An Advanced Auditing Practice Test!

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Independent auditing can best be described as:
- A branch of accounting.
- A discipline that provides assurance regarding the results of accounting and other functional operations and data.
- A professional activity that measures and communicates financial and business data.
- A regulatory function that prevents the issuance of improper financial information.

About This Quiz

An audit is carried out in firms to affirm that their books of accounts reflect a true and fair view of the position of the company and note incidences where fraud has taken place. Test out what you know about audits by taking up the audit test below, covering various terminologies and procedures.

An Advanced Auditing Practice Test! - Quiz

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2.

Information asymmetry:
- Refers to an imbalance of information among stockholders in a company.
- Refers to an imbalance of information between the auditor and the management of the company.
- Refers to an imbalance of information between stockholders and the management of the company.
- Refers to an imbalance of information between the auditor and the stockholders of the company.
Correct Answer

A. Refers to an imbalance of information between stockholders and the management of the company.
3.

Which of the following best describes the primary reason an independent auditor reports on financial statements?
- To give stockholders some assurance that any fraudulent activities will be detected.
- To identify a poorly designed internal control structure that may produce unreliable financial statements.
- To provide expertise to clients, which may not be totally knowledgeable of prevailing GAAP.
- To add credibility where appropriate, since the client may not be perceived as objective with respect to its own financial statements.
Correct Answer

A. To add credibility where appropriate, since the client may not be perceived as objective with respect to its own financial statements.

Explanation

The primary reason an independent auditor reports on financial statements is to add credibility where appropriate, since the client may not be perceived as objective with respect to its own financial statements. Independent auditors provide an unbiased and objective assessment of the financial statements, which helps to enhance the credibility and reliability of the information presented to stakeholders. This is important because stakeholders, such as investors and creditors, rely on the accuracy and integrity of financial statements to make informed decisions. The auditor's report provides assurance to these stakeholders that the financial statements have been examined and are presented fairly in accordance with applicable accounting standards.

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2
4.

Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that:
- The buyer [or user] pays directly for this assurance in both situations.
- There are often information asymmetry and conflicts of interest.
- The cost of obtaining information is not relevant.
- Independence is not relevant in either situation.
Correct Answer

A. There are often information asymmetry and conflicts of interest.

Explanation

The correct answer is "There are often information asymmetry and conflicts of interest." In both situations, financial statement users and potential home buyers face the challenge of not having all the necessary information or expertise to make informed decisions. This creates a situation where there is a difference in knowledge between the user and the party providing the assurance (financial statement preparer or home seller). Additionally, conflicts of interest may arise as the party providing the assurance may have incentives to present information in a favorable light. Therefore, both financial statement users and potential home buyers seek assurance to mitigate these issues and make more informed decisions.

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1
5.

Assurance services differ from auditing services in that:
- Assurance services are more narrow in scope than audit services.
- Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.
- Assurance services are limited to economic events or actions, and audit services are not similarly limited.
- Audit services do not improve the quality of information as do assurance services.
Correct Answer

A. Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

Explanation

Assurance services differ from auditing services in that they not only focus on the reliability of information but also on its relevance and timeliness. While auditing services primarily assess the accuracy and fairness of financial statements, assurance services go beyond this by providing a broader evaluation of information. This means that assurance services may include a report that considers the importance and timeliness of the information being provided, in addition to its reliability.

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6.

Which of the following best describes the relationship between attestation services and audit services?
- Attestation is a subset of auditing that improves the quality of information for decision makers.
- Auditing is a subset of attestation and focuses on providing clients with advisory services and decision support.
- Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.
- Attestation is a subset of auditing that provides more assurance than does an audit engagement.
Correct Answer

A. Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.
7.

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole relates most closely to which major audit concept?
- Materiality
- Audit risk
- Management assertions
- Reasonable assurance
Correct Answer

A. Materiality

Explanation

The concept of materiality is the most closely related to the fact that errors and/or omissions in relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole. Materiality refers to the significance or importance of an item or information in the financial statements, and auditors focus their attention on material items that could potentially impact the decision-making of users of the financial statements. In this case, the errors or omissions in relatively insignificant account balances would not be considered material and therefore would not affect the overall decision made by the auditor.

