AUD - Assessing Risk and Developing a Planned Response

Question 1

Purpose of an audit

Answer 1

The auditor’s primary role is to provide an impartial (independent) report on the reliability of management’s financial statements

The purpose of an audit is to provide financial statement users w/an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance w/the applicable financial reporting framework.

Question 2

A firm must have annual inspections by the PCAOB only if

Answer 2

it conducts more than 100 audits of public companies

Question 3

The audit partner in charge of an audit of a public company may only

Answer 3

Perform that role for 5 consecutive years

Question 4

6 Elements of Quality Control

Answer 4

1. Leadership responsibilities for quality within the firm (policies/procedures should promote an internal culture that emphasizes commitment to quality)
2. Relevant ethical requirements (policies/procedures should address the independence of personnel as necessary)
3. Acceptance and continuance of client relationships and specific engagements (policies/procedures should carefully assess the risks associated w/each engagement)
4. Human resources (policies/procedures should address important personnel issues)
5. Engagement performance (policies/procedures should focus on compliance w/all applicable firm and professional standards and regulatory requirements)
6. Monitoring (policies/procedures should provide an ongoing assessment of the adequacy of the system of quality control)

Question 5

The Statement on Auditing Standards (SASs) constitute GAAS and must

Answer 5

be followed by auditors when AICPA auditing standards are applicable

Question 6

Engagement partner

Answer 6

The person in the firm who is responsible for:

• audit engagement and its performance
• auditor’s report

Question 7

Overview of the audit process

Answer 7

1. Engagement planning (decide whether to accept the engagement, perform risk assessment, write an audit plan)
2. Internal Control Considerations (Obtain an understanding of internal control for planning purposes as required)
3. Substantive Audit Procedures (Evidence gathering procedures whose purpose is to detect material misstatements, if there are any)
4. Reporting (Conclusions are expressed in writing)

Question 8

Under Title II of the Sarbanes-Oxley Act, the auditor of an issuer cannot legally perform…

Answer 8

internal audit outsourcing services

Question 9

Compilation

Answer 9

When the CPA is engaged simply to assemble into financial statement format the financial records of a private company and issue a compilation report without expressing any degree of assurance on the reliability of those statements

Question 10

Preparation engagement

Answer 10

When the CPA is engaged to prepare the financial statements of a private company w/out expressing any form of assurance

Question 11

Review

Answer 11

When the CPA is engaged to provide a lower level of assurance (relative to that of an audit) on financial statements of a private company by performing limited procedures…

Question 12

5 primary responsibilities of the PCAOB

Answer 12

1. Registration of public accounting firms
2. Inspections of registered public accounting firms (PCAOB is directed to conduct a continuous program of inspections that assess compliance w/SOA, PCAOB rules, SEC rules and all applicable professional standards)
3. Standard setting
4. Enforcement
5. Funding

Question 13

Preconditions for an audit

Answer 13

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted

In other words, mgmt is responsible for the fair presentation of financial statements and the design/implementation of effective internal control over financial reporting

Question 14

Analytical Procedures

Answer 14

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

Question 15

Audit Data Analytics (ADAs)

Answer 15

Analysis of patterns, IDing anomalies, and extracting other useful info in data underlying/related to the subject matter of an audit through analysis, modelling etc -> this is all for the purpose of planning or performing the audit

Question 16

5 step process applicable to using ADAs

Answer 16

1. Plan the ADA
2. Access and prepare the data for purposes of the ADA
3. Consider the relevance and reliability of the data used
4. Perform the ADA
5. Evaluate the results and decide whether the purpose and specific objectives have been achieved

Question 17

Notable Item

Answer 17

An item that has 1 or more characteristics that, for the relevant assertions, may do the following:

1. Be indicative of a risk of material misstatement that (i) was not previously IDed (a new risk) or (ii) is higher than originally assessed by the auditor
2. Provide info that is useful in designing or tailoring procedures to address risks of material misstatement

Question 18

test of controls

Answer 18

A test of control describes any auditing procedure used to evaluate a company’s internal controls. The aim of tests of control in auditing is to determine whether these internal controls are sufficient to detect or prevent risks of material misstatements.

Question 19

control risk

Answer 19

Control risk is the risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company’s internal control.

