Exam Questions Risk Response Chapter 9

Chapter 9

Risk Response

Performing Substantive Procedures

Question Type: True or False

When evidence is collected at an interim date, substantive tests are more effective.

A. True

B. False

If the assessed risk of material misstatement for an assertion is high, auditors need to gather more persuasive audit evidence.

A. True

B. False

When the entity’s control environment has been assessed as effective, limited roll-forward procedures such as substantive analytical procedures are necessary.

A. True

B. False

Determining fair value of a transaction or financial statement item for inclusion in the financial statements is a type of accounting estimate.

A. True

B. False

The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed.

A. True

B. False

Question Type: Multiple choice

Finding an appropriate combination of audit procedures to minimize an engagement’s audit risk _______.

A. can be challenging

B. is generally fairly straightforward

C. is the responsibility of the internal audit function

D. is the responsibility of management

The types of substantive procedures discussed in this chapter include _______.

A. analytical procedures

B. substantive tests to follow-up on notable items identified when performing audit data analytics

C. tests of details of transactions and balances including audit data analytics (ADA) used as a substantive test

D. All of these answer choices are correct.

An audit strategy is developed _______.

A. in response to the risk assessment for each significant account and assertion using the formula for audit risk

B. in response to the risk assessment for each insignificant account and assertion using the formula for audit risk

C. by the auditor, but must be reviewed and approved by management

D. by the auditor, but must be reviewed and approved by the internal audit function

An audit strategy can take _______.

A. a reliance on procedures approach, a substantive approach, or a combination of both

B. a reliance on controls approach, a substantive approach, or a combination of both

C. neither a reliance on controls approach, nor a substantive approach

D. an approach whereby only internal control is audited

The term “substantive” comes from _______.

A. “substantiate,” which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements

B. “insubstantial,” which means auditors gather evidence to support the transactions, account balances, and disclosures provided by management in the financial statements

C. “insubstantial,” which means auditors gather evidence to support only insubstantial transactions, account balances, and disclosures provided by management in the financial statements

D. the fact that the audit report is designed to assist stockholders with substantial stock holdings in the client

After auditors have completed testing controls and drawn a conclusion about control risk, _______.

A. they make decisions about the nature and timing of substantive testing

B. they are ready to issue the audit opinion

C. they make decisions about the nature, timing, and extent of substantive testing

D. they should withdraw if control risk is assessed as high

If internal controls are strong, _______.

A. the auditor can usually assess control risk as low

B. the auditor can usually assess control risk as high

C. the auditor does not need to test the controls

D. the auditor should allow the internal audit function to conduct any testing

An auditor mailing positive confirmations is an example of _______.

A. a compilation engagement

B. a review engagement

C. a substantive procedure

D. a test of internal control

When internal controls are strong, _______.

A. the auditor should plan to conduct more substantive testing

B. the auditor may be able to conduct less substantive testing

C. there is no need to test the internal controls

D. the auditor is ready to issue an unmodified opinion

Assertions about classes of transactions and events typically include _______.

A. occurrence, cutoff, and completeness

B. existence, rights, and obligations

C. existence, rights, and cutoff

D. completeness, accuracy, and valuation

Assertions about account balances at year-end typically include _______.

A. existence, completeness, and allocation

B. existence, completeness, and rights and obligations

C. existence, occurrence, and cutoff

D. accuracy, valuation, and occurrence

Assertions about presentation and disclosure typically include _______.

A. completeness, accuracy and valuation, and classification and understandability

B. existence, rights and obligations, and cutoff

C. cutoff, presentation, and disclosure

D. cutoff, accuracy, and valuation

The objective of auditors is to obtain _______.

A. sufficient appropriate audit evidence regarding the assessed risks of immaterial misstatement

B. insufficient appropriate audit evidence regarding the assessed risks of material misstatement

C. sufficient appropriate audit evidence regarding the assessed risks of material misstatement

D. sufficient appropriate audit evidence from internal control only regarding the assessed risks of material misstatement

What are substantive procedures?

A. Audit procedures designed to detect material misstatements at the assertion level

B. Audit procedures designed to aid testing controls

C. Audit procedures that are applied when internal controls are not functioning as designed

D. Audit procedures applied to gather appropriate relevant and reliable data

If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as_______.

A. high and set detection risk as low

B. low and set detection risk as low

C. high and set detection risk as high

D. low and set detection risk as high

If the control environment is assessed to be weak, _______.

