before accepting the engagement.

Question 5

Which of the following situations would an auditor consider a potential risk factor for misstatements from fraudulent financial reporting?

Accepted Answer

Management's interest in maintaining the entity's earnings trend by using aggressive accounting practices can increase the risk of fraudulent financial reporting.

Question 6

If the economy is experiencing a recession,an auditor should focus increased attention on which of the following accounts?

Accepted Answer

During a recession, customers may struggle financially and be unable to pay their bills on time, leading to an increase in doubtful accounts. As a result, an auditor should focus increased attention on the allowance for doubtful accounts to ensure it is adequately stated.

Question 7

The risk of a material misstatement occurring in an account,assuming an absence of internal control,is referred to as:

Accepted Answer

The risk of a material misstatement occurring in an account, assuming an absence of internal controls, is referred to as inherent risk. Inherent risk is the risk that exists in the absence of any internal controls, and it is an important consideration when planning an audit. The auditor assesses inherent risk for each account or assertion and uses that assessment to determine the nature, timing, and extent of audit procedures needed to reduce audit risk to an acceptable level.

Question 8

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

Accepted Answer

Extreme degree of competition within the industry can pressure companies to manipulate financial results to appear more competitive, increasing the risk of fraudulent financial reporting.

Question 9

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?

Accepted Answer

When significant risk is found to exist, the auditors' overall audit approach may include applying increased professional skepticism about material transactions, assigning personnel with particular skill to areas of high risk, and obtaining increased evidence about the appropriateness of management's selection of accounting principles. However, increasing the assessed level of detection risk would not be a likely adjustment because significant risk indicates a higher risk of material misstatement, and increasing detection risk would increase the risk of accepting a material misstatement.

Question 10

Which of the following is not one of the assertions made by management about an account balance?

Accepted Answer

All of the assertions mentioned are typically made by management about an account balance, except for relevance. Relevance is a characteristic of financial information that ensures it is useful and helpful in making decisions. While management may strive to provide relevant financial information, it is not an assertion made about an account balance specifically.

Question 11

A successor auditor is required to make an effort to communicate with the predecessor auditor prior to:

Accepted Answer

According to the auditing standards, a successor auditor is required to make an effort to communicate with the predecessor auditor prior to accepting the engagement. This communication helps the successor auditor to understand the reasons for the change of auditors and any potential ethical or audit quality issues related to the client. It can also provide valuable information about the client's industry, accounting policies, and internal control environment. Therefore, option D is the correct answer.

Question 12

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?

Accepted Answer

Fraud risk factors are indicators that increase the likelihood of fraud occurring, but the presence of these factors does not necessarily mean fraud exists. They are based on observations from past fraud cases and can help the auditor identify areas of potential risk. These risk factors may require modification to planned audit procedures, and the auditor may need to communicate any identified risks and findings to the audit committee.

Question 13

Which of the following is (are)considered a further audit procedure(s)that may be designed after assessing the risks of material misstatement? $\begin{array}{lll}&\text { Substantive Tests of Details }&\text { Substantive Analytical Procedures }\
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

Substantive tests of details and substantive analytical procedures are both considered further audit procedures that may be designed after assessing the risks of material misstatement. These procedures are used to gather audit evidence to reduce audit risk to an acceptably low level.

Question 14

Which of the following situations would lead a CPA to conclude that a potential audit engagement should not be accepted?

Accepted Answer

If it is unlikely that sufficient evidence is available to support an opinion on the financial statements, then the CPA cannot provide assurance that the financial statements are fairly stated. This would lead to a conclusion that the audit engagement should not be accepted. Choices A, B, and C represent areas of concern for auditors, but are not necessarily reasons to decline an audit engagement if they can be managed appropriately.

Question 15

Which of the following conditions identified during the audit increases the risk of employee fraud?

Accepted Answer

Inventory items that are small in size but high in value are easier to misappropriate without detection, increasing the risk of employee fraud.

Question 16

In using the statement of cash flows to obtain an understanding of a profitable,growing company,which of the following would ordinarily be least surprising to an auditor?

Accepted Answer

Negative cash flows from investing activities are common in profitable, growing companies as they often invest in new assets, expansion, or acquisitions to support their growth, which leads to cash outflows in the investing section of the cash flow statement.

Question 17

Which measure(s)of materiality considers quantitative considerations?  
$\begin{array}{lll}&\text { Planning } & \text { Evaluation } \
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

Both planning and evaluation phases of an audit consider quantitative considerations when determining materiality. Quantitative factors help in assessing the significance of financial statement misstatements.

Question 18

Which of the following procedures is not performed as a part of planning an audit engagement?

Accepted Answer

Verifying cutoff procedures is a substantive audit procedure that is performed during the fieldwork stage of the audit, rather than during the planning stage. The other three procedures mentioned are all components of the planning stage of an audit engagement.

Question 19

Which of the following is an example of fraudulent financial reporting?

Accepted Answer

Falsifying inventory count tags in order to overstate ending inventory and understate cost of goods sold is an example of fraudulent financial reporting. The purpose would be to make the company appear more profitable than it actually is. The other options describe examples of asset misappropriation, not fraudulent financial reporting.

Question 20

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: $\begin{array}{lll}&\text { Errors } & \text { Misappropriation of Asset: } \
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

Audits are designed to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, which includes both errors and misappropriation of assets.

Quiz 6: Audit Planning, understanding the Client, assessing Risks, and Responding

Which of the following is least likely to be considered a financial statement audit risk factor?