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1. Management integrity affects all of the following risks-(Answered)

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Question

Please look at the attached word file for the MCQ:?
I have copy pasted them here as well?

Management integrity affects all of the following risks except

enterprise risk

financial reporting risk

engagement risk

all of the above

?

A key element of the COSO (Committee of Sponsoring Organizations of the Treadway Commission) ERM (Enterprise Risk Management) model is risk appetite is

?

best determined by management with board of director review and concurrence.

an integral part of the risk culture.

a necessary prerequisite of an ERM model.

all of the above.

?

If the auditor has concerns about the integrity of management, which of the following would not be an appropriate course of action?

?

Refuse to accept the engagement because a client does not have an inalienable right to an audit.

Expand audit procedures in areas where management representations are normally important by requesting outside verifiable evidence.

Raise the audit fees to compensate for the risk inherent in the audit, but do not plan any extended audit procedures.

Plan the audit with a higher degree of skepticism, including specific procedures that should be effective in uncovering management fraud.

?

An auditor suspects that fictitious sales may have been recorded during the year. Which of the following analytical review results would most likely indicate that fictitious sales have been recorded?

?

Uncollectible account write-offs increased by 10%, sales increased by 10%, and accounts receivable increased by 10%.

Gross margin decreased from 40 to 35 percent.

The number of day?s sales in accounts receivable decreased from 64 to 38.

Accounts receivable turnover 7.1 to 4.3.

?

The auditor concludes that a public company has significant deficiencies in its internal controls over financial reporting. Which of the following is a proper response to the finding?

?

Report the deficiencies to management and the audit committee.

Report the deficiencies in the report to shareholders.

Expand the planned testing of account balances to consider the types of errors that might occur because of the deficiency.

All of the above.

a and c only.

?

Segregation of duties is best accomplished when the auditor can determine that

?

Employees perform only one job, for example, someone working on accounts payable does not have access to other accounting records such as the details in property, plant, and equipment.

The internal audit department performs an independent test of transactions throughout the year and reports any errors to departmental managers.

The person responsible for reconciling the bank account is responsible for cash disbursements, not cash receipts.

The payroll department cannot add employees to the payroll or change pay rates without explicit authorization of the personnel department.

?

An advantage of using statistical sampling techniques is that such techniques:?

?

Mathematically measure risk

Eliminate the need for judgmental decisions

Define the values of precision and reliability required to provide audit satisfaction

Have been established in the courts to be superior to judgmental sampling.

A CPA examining inventory may appropriately apply sampling for attributes to estimate the:

?

Average price of inventory items

percentage of slow-moving inventory items

Dollar value of inventory

physical quantity of inventory items

Which of the following combinations results in a decrease in an attribute estimation sample size?

?

?

?

?

?

??????????? ?

?

??????????????????????? a)

??????????????????????? b)

??????????????????????? c)

??????????????????????? d)

Risk of assessing Control risk too low

Increase?

Decrease?

Increase?

Decrease?

Tolerate Rate?

Decrease?

Increase?

Increase?

Increase?

Expected

Population?

Failure Rate?

Increase?

Decrease?

Decrease?

Increase?

?

?

?

?

An internal auditor selects a statistical sample from a large inventory of replacement parts. Which of the following audit objectives would be most appropriate if the sampling method used is PPS?

?

The auditor plans to estimate the total dollar value of the inventory when individual book values of items making up the population do not exist

The auditor plans to make a statement concerning the total dollar amount of misstatement in the population from the recorded book value?

The auditor wishes to accept or reject the hypothesis that the proportion of defective parts in the population is less than 5 percent

The auditor wishes to estimate the proportion of defective parts in the population

?

Which of the following best describes an inherent limitation of the PPS sampling method?

?

It can be used only substantive testing of asset accounts

it is complicated and always requires the use of a computer system to perform the calculations.

Error rates must be large and the misstatements must be overstatements.

Error rates must be small.

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. These results most likely would indicate that:

?

Internal control activities are not operating effectively.?

fraud exists among the relevant account balances

additional tests of details are required

the communication with the audit committee should be revised

?

In an audit of contingent liabilities, which of the following procedures would be least effective?

?

