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Home Questions Chapter 6 Multiple choice questions

Multiple choice questions

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This activity contains 23 questions.

Which of the following is one of the procedures in the planning phase?

Prepare client proposal.

Select staff to perform the audit.

Determine materiality.

Determine need for other professionals.

Inquiries of management and personnel include discussion of all the following




Audit procedures needed.


The standards given in Understanding the Entity and Its Envir

onment and Assessing theRisks of
Material Misstatement (ISA 315) emphasizes:
Obtaining an understanding of control risk.

Reports to federal regulators.

Procedures for sampling audit tests.

Obtaining an understanding of business risks and signicant risks.

Information acquired during the planning phase about business operations may include all of the
following except:

Acquisition and disposals of business divisions.


Nature of revenue sources.

Which of the following isnot a procedure to obtain an understanding of risk in the planning stage
(described in ISA 315)?
Inquiries of management.

Observation and inspection.

Procedures for sampling audit tests.

Analytical procedures.

ISAs require that ________________________ discuss the susceptibility of the entity

s nancial
statements to material misstatement.
The engagement partner and an outside partner.

Auditee management and the engagement partner.

Key engagement team members.

The engagement partner and other key engagement team members.

Important investment transactions for which information should be gather

ed include all the
following except:
Acquisitions, mergers and disposals of business divisions.

Capital investment activities.

Investments of the audit staff.

Types of major investment by the company.

When investigating the companys legal position, the auditor should look at:

Minutes of the board of directors and stockholders meetings.

Attorney billings.

The auditees website.

Customs import documents.

Signicant conditions, events, circumstances or actions that could adversely affect the entitys
ability to achieve its objectives and execute its strategies create:
Control risks.

Management risks.

Detection risks.

Business risks.

Auditors may use a strategy-oriented framework, which involves the following steps:

Use the comprehensive business knowledge decision frame to develop expectations about
key assertions embodied in the overall nancial statements.
Measure and benchmark process performance.

Understand the risks that threaten the clients business objectives.

Compare reported nancial results to future plans and design additional audit test work ot
address any gaps.
The rst three answers.

Misstatements or omissions are material if they could reasonably be expected to inuence

_____________ taken on the basis of the nancial statements.
Pervasiveness of the item.

Primary qualitative characteristics.

Economic decisions of users.

The content of the item or error.

Judgements about materiality are made in light of surrounding circumstances, and are affected by
the ______________ of a misstatement, or a combination of both.
Signicance or nature.

Size or characteristics.

Signicance or size.

Size or nature.

Inherent risk, control risk and detection riskare components of:

Audit risk.

Auditors risk.

Business risk.

Materiality risk.

In determining what a signicant risk is, the audit
or considers a number of matters, including all
the following except:
The degree of subjectivity in the measurement of nancial information e
r lated to the risk.

Whether the risk is related to recent signicant accounting developments and, therefore,
requires specic attention.
The likelihood of the occurrence of the risk.

The complexity of transactions that may give rise to the risk.

The audit standards dene fraud as an intentional act by one or more individuals among
management, those charged with governance, ___________________ , involving the use of deception
to obtain an unjust or illegal advantage.
Employees, vendors or third parties.

Employees or others.

Employees or third parties.

Employees or vendors.

A situation where someone believes they have a favourable or promising combination of

circumstances to commit an undetectable fraud is the description of:
Perceived opportunity.

Management fraud.

Perceived pressure.


The auditor must obtain an understanding ofthe controls of the service organisation used by the
auditee from one or more of the following procedures except:
Using another auditor to perform procedures that will provide the necessary controls
information at the service organisation.
Visiting the service organisation and performing procedures.

Obtaining a Type 1 or Type 2 report.

Contacting the service organisations auditor.

Business operations, types of investments, capital structure and nancing, and ownership
structures are areas that are considered when obtaining an understanding of:
Measurement and review of nancial performance.

The nature of the entity.

Objectives and strategies.

Accounting policies.

Detection risk is:

The risk that an auditors substantive procedures will not detect a misstatement that exists
and that could be material.
The risk that the auditor expresses an inappropriate audit opinion when the nancial
statements are materially misstated.
The risk that a misstatement that could occur in an assertion, and that could be material, will
not be prevented, or detected and corrected, on a timely basis by the entitys internal control.
The susceptibility of an assertion to misstatements that could be material, before
consideration of any related controls.

Which of the following might be a commonly used guidelineelated

r to a nancial statement
materiality base?
15% to 20% of current assets.

5% to 10% of long-term liabilities.

1/2% to 2% of total assets.

2% to 4% of net income before taxes.

Risk assessment procedures that may indicate fraud include inquiries of management er garding:

If there are any relatives of the executives employed in the entity.

Whether management knows of any fraud in the entity.

Internal control effectiveness.

If there is fraud elsewhere in their industry.

The difference between a Type 1 and Type 2 internal control report is that the Type 2 report and not
a Type 1 report includes:
Managements description of the service organisation, service organisations system, control
objectives and related controls.
A report by the service auditor conveying their opinion on the description of the service
organisations system, etc. and the operating effectiveness of the controls.
The report on internal controls given to those charged with corporate governance.

A description of the service auditors tests of the controls and the results thereof.

Typically, an audit planning memorandum would contain the following sectionsexcept:

Audit approach.

Objectives of the audit.

Background information.

Assessment of business risk.

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