A. auditors may respond by altering the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client’s locations

B. auditors may respond by altering the audit plan to include less audit procedures and expanding the scope of the audit to include more of the client’s locations

C. the auditor will likely consider withdrawing from the engagement

D. the auditor will likely be able to perform the audit at a lower cost

If significant fraud risk exists, the auditors should _______.

A. respond by including elements of predictability in their audit plan

B. respond by including elements of unpredictability in their audit plan

C. plan to place greater reliance on the internal audit function

D. be able to place greater reliance on management assertions

Management may feel pressure to maintain debt covenants _______.

A. if a client is relying heavily on debt financing and struggling to make debt payments

B. if a client is relying heavily on equity financing and struggling to make equity payments

C. both the liquidity and solvency positions have improved

D. the accounts receivable turnover ratio has increased

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor’s Responses to the Risks of Material Misstatement provide which of the following examples of responding to risk at the financial statement level?

A. Emphasize that audit team members should not attempt to maintain professional skepticism

B. Assign less experienced staff to areas of higher risk of material misstatement

C. Provide less supervision

D. Include more elements of unpredictability in the selection of audit procedures

Risk response at the financial statement level is affected by _______.

A. the auditor’s understanding of the auditor's control environment and the assessed risk of material misstatement due to fraud

B. the auditor’s understanding of the entity’s control environment and the assessed risk of material misstatement due to fraud

C. the internal auditor’s system of internal control

D. the prior auditor's current assessment of audit risk

An effective control environment suggests that _______.

A. internal control risk should be assessed at the maximum

B. management and those charged with the audit demonstrate a commitment to ethical values and strong internal control

C. management and those charged with governance demonstrate a commitment to ethical values and strong internal control

D. the system of internal control is ineffective

Auditors will have more confidence in internal controls and audit evidence generated internally _______.

A. with a client that maintains an effective control environment

B. with a client that maintains a poor control environment

C. if the controls are centralized and controlled by one department

D. if the audit evidence is received from one department of function only

If the control environment is assessed to be weak, _______.

A. the auditors should immediately consider withdrawal from the engagement

B. the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client’s locations

C. the auditors should plan to increase their reliance on the evidence generated by the system

D. the auditors should plan to increase their reliance on the internal audit function

After auditors have assessed control risk, _______.

A. they are in a good position to evaluate the risk of fraud

B. the audit is ready to be finalized and the audit opinion issued

C. the findings should be submitted to management for review and approval

D. the findings should be referred to the internal audit function for investigation

Auditors will assess the risk of fraud by considering _______.

A. fraud risk factors that may not be present, such as pressure and opportunities for management to commit fraud

B. fraud risk factors that may be present, such as pressure and opportunities for management to commit fraud

C. fraud risk factors that may be present, such as a lack of pressure and opportunities for management to commit fraud

D. management's opinion and statements on whether fraud is occurring or not

For clients with multiple locations, the auditors_______.

A. could vary which locations are tested each year and the type of audit procedures that are performed at the different locations

B. could vary which locations are tested each year and not change the type of audit procedures that are performed at the different locations

C. could not vary which locations are tested each year, but instead vary the type of audit procedures that are performed at the different locations

D. should always hire another auditor to check other locations, and not attempt to do this themselves

In order to obtain more reliable evidence, _______.

A. the auditors should request the internal audit function generate it

B. auditors must exercise professional skepticism and be prepared to modify the planned audit procedures as needed

C. the auditors should request that management generate it

D. auditors should only rely on internally generated evidence

Which of the following factors is used by the audit team to assess the risk of fraud?

A. Pressure and opportunities for management to commit forgery

B. Inclusion of elements of unpredictability

C. Misappropriation of assets

D. Modification of planned audit procedures

Which of the following is an audit procedure in response to assessed risks?

A. Making changes to the nature, timing, or extent of audit procedures to obtain more persuasive evidence

B. Developing an understanding of the entity’s control environment

C. Designing and implementing appropriate responses to financial statements

D. Changing the recalculating procedures applied in financial statements

When analytical procedures are used to obtain audit evidence during the risk response phase, _______.

A. they are referred to as “substantive analytical procedures.”

B. they are referred to as tests of internal control

C. the audit report is ready to be issued

D. management should be allowed to select the procedures and tests

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor’s Responses to the Risks of Material Misstatement state that _______.

