FINAL EXAM PREPARATION AUDITING COURSE Lecturer: Prof. Dr. Ida Suraida, SE, MS, Ak.

. Ahmad Zakie Mubarrok, SE.

MULTIPLE CHOICE QUESTION

1. 2. 3. 4. 5. 6. A measure of how willing the auditor is to accept that the financial statements may be materially a. inherent risk.. b. acceptable audit risk. c. statistical risk. d. financial risk. A measure of the auditors assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the clients internal control is Inherent Risk a. control risk. b. acceptable audit risk. c. statistical risk. d. financial risk. Most auditors assess inherent risk as high for related parties and related-party transactions because a. of the accounting disclosure requirement. b. of the lack of independence between the parties. c. both a and b. d. it is required by generally accepted accounting principles. Which of the following is not a document or record that should be examined early in the engagement? a. Management letter. b. Corporate charter and bylaws. c. Contracts. d. Minutes of board of directors and stockholders meetings. Why do auditors need to obtain an understanding of a clients industry and external environment? a. Certain industries have different business risks than others. b. Inherent risks commonly differ across companies within an industry. c. Accounting issues may be highly complex across companies within an industry. d. All of the above. In what order should the following steps occur? A. Assess client business risk B. Understand the clients business and industry C. Perform preliminary analytical procedures D. Assess risk of material misstatements a. D, B, C, A. b. B, A, D, C. c. B, D, A, C. d. D, C, B, A. The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. minimum b. maximum c. mean average

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d. median average If an auditor establishes a relatively low level for materiality, then the auditor will a. accumulate more evidence than if a higher level had been set. b. accumulate less evidence than if a higher level had been set. c. accumulate approximately the same evidence as would be the case were a higher level set. d. accumulate an undetermined amount of evidence. Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of a set of financial statements? a. Net income before taxes. b. Current assets. c. Owners equity. d. Inventory. Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence. a. directly, inversely. b. directly, directly. c. inversely, inversely. d. inversely, directly. The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set preliminary judgment about materiality. 4. Allocate preliminary judgment about materiality to segments. 5. Compare combined estimate with preliminary judgment about materiality. The correct sequence from start to finish would be a. 1 2 5 4 3. b. 3 4 2 1 5. c. 4 3 1 5 2. d. 5 1 3 2 4. Allocating the preliminary judgment about materiality to segments of the financial statements is necessary because a. evidence is accumulated for the financial statements as a whole so the materiality doesnt apply to them. b. evidence is accumulated by segments rather than for the financial statements as a whole. c. it is required by the AICPAs Code of Professional Conduct. d. it is required by the SEC. A major limitation in the application of the audit risk model is a. the difficulty in defining the terms of the model. b. the difficulty in measuring the components of the model. c. the difficulty in understanding the effect on other factors in the model when one factor is changed. d. the failure of the Audit Standards Board (ASB) of the AICPA to accept it and incorporate it into the SASs. When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, this is referred to as a. tracing. b. vouching. c. a walk-through. d. tests of controls. 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. A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.

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b. c.

d. The ______ consists of the actions, policies, and procedures that reflect the overall attitudes of top management. a. control activities. b. management philosophy. c. control environment. d. monitoring function. The essence of an effectively controlled organization lies in the a. effectiveness of its independent auditor. b. effectiveness of its internal auditor. c. attitude of its employees. d. attitude of its management. Authorizations can be either general or specific. Which of the following is not an example of a general authorization? a. Automatic reorder points for raw materials inventory. b. A sales managers authorization for a sales return. c. Credit limits for various classes of customers. d. A sales price list for merchandise. Narratives, flowcharts, and internal control questionnaires are three common methods of a. testing the internal controls. b. documenting the auditors understanding of internal controls. c. designing the audit manual and procedures. d. documenting the auditors understanding of a clients organizational structure. Evidential matter concerning proper segregation of duties ordinarily is best obtained by a. direct personal observation of the employee who applies control procedures. b. making inquiries of co-workers about the employee who applies control procedures. c. preparation of a flowchart of duties performed and available personnel. d. inspection of third-party documents containing the initials of who applied control procedures. Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? 1. procedures to obtain an understanding of internal control 2. tests of controls 3. tests of transactions 4. analytical procedures Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? 1. procedures to obtain an understanding of internal control 2. tests of controls 3. tests of transactions 4. analytical procedures 5. tests of balances a. 1, 2, and 3. b. 3, 4, and 5. c. 2, 3, and 5. d. 2, 3, and 4.

A statement that management and the board of directors are 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 for establishing and maintaining an adequate internal control structure and procedures for financial reporting. None of the above is correct.

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A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a a. test of control. b. substantive test. c. test of attributes. d. monetary-unit sampling test. As audit evidence, physical examination and confirmation, may only be obtained using which of the following types of tests? a. Tests of controls. b. Tests of transactions. c. Analytical procedures. d. Tests of details of balances. The most effective way to prevent and deter fraud is to a. implement programs and controls that are based on core values embraced by the company. b. hire highly ethical employees. c. communicate expectations to all employees on an annual basis. d. terminate employees who are suspected of committing fraud.

ESSAY CHOICE QUESTION

1. Define client business risk. List several factors that may impact the auditors assessment of business risk. Client business risk is the risk that a company will fail to achieve its objectives. Factors that may impact business risk include: General economic conditions. Extent of competition within an industry. Changing regulatory requirements. Competence of management. Ability to maintain sufficient cash flows and secure financing. Successful implementation of business strategies. Disclosure controls and procedures (to ensure material information about business risks is known)

2.

Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts. Allocating the preliminary judgment about materiality to individual segments is necessary because evidence is accumulated for segments rather than for the financial statements as a whole. Allocating to segments establishes a tolerable misstatement amount for each segments, which helps the auditor decide the appropriate audit evidence to accumulate for each segments. Most practitioners allocate materiality to balance sheet accounts rather than income statement accounts because there are fewer balance sheet than income statement accounts.

3.

Control activities, one of the five components of internal control, are defined as the policies and procedures, in addition to those included in the other four components, that help ensure necessary actions are taken to address risks in the achievement of the entitys objectives. There are five categories of control activities. Please list the five categories of control activities. The five categories of control activities are: Adequate separation of duties. a. Custody of assets should be separated from accounting. b. Authorizing transactions should be separated from custody of related assets.

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c. Operational responsibility should be separated from record-keeping. d. Duties within IT should be separated from user departments. Proper authorization of transactions and activities. a. General authorization is given for transactions meeting established criteria. b. Specific authorization is required for individual transactions that dont confirm to the criteria. Adequate document and records. a. Documents should be prenumbered and simple to understand and use. b. A chart of accounts should be available. c. Systems manuals should be available. Physical control over assets and records. These should include fireproof safes and limited access storerooms. Independent checks on performance by internal verification should be used.

List and briefly describe the three conditions for fraud arising from fraudulent financial reporting and misappropriation of assets as described in Fraud Triangle. Incentives/pressures Management or other employees have incentives or pressures to commit fraud. Opportunities Circumstances provide opportunities for management or employees to commit fraud. Attitudes/Rationalization An attitude, character, or set of ethical values exists that allows management or employees to intentionally commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act.