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2
8.

Audit evidence:
- May only be gathered from parties external to the client to be reliable.
- May only be gathered from the client to be reliable since the client is the most knowledgeable source of information.
- May only be gathered from computerized sources to avoid human error.
- Can be gathered from many sources and is not limited to the underlying accounting data.
Correct Answer

A. Can be gathered from many sources and is not limited to the underlying accounting data.

Explanation

Audit evidence can be gathered from many sources and is not limited to the underlying accounting data. This means that auditors can gather evidence from various sources, such as documents, interviews, observations, and confirmations, to support their findings and conclusions. It recognizes that reliable evidence can come from external parties, the client, computerized sources, or any other relevant source. This flexibility allows auditors to obtain a comprehensive understanding of the client's operations and financial reporting, ensuring a thorough and reliable audit.

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9.

Audit risk:
- Can be completely eliminated through appropriate sampling of transactions.
- Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.
- Is what creates the demand for an audit.
- Is the risk that a company may hire an incompetent auditor.
Correct Answer

A. Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.

Explanation

Audit risk refers to the possibility that an auditor may issue an incorrect opinion on the financial statements. This means that even though the financial statements may contain material misstatements, the auditor mistakenly concludes that they are accurate and issues a "clean" opinion. This type of risk cannot be completely eliminated through appropriate sampling of transactions because it involves the overall assessment of the financial statements as a whole. Sampling can help in identifying errors or irregularities, but it does not guarantee the elimination of audit risk.

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10.

The examination of all of a client's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?
- A decrease in the materiality level.
- A decrease in the desired level of assurance.
- An assessment that the account being audited is high risk.
- An increase in the desired level of assurance.
Correct Answer

A. A decrease in the desired level of assurance.

Explanation

An audit sample is a subset of transactions or items selected from a larger population for testing. The desired level of assurance refers to the level of confidence the auditor wants to achieve in their conclusion. If the desired level of assurance is decreased, it means the auditor is willing to accept a lower level of confidence, which would result in a smaller sample size. This is because a smaller sample size can still provide sufficient evidence to support a lower level of assurance, reducing the cost and time required for the audit.

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11.

Which of the following audit phases would generally be conducted before all of the others listed below?
- Auditing business processes and related accounts.
- Evaluation of audit evidence.
- Gaining an understanding of the client's industry.
- Consideration of internal control systems.
Correct Answer

A. Gaining an understanding of the client's industry.

Explanation

Gaining an understanding of the client's industry is typically conducted before all other audit phases because it provides important context and background knowledge that is necessary for conducting an effective audit. Understanding the client's industry helps auditors identify potential risks and areas of focus for the audit, as well as understand the unique characteristics and challenges of the industry that may impact the audit process. This phase also helps auditors develop appropriate audit procedures and tailor their approach to the specific industry, ensuring that the audit is comprehensive and relevant.

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12.

An auditor's evaluation of the reasonableness of a client's loan loss reserve would normally be made during which phase of the audit?
- Gaining an understanding of the client's industry.
- Client acceptance/pre-planning.
- Consideration of internal control systems.
- Auditing business processes and related accounts.
Correct Answer

A. Auditing business processes and related accounts.

Explanation

During the phase of auditing business processes and related accounts, an auditor would typically evaluate the reasonableness of a client's loan loss reserve. This is because the loan loss reserve is directly related to the client's financial statements and business operations. By examining the business processes and related accounts, the auditor can assess the adequacy and accuracy of the client's loan loss reserve, ensuring that it is reasonable and in accordance with applicable accounting standards and regulations.

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13.

Gaining an understanding of the client and its environment includes all of the following areas except:
- Regulatory issues unique to the industry.
- The entity's application of accounting policies.
- The audit fee and timeline for completion of the work.
- The entity's business risks.
Correct Answer

A. The audit fee and timeline for completion of the work.

Explanation

Gaining an understanding of the client and its environment involves various aspects such as regulatory issues unique to the industry, the entity's application of accounting policies, and the entity's business risks. However, the audit fee and timeline for completion of the work are not part of understanding the client and its environment. These factors are more related to the practical aspects of conducting the audit rather than understanding the client's operations and risks.