A. auditors are required to perform substantive procedures for all relevant assertions that have been identified during the report issuance phase

B. auditors are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase

C. the auditors must always confer with the prior auditor before issuance of any audit report

D. the accounting qualities of faithful representation and comparability are immaterial to the audit

The nature of an audit procedure refers to _______.

A. its purpose (test of controls or substantive procedure) and its type

B. its extent (test of controls or substantive procedure) and its type

C. its timing (test of controls or substantive procedure) and its type

D. its timing (test of controls only) and its type

Examples of substantive procedures include _______.

A. observation

B. inquiry

C. confirmation

D. All of these answer choices are correct.

The most important factor when responding to assessed risks is _______.

A. consideration of the nature of the audit procedure

B. consideration of the nature of the associated internal control

C. the opinion of management regarding the assessed risk

D. the opinion of the internal auditor regarding the assessed risk

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor’s Responses to the Risks of Material Misstatement state that auditors _______.

A. are required to perform substantive procedures for all relevant assertions that have been identified after issuance of the audit opinion

B. are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase

C. are required to perform tests of controls for all relevant assertions that have been identified during the risk assessment phase

D. should notify the client immediately of a change in fee structure pertaining to the audit

Every audit will involve _______.

A. conflicts with management pertaining to estimates

B. relying on the internal audit function for production of evidentiary matter

C. some amount of substantive testing because audit standards require it for relevant assertions

D. no substantive testing because audit standards require it not to be conducted for relevant assertions

A reliance on controls strategy would involve _______.

A. the auditor performing primarily tests of controls

B. the auditor performing primarily substantive procedures

C. obtaining written assertions and representations from management

D. the external auditor relying on the internal audit function

A dual-purpose test _______.

A. involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on different transactions

B. involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on the same transaction

C. involves satisfying informational requests from management and the client's legal counsel simultaneously

D. involves the auditor being able to bill the client for two tests when only one was performed

A factor that auditors consider when determining the type of substantive procedure to use is _______.

A. the assessed level of risk for the assertion

B. the assessed level of risk for the control

C. the cost of the procedure, and if management will be able to afford it

D. the recommendations of management

When the risk of material misstatement for an assertion is high, the auditors_______.

A. must gather less reliable and persuasive evidence

B. must gather more reliable and persuasive evidence

C. should not attempt to audit this assertion

D. should consider allowing the internal audit function to audit this assertion

A significant risk is _______.

A. a risk that the auditor should not attempt to address

B. an identified and assessed risk of immaterial misstatement that, in the auditor’s judgment, requires special audit consideration

C. an identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit consideration

D. a risk for which the auditor should immediately notify the SEC

Examples of initial procedures that an auditor may perform include _______.

A. trace beginning balances to working papers from the prior year's audit

B. scan the transactions in the account for unusual items

C. obtain a trial balance or other detailed report for the account

D. All of these answer choices are correct.

Analytical procedures _______.

A. are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

B. are evaluations of financial information through analysis of plausible relationships using financial data only

C. are evaluations of financial information through analysis of plausible relationships using non-financial data only

D. are optional, and generally unnecessary if the system of internal control is strong

The use of analytical procedures _______.

A. is optional during risk assessment

B. is prohibited during risk assessment

C. is required during risk assessment

D. is most effective as part of the testing of the system of internal control

Examples of analytical procedures include _______.

A. ratio analysis

B. trend analysis

C. complex statistical techniques

D. All of these answer choices are correct.

When conducting a substantive analytical procedure, _______.

A. auditors develop an expectation, or estimate, using data in the auditor's records or data from reliable outside sources, and then compare the expectation with the client’s recorded amount

B. auditors develop an expectation, or estimate, using data in the client’s records or data from reliable outside sources, and then compare the expectation with the client’s recorded amount.

C. auditors develop an expectation, or estimate, using data in the client’s records or data from reliable internal sources, and then compare the expectation with the client’s recorded amount.

D. the procedure should be approved by management beforehand

Before auditors can use substantive analytical procedures, _______.

A. they must be ready to issue the preliminary audit opinion

B. they must consider the availability and reliability of data to be used to develop their expectation

C. they must consider the availability and reliability of data to be used to develop their audit opinion

D. they must be approved by the internal auditors beforehand

The use of a substantive analytical procedure may be more appropriate and provide more persuasive audit evidence depending on _______.

