Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

a. all of the answers are correct
b. an internal control questionnaire
c. a flowchart of the documents and procedures used by the company
d. a narrative memorandum describing the control system


Answer: b. an internal control questionnaire

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

a. provide the rational for the inherent risk assessment at the financial statement assertion level
b. provide information for a communication of internal control-related matters to management
c. provide a basis for making constructive suggestions in a management letter
d. determine the nature, timing and extent of tests to be performed in the audit



Answer: d. determine the nature, timing and extent of tests to be performed in the audit

The most important fundamental component of an entity's internal control is

a. reliability of financial reporting
b. people who operate the control system
c. compliance with laws and regulations
d. effectiveness and efficiency of operations


Answer: b. people who operate the control system

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

a. confirmation of balances
b. inspection of documentation
c. inquiry of client personnel
d. observation of company operations


Answer: a. confirmation of balances

Effectiveness of audit procedures would be reduced by

a. performing procedures during the interim period as opposed to at the fiscal year-end date
b. performing audit procedures at the fiscal year-end date as opposed to the interim period
c. deciding to obtain external evidence instead of internal evidence
d. selecting larger sample sizes for audit


Answer: a. performing procedures during the interim period as opposed to at the fiscal year-end date

An audit committee is

a. a committee composed of persons not associating in any way with the client or the board of directors
b. composed of internal auditors
c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company
d. composed of members of the audit team


Answer: c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company

The likelihood that material misstatements may have entered the accounting system and not been detected

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as

a. risk of material misstatement
b. inherent risk
c. control risk
d. detection risk


Answer: a. risk of material misstatement

One of the typical characteristics of management fraud is

a. falsification of documents in order to misappropriate funds from an employer
b. conversion of stolen inventory to cash deposited in a falsified bank account
c. victimisation of investors through the use of materially misleading financial statements
d. illegal acts committed by management to evade laws and regulations


Answer: c. victimisation of investors through the use of materially misleading financial statements

Which of the following circumstances would most likely cause an audit team to perform extended procedures?

a. supporting documents are produced when requested
b. the company has recently hired a new chief financial officer after the previous on retired
c. the company maintains several different petty cash funds
d. the client made several large adjustments at or near year-end


Answer: d. the client made several large adjustments at or near year-end

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

a. audit risk
b. inherent risk
c. control risk
d. detection risk


Answer: d. detection risk

The risk of material misstatements is composed of which audit risk components?

a. inherent risk, control risk and detection risk
b. inherent risk and detection risk
c. inherent risk and control risk
d. control risk and detection risk


Answer: c. inherent risk and control risk

When evaluating whether accounting estimates made by mangement are reasonable, the audit team would be most interested in which of the following?

a. evidence of a conservative systematic bias
b. assumptions that are similar to industry guidelines
c. key factors that are consistent with prior periods
d. measurements that are objective and not susceptible to bias


Answer: a. evidence of a conservative systematic bias