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2
14.

The most favorable type of audit report opinion for the client to receive is:
- Qualified.
- Unqualified.
- Full assurance.
- Exceptional.
Correct Answer

A. Unqualified.

Explanation

An unqualified audit report opinion is the most favorable type of opinion for the client to receive. This means that the auditor has reviewed the client's financial statements and found them to be free from material misstatements or inaccuracies. It provides full assurance to the client and stakeholders that the financial statements are reliable and can be trusted. In contrast, a qualified opinion indicates that there are some limitations or exceptions to the auditor's opinion, which may raise concerns about the accuracy or completeness of the financial statements.

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15.

The study and practice of auditing is unlike other areas in accounting because it:
- Requires the memorization of formulas and patterns.
- Requires the knowledge of GAAP.
- Requires common sense and some creativity.
- Is required by law for all companies in the United States.
Correct Answer

A. Requires common sense and some creativity.

Explanation

The study and practice of auditing is unlike other areas in accounting because it requires common sense and some creativity. Unlike other areas that may rely heavily on memorizing formulas and patterns, auditing involves analyzing financial statements, identifying risks, and making judgments. It requires the auditor to think critically, use their judgment, and apply their knowledge of accounting principles (such as GAAP) in a practical and creative manner to assess the accuracy and reliability of financial information. Additionally, while auditing is often required by law for certain companies, this is not the primary reason why it is different from other areas in accounting.

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16.

The Public Company Accounting Oversight Board [PCAOB] was established by:
- The American Institute of Certified Public Accountants [AICPA]
- The Securities & Exchange Commission
- An Act of Congress
- A Presidential executive order
Correct Answer

A. An Act of Congress

Explanation

The Public Company Accounting Oversight Board [PCAOB] was established by an Act of Congress. This means that it was created through legislation passed by the United States Congress. An Act of Congress is a law that has been passed by both the House of Representatives and the Senate and signed by the President. This indicates that the establishment of the PCAOB was a formal and official decision made by the legislative branch of the government, rather than being initiated by a professional organization, regulatory agency, or executive order.

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17.

Which of the following is generally not considered one of the five business processes or cycles?
- Information technology
- Revenue [or sales]
- Financing
- Inventory management
Correct Answer

A. Information technology

Explanation

Information technology is generally not considered one of the five business processes or cycles because it is a support function that enables and enhances the other processes. The five main business processes or cycles are typically considered to be revenue or sales, financing, procurement or purchasing, production or operations, and human resources. These processes are directly involved in the core activities of a business, while information technology is a separate function that supports these activities by providing technology infrastructure, software applications, and data management systems.

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18.

Which of the following management assertions is generally of greatest importance in the audit of inventory?
- Existence
- Completeness
- Rights and Obligations
- Presentation and Disclosure
Correct Answer

A. Existence

Explanation

Existence is generally the most important management assertion in the audit of inventory because it ensures that the inventory actually exists and is physically present. This assertion is crucial because it verifies that the reported inventory balances are accurate and reliable. Without existence, there is a risk of misstatement or fraud, such as fictitious inventory or inventory that has been stolen or misplaced. Therefore, the auditor must focus on verifying the existence of inventory through physical observation, inventory counts, and reconciling the inventory records with the actual inventory on hand.

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19.

Prior to the Sarbanes-Oxley Act of 2002, the _________ was responsible for creating all new auditing standards in the U.S. Today, for publicly-held companies, that responsibility rests with the _____________.
- Financial Accounting Standards Board (FASB); PCAOB
- AICPA Auditing Standards Board (ASB); SEC
- AICPA Auditing Standards Board (ASB); PCAOB
- Financial Accounting Standards Board (FASB); SEC
Correct Answer

A. AICPA Auditing Standards Board (ASB); PCAOB

Explanation

Prior to the Sarbanes-Oxley Act of 2002, the AICPA Auditing Standards Board (ASB) was responsible for creating all new auditing standards in the U.S. Today, for publicly-held companies, that responsibility rests with the PCAOB (Public Company Accounting Oversight Board). The ASB is a part of the American Institute of Certified Public Accountants (AICPA), while the PCAOB is a government organization established by the Sarbanes-Oxley Act to oversee the audits of public companies. The change in responsibility was implemented to enhance the independence and quality of audits for public companies.