Reviewing a bank confirmation letter

Examining customer confirmation replies

examining invoices of professional services

reading the minutes of board of directors

?

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluation Zero?s plan for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero?s plans to?

?

Make credit terms for sales on account more lenient

strengthen internal control over cash disbursements

purchase production facilities currently being leased from a related party

postpone expenditure for research and development projects.

?

Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate that there could be substantial doubt about an entity?s ability to continue as a going concern?

?

Review compliance with the terms of debt agreements.

confirm accounts receivable from principal customers.

reconcile interest expense with debt outstanding.

confirm bank balances.

?

Six months after issuing an unqualified audit opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client?s material accounts receivable balances. The auditor should first:

?

request the permission of the client to undertake the confirmation of accounts receivable.

perform alternative procedures to provide a satisfactory basis for the unqualified opinion.

assess the importance of the omitted procedures to the auditor?s ability to support the previously expressed opinion.

inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.

?

Nast Corp. orally engaged Baker & Co., CPAs, to audit its financial statements.? Nast management informed Baker that it suspected the accounts receivable were materially overstated. Although the financial statements audited by Baker did, in fact, include a materially overstated accounts receivable balance, Baker issued an unqualified opinion. Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations. Nast has defaulted on the loan and has incurred a substantial loss.

?

If Nast sues Baker for negligence in failing to discover the overstatement, Baker?s best defense would be that:

?

Baker did not perform the audit recklessly or with intent to deceive.

Baker was not in privity of contract with Nast.

Baker performed the audit in accordance with generally accepted auditing standards.

Baker had not signed an engagement letter.

?

?

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following, if present, would be the CPA?s best defense?

?

The stockholder lacks privity to sue.

The false statements were immaterial.

The CPA did not financially benefit from the alleged fraud.

The client was guilty of contributory negligence.

?

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client?s financial statements?

?

The CPA is liable only to third parties in privity of contract with the CPA.

The CPA is liable only to known users of the financial statements.

The CPA probably is liable to any person who suffered a loss as a result of the fraud.

The CPA probably is liable to the client, even if the client was aware of the fraud and did not rely on the opinion.

?

One of the elements necessary to hold a CPA liable to a client for negligently conducting an audit is that the CPA:

?

acted with scienter.

was a fiduciary to the client.

failed to exercise due care.

executed an engagement letter.

?

In which of the following circumstances would an auditor be most likely to express an adverse opinion?

?

Information comes to the auditor?s attention that raises substantial doubt about the entity?s ability to continue as a going concern.

The chief executive officer refuses the auditor access to minutes of board of directors? meetings.

Tests of control show that the entity?s internal controls are so poor that they cannot be relied on.

The financial statements are not in conformity with FASB statements regarding the capitalization of leases.

?

During a review o the financial statements of a nonpublic entity, an accountant becomes aware of the lack of adequate disclosure that is material to the financial statements.? If management refuses to correct the financial statement presentations, the accountant should

?

issue an adverse opinion.

issue an ?except for? qualified opinion.

disclose this departure from GAAP in a separate paragraph of the report.

express only limited assurance on the financial statement presentations.



? ??

? ?

? ?

? ?

? ?



1. Management integrity affects all of the following risks except

 


 

a. enterprise risk

 

b. financial reporting risk

 

c. engagement risk

 

d. all of the above

 


 

2. A key element of the COSO (Committee of Sponsoring Organizations of the Treadway

 

Commission) ERM (Enterprise Risk Management) model is risk appetite is

 


 

a. best determined by management with board of director review and concurrence.

 

b. an integral part of the risk culture.

 

c. a necessary prerequisite of an ERM model.

 

d. all of the above.

 


 

3. If the auditor has concerns about the integrity of management, which of the following would

 

not be an appropriate course of action?

 


 

a. Refuse to accept the engagement because a client does not have an inalienable right to

 

an audit.

 

b. Expand audit procedures in areas where management representations are normally

 

important by requesting outside verifiable evidence.

 

c. Raise the audit fees to compensate for the risk inherent in the audit, but do not plan

 

any extended audit procedures.

 

d. Plan the audit with a higher degree of skepticism, including specific procedures that

 

should be effective in uncovering management fraud.

