It is acceptable under generally accepted auditing standards for an audit team to

It is acceptable under generally accepted auditing standards for an audit team to

a. assess inherent risk at zero and perform a minimum of detection work
b. assess control risk at zero and perform a minimum of detection work
c. decide that audit risk can be 40 percent
d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work


Answer: d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work

Auditors are not responsible for accounting estimates with respect to

a. determining the reasonableness of estimates
b. determining that estimates are adequately disclosed in the financial statements
c. determining that estimates are presented in conformity with GAAP
d. making the estimates


Answer: d. making the estimates

An audit strategy contains

a. documentation of the assertions under audit, the evidence obtained, and the conclusions reached
b. reconciliation of the account balances in the financial statements with the account balances in the client's general ledger
c. specifications of procedures the auditors believe appropriate for the financial statements under audit
d. specifications of auditing standards relevant to the financial statements being audited


Answer: c. specifications of procedures the auditors believe appropriate for the financial statements under audit

Under the Private Securities Litigation Reform Act, independent auditors are required to first

Under the Private Securities Litigation Reform Act, independent auditors are required to first

a. report clearly inconsequential noncompliance to the audit committee of the client's board of directors
b. resign from the audit engagement and report the instances of noncompliance to the SEC
c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC
d. report in writing all instances of noncompliance to the client's board of directors


Answer: c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC

Analytical procedures used when planning an audit should concentrate on

a. accounts and relationships that can represent specific potential problems and risks in the financial statements
b. management assertions in financial statements
c. weaknesses in the company's internal control activities
d. predictability of account balances on individual transactions


Answer: a. accounts and relationships that can represent specific potential problems and risks in the financial statements

When evaluating whether accounting estimates made by management are reasonable, auditors 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

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?

a. 0.10
b. 0.00
c. 0.20
d. 0.75


Answer: a. 0.10

When a company that sells its products for a (gross) profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods ratio will

a. decrease
b. increase
c. remain unchanged
d. not be able to be determined with the information provided


Answer: a. decrease

Analytical procedures can be used in which of the following ways?

a. as "attention-directing" methods when planning an audit at the beginning
b. as a means of overall review at the end of the audit
c. as substantive audit procedures to obtain evidence during an audit
d. all of the answers are correct


Answer: d. all of the answers are correct

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05)

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to

a. be unchanged
b. change from 0.1 to 0.04
c. change from 0.2 to 0.3
d. change from 0.25 to 0.1


Answer: d. change from 0.25 to 0.1

Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?

a. exercising more professional skepticism
b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis
c. studying management's selection and application of accounting principles more carefully
d. carefully avoiding conducting interviews with people in the fraud-rich areas


Answer: b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis

Analytical procedures are generally used to produce evidence from

a. detailed examination of external, external-internal, and internal documents
b. relationships among current financial balances and prior balances, forecasts and non-financial data
c. confirmations mailed directly to the auditors by client customers
d. physical observation of inventories


Answer: b. relationships among current financial balances and prior balances, forecasts and non-financial data

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

Auditing standards do not require auditors of financial statements to

Auditing standards do not require auditors of financial statements to

a. assess the risk of occurrence of errors and frauds
b. understand the nature of errors and frauds
c. report all errors and frauds found to police authorities
d. design audits to provide reasonable assurance of detecting errors and frauds


Answer: c. report all errors and frauds found to police authorities

Enterprise risk management is the responsibility of:

a. company management
b. the external auditors
c. the company's insurance providers
d. all of the answers are correct


Answer: a. company management

Failure to meet company objectives is a result of

a. audit risk
b. inherent risk
c. information risk
d. business risk


Answer: d. business risk