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20.

To exercise due professional care, an auditor should:
- Attain the proper balance of professional experience and formal education.
- Critically review the work performed and judgment exercised by those assisting in the audit.
- Examine all available corroborating evidence supporting management's assertions.
- Design the audit to detect all instances of illegal acts.
Correct Answer

A. Critically review the work performed and judgment exercised by those assisting in the audit.

Explanation

To exercise due professional care, an auditor should critically review the work performed and judgment exercised by those assisting in the audit. This is important because the auditor is ultimately responsible for the accuracy and reliability of the audit findings. By reviewing the work and judgment of others involved in the audit, the auditor can ensure that proper procedures have been followed and that any potential errors or biases have been identified and addressed. This helps to maintain the integrity and credibility of the audit process.

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21.

What is the essential meaning of the generally accepted auditing standard that requires that the auditor be independent?
- The auditor must be without bias with respect to the client under audit.
- The auditor must adopt a critical attitude during the audit.
- The auditor's sole obligation is to third parties.
- The auditor may have a direct ownership interest in his client's business if it is not material.
Correct Answer

A. The auditor must be without bias with respect to the client under audit.

Explanation

The generally accepted auditing standard that requires the auditor to be independent means that the auditor should not have any bias or personal interest in the client under audit. This ensures that the auditor can objectively and impartially evaluate the client's financial statements and provide an unbiased opinion. Independence is crucial in maintaining the integrity and credibility of the audit process, as it helps to prevent any conflicts of interest or undue influence that may compromise the auditor's objectivity and professional judgment.

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22.

Which of the following statements best describes an auditor's responsibility to detect errors, fraud, and illegal acts?
- The auditor should study and evaluate the client's internal control system and design the audit to provide reasonable assurance of detecting all errors and fraud.
- The auditor should consider the types of errors and fraud that could occur and determine whether the necessary internal controls are prescribed and are being followed.
- The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.
- The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and determine whether the necessary internal controls are prescribed and are being followed satisfactorily.
Correct Answer

A. The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.

Explanation

The auditor's responsibility is to assess the risk of errors and fraud that could cause material misstatements in the financial statements. They should then design the audit procedures to provide reasonable assurance of detecting these material errors and fraud. This means that the auditor should consider the potential types of errors and fraud that could occur, evaluate the internal controls in place to prevent and detect them, and tailor their audit procedures accordingly. By doing so, the auditor aims to provide reasonable assurance that any material errors and fraud will be detected during the audit process.

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23.

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the:
- Senior management
- External auditors
- Internal audit department
- Shareholders
Correct Answer

A. Senior management

Explanation

Senior management is responsible for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements. They are the ones who oversee and direct the company's operations, including financial reporting. They have the authority and knowledge to ensure that the company's financial statements are accurate and comply with accounting standards. External auditors and internal audit departments may provide additional oversight and assurance, but the ultimate responsibility lies with senior management. Shareholders, although they have an interest in the financial statements, do not have the direct responsibility for their preparation and accuracy.

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24.

Which of the following is considered an example of a compliance audit?
- The examination a company's claims that its product is superior to that of a competitor on specific dimensions.
- The examination of a school district networked computer system.
- The examination of a company's adherence to government-mandated safety provisions.
- The examination of a company's financial statements.
Correct Answer

A. The examination of a company's adherence to government-mandated safety provisions.

Explanation

The examination of a company's adherence to government-mandated safety provisions is considered an example of a compliance audit because it involves assessing whether the company is following the specific regulations and requirements set by the government regarding safety measures. This type of audit ensures that the company is meeting the necessary standards and guidelines to ensure the safety of its employees, customers, and the general public. It focuses on evaluating the company's compliance with legal obligations rather than assessing its financial statements or comparing products with competitors.