 


 

4. An auditor suspects that fictitious sales may have been recorded during the year. Which of

 

the following analytical review results would most likely indicate that fictitious sales have

 

been recorded?

 


 

a. Uncollectible account write-offs increased by 10%, sales increased by 10%, and

 

accounts receivable increased by 10%.

 

b. Gross margin decreased from 40 to 35 percent.

 

c. The number of day?s sales in accounts receivable decreased from 64 to 38.

 

d. Accounts receivable turnover 7.1 to 4.3.

 


 

5. The auditor concludes that a public company has significant deficiencies in its internal

 

controls over financial reporting. Which of the following is a proper response to the finding?

 


 

a. Report the deficiencies to management and the audit committee.

 

b. Report the deficiencies in the report to shareholders.

 

c. Expand the planned testing of account balances to consider the types of errors that

 

might occur because of the deficiency.

 

d. All of the above.

 

e. a and c only.

 


 

6. Segregation of duties is best accomplished when the auditor can determine that

 


 

a. Employees perform only one job, for example, someone working on accounts payable

 

does not have access to other accounting records such as the details in property, plant,

 

and equipment.

 

b. The internal audit department performs an independent test of transactions

 

throughout the year and reports any errors to departmental managers.

 

c. The person responsible for reconciling the bank account is responsible for cash

 

disbursements, not cash receipts.

 

d. The payroll department cannot add employees to the payroll or change pay rates

 

without explicit authorization of the personnel department.

 


 

7. An advantage of using statistical sampling techniques is that such techniques:

 


 

a. Mathematically measure risk

 


 

b. Eliminate the need for judgmental decisions

 

c. Define the values of precision and reliability required to provide audit satisfaction

 

d. Have been established in the courts to be superior to judgmental sampling.

 

8. A CPA examining inventory may appropriately apply sampling for attributes to estimate the:

 


 

a. Average price of inventory items

 

b. percentage of slow-moving inventory items

 

c. Dollar value of inventory

 

d. physical quantity of inventory items

 

9. Which of the following combinations results in a decrease in an attribute estimation sample

 

size?

 


 

Expected

 

Population

 


 

Risk of assessing Control risk

 

too low

 


 

Tolerate Rate

 


 

Failure Rate

 


 

a)

 


 

Increase

 


 

Decrease

 


 

Increase

 


 

b)

 


 

Decrease

 


 

Increase

 


 

Decrease

 


 

c)

 


 

Increase

 


 

Increase

 


 

Decrease

 


 

d)

 


 

Decrease

 


 

Increase

 


 

Increase

 


 

10. An internal auditor selects a statistical sample from a large inventory of replacement parts.

 

Which of the following audit objectives would be most appropriate if the sampling method

 

used is PPS?

 


 

a. The auditor plans to estimate the total dollar value of the inventory when individual

 

book values of items making up the population do not exist

 

b. The auditor plans to make a statement concerning the total dollar amount of

 

misstatement in the population from the recorded book value

 

c. The auditor wishes to accept or reject the hypothesis that the proportion of defective

 

parts in the population is less than 5 percent

 

d. The auditor wishes to estimate the proportion of defective parts in the population

 


 

11. Which of the following best describes an inherent limitation of the PPS sampling method?

 


 

a. It can be used only substantive testing of asset accounts

 

b. it is complicated and always requires the use of a computer system to perform the

 

calculations.

 

c. Error rates must be large and the misstatements must be overstatements.

 

d. Error rates must be small.

 

12. Analytical procedures performed in the overall review stage of an audit suggest that several

 

accounts have unexpected relationships. These results most likely would indicate that:

 


 

a. Internal control activities are not operating effectively.

 

b. fraud exists among the relevant account balances

 

c. additional tests of details are required

 

d. the communication with the audit committee should be revised

 


 

13. In an audit of contingent liabilities, which of the following procedures would be least

 

effective?

