Question 1

Which of the following conditions identified during the audit increases the risk of employee fraud?
A) Large amounts of cash in the bank.
B) Existence of a mandatory vacation policy for employees performing key functions.
C) Inventory items of small size, but high value.
D) Presence of reconciling items on a client prepared year-end proof of cash.

Accepted Answer

The answer of Which of the following conditions identified during...

Question 2

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:
A) Account risk.
B) Control risk.
C) Detection risk.
D) Inherent risk.

Accepted Answer

Inherent risk is the risk that exists within an account even without considering the effectiveness of internal controls. It is based on the nature of the account and the potential for material misstatements to occur.

Question 3

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?
A) Factors whose presence indicates that fraud exists.
B) Factors whose presence often have been observed in circumstances where frauds have occurred.
C) Factors whose presence will require modification to planned audit procedures.
D) Factors obtained during the audit which lead to required communications with the audit committee.

Accepted Answer

Fraud risk factors are characteristics or conditions that may indicate that a fraud has occurred, is occurring, or may occur in the future. These factors have been observed in circumstances where frauds have occurred in the past, and are used to help auditors identify areas of higher risk and adjust their audit procedures accordingly. While the presence of fraud risk factors does not necessarily indicate that fraud is present, it does warrant additional scrutiny and consideration during the audit.

Question 4

Which of the following is least likely to be considered a financial statement audit risk factor?
A) Management operating and financing decisions are dominated by top management.
B) A new client with no prior audit history.
C) Rate of change in the entity's industry is rapid.
D) Profitability of the entity relative to its industry is inconsistent.

Accepted Answer

The answer of Which of the following is least likely...

Question 5

A successor auditor is required to attempt communication with the predecessor auditor prior to:
A) Performing test of controls.
B) Testing beginning balances for the current year.
C) Making a proposal for the audit engagement.
D) Accepting the engagement.

Accepted Answer

A successor auditor is required to attempt communication with the predecessor auditor prior to accepting the engagement. This is to obtain information about the client and the nature of the audit work performed by the predecessor auditor, which may affect the successor auditor's decision to accept the engagement. Communication with the predecessor auditor is not necessary for performing test of controls or testing beginning balances for the current year. Making a proposal for the audit engagement may require communication with the client but not necessarily with the predecessor auditor.

Question 6

Which of the following is least likely to be required on an audit?
A) Evaluate the business rationale for significant, unusual transactions.
B) Make a legal determination of whether fraud has occurred.
C) Review accounting estimates for biases.
D) Test appropriateness of journal entries and adjustments.

Accepted Answer

While auditors are responsible for detecting and reporting fraud, they are not responsible for making a legal determination of whether fraud has occurred. This is typically the responsibility of law enforcement and the judicial system. Auditors are primarily concerned with evaluating the accuracy and completeness of the financial statements and ensuring that they comply with accounting standards and regulations. Therefore, B is least likely to be required on an audit.

Question 7

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?
A) Low turnover of senior management.
B) Extreme degree of competition within the industry.
C) Capital structure including various operating subsidiaries.
D) Sales goals in excess of any of the preceding three years.

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 8

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
A) Several members of management have recently purchased additional shares of the entity's stock.
B) Several members of the board of directors have recently sold shares of the entity's stock.
C) The entity distributes financial forecasts to financial analysts that predict conservative operating results.
D) Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Accepted Answer

Management's interest in maintaining an earnings trend by using aggressive accounting practices increases the risk of fraudulent financial reporting. This is because such practices may involve deliberate misstatements or omissions in financial statements to manipulate financial performance. A and B relate to insider trading and do not necessarily suggest fraudulent financial reporting. C is not directly related to the risk of fraudulent financial reporting.

Question 9

A predecessor auditor will ordinarily initiate communication with the successor auditor: $\begin{array}{|l|l|}
\hline\
\hline \text { A. } &~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ \
\hline \text { B. } & \
\hline \text { C. } \
\hline \text { D. } & \
\hline
\end{array}$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

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

Question 10

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?
A) Decreases in accounts payable.
B) Decreases in accounts receivable.
C) Negative cash flows from investing.
D) Negative operating cash flows.