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25.

Which of the following best describes the fiduciary relationship between management and the board of directors?
- Management reports to the board of directors.
- The board of directors reports to management.
- Neither group is accountable to the other.
- Both groups report directly to the shareholders.
Correct Answer

A. Management reports to the board of directors.

Explanation

The fiduciary relationship between management and the board of directors is best described by the statement "Management reports to the board of directors." In a company, the board of directors is responsible for overseeing the management and making strategic decisions on behalf of the shareholders. Management, on the other hand, is responsible for the day-to-day operations of the company and implementing the board's decisions. Therefore, management is accountable to the board of directors, and they report to the board to provide updates, seek guidance, and receive instructions.

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26.

Which of the following best describes the roles of the AICPA and the PCAOB in establishing auditing standards?
- Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors.
- The AICPA sets auditing standards for use in audits of non-public entities.
- The PCAOB sets auditing standards for use in audits of publicly held companies.
- All of the above.
Correct Answer

A. All of the above.

Explanation

The correct answer is "All of the above." This means that all of the statements provided accurately describe the roles of the AICPA and the PCAOB in establishing auditing standards. The AICPA sets auditing standards for non-public entities, while the PCAOB sets auditing standards for publicly held companies. Both organizations' standards are considered minimum standards of performance for auditors.

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27.

"Mid – Tier" firms:
- Audit about 80% of publicly traded companies in the US.
- Are national in their practices and have international affiliates.
- Are generally regional in their practices (such as the west coast).
- Are generally local in their practices (such as large metropolitan areas).
Correct Answer

A. Are national in their practices and have international affiliates.

Explanation

"Mid-Tier" firms are described as being national in their practices and having international affiliates. This means that they operate on a national level, working with clients across the country, and also have connections and partnerships with firms in other countries. This distinguishes them from firms that are generally regional or local in their practices, as they have a wider reach and global presence.

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28.

Which of the following organizations affect the environment that CPAs work in?
- AICPA.
- SEC.
- PCAOB.
- All of the above.
Correct Answer

A. All of the above.

Explanation

All of the organizations mentioned, namely AICPA, SEC, and PCAOB, have a significant impact on the environment in which CPAs work. AICPA, the American Institute of Certified Public Accountants, sets professional standards and guidelines for CPAs, ensuring ethical conduct and quality in the profession. SEC, the Securities and Exchange Commission, regulates the financial markets, including the accounting and reporting requirements for public companies, which directly affects CPAs. PCAOB, the Public Company Accounting Oversight Board, oversees the audits of public companies to protect investor interests, thereby influencing the work of CPAs. Therefore, all three organizations have a direct influence on the environment in which CPAs operate.

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29.

Which of the following primarily shapes the context in which auditing takes place?
- The American Institute of Certified Public Accountants [AICPA]
- The Securities & Exchange Commission
- The client company's business environment
- Legislation passed by Congress
Correct Answer

A. The client company's business environment

Explanation

The client company's business environment primarily shapes the context in which auditing takes place. This environment includes factors such as the industry in which the client operates, the regulatory requirements applicable to the client, the client's internal controls and governance structure, and the overall economic conditions affecting the client. The business environment directly impacts the risks and challenges that auditors may encounter during the audit process and influences the nature, timing, and extent of audit procedures performed. Understanding the client's business environment is crucial for auditors to assess the risks of material misstatement and design appropriate audit procedures.

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3
30.

An "integrated audit" includes:
- A special audit related to management fraud.
- A financial statement audit and an audit of internal control over financial reporting.
- A financial statement audit and a special audit related to management fraud.
- A special audit related to management fraud and an audit of internal control over financial reporting.
Correct Answer

A. A financial statement audit and an audit of internal control over financial reporting.

Explanation

An "integrated audit" refers to an audit approach that combines a financial statement audit with an audit of internal control over financial reporting. This means that the auditor not only examines the accuracy and fairness of the financial statements but also assesses the effectiveness of the internal controls in place to ensure the reliability of financial reporting. By conducting both audits together, the auditor can gain a comprehensive understanding of the entity's financial reporting process and identify any weaknesses or risks that may impact the reliability of the financial statements. This integrated approach enhances the overall quality and reliability of the audit.