Question 20

Auditor’s specialist

Answer 20

an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence

Question 21

Management’s specialist

Answer 21

an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements

Question 22

“Those Charged with Governance”

Answer 22

The persons or organization(s) w/responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity

Question 23

The auditor’s objectives are to…

Answer 23

1. communicate to the audit committee the auditor’s responsibilities regarding the audit and establish an understanding of the terms of the audit engagement w/the audit committee
2. obtain information from the audit committee relevant to the audit
3. Communicate to the audit committee info about the strategy ad timing of the audit
4. PRovide the audit committee w/timely observations about the audits that are significant

Question 24

critical accounting estimate

Answer 24

an accounting estimate where:

• the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters
• the impact of the estimate on financial condition or operating performance is material

Question 25

critical accounting policies and practices

Answer 25

a company's accounting policies and practices that are both most important to the portrayal of the co

Question 26

When performing Tests of Controls...

Answer 26

Select a sample of transactions and verify that the control procedures of interest were performed on the transactions in the sample which usually requires that the control procedure be documented as it is performed

Question 27

Wholy substantive audit (also known as substantive audit procedures)

Answer 27

This entails **no reliance** on internal control (which means the same thing **as assessing control risk at the max level)** In other words, the auditor plans to meet the audit risk objectives by performing only substantive audit procedures w/out any expectation about the operating effectiveness of internal control No Tests of Control would be performed

Question 28

4 main phases in evaluating internal control

Answer 28

1. Obtain an understanding of internal control 2. Make a preliminary evaluation about the reliance on internal controls (consider the adequacy of internal control and cost benefit issues) 3. Perform the appropriate tests of control if reliance is planned 4. Re-evaluate that reliance based on results of the tests of control

Question 29

Internal control

Answer 29

a process (effected by those charged w/governance, management, and other personnel) that is designed to provide reasonable assurance about the achievement of the entity's objectives w/regard to the reliability of financial reporting, effectiveness, and compliance w/applicable laws and regulations

Question 30

Negative/limited assurance

Answer 30

Negative assurance is **a confirmation** from an auditor that certain facts are accurate **because there is no evidence to the contrary.** When positive assurance (the proof of facts) is not applicable, negative assurance is used. The purpose of negative assurance is to confirm that no fraud or violations have been found. **\*\*Note, negative/limited assuance is used in reviews** "Nothing came to my attention that makes me believe that there is a misstatement"

Question 31

Postive assurance

Answer 31

Positive assurance is the affirmation that a Certified Public Accountant believes a something to be true or correct. ## Footnote **\*\*When you do audits, you do positive assurance** **E.g. Issuing an opinion that the financial statements are presented fairly in conformity with U.S. GAAP is an example of a CPA providing positive assurance.**

Question 32

Initial audits

Answer 32

Initial audit refers to when the prior year's financial statements have been audited by a different auditor (referred to as the predecessor auditor)

Question 33

Q: What if the auditor believes that the financial statements covered by the predecessor's report require revision?

Answer 33

A: The auditor should try to arrange a 3way meeting involving himself, the predecssor, and entity mgmt. If mgmt refuses to meet to discuss issues related to the appropriateness of previously issued financial statements, the auditor should consider those matters in deciding whether to accept the engagement.

Question 34

Materiality in auditing

Answer 34

Materiality in auditing = an understanding of what's important in financial reporting based on the auditor's perception of the users' needs The determination of materiality involves both **quantitative** (the relative magnitude of the items in question) and **qualitative** (the surrounding circumstances)

Question 35

audit risk

Answer 35

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Question 36

Risk of material misstatement

Answer 36

The risk that the financial misstatements are materially misstated **prior to the audit**

Question 37

3 components of audit risk

Answer 37

1. **inherent risk** 2. **control risk** 3. **detection risk** **Audit risk = inherent risk x control risk x detection risk**

Question 38

inherent risk

Answer 38

the probability that a material misstatement would occur in the paticular audit area in the absence of any internal control policies/procedures

Question 39

control risk

Answer 39

The probability that a material misstatement that occurred in the 1st place wouldn't be detected and corrected by internal controls that are applicable

Question 40

Detection risk

Answer 40

The probability that a material misstatement that wasn't prevented/detected and corrected by internal control wasn't detected by the auditor's substantive audit procedures

Question 41

The essence of the auditor's responsibility is to...