 


 

a. Reviewing a bank confirmation letter

 

b. Examining customer confirmation replies

 

c. examining invoices of professional services

 

d. reading the minutes of board of directors

 


 

14. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as

 

a going concern for a reasonable period of time. In evaluation Zero?s plan for dealing with

 

the adverse effects of future conditions and events, Cooper most likely would consider, as a

 

mitigating factor, Zero?s plans to

 


 

a. Make credit terms for sales on account more lenient

 

b. strengthen internal control over cash disbursements

 

c. purchase production facilities currently being leased from a related party

 

d. postpone expenditure for research and development projects.

 


 

15. Which of the following audit procedures would most likely assist an auditor in identifying

 

conditions and events that may indicate that there could be substantial doubt about an

 

entity?s ability to continue as a going concern?

 


 

a. Review compliance with the terms of debt agreements.

 

b. confirm accounts receivable from principal customers.

 

c. reconcile interest expense with debt outstanding.

 

d. confirm bank balances.

 


 

16. Six months after issuing an unqualified audit opinion on audited financial statements, an

 

auditor discovered that the engagement personnel failed to confirm several of the client?s

 

material accounts receivable balances. The auditor should first:

 


 

a. request the permission of the client to undertake the confirmation of accounts

 

receivable.

 

b. perform alternative procedures to provide a satisfactory basis for the unqualified

 

opinion.

 

c. assess the importance of the omitted procedures to the auditor?s ability to support the

 

previously expressed opinion.

 

d. inquire whether there are persons currently relying, or likely to rely, on the unqualified

 

opinion.

 


 

17. Nast Corp. orally engaged Baker & Co., CPAs, to audit its financial statements. Nast

 

management informed Baker that it suspected the accounts receivable were materially

 

overstated. Although the financial statements audited by Baker did, in fact, include a

 

materially overstated accounts receivable balance, Baker issued an unqualified opinion. Nast

 

relied on the financial statements in deciding to obtain a loan from Century Bank to expand

 

its operations. Nast has defaulted on the loan and has incurred a substantial loss.

 


 

If Nast sues Baker for negligence in failing to discover the overstatement, Baker?s best defense would be

 

that:

 


 

a. Baker did not perform the audit recklessly or with intent to deceive.

 

b. Baker was not in privity of contract with Nast.

 

c. Baker performed the audit in accordance with generally accepted auditing standards.

 

d. Baker had not signed an engagement letter.

 


 

18. If a stockholder sues a CPA for common law fraud based on false statements contained in the

 

financial statements audited by the CPA, which of the following, if present, would be the

 

CPA?s best defense?

 


 

a. The stockholder lacks privity to sue.

 

b. The false statements were immaterial.

 

c. The CPA did not financially benefit from the alleged fraud.

 

d. The client was guilty of contributory negligence.

 


 

19. Under common law, which of the following statements most accurately reflects the liability

 

of a CPA who fraudulently gives an opinion on an audit of a client?s financial statements?

 


 

a. The CPA is liable only to third parties in privity of contract with the CPA.

 

b. The CPA is liable only to known users of the financial statements.

 

c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

 


 

d. The CPA probably is liable to the client, even if the client was aware of the fraud and

 

did not rely on the opinion.

 


 

20. One of the elements necessary to hold a CPA liable to a client for negligently conducting an

 

audit is that the CPA:

 


 

a. acted with scienter.

 

b. was a fiduciary to the client.

 

c. failed to exercise due care.

 

d. executed an engagement letter.

 


 

21. In which of the following circumstances would an auditor be most likely to express an

 

adverse opinion?

 


 

a. Information comes to the auditor?s attention that raises substantial doubt about the

 

entity?s ability to continue as a going concern.

 

b. The chief executive officer refuses the auditor access to minutes of board of directors?

 

meetings.

 

c. Tests of control show that the entity?s internal controls are so poor that they cannot be

 

relied on.

 

d. The financial statements are not in conformity with FASB statements regarding the

 

capitalization of leases.

 


 

22. During a review o the financial statements of a nonpublic entity, an accountant becomes

 

aware of the lack of adequate disclosure that is material to the financial statements. If

 

management refuses to correct the financial statement presentations, the accountant should

 


 

a. issue an adverse opinion.

 

b. issue an ?except for? qualified opinion.

 

c. disclose this departure from GAAP in a separate paragraph of the report.

 

d. express only limited assurance on the financial statement presentations.

 


 

 

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