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31.

The existence of audit risk is recognized by the statement in the auditor's standard report that the:
- Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.
- Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
- Financial statements are presented fairly, in all material respects, in conformity with GAAP.
- Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
Correct Answer

A. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.

Explanation

The correct answer is "Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements." This statement recognizes the existence of audit risk because it implies that there is a possibility of material misstatements in the financial statements. The auditor's objective is to obtain reasonable assurance, not absolute assurance, which acknowledges that there is inherent risk in the audit process. The auditor's role is to examine the financial statements and gather evidence to minimize this risk and express an opinion on the fairness of the statements.

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32.

Which of the following factors would an auditor least likely consider when assessing theinherent risk associated with client sales transactions?
- Billings are made using the percentage-of-completion method of revenue recognition.
- The nature of the credit authorization process.
- Some invoices are normally billed prior to shipments [which occur at a later date].
- The conditions of the sale allow for a right of return or the right to modify the purchase agreement.
Correct Answer

A. The nature of the credit authorization process.

Explanation

The auditor would least likely consider the nature of the credit authorization process when assessing the inherent risk associated with client sales transactions. This is because the credit authorization process is more related to the control risk, which is the risk of misstatements in the financial statements due to internal control deficiencies. Inherent risk, on the other hand, refers to the susceptibility of an account balance or class of transactions to material misstatement, regardless of the related controls. The other factors mentioned in the question, such as the revenue recognition method, timing of invoices, and conditions of sale, are more directly related to the inherent risk.

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33.

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist, when in fact a misstatement did occur, is known as:
- Audit risk.
- Detection risk.
- Inherent risk.
- Business risk.
Correct Answer

A. Detection risk.

Explanation

Detection risk refers to the risk that an auditor's procedures fail to detect a material misstatement in an account balance. In other words, it is the risk that the auditor concludes that no misstatement exists when there actually is one. This risk is influenced by the effectiveness of the auditor's procedures and the quality of evidence obtained. The other options, such as audit risk, inherent risk, and business risk, do not specifically pertain to the risk of failing to detect a misstatement.

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34.

One of your clients recently upgraded their accounting system from a medium-scale general ledger package to a complex state-of the-art enterprise resource planning system. This installation took place over the last nine months of their fiscal year and is nearly 100% complete by the balance sheet date. Which of the following best describes the main affect of this event on the audit risk model for the current year?
- It will likely increase risk of material misstatement.
- It will likely decrease risk of material misstatement.
- It will likely decrease detection risk.
- It will likely increase detection risk.
Correct Answer

A. It will likely increase risk of material misstatement.

Explanation

The upgrade from a medium-scale general ledger package to a complex enterprise resource planning system is a significant change in the client's accounting system. This change introduces new processes, controls, and potential risks that may not have been present in the previous system. As a result, there is a higher likelihood of material misstatements occurring in the financial statements due to the complexity and potential errors associated with the new system. Therefore, this event will likely increase the risk of material misstatement in the audit risk model for the current year.

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2
35.

Which of the following would be classified as an error?
- Misinterpretation by management of facts that existed when the financial statements were prepared.
- Misappropriation of assets for the benefit of management.
- Preparation of records by employees to cover a fraudulent scheme.
- Intentional omission of the recording of a transaction to benefit a third party.
Correct Answer

A. Misinterpretation by management of facts that existed when the financial statements were prepared.

Explanation

Misinterpretation by management of facts that existed when the financial statements were prepared would be classified as an error because it involves a mistake or misunderstanding in the interpretation of information. This can lead to inaccurate financial statements and misrepresentation of the company's financial position. Unlike the other options, which involve intentional actions such as misappropriation, fraudulent schemes, or intentional omission, misinterpretation is unintentional and can occur due to negligence or lack of understanding.