Answer 41

obtain **reasonable assurance** that the financial statements are free from material misstatement, whether caused by fraud or error

Question 42

The auditor should always document any identified or suspected noncompliance

Question 43

Unmodified opinion

Answer 43

Unmodified opinion = unqualified opinion In other words, auditor believes that the financial statements are presented fairly in all material respects

Question 44

Specialist

Answer 44

AICPA and PCAOB have similar definitions: a specialistis a person (or firm) possessing special skill or knowledge in a particular field **other than accounting or auditing**

Question 45

Those Charged with Governance

Answer 45

The people or organizations w/responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity (encompasses the term "BoD" or "audit committee" used elsewhere in the auditing standards) Mgmt: The person/people w/executive responsibility for the conduct of the entity's opreations

Question 46

Matters required to be communicated w/Those Charged with Governance

Answer 46

1. The auditor's responsibilities under GAAS 2. The planned scope and timing of the audit 3. Significant findings from the audit 4. Uncorrected misstatements 5. Other matters

Question 47

Audit committee

Answer 47

A committee established by and among the BoD of a company for the purpose of overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company If no such committee exists within the company, then the BoD is the audit committee in that situation

Question 48

Critical accounting estimate

Answer 48

An accounting estimate where * the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and * the impact of estimate on financial conditions or operating performance is material

Question 49

Critical Accounting policies and practices

Answer 49

A company's accounting policies and practices that are both most important to the portrayal of the company's financial conditions and results, and require mgmt's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain

Question 50

Internal control consists of 5 interrelated components

Answer 50

1. **Control environment** (policies/procedures taht determine th eoverall control of the entity, "tone at the top") 2. **Risk assessment** - The policies and procedures involving the IDing, priortiziation, and analysis of relevant risks as a basis for managing those risks 3. **Information and communication systems** 4. **Control activities** - authorization, segregation of duties, performance reviews, info processing, and physical controls 5. **Monitoring** - The policies/procedures involving the ongoing assessment of the quality of internal control effectiveness over time

Question 51

Auditor should identify and assess the risks of material misstatement...

Answer 51

1. At the financial statement level; and 2. At the relevant assertion level related to classes of transactions, account balances, and disclosures

Question 52

Substantive Procedures

Answer 52

Substantive procedures are the method or audit tests designed by an auditor to evaluate the financial statements of the company which require an auditor to create conclusive evidence for verifying the completeness, accuracy, existence, occurrence, measurement, and valuation (audit assertions) of the financial records of the business.

Question 53

IT systems leave no audit trails

Question 54

Significant deficiency

Answer 54

A deficiency (or combination of deficiencies) in internal control that is less severe than material weakness, yet important enough to merit attention by those charged w/governance

Question 55

Material weakness

Answer 55

A deficiency (or combo of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis

Question 56

Significant deficiences are **less severe** than material weakness, but still important enough to merit attention by those charged w/governance

Question 57

The external auditor may use the internal function to...

Answer 57

1. **Obtain audit evidence** that modifies the nature, timing, or extent of audit procedures to be performed by the external auditor; and/or 2. provide direct assistance to the external auditor under the external auditor's direction, supervision, and review

Question 58

3 necessary conditions before the external auditor may use the internal audit function to obtain audit evidence

Answer 58

1. **Objectivity** 2. **Competence** 3. **Systematic and disciplined approach**

Question 59

Internal audit function

Answer 59

A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management, and internal control processes

Question 60

Using the internal audit function to provide direct assitance means...

Answer 60

using internal auditors to perform audit procedures subject to the external auditor's direction, supervision, and review

Question 61

2 necessary conditions before the external auditor may use the internal audit function to provide direct asstiance

Answer 61

1. Objectivity 2. Competence

Question 62

If an auditor has to audit an entity that processes most of its financial data only in electronic form (paperless system), he would most likely use the strategy of

Answer 62

continuous monitoring and analysis of transaction processing w/an embedded audit module

Question 63

Independent auditor may allow the internal auditor to perform tests of controls

Question 64

Risk assessment

Answer 64

Audit risk assessment procedures are performed **to obtain an understanding of your company and its environment, including your company's internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error**

Question 65

The work performed by each assistant should be reviewed to determine whether it was adequately performed and...

