CHAPTER 9 Demonstrate how audit risk, management assertions, and substantive procedures are linked.

CHAPTER 9 Demonstrate how audit risk, management assertions, and substantive procedures are linked. Testing of internal controls is optional, and only used for high-risk clients. usually completed after substantive ...

CHAPTER 9 Demonstrate how audit risk, management assertions, and substantive procedures are linked. Testing of internal controls is optional, and only used for high-risk clients. usually completed after substantive testing. usually completed at the same time as substantive testing. usually completed before substantive testing. One of the main objectives of substantive procedures is to test the assertions being made by internal control. determine that underlying accounting records are fairly presented and reconcile to the financial statements. ensure that the financial statements, being the responsibility of the internal audit function, are accurate and fairly stated. serve as a substitute for testing of controls. Which of the following is NOT a management assertion about presentation and disclosure? completeness accuracy understandability cutof Auditors make decisions about the nature, timing, and extent of substantive testing after they have drawn a conclusion about control risk. testing risk. detection risk. inherent risk.One of the main objectives of substantive procedures is to determine that underlying accounting records are fairly presented and reconcile to the financial statements. test the assertions being made by internal control. serve as a substitute for testing of controls. ensure that the financial statements, being the responsibility of the internal audit function, are accurate and fairly stated. Management assertions about typical balance sheet accounts include all of the following except? Completeness Allocation Rights and obligations Understandability In the given table, match the assertions about classes of transactions and events on the left with the assertions about account balances at year-end on the right. A. Occurrence B. Cutof C. Classification D. Accuracy Which of the following terms best reflects the concept of “substantive” testing? requirement. liability. evidence. scale. Which of the following is NOT a management assertion about classes of transactions and events? cutof. completeness. occurrence. existence. Existence Rights and obligations Valuation AllocationManagement assertions pertaining to account balances at year-end include cutof. existence. classification. accuracy. Testing performed on the occurrence of sales transactions is not related to any other assertion(s). also provides evidence on the existence of accounts receivable. should be conducted by the internal audit function. also provides evidence on the existence of accounts payable. Considering the potential risk of material misstatement, when the sample size of substantive tests is low, the combined assessed level of inherent risk and control risk is _______ and the acceptable level of detection risk is low; low. low; high. high; high. high; low. An inverse relationship exists between the billable hours generated by the internal audit function and the external audit fees generated. risk of audit risk and detection risk. risk of material misstatement and detection risk. inherent risk and audit fees generated. The management assertion of occurrence about presentation and disclosure is related to the management assertion of _______ about classes of transactions and events. completeness classification valuation cutof Pam is auditing the accounts payable account of her client, Roadrunner Training Company (RTC). Pam has decided to perform her testing at interim and to usesmaller sample sizes. Which of the following pairs of information about the combined assessed level of inherent risk and control risk and detection risk best fits this scenario? Combined assessed level of inherent risk and control risk » low; detection risk » low Combined assessed level of inherent risk and control risk » low; detection risk » high Combined assessed level of inherent risk and control risk » high; detection risk » low Combined assessed level of inherent risk and control risk » high; detection risk » high Liz Brown is auditing her client, Coconino Industries. Liz is gathering evidence to support accounts receivable transactions and account balances. Her testing is designed to detect material misstatements. Liz’s most likely audit strategy is a classification and understandability approach. a substantive approach. an assertion and material misstatement approach. reliance on controls approach. Pam is auditing the accounts receivable account of her client, Roadrunner Training Company (RTC). RTC extends credit to most of its clients as a method of paying for services received. Pam has assessed the levels of inherent risk and control risk as high. Additionally, she has set the acceptable level of detection risk as low. Which of the following pairs of information about the substantive tests Pam is likely to perform best fits this scenario? Timing » year-end; extent » larger sample sizes Nature » less efective; extent » larger sample sizes Timing » interim; extent » smaller sample sizes Nature » more efective; timing » interim Pam is auditing the property, plant, and equipment account of her client, Roadrunner Training Company (RTC). Pam has decided to perform her testing at year-end and to use larger sample sizes. Which of the following pairs of information about the combined assessed level of inherent risk and control risk and detection risk best fits this scenario? Combined assessed level of inherent risk and control risk » low; detection risk » low Combined assessed level of inherent risk and control risk » high; detection risk » lowCombined assessed level of inherent risk and control risk » high; detection risk » high Combined assessed level of inherent risk and control risk » low; detection risk » high Pam is auditing the inventory account of her client, Roadrunner Training Company (RTC). Since RTC is a service industry client and carries a minimal amount of inventory, Pam has assessed the levels of inherent risk and control risk as low. Additionally, she has set the acceptable level of detection risk as high. Which of the following pairs of information about the substantive tests Pam is likely to perform best fits this scenario? Nature » less efective; extent » larger sample sizes Nature » more efective; timing » interim Timing » year-end; extent » larger sample sizes Timing » interim; extent » smaller sample sizes If the auditor determines that internal controls are not functioning as designed, and there is no compensating control, the auditor will assess control risk and risk of material misstatement as low, and set detection risk as low. low, and set detection risk as high. high, and set detection risk as low. high, and set detection risk as high. When sample sizes for substantive tests are large, the acceptable level of detection risk related to risk of material misstatement is very high. low. very low. moderate. Describe methods of risk response at the financial statement level. Brian and his team are auditing Powell Speed Boats. Powell sells high-end speed boats at several marina locations across the west coast. Powell relies heavily on debt financing from its suppliers, in turn its customers rely heavily on debt financing provided by Powell to finance their purchases. Which of the following likely indicates Brian believes the risk of fraud is high? Brian plans to test immaterial account balances.Brian plans to include interns and other young staf on the audit team so they can get exposure to areas of higher risk of material misstatement. Brian plans to assign additional supervisory responsibility to the audit team’s younger, less experienced staf in order to help them develop. Brian plans to rely on evidence gathered from the company’s records. Brian and his team are auditing Powell Speed Boats. Powell sells high-end speed boats at several marina locations across the west coast. Powell relies heavily on debt financing from its suppliers, in turn its customers rely heavily on debt financing provided by Powell to finance their purchases. Which of the following activities indicate that Brian is exhibiting enhanced professional skepticism? Brian plans to audit locations according to the planned rotation schedule. Brian directs the staf to make a list of all questions so they can be addressed at the conclusion of the audit. Brian’s team is new to the client and the industry so they can provide “fresh eyes”. Brian plans to closely supervise the testing of notes receivable and notes payable. Regina has decided to gather more evidence from independent sources to corroborate management’s explanations and other internally generated evidence. Which of the following actions is Regina least likely to take in addition to the described process? Vary locations tested from year to year. Increase procedures performed on a “surprise” basis. Assign more supervisory responsibility to younger members of the staf. Include elements of unpredictability in the audit plan. Risk response at the financial statement level is afected by which of the following factors? Auditor understanding of the entity’s control environment Materiality procedures used during auditing Recalculation of procedures applied in financial statements Design of appropriate responses to financial statements An auditor’s risk response at the financial statement level is afected by Both the auditor’s understanding of the entity’s control environment and the assessed risk of material misstatement due to fraud. The auditor’s understanding of the entity’s control environment, the assessed risk of material misstatement due to fraud, and the risk of evaluating the evidence obtained.Both the assessed risk of material misstatement due to fraud and the risk of evaluating the evidence obtained. Both the auditor’s understanding of the entity’s control environment and the risk of evaluating the evidence obtained. Management’s explanations of audit discrepancies should be taken as reasonable assurance by the auditor. be corroborated wherever possible, in exercising professional skepticism. be referred to the internal audit function for further investigation. never be relied upon by the auditor, regardless of corroborating evidence. Stacey and her team are auditing Pine Builders. Stacey has been involved in the Pine audit for 5 years, each year taking on additional responsibilities. Stacey has confidence in the audit evidence that Pine will generate internally. Which of the following is most likely true of Stacey’s audit of Pine? Stacey is planning to audit immaterial account balances. Stacey has assessed Pine’s control risk as high. Pine’s governance team is committed to strong internal controls. Stacey plans to perform “surprise” audit procedures. In an audit, evidence obtained from independent sources is inadmissible as audit evidence. gathered by the internal audit team. considered to be less reliable. considered to be more reliable. If the control environment is assessed to be weak, auditors may respond by altering the audit plan to include more audit procedures. True An auditor will seriously consider _________ when control risk is increasing professional skepticism; low. the risk of fraud; low. decreasing professional skepticism; high. the risk of fraud; high. If control risk is high, the auditors will assign control testing to the internal audit function