Accepted Answer

Growing companies often reinvest in their business, leading to negative cash flows from investing activities due to capital expenditures.

Question 11

Which of the following procedures is not performed as a part of planning an audit engagement?
A) Reviewing the working papers of the prior year.
B) Developing an overall audit strategy.
C) Confirmation of all major accounts.
D) Designing an audit plan.

Accepted Answer

Confirmation of all major accounts is not typically performed as part of planning an audit engagement. This procedure is typically performed during the fieldwork phase of the audit. The other options listed (reviewing prior year working papers, developing an overall audit strategy, and designing an audit plan) are all important steps in the planning phase of an audit engagement.

Question 12

Which of the following is an example of fraudulent financial reporting?
A) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
B) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.
C) An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
D) An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Accepted Answer

Falsifying inventory count tags is a form of fraudulent financial reporting as it leads to an overstatement of ending inventory and understatement of cost of goods sold. This can manipulate financial statements to make the company appear more profitable than it actually is.

Question 13

Which measure of materiality (or both) considers quantitative considerations? $$\begin{array} { | l | c | c | } 
\hline & \text { Planning } & \text { Evaluation } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

Planning materiality considers quantitative factors such as the size of the financial statements and the nature of the entity's business.

Question 14

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

Accepted Answer

Both substantive tests of details and substantive analytical procedures are considered further audit procedures that can be designed after assessing the risks of material misstatement.

Question 15

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
A) Purchase returns and allowances.
B) Allowance for doubtful accounts.
C) Common stock.
D) Noncontrolling interest of a subsidiary purchased during the year.

Accepted Answer

In a recession, there is a higher likelihood of customers experiencing financial difficulties and not being able to pay their debts. Therefore, the auditor would focus increased attention on the allowance for doubtful accounts to ensure that it accurately reflects the potential for bad debts.

Question 16

Which of the following is not one of the assertions made by management about an account balance?
A) Relevance.
B) Existence.
C) Valuation.
D) Rights and obligations.

Accepted Answer

All of the options listed (B, C, and D) are common assertions made by management about an account balance. Relevance, however, is not an assertion, as it is a characteristic of financial information that relates to its importance and usefulness for decision-making.

Question 17

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

Accepted Answer

Audits are designed to detect material misstatements due to both errors and fraud, including misappropriation of assets.

Question 18

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?
A) Apply increased professional skepticism about material transactions.
B) Increase the assessed level of detection risk.
C) Assign personnel with particular skill to areas of high risk.
D) Obtain increased evidence about the appropriateness of management's selection of accounting principles.

Accepted Answer

When significant risk is found to exist, the auditors will adjust their overall audit approach to increase the assurance that there are no material misstatements in the financial statements. This may include applying increased professional skepticism, assigning personnel with particular skills 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 is not an appropriate adjustment as it would actually decrease the level of assurance obtained from the audit.

Question 19

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
A) There are significant related party transactions that management claims occurred in the ordinary course of business.
B) Internal control activities requiring the segregation of duties are subject to management override.
C) Management continues to employ an inefficient system of information technology to record financial transactions.
D) It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Accepted Answer

If sufficient evidence is unlikely to be available, the CPA cannot issue an opinion in accordance with auditing standards. Therefore, the potential audit engagement should not be accepted. Choices A, B, and C may indicate some risks, but they do not necessarily prohibit the acceptance of the engagement.

Question 20

When a company has changed auditors, according to the Professional Standards:
A) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.
B) The predecessor must always respond fully to all inquiries made by the successor auditor.
C) The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement.
D) The successor may choose not to attempt any communication with the predecessor auditor.

Accepted Answer

The answer of When a company has changed auditors, according...

Quiz 6: Planning the Audit; Linking Audit Procedures to Risk

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

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

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

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

A successor auditor is required to attempt communication with the predecessor auditor prior to:

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

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

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

A predecessor auditor will ordinarily initiate communication with the successor auditor: $\begin{array}{|l|l|}\hline\\\hline \text { A. } &~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ \\\hline \text { B. } & \\\hline \text { C. } \\\hline \text { D. } & \\\hline\end{array}$

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

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

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

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

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

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?

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

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