Answer 65

to evaluate whether the results are consistent w/the conclusions to be presented on the auditor's report

Question 66

The objective of analytical procedures used near completion of the audit address whether...

Answer 66

the financial statements are consistent w/the auditor's understanding of the company

Question 67

Material weakness leads to an

Answer 67

**adverse opinion** on internal control

Question 68

In assessing the objectivity of internal auditors, an independent auditor should

Answer 68

Determine the organizational level to which the internal auditors report The logic is that the CPA should consider organizational status and policies for maintaining objectivity

Question 69

distributed data processing system

Answer 69

a processing system in which there is a network of remote computer sites, each having a computer connected to the main computer system (which allows access to the computers by various levels of users)

Question 70

Comparing the current year's slaes to that of the prior year is an analytical procedure at a high level of aggregation that would normally be done in

Answer 70

planning the audit

Question 71

Analytical procedure is used to...

Answer 71

gather evidence with respect to relationships among **various accounting and nonaccounting data**

Question 72

Substantive testing

Answer 72

Substantive testing is an audit procedure that **examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate.** _Examples:_ * Issue a bank confirmation to test ending cash balances * Contact customers to confirm that accounts receivable balances are correct * Observe the period-end physical inventory count * Confirm the validity of inventory valuation calculations * Confirm with experts that the fair values assigned to assets obtained through a business combination are reasonable * Physically match fixed assets to fixed asset records * Contact suppliers to confirm that accounts payable balances are correct * Contact lenders to confirm that loan balances are correct * Review board of directors minutes to verify the existence of approved dividends

Question 73

An auditor should obtain sufficient knowledge of the entity's risk assessment process to understand how mgmt considres risks relevant to financial reporting objectives and decide about actions to address those risks -\> that knowledge might include...

Answer 73

* understanding of how mgmt identifies risks * understanding how mgmt estimates the significance of risks * understanding how mgmt assesses the likelihood of their occurrence and relates them to financial reporting

Question 74

Which of the following is not a procedure performed primarily for the purpose of expressing an opinion on the financial statements, but may bring possible illegal acts to the auditor’s attention?

Answer 74

Answer: Review of policies concerning effectiveness of mgmt decision making policies This answer is correct because the review of effectiveness of decision making policies is not a procedure when expressing an opinion on the financial statements. External auditors are primarily concerned with internal controls that affect recording, processing, summarizing, and reporting financial data.

Question 75

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

Answer 75

A: scrap sales This answer is correct because **scrap sales are generally irregular in nature and these sales often are inadequately controlled by the internal control.** **This lack of adequate internal control makes it difficult for the auditor to detect any irregularities.**

Question 76

Before accepting an engagement to audit a new client that has previously been audited by another CPA firm**, a CPA is required to obtain**

Answer 76

A: The prospective client's consent to make inquiries of the predecessor This answer is correct because a CPA should obtain the prospective client's consent to make inquiries of the predecessor; ordinarily, such inquiries are then made.

Question 77

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer 77

A: interest expense Estimation of interest expense, based on interest rates and principal balances, would most likely yield the highest level of evidence because the relationship is highly predictable. **Relationships involving P/L accounts are more predicable than relationships involving BS accounts because P/L accounts involve transactions occurring over a period of time rather than at a point in time.**

Question 78

**fraud risk factors** do not necessarily indicate the existence of fraud, they often have been **observed in circumstances where frauds have occurred.**

Question 79

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Answer 79

A: comparing the financial statements to anticipated results The requirement is to identify the audit procedure that an auditor will most likely perform during risk assessment for a financial statement audit. AU-C 315 requires that an auditor perform analytical procedures such as comparing the financial statements to anticipated results during the planning stage of an audit.

Question 80

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's

Answer 80

A: Understanding as to the reasons for the change of auditors The requirement is to identify the correct statement regarding a successor auditor's inquiries of the predecessor auditor. Answer (b) is correct because **the successor should request information such as (1) facts that might bear on the integrity of management, (2) disagreements with management as to accounting principles, auditing procedures, or other significant matters, and (3) the predecessor's understanding of the reasons for the change of auditors.**

Question 81

In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor

Answer 81

A: adds an emphasis-of-matter paragraph to the auditor's report to emphasize an **unusually important subsequent event** This answer is correct because **the specialist is only referred to when that report directly relates to a matter resulting in modification of the report—here an important subsequent event.** **It might also involve a case in which a specialist’s valuation differs from management’s valuation.**

Question 82

Which of the following would an auditor **most likely** use in determining the auditor's preliminary judgment about materiality?