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36.

Which of the following factors is least likely to represent an opportunity to commit fraud?
- The audit committee is ineffective.
- Poor internal controls over cash transactions
- The existence of highly complex transactions
- Operating losses make a hostile takeover imminent.
Correct Answer

A. Operating losses make a hostile takeover imminent.

Explanation

Operating losses making a hostile takeover imminent is least likely to represent an opportunity to commit fraud because in such a situation, the focus of the company would be on survival and recovery rather than engaging in fraudulent activities. The company would be more concerned with addressing the financial challenges and improving its performance to avoid a takeover, rather than engaging in fraudulent activities.

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2
37.

The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except:
- Inquiries of management and others.
- Compute the level of detection risk.
- Analytical procedures.
- Observation and inspections.
Correct Answer

A. Compute the level of detection risk.

Explanation

The auditor obtains an understanding of the entity and its environment by performing inquiries of management and others, analytical procedures, and observation and inspections. These assessment procedures help the auditor gather information and identify potential risks and areas of concern. However, computing the level of detection risk is not a procedure for obtaining an understanding of the entity and its environment. Detection risk is assessed during the planning and execution of audit procedures to determine the risk that material misstatements in the financial statements will not be detected.

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38.

Which of the following statements is false related to the auditor's responsibility to document its risk assessment?
- The documentation may include the use of questionnaires.
- Management's response to high risk areas identified by the auditor should be included in the documentation.
- The level of risk must be set quantitatively (i.e. inherent risk is 60%)
- All of the above are false.
Correct Answer

A. The level of risk must be set quantitatively (i.e. inherent risk is 60%)

Explanation

The level of risk does not need to be set quantitatively, such as stating that inherent risk is 60%. Risk assessment is a qualitative process that involves identifying and evaluating risks based on their likelihood and potential impact. It does not require assigning specific numerical values to the level of risk.

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39.

The disclosure of fraud to parties other than the client's senior management and its audit committee ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality. However, the auditor has a duty to disclose the information to parties outside the entity in all of the following circumstances except:
- A court subpoena in conjunction with a fraud investigation.
- A successor auditor makes inquiries in determining whether to accept the client.
- A Wall Street analyst inquiry regarding future profit projections.
- To comply with legal or regulatory requirements.
Correct Answer

A. A Wall Street analyst inquiry regarding future profit projections.

Explanation

The auditor's ethical or legal obligations of confidentiality usually prevent them from disclosing fraud to parties other than the client's senior management and audit committee. However, there are certain circumstances where the auditor has a duty to disclose the information to parties outside the entity. These include when there is a court subpoena in conjunction with a fraud investigation, when a successor auditor makes inquiries in determining whether to accept the client, and when there is a need to comply with legal or regulatory requirements. However, a Wall Street analyst inquiry regarding future profit projections does not fall under any of these circumstances, and therefore, the auditor is not obligated to disclose the information in this case.

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40.

The concept of materiality as it applies to a financial statement audit:
- Relates primarily to the audit fees involved.
- Generally involves less professional judgment for public companies.
- Is determined, in part, based on how financial statement users may be influenced in making decisions.
- Relates primarily to the quantity of audit procedures performed.
Correct Answer

A. Is determined, in part, based on how financial statement users may be influenced in making decisions.

Explanation

The concept of materiality in a financial statement audit refers to the significance or importance of information in the financial statements. It is determined, in part, based on how financial statement users may be influenced in making decisions. This means that the auditor considers the potential impact that certain information may have on the decisions made by users of the financial statements. Materiality is not primarily related to audit fees, involves professional judgment for public companies, or solely based on the quantity of audit procedures performed.

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An Advanced Auditing Practice Test!

Independent auditing can best be described as:

Quiz Preview

Information asymmetry:

Which of the following best describes the primary reason an independent auditor reports on financial statements?

Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that:

Assurance services differ from auditing services in that:

Which of the following best describes the relationship between attestation services and audit services?

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole relates most closely to which major audit concept?

Audit evidence:

Audit risk:

The examination of all of a client's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?