A. the nature of the assertion

B. whether management agrees with its use

C. the nature of the control

D. whether the internal auditors are able to confirm the evidence

If the assessed risk of material misstatement for an assertion is high, _______.

A. the auditors should avoid auditing the assertion in question

B. auditors need to gather less persuasive audit evidence

C. auditors need to gather more persuasive audit evidence

D. the auditors should consider withdrawing from the engagement

Which of the following factors impact the effectiveness and efficiency of using a substantive analytical procedure to respond to risk?

A. Nature of the assertion

B. Assessed risk of the material misstatement

C. Control over the data

D. Persuasiveness of the evidence

Testing of internal controls is typically conducted _______.

A. during an interim period

B. at the balance sheet date

C. after the balance sheet date

D. upon issuance of the audit report

Roll-forward procedures relate to _______.

A. auditors updating their audit findings from an interim period through year-end

B. auditors updating their audit findings from year-end through an interim period

C. any substantive procedure performed after the balance sheet date

D. any procedure carried out by the auditor to update their audit findings through the date of the audit report

Some substantive procedures can only be performed at year-end _______.

A. due to management not allowing the auditors access beforehand

B. because there have been no transactions occurring in these accounts during the year

C. due to the nature of the assertion or the timing of the transactions

D. once the internal audit function has completed its preliminary testing of the account

The cutoff assertion for sales means _______.

A. that transactions have been recorded in the proper accounting period

B. that the auditor should check to make sure sales are being shipped to the correct client customers

C. that transactions are being recorded in the correct accounts

D. that sales should be limited to certain clients who may not have the ability to pay

If during risk assessment auditors have identified risks of material misstatement due to fraud, _______.

A. they may consider not changing the timing of audit procedures

B. they may consider changing the timing of audit procedures

C. the auditors should confront the employee(s) in question

D. the auditors should immediately report this to the SEC

Which of the following procedures aim to provide sufficient appropriate audit evidence on which to base conclusions at year-end when substantive procedures were performed at an interim date?

A. Roll-forward procedures

B. Analytical procedures

C. Auditing procedures

D. Interim procedures

The extent of substantive procedures refers to _______.

A. how much testing will be performed outside of a class of transactions or account balance

B. how much testing will be performed within a class of transactions or account balance

C. the extent of the cost associated with performing a particular audit procedure

D. the extent to which management agree with the procedures performed

In general, an auditor is more likely to use audit data analytics (ADA) when which of the following conditions exist?

A. Evidence to support the audit test is available in electronic form.

B. Relevant data is reliable and internal controls over the reliability of data are strong.

C. Relevant data is clean or can be cleaned up easily.

D. All of these answer choices are correct.

The auditor is more likely to use audit sampling when _______.

A. professional standards expect the auditor to perform certain audit procedures

B. evidence to support the audit test is not available in electronic form

C. the audit population is relatively small and can efficiently be tested using traditional audit tests

D. All of these answer choices are correct.

If the risk of material misstatement is low and detection risk is high _______.

A. then a smaller sample size should be selected

B. then a larger sample size should be selected

C. then control risk should be assessed as high

D. the auditor should consider outsourcing the audit work to the internal audit function

An example of a qualitative factor auditors will consider when determining sample size is _______.

A. the accounts receivable turnover ratio

B. the days in receivables ratio

C. the percentage of bad debt expense

D. significant turnover in the accounts receivable department

One method of selecting specific items from a population when testing for overstatement is to _______.

A. select items that are over a certain dollar amount

B. select items that are identical dollar amounts

C. allow the internal auditors to select them

D. allow management to select them

Auditors can use statistical audit sampling _______.

A. to determine which clients to accept

B. to select a sample of items to test

C. as a means of testing the system of internal control

D. to determine which accounts should not be audited

Statistical sampling _______.

A. should generally not be used for auditing engagements

B. is typically less complicated than non-statistical sampling

C. can be used in addition to testing specific items from a population

D. can be used instead of testing specific items from a population

The auditor is likely to use audit sampling in which of the following cases?

A. Evidence to support the audit test is not available in electronic form.

B. The audit population is relatively large.

C. Relevant data is not reliable.

D. Relevant data is in different formats.

When the audit population can efficiently be tested using traditional audit tests, the auditor is more likely to use _______.