Answer 82

A: the entity's annualized interim financial statement This is correct because many materiality measures relate to an **annual figure** (e.g., net income, sales).

Question 83

requirements for engagement letters, specifically states that an **engagement letter** should include, among other matters, **identification of the applicable financial reporting framework used to prepare the entity's financial statements.**

Question 84

Detection risk differs from both control risk and inherent risk in that detection risk

Answer 84

A: Can be changed at the auditor's discretion This answer is correct because auditors determine an appropriate level of detection risk based on their assessment of the risk of material misstatement composed of inherent risk and control risk.

Question 85

With respect to planning an audit, which of the following statements is always true?

Answer 85

A: It's acceptable to perform a portion of the audit of a continuing audit client at interim dates It is acceptable for an auditor to perform a certain portion of the audit at an interim date; for example, performing a portion of planning prior to year-end is always acceptable for a continuing client. Also, when a new client has engaged an auditor prior to year-end, a portion of the audit may be conducted prior to year-end.

Question 86

analytical procedures involve **an assumption** of the existence of a plausible relationship among financial and nonfinancial information

Question 87

In general, material fraud perpetrated by which of the following are most difficult to detect?

Answer 87

A: controller A fraud committed by the controller is **most difficult to detect** because the controller is in control of the recordkeeping function and thus may be able to commit a fraud and then manipulate the accounting records so as to make its discovery unlikely.

Question 88

Which of the following activities is most likely to be performed near completion of an audit to ensure that the financial statements are free from material misstatement?

Answer 88

A: Comparing the current year's financial statements w/those of the prior years This answer is correct because these procedures are used by an auditor when forming an overall conclusions about whether the financial statements are consistent with the auditor's understanding of the entity and comparing current year financial statements with those of the prior year will help the auditor to determine whether the amounts seem reasonable.

Question 89

What is an auditor's responsibility who discovers management involved in financially immaterial fraud?

Answer 89

A: report the fraud to the audit committee AU-C 240 **requires that all management fraud, regardless of materiality, be reported to the audit committee.**

Question 90

fraud risk factors may be identified during planning, obtaining an understanding, or while conducting fieldwork; in addition, they may be identified while considering acceptance or continuance of clients and engagements.

Question 91

When such transactions are **few in number and involve large dollar amounts**, it is likely that an audit trail would exist, which would support the auditor's substantive tests.

Question 92

**Inadequate accounting record**s may cause an auditor to conclude that it is unlikely that sufficient appropriate evidence will be available to support an opinion on the financial statements; **accordingly, an auditor may determine that the financial statements are not auditable.**

Question 93

When applying analytical procedures during an audit, which of the following is the best approach for developing and evaluating expectations?

Answer 93

A: IDing reasonable explanations for unexpected differences before talking to client management This answer is correct because identifying reasonable explanations for unexpected differences before talking to client management will help the auditor to consider why the differences might have occurred and the reasonableness of management’s replies.

Question 94

Missing documents may be indicative of fraud.

Question 95

**Comparing the financial statements to anticipated results is an analytical procedure,** which would most likely be performed in **planning a financial statement audit.** **Analytical procedures are required to be performed during planning** and the comparison of actual to budget is a commonly performed analytical procedure.

Question 96

**Detection risk**, the risk that audit procedures will not detect a material misstatement, **increases due to the three months between confirmation and year-end.**

Question 97

**Decreasing the tolerable amount of misstatement will require the auditor to do one or more of the following:** (1) perform auditing procedures **closer to the balance sheet dat**e (answer [b]); (2) select a more effective auditing procedure; or (3) increase the extent of a particular auditing procedure.

Question 98

AU-C 315 and AU-C 520 require the use of analytical procedures at both the risk assessment and near completion of the audit, but not as a substantive procedure.

Question 99

Analytical procedures **assume** that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. ## Footnote **For this reason, data can be used to predict future balances against which recorded balances may be compared.**

Question 100

Auditors do not generally initiate a discussion on materiality, although they do occasionally respond to such questions.

