When taken together, the concepts of risk and materiality in auditing:
measure the uncertainty of amounts of a given magnitude.
measure uncertainty only.
measure magnitude only.
measure inherent risk.
Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.
do not allow
Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
________ misstatements are those where the auditor can determine the amount of the misstatement in the account.
Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.
Management must disclose material weaknesses in internal control in its audit report: Answer
whenever the weakness is deemed significant to a single class of transactions.
whenever the weakness is significant to overall financial reporting objectives.
if the weakness exists at the end of the year.
only if the auditor identifies the weakness as significant.
Which of the following deficiency exists if a necessary control is missing or not properly formulated?
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
a material weakness
a control deficiency
a significant deficiency
Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that the external auditors are solely responsible
Which of the following components of the control environment define the existing lines of responsibility and authority?
Management philosophy and operating style
Human resource policies and practices
Management integrity and ethical values
Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement?
Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period.
Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report.
Senior management emphasizes that job rotation is a worthwhile corporate objective.
Senior management emphasizes that job evaluations are based on performance.
Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.
cookie jar reserves
Company management is often under pressure to increase revenue and/or net income. One approach is to use a “bill and hold” arrangement. This is an example of which of the following?
Significant accounting estimates
Fictitious revenue recorded
Premature revenue recognized
Alteration of cutoff documents
Who is most likely to perpetrate fraudulent financial reporting?
Members of the board of directors
Management of the company
The internal auditors
Fraud awareness training should be:
broad and all-encompassing.
extensive and include details for all functional areas.
specifically related to the employee’s job responsibility.
focused on employees understanding the importance of ethics.
Controls which are designed to assure that the information processed by the computer is authorized, complete, and accurate are called:
The approach to auditing where the auditor does not test automated controls to reduce assessed control risk is called:
the single-stage audit.
the test deck approach.
auditing around the computer.
generalized audit software (GAS).
A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized.
chief computer operator
data control operator
A ________ total represents the summary total of codes from all records in a batch that do not represent a meaningful total.
One of the unique risks of protecting hardware and data is:
lack of traditional authorization.
the decreased risk of loss or destruction of data files if data is stored in a centralized location.
the ease at which the IT system can be installed and maintained.
the unauthorized access to the IT system resulting in improper changes in software programs and master files.
involve comparisons of recorded amounts to expectations developed by management.
are only performed during the planning stage of the audit.
are required to be performed when auditing an account balance.
provide substantive evidence
If tests of controls support the control risk assessment, then ________ in the audit risk model is increased.
planned detection risk.
planned inherent risk.
planned fraud risk.
planned assurance risk.
Tests of controls are directed toward the control’s:
cost and effectiveness.
cost benefit ratio.
Transaction related audit objectives would most likely be performed in which phase of the audit process?
Plan and design audit approach
Perform audit tests for controls and transactions
Perform analytical procedures and tests of balances
Complete the audit and issue the audit report
An increased extent of tests of controls is most likely to occur when:
it is a first-year audit.
the auditor is doing a “fraud audit.”
controls are effective and the preliminary control risk assessment is low.
controls are ineffective and the preliminary control risk assessment is high.