A. audit sampling

B. audit data analytics

C. substantive procedures

D. none of the above is correct

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states _______.

A. the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate

B. the objective of the internal auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate

C. the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable only

D. the objective of the auditor is to obtain sufficient appropriate evidence that disclosures are adequate only

Financial statements include _______.

A. a variety of items that cannot be measured precisely and must be estimated by client management

B. a variety of items that can be measured precisely and must be estimated by client management

C. a variety of items that cannot be measured precisely and must be estimated by the internal auditors

D. a variety of items that can be measured precisely and should not be estimated by client management

An accounting estimate is _______.

A. an exact monetary amount when a precise means of measurement is available

B. an approximation of a monetary amount when a precise means of measurement is not available

C. prohibited by GAAP and should be questioned by the auditor

D. a figure that should be left to the external auditor to determine at the end of the year

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______.

A. the accounting estimates are reasonable

B. accounting estimates are reasonable, but disclosures are not adequate

C. accounting estimates are reasonable, and disclosures are adequate

D. disclosures are adequate

Once the final outcome of a transaction or event occurs _______.

A. it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements

B. it is expected that there will be no difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements

C. the amount should be adjusted to match the estimated balance

D. the auditor should not concern themselves with investigating abnormally large variances

Estimation uncertainty is defined as _______.

A. the susceptibility of an accounting estimate and related disclosures to be accurate

B. the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement

C. the uncertainty surrounding the ultimate cost of the audit

D. the uncertainty surrounding which staff members to assign to a particular audit

The amount of estimation uncertainty is affected by _______.

A. the nature of the accounting estimate

B. the subjectivity of the assumptions used to make the estimate

C. the extent to which a generally accepted method or model is available to aid in developing the estimate

D. All of these answer choices are correct.

In general, accounting estimates with a high degree of estimation _______.

A. uncertainty pose a greater risk of material misstatement

B. uncertainty pose a smaller risk of material misstatement

C. uncertainty pose no risk of material misstatement

D. serve to lower inherent risk

Accounting estimates, by their nature _______.

A. involve objective decision making on the part of management

B. involve subjective decision making on the part of management

C. should cause little or no variance at the end of the period

D. should not be estimated by management, but rather by the auditor at the end of the period

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

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.

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

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

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

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

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

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.

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

A misstatement could occur with _______.

A. an account balance

B. a transaction

C. a classification

D. All of these answer choices are correct

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.

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

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.

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

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

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

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

Question Type: Text Entry

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 _______.

A. substantive test

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 _______.

A. element of unpredictability

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

A. trial balance

Substantive tests of details to test the _______ assertion for sales transactions are performed at year-end.

A. cutoff

The auditor’s tests supported by reliable and relevant data in electronic form make the choice of _______ an efficient approach.

A. Audit data analytics (ADA)

If the client has well-designed, implemented, and documented controls over the preparation of _______, then an appropriate risk response is required to test the operating effectiveness of the controls.

A. accounting estimates

Question Type: Multiple choice multi select

In the context of the impact of risk of material misstatement (RMM) on the level of substantive testing, which of the following statements are true in the case of small sample sizes?

A. The combined assessed level of inherent risk and control risk is low.

B. The acceptable level of detection risk is high.

C. Substantive tests are less effective.

D. Evidence is collected at year-end.

• 1. The combined assessed level of inherent risk and control risk is low.
  2. The acceptable level of detection risk is high.
  3. Substantive tests are less effective.

Which of the following affect risk response at the financial statement level?

A. The auditor’s understanding of the entity’s control environment

B. The assessed risk of material misstatement due to fraud

C. The audit team maintaining professional skepticism

D. Estimating high risk of material misstatement

Which of the following initial procedures do auditors perform before applying substantive procedures when auditing an account balance?

A. Trace the beginning balance of the prepaid insurance account to the auditor’s working papers from the prior year’s audit.

B. Scan the transactions in the account for unusual items.

C. Obtain a trial balance or other detailed report for the account.

D. Check if appropriate and understandable terminology is used, as prescribed by the applicable financial reporting framework.

• 1. Trace the beginning balance of the prepaid insurance account to the auditor’s working papers from the prior year’s audit.
  2. Scan the transactions in the account for unusual items.
  3. Obtain a trial balance or other detailed report for the account.

