he correct answer for each question is indicated by a

1 INCORRECT

Which of the following may cause management to intentionally understate profits? A) B) Management wants to create "cookie jar" reserves for a rainy day. The company believes its income tax expense is too high.

The company is suffering a large loss and wants to take a "big C) bath." All of the above. D) Feedback: Incorrect. While this statement is correct, D (all of the above) is a better answer.

2 INCORRECT

Which of the following is true. Auditors are responsible for detecting all fraudulent financial A) reporting. Auditors must specifically consider fraud risk from overstating B) liabilities. Auditors must specifically consider fraud risk from management C) override of controls. Auditors must report all fraud to the audit committee. D) Feedback: Incorrect. Auditors only provide reasonable assurance the financial statements are not materially misstated due to fraud.

3 INCORRECT

Auditors would perform the following steps in which order? Set audit risk; assess risk of material misstatement; calculate A) detection risk. Set audit risk; determine detection risk, assess risk of material B) misstatement. Assess risk of material misstatement; determine detection risk; C) calculate audit risk. Assess risk of material misstatement; assess audit risk, determine D) detection risk. Feedback: Incorrect. Auditors must set audit risk and assess the risk of material misstatement before solving for detection risk.

4 INCORRECT

Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"? Conduct a continuing assessment of the risks of material A) misstatement due to fraud throughout the audit. Conduct a discussion by the audit team of the risks of material B) misstatement due to fraud. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the C) auditor. Conduct inquiries of shareholders as to their views about the risks D) of fraud and their knowledge of any fraud or suspected fraud. Feedback:

Incorrect. This procedure is required by AU 240.

5 CORRECT

Analytical procedures are performed in the following order: Calculate predictions and compare them to the recorded amount; define a significant difference; develop an expectation; investigate A) significant differences. Calculate predictions and compare them to the recorded amount; investigate significant differences; define a significant difference; B) develop an expectation. Develop an expectation; define a significant difference; calculate predictions and compare them to the recorded amount; investigate C) significant differences. Develop an expectation; calculate predictions and compare them to the recorded amount; define a significant difference; investigate D) significant differences. Feedback: Correct. The correct order is: 1) Develop an expectation; 2) define a significant difference; 3) calculate predictions and compare them to the recorded amount; and 4) investigate significant differences. The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated is referred to as A) B) C) Audit risk. Detection risk. Information risk.

6 INCORRECT

Business risk. D) Feedback: Incorrect. Information risk is the probability that the information circulated by a company will be false or misleading.

7 INCORRECT

If results from the auditor's tests of controls induce the auditor to change the assessed level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk? A change in detection risk cannot be calculated because audit risk A) and inherent risk values are not given. B) C) Detection risk would increase from .3 to .6. Detection risk would decrease from 0.4 to 0.2.

Detection risk would not change since audit risk and inherent risk do D) not change. Feedback: Incorrect. Detection risk would decrease due to the increased control risk.

8 INCORRECT

The auditor has assessed the risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions for inventory account balances. As the acceptable level of detection risk decreases, which of the following adjustments to the accounts receivable audit program would the audit team normally make?

Change the nature of substantive tests to more efficient procedures, A) such as using negative rather than positive confirmations. B) C) Change the timing of the confirmation process to an interim date. Increase the sample size of the confirmations.

Decrease the sample size of the confirmations. D) Feedback: Incorrect. If detection risk decreases, the audit team must be more effective in its audit procedures. Decreasing the number (extent) of confirmations decreases effectiveness.

9 INCORRECT

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? A) B) C) Accounts payable. Accounts receivable. Interest expense.

Advertising expense. D) Feedback: Incorrect. Balance sheet accounts tend to be the more unpredictable because auditors are comparing one day with another 365 days earlier, compared to income statement accounts that are an aggregation of 365 days.

10 INCORRECT

Which of the following would not cause auditors to increase their assessment of inherent risk? The lessor of the client's office building is the brother-in-law of the A) CEO. B) C) The balance of an account is based on complex estimates. The company has recently introduced a major new product.

The client's controller is an expert in application of accounting D) standards. Feedback: Incorrect. Transactions with related parties increase the risk of material misstatement.

11 INCORRECT

With respect to management's accounting estimates, auditors are responsible for A) B) Determining the reasonableness of estimates. Determining that estimates are presented in conformity with GAAP.

Determining that estimates are adequately disclosed in the financial C) statements. D) All of the above.

Feedback: Incorrect. Auditors are responsible for evaluating the reasonableness of management's estimates, whether they are presented in conformity with GAAP, and whether they are adequately disclosed (all of the above).

12 INCORRECT

Auditors would be responsible for designing audit procedures to detect non compliance with which of the following laws and regulations? A) B) C) Federal income tax laws. Environmental protection regulations. Equal opportunity and non discrimination laws.

Auditors are responsible for designing audit procedures to detect all D) of the above. Feedback: Incorrect. Noncompliance with environmental protection regulations would have an indirect effect on the financial statements.

13 INCORRECT

The audit strategy should not take into account: A) Reporting objectives of the engagement.

Factors significant in directing the activities of the engagement B) team. Results of preliminary engagement activities and the initial risk C) assessment. The audit fee agreed to by the audit committee. D) Feedback: Incorrect. The audit strategy should take results of preliminary engagement activities and the initial risk assessment into account.