Question 101

Early appointment of the independent auditor will enable **a more efficient audit to be planned**

Question 102

In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed by the specialist. Preferably, the understanding should be documented and would include all of the following except

Answer 102

A: A statement that the methods or assumptions to be used aren't inconsistent w/those used by the client

Question 103

**Analytical procedures** used in **planning the audit** should focus on (1) enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit and (2) identifying areas of specific risk to the audit.

Question 104

An auditor’s decision whether to apply analytical procedures as substantive tests usually is determined by the

Answer 104

A: precision and reliability of the data used to develop expectations This answer is correct because, to have value in substantiating the assertions in an account, the data used should be reliable and precise enough to provide the desired level of assurance.

Question 105

**in assessing competence of an internal auditor**, an independent CPA will consider the **quality of working paper documentation** as well as a variety of other factors outlined in AU-C 610

Question 106

Which of the following statements is correct concerning an auditor’s communication on internal control related matters noted in an audit of a nonpublic company?

Answer 106

A: The auditor may choose to communicate significant control-related matters either during the course of the audit or up to 60 days after the audit report release date

Question 107

Which of the following statements regarding auditor documentation of the client's internal control is correct?

Answer 107

A: No one particular form of documentation is necessary, and the extent of documentation may vary

Question 108

An auditor assesses control risk because it

Answer 108

Affects the level of detection risk that the auditor may accept

Question 109

In planning an audit, an auditor should document in the working papers the auditor's risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present?

Answer 109

A: Those risk factors identified AICPA Professional Standards **specifically require** that the documentation regarding the auditor's risk assessment related to fraud include the identified and assessed risks of material misstatement due to fraud

Question 110

substantive analytical procedures are substantive tests which can aid in the detection of material errors by identifying unexpected fluctuations or the absence of expected fluctuations in the relationships between data.

Question 111

Which of the following factors is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls?

Answer 111

A: to degree to which information technology is used in the accounting function This answer is correct because differences in information technology use will have a major effect. For example, documentation of the understanding of a complex information system with a large volume of transactions may include flowcharts, questionnaires, and/or decision tables; documentation for an information system with limited or no use of IT and few transactions may be in the form of a memorandum.

Question 112

**Increasing analytical procedures decreases detection risk** in a manner which may counterbalance the condition in internal control. ## Footnote **In effect, the weakness in internal control is compensated for by increased substantive testing**

Question 113

Assessing control risk at a low level most likely would involve

Answer 113

A: identifying specific controls relevant Assessing control risk at a low level involves (1) identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions, and (2) performing tests of controls to evaluate the effectiveness of such controls.

Question 114

**Analytical procedures performed near the end of an audit suggest that several accounts have unexpected relationship** When **unexpected relationships** exist, **additional tests of details are generally required** to determine whether misstatements exist.

Question 115

Analytical procedures used in the overall review stage of an audit generally include

Answer 115

Considering unusual or unexpected account balances that weren't previously identified

Question 116

A **"direct effect" illegal act** is one that would have an effect on the determination of financial statement amounts

Question 117

**Tests of controls** directed toward effectiveness or operation of a control would ordinarily **include inquiries, inspections of documents, observation, and reperformance of the application of a control**

Question 118

An **increase** in the extent of **tests of details (a type of substantive test)** will **decrease detection risk,** which is appropriate when there is an increase in control risk

Question 119

risk assessment procedures are performed **to assess the risk of material misstatement throughout the financial statements.**

Question 120

An auditor assesses the **organizational status of the director of internal audit** as a method of addressing the function's **likely independence from management**

Question 121

A control deficiency is a condition in which the operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis—it does not explicitly consider likelihood of loss.

Question 122

An auditor uses the risk of material misstatement to determine the **acceptable level of detection risk for financial statement assertions.** The auditor then uses the acceptable level of detection risk to determine the nature, timing, and extent of the auditing procedures to be used to detect material misstatements in the financial statement assertions.

Question 123

An auditor may communicate significant deficiencies **either during an audit or after the audit's completion.**

Question 124

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Answer 124

A: an audit plan

Question 125

tests of controls are **only** performed on controls that the auditor plans to consider is assessing the risk of material misstatement.

Question 126

**independent auditor** responsibility **cannot be shared with the internal auditors for any judgments**