Which of the following audit phases would generally be conducted before all of the others listed below?

An auditor's evaluation of the reasonableness of a client's loan loss reserve would normally be made during which phase of the audit?

Gaining an understanding of the client and its environment includes all of the following areas except:

The most favorable type of audit report opinion for the client to receive is:

The study and practice of auditing is unlike other areas in accounting because it:

The Public Company Accounting Oversight Board [PCAOB] was established by:

Which of the following is generally not considered one of the five business processes or cycles?

Which of the following management assertions is generally of greatest importance in the audit of inventory?

Prior to the Sarbanes-Oxley Act of 2002, the _ was responsible for creating all new auditing standards in the U.S. Today, for publicly-held companies, that responsibility rests with the _____.

To exercise due professional care, an auditor should:

What is the essential meaning of the generally accepted auditing standard that requires that the auditor be independent?

Which of the following statements best describes an auditor's responsibility to detect errors, fraud, and illegal acts?

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the:

Which of the following is considered an example of a compliance audit?

Which of the following best describes the fiduciary relationship between management and the board of directors?

Which of the following best describes the roles of the AICPA and the PCAOB in establishing auditing standards?

"Mid – Tier" firms:

Which of the following organizations affect the environment that CPAs work in?

Which of the following primarily shapes the context in which auditing takes place?

An "integrated audit" includes:

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

Which of the following factors would an auditor least likely consider when assessing theinherent risk associated with client sales transactions?

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist, when in fact a misstatement did occur, is known as:

Which of the following would be classified as an error?

Which of the following factors is least likely to represent an opportunity to commit fraud?

The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except:

Which of the following statements is false related to the auditor's responsibility to document its risk assessment?

The concept of materiality as it applies to a financial statement audit:

An Advanced Auditing Practice Test!

Independent auditing can best be described as:

Quiz Preview

Information asymmetry:

Which of the following best describes the primary reason an independent auditor reports on financial statements?

Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that:

Assurance services differ from auditing services in that:

Which of the following best describes the relationship between attestation services and audit services?

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole relates most closely to which major audit concept?

Audit evidence:

Audit risk:

The examination of all of a client's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?

Which of the following audit phases would generally be conducted before all of the others listed below?

An auditor's evaluation of the reasonableness of a client's loan loss reserve would normally be made during which phase of the audit?

Gaining an understanding of the client and its environment includes all of the following areas except:

The most favorable type of audit report opinion for the client to receive is:

The study and practice of auditing is unlike other areas in accounting because it:

The Public Company Accounting Oversight Board [PCAOB] was established by:

Which of the following is generally not considered one of the five business processes or cycles?

Which of the following management assertions is generally of greatest importance in the audit of inventory?

Prior to the Sarbanes-Oxley Act of 2002, the _________ was responsible for creating all new auditing standards in the U.S. Today, for publicly-held companies, that responsibility rests with the _____________.

To exercise due professional care, an auditor should:

What is the essential meaning of the generally accepted auditing standard that requires that the auditor be independent?

Which of the following statements best describes an auditor's responsibility to detect errors, fraud, and illegal acts?

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the:

Which of the following is considered an example of a compliance audit?

Which of the following best describes the fiduciary relationship between management and the board of directors?

Which of the following best describes the roles of the AICPA and the PCAOB in establishing auditing standards?

"Mid – Tier" firms:

Which of the following organizations affect the environment that CPAs work in?

Which of the following primarily shapes the context in which auditing takes place?

An "integrated audit" includes:

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

Which of the following factors would an auditor least likely consider when assessing theinherent risk associated with client sales transactions?

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist, when in fact a misstatement did occur, is known as:

Which of the following would be classified as an error?

Which of the following factors is least likely to represent an opportunity to commit fraud?

The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except:

Which of the following statements is false related to the auditor's responsibility to document its risk assessment?

The concept of materiality as it applies to a financial statement audit:

Prior to the Sarbanes-Oxley Act of 2002, the _ was responsible for creating all new auditing standards in the U.S. Today, for publicly-held companies, that responsibility rests with the _____.