Which of the following circumstances most likely would cause the auditor to suspect that there

are material misstatements in the entity's financial statements?

1) The entity's management places no emphasis on meeting publicized earnings projections
2) Significant differences between the physical inventory count and the accounting records are
not investigated
3) Monthly bank reconciliations ordinarily include several large outstanding checks
4) Cash transactions are electronically processed and recorded, leaving no paper audit trail
2) Significant differences between the physical inventory count and the accounting records are
not investigated
Which of the following statements describes why a properly designed and executed audit may
not detect a material misstatement in the financial statements resulting from fraud?
1) Audit procedures that are effective for detecting an unintentional misstatements may be
ineffective for an intentional misstatement that is concealed through collusion
2) An audit is designed to provide reasonable assurance of detecting material errors, but there is
no similar responsibility concerning fraud
3) the factors considered in assessing control risk indicated an increased risk of intentional
misstatements, but only a low risk of unintentional errors in the financial statements
4) The auditor did not consider factors influencing audit risk for account balances that have
effects pervasive to the financial statements as a whole
1) Audit procedures that are effective for detecting an unintentional misstatements may be
ineffective for an intentional misstatement that is concealed through collusion
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team
members should discuss the potential for material misstatement due to fraud. Which of the
following best characterizes the mindset that the audit team should maintain during this
discussion?
1) Presumptive
2) Judgmental
3) Criticizing
4) Questioning
4) Questioning
Some account balances, such as those for pensions and leases, are the result of complex
calculations. The susceptibility to material misstatements in these types of accounts is defined as
1) audit risk
2) detection risk
3) inherent risk
4) sampling risk
3) inherent risk
As the acceptable level of detection risk decreases, the auditor may do one or more of the
following except change the
1) nature of audit procedures to more effective procedures
2) timing of audit procedures, by perhaps performing them at year-end rather than an interim
date
3) extent of audit procedures, by perhaps using larger sample sizes
4) assurances provided by audit procedures to a lower level
4) assurances provided by audit procedures to a lower level
Inherent risk and control risk differ from planned detection risk in that they
1) arise from the misapplication of auditing procedures
2) may be assessed in either quantitative or nonquantitative terms
3) exist independently of the financial statement audit
4) can be changed at the auditor's discretion
3) exist independently of the financial statement audit
Which of the following does not increase the need for sufficient appropriate audit evidence?
1) A lower acceptable level of detection risk
2) An increase in the assessed control risk
3) A lower acceptable audit risk
4) A decrease in the assessed inherent risk
4) A decrease in the assessed inherent risk
As lower acceptable levels of both audit risk and materiality are established, the auditor should
plan more work on individual accounts to
1) find smaller misstatements
2) find larger misstatements
3) increase the performance materiality in the accounts
4) increase inherent risk in the accounts
1) find smaller misstatements
Based on the evidence gathered and evaluated, an auditor decides to increase the assessed level
of control risk from that originally planned. To achieve an overall audi risk that is substantially
the same as planned audit risk level, the auditor could
1) decrease detection risk
2) increase materiality levels
3) decrease substantive testing
4) increase inherent risk
1) decrease detection risk
Which of the following procedures would a CPA most likely perform during the planning stage
of the audit?
1) Evaluate the reasonableness of management's allowance for doubtful accounts
2) Determine areas where there is a higher risk of material misstatements
3) Evaluate the significance of uncorrected misstatements
4) Confirm a sample of accounts receivable
2) Determine areas where there is a higher risk of material misstatements
Dan, CPA. has been engaged to audit Modern Home, a manufacturing company that specialized
in furniture. Which of the following matters related to the year under audit would most likely
result in an increase of inherent risk?
1) The furniture industry has experienced an overall increase in demand
2) Modern Home recently engaged in a complex derivative transaction
3) Modern Home experienced an increase in working capital
4) Modern Home purchased expensive new equipment in the current year
2) Modern Home recently engaged in a complex derivative transaction
After making a preliminary assessment of the risk of material misstatement during planning and
beginning t apply audit procedures, an auditor determines that this risk is actually higher than
anticipated. Which would be the most likely effect of this finding on the auditor's desired level of
detection risk and the overall level of audit risk, as compared to the levels originally planned?
1) increase/decrease/same - Auditor's desired level of detection risk
2) lower/higher/same - Overall level of audit risk
Decrease auditor's desired level of detection risk
Lower overall level of audit risk
Which of the following would not be considered an inherent limitation of the potential
effectiveness of an entity's internal control structure?
1) Incompatible duties
2) Management override
3) Mistakes in judgement
4) Collusion among employees
1) Incompatible duties
Actions, policies, and procedures that reflect the overall attitude of management,
directors, and owners of an entity about internal control relate to which of the following
internal control components?
1) Control environment
2) Information and communication
3) Risk assessment
4) Monitoring