Which of the following are the conditions when limited tests of details of transactions occurring between the interim period and the year-end are necessary?

A. The entity’s control environment has been assessed as effective.

B. Controls have been tested.

C. No significant changes in the control environment have occurred.

D. Major changes are required in internal controls.

• 1. The entity’s control environment has been assessed as effective.
  2. Controls have been tested.
  3. No significant changes in the control environment have occurred.

Which of the following are indicators of possible management bias?

A. Changes in the method of making the accounting estimate that are based on subjective assumptions.

B. Selecting or developing significant assumptions that yield an estimate more favorable for management’s objectives.

C. Selecting an estimate that indicates a pattern of optimism or pessimism.

D. Inspecting the outcome of prior period accounting estimates.

• 1. Changes in the method of making the accounting estimate that are based on subjective assumptions.
  2. Selecting or developing significant assumptions that yield an estimate more favorable for management’s objectives.
  3. Selecting an estimate that indicates a pattern of optimism or pessimism.

Which of the following are causes of misstatements?

A. Omission of an amount or disclosure

B. Incorrect accounting estimate caused by a misinterpretation of facts

C. Inappropriate selection of accounting policies

D. Inaccurate substantive procedure used

Question Type: Short Answer

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population of 1,000 items that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, what would the auditor most likely would conclude?

The auditor might conclude that there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

Briefly discuss the two factors that affect the auditor’s risk response at the financial statement level.

Risk response at the financial statement level is affected by (1) the auditor’s understanding of the entity’s control environment and (2) the assessed risk of material misstatement due to fraud.

Auditing standards require that the auditor appropriately document the processes, procedures, judgments, and results relating to the audit of internal control. Specifically, what must this documentation include?

The auditor's documentation must include the auditor's understanding and evaluation of the design of each of the components of the entity's internal control over financial reporting. The auditor also documents the process used to determine and the points at which misstatements could occur within, significant accounts, disclosures, and major classes of transactions. The auditor must justify and document the extent to which he or she relied upon work performed by others. Finally, the auditor must describe the evaluation of any deficiencies discovered, as well as any other findings that could result in a modification to the auditor's report.

Briefly discuss and explain analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Briefly discuss and explain the relationship between the timing of audit procedures and the risk of material misstatement.

For assertions that have a lower risk of material misstatement, it may be more efficient for auditors to perform substantive procedures on those assertions prior to year-end to allow more time for testing higher risk assertions at year-end.

A client has 100 customers constituting a total accounts receivable balance of $2 million. Twenty of the client’s customers currently have balances over $50,000, with the remainder having balances less than this amount. If auditors decide to send confirmations to the twenty customers with balances of at least $50,000, what percentage of the total accounts receivable will the auditor ultimately audit?

If the auditor proceeds with this plan, the auditor will audit at least $1 million ($50,000 x 20 customers) of the total $2 million in accounts receivable, thus auditing at least 50% of the account.

A client currently being audited has an inventory with a historical cost of $1,450,000 and an NRV (net realizable value) of $1,200,000. What is the correct value of the inventory, and why?

The correct value of the inventory based on the LCM (lower of cost or market) rule requires that inventory be carried at the lower of the two numbers. As a result, the client should record the inventory’s value at $1,200,000. This is an example of the accounting principle of conservatism.

Question Type: Drag and Drop

The relationship between the auditor’s assessed risk of material misstatement (combined inherent and control risk) and detection risk is _______.

A. [[inverse]] | direct | no relation | cannot be determined

Including more elements of unpredictability in the selection of audit procedures is an auditor’s response to the risks of _______.

A. [[material misstatement]] | financial misstatement | auditing misstatement | audit evidence

When substantive procedures are performed during an interim period, auditors perform _______ to update their audit findings from the time of the interim procedures through to year-end.

A. [[roll-forward procedures]] | audit evidence procedures | tests of control | analytical procedures

_______ is the most effective way of gathering sufficient appropriate audit evidence.

A. [[Audit data analytics]] | Audit sampling | Substantive procedure | Analytical procedure

For accounting estimates that have been identified as _______, auditors perform additional substantive procedures.

A. [[significant risks]] | inherent risks | control risks | detection risks

In _______, differences are caused by management’s opinion regarding accounting estimates that auditors find unreasonable.

A. [[ judgmental misstatements]] | projected misstatements | factual misstatements | accumulated misstatements