ACC 562 EXAM PART 1 (A++++ Solution) - 92531

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1. What analysis best considers the economic relationships among account balances? Answer Altman "Z" Analysis Ratio analysis. Vertical analysis. Horizontal analysis. 2. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk? Answer Inherent risk Audit risk Client risk Control risk 3. Audit risk in the audit risk model concerns the risk that the auditor may issue an unqualified opinion on financial statements that are materially misstated. What is the manner in which the auditor assesses audit risk in using the audit risk model to determine the nature, extent and timing of audit evidence to collect in an audit. Answer assessed to maintain low level of audit risk given residual risk assessed to maintain low level of audit risk given financial statement risk assessed to maintain a low level of audit risk given engagement risk assessed to maintain a low level of audit risk given enterprise risk 4. The preliminary use of analytical review procedures by the auditor is Answer required to identify areas of heightened risk optional in accordance with auditor judgment. only used when other planning procedures cannot be applied. used to assist the auditor in documenting internal control. 5. Which is a primary limitation of the audit risk model? Answer The audit risk model does not adequately consider external forces on the client organization. Components of audit risk are treated as independent variables even though many interdependencies exist between them. The audit technology achieves approximate precision outside of a mathematical model. Control risk must be adjusted at the hands of the auditor, not by an arbitrary estimation. 6. An auditor compares year-to-year account balances in order to perform analytical procedures. This is an example of: Answer ratio analysis. trend analysis. internal control analysis. vertical analysis. 7. Analytical procedures are used in an audit because it is assumed of financial statements that Answer management fraud can be discovered using such procedures. it is plausible that no relationship among data exists. analytical procedures are used as tests of controls. plausible relationships among data may reasonably be expected to exist and continue. 8. What is the most important purpose that is achieved by having an auditor write a formal engagement letter that is signed by the client? Answer Documented proof of auditor responsibility for financial statements in accordance with GAAP. Multiple degrees of legal separation of the client from the auditor. A locking-in of fees and timetable that must be adhered to by the client. A communication and clarification of the responsibilities and expectations of the auditor and the client. 9. When control risk is assessed as high the auditor needs to: Answer perform more tests of controls. perform more direct testing of account balances. perform significantly fewer tests of controls. perform significantly less testing of account balances. 10. The PCAOB requires auditors of public companies to perform Answer a financial statement audit and an attest audit. a financial statement audit and an assurance audit. a financial statement audit and agreed upon procedures. a financial statement audit and an audit of internal control. 11. An auditor of a client company that has multiple locations must: Answer increase control risk to moderate or high. conclude that independent business units of the consolidation are immaterial. issue multiple audit reports for each segment of the company. determine the universal application of controls across the company. 12. The control environment includes which of the following? Answer Control activities. Management philosophy and operating style. Assessing activity level risks. Application level controls. 13. Which of the following would result in an adverse report issued by an auditor on an audit of internal control? Answer The control risk is assessed at a lower level. The tests of controls support the documented understanding of controls. There is a material weakness in the design or operation of controls. A confirmation is not returned by a customer in a timely manner. 14. Which of the following best represents a walk-through? Answer The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries. The auditor walks the production line to find inefficiencies in the inventory process and reports them to management. The controller takes a sample of write-offs to ensure they have been adequately documented and recorded. The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding. 15. Which of the following will an auditor perform to better understand a client's internal control over accounting systems? Answer An auditor will re-test subsequent year working papers. An auditor will review previous year working papers. An auditor will copy previous year working papers. An auditor will re-draft subsequent year working papers. 16. Which is clearly a test of control? Answer Confirmation to a customer of an accounts receivable balance. Examination of a sample of purchase order records for electronic, authenticated, authorization. Observing the controller's use of company owned equipment. Sending a letter to the client's attorney to determine litigation that is pending between plaintiff and the defendant. 17. An auditor's test of transaction processing whereby the auditor is evaluating both the operation and effectiveness of controls and the correctness and completeness of processing and posting to an account balance is: Answer a test of controls. a substantive test. a dual-purpose test. an analytical review procedure. 18. If the audit team discovers that fraud risk factors are present on an engagement, it should then: Answer resign from the client and inform the audit committee and regulatory authorities. modify procedures to actively search for the existence of fraud. reduce the amount of evidence required and resort to management inquiry. turn the audit over to forensic accountants. 19. The audit team asks management for original documents related to sales contracts. Despite the team's persistence, management does not supply the documents for over two weeks. With the use of professional skepticism, what should this audit team be most concerned with as it relates to the documents? Answer The need to complete the audit within a specified period of time. Management's possible use of the time to fabricate the documents. Discrepancies of the evidence. Conflicting evidence. 20. When is the assessment of fraud risk on a single engagement completed by the audit team? Answer Upon completion of the planning stage. Once internal control is understood. Only after the audit risk model has been used to design tests. Once the audit is complete. 21. Which of the following are most often involved in perpetrating fraud in financial statement reporting? Answer The auditors and the attorneys. The audit committee members. The chief executive and chief financial officers. The accounts payable clerks. 22. Which of the following is most likely considered a material omission from the rules of financial statement reporting? Answer The company no longer discloses a previously settled contingency. The company does not present the fair value of all current assets on the balance sheet. A privately held company does not disclose earnings per share. A company with a net loss does not present a statement of cash flows. 23. What is the primary determinate in the difference between fraud and errors in financial statement reporting? Answer The materiality of the misstatement. The intent to deceive. The level of management involved. The type of transaction effected. 24. The key elements of the fraud triangle include all of the following except Answer Pressure Materiality Opportunity Rationalization 25. Audits of financial statements are valuable to the detection of fraud because: Answer Auditors are not required to seek out and find all fraud. Auditors expect that management will make them aware of any fraud in the financial statements. Society expects that the auditor will ensure that financial statements have not been materially misstated due to fraud. Society realizes that some fraud is not capable of being discovered by auditors.
Solution Description

1. What analysis best considers the economic relationships among account balances?

Answer

Altman "Z" Analysis

Ratio analysis.

Vertical analysis.

Horizontal analysis.

2. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk?

Answer

Inherent risk

Audit risk

Client risk

Control risk

3. Audit risk in the audit risk model concerns the risk that the auditor may issue an unqualified opinion on financial statements that are materially misstated. What is the manner in which the auditor assesses audit risk in using the audit risk model to determine the nature, extent and timing of audit evidence to collect in an audit.

Answer

assessed to maintain low level of audit risk given residual risk

assessed to maintain low level of audit risk given financial statement risk

assessed to maintain a low level of audit risk given engagement risk

assessed to maintain a low level of audit risk given enterprise risk

4. The preliminary use of analytical review procedures by the auditor is

Answer

 

required to identify areas of heightened risk

optional in accordance with auditor judgment.

only used when other planning procedures cannot be applied.

used to assist the auditor in documenting internal control.

5. Which is a primary limitation of the audit risk model?

Answer

The audit risk model does not adequately consider external forces on the client organization.

Components of audit risk are treated as independent variables even though many interdependencies exist between them.

The audit technology achieves approximate precision outside of a mathematical model.

Control risk must be

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