Question
Oakland Hills (OH) is a ski resort, and the revenue it reports each year is greatly affected by the temperature and snowfall in the winter
Oakland Hills (OH) is a ski resort, and the revenue it reports each year is greatly affected by the temperature and snowfall in the winter months. The variation in revenues from year to year is difficult for management, as their bonus is based on increasing income year over year. This situation best describes which kind of risk?
Multiple Choice
- Inherent risk
- Audit risk
- Detection risk
- Control risk
As part of the audit of property, plant, and equipment, you review the sales agreement for a new building to confirm that the auditee's name appears as the buyer. This procedure aims to cover which of the following assertions?
Multiple Choice
- Valuation
- Presentation
- Cut-off
- Ownership
In the audit risk model, control risk refers to:
Multiple Choice
- the probability that audit procedures will not catch a misstatement that has occurred and was not caught by the auditee's internal control.
- the probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.
- the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially misstated.
- the probability that management's internal controls do not catch a misstatement once it has occurred.
The revenue process of a company generally includes these accounts.
Multiple Choice
- Cash, notes payable, and capital stock
- Inventory, general expenses, and payroll
- Inventory, accounts payable, and general expenses
- Cash, accounts receivable, and sales
The CFO of a small business recorded sales before the goods were shipped. He managed to commit this fraud because the accounting system allowed him to override the shipping controls. As a result, the net income increased and the CFO received his bonus. From the above description, what would represent an incentive for the CFO to commit fraud?
Multiple Choice
- The CFO felt that he deserved a bonus due to his hard work for the past year that would not be rewarded otherwise.
- The CFO would receive a bonus if the sales were booked before the year-end.
- The CFO was not aware that recording the sales was incorrect.
- The accounting system had a control weakness that allowed for management override.
Business risk is related to business strategy because:
Multiple Choice
- business risks are events or actions that cause changes in technology.
- business risks are events or actions that may have a negative effect on the audit client's ability to achieve its strategic objectives.
- auditors assess business risk so they can provide their auditees with a business strategy.
- managers frequently change their business risks in response to changes in the business strategy.
The auditor performing the audit risk assessment determined that the audit risk for GXP's current-year audit increased from moderate to high. As a result, the auditor should:
Multiple Choice
- accept the engagement only if GXP agrees to a review-level engagement that would reduce the auditor's liability.
- refuse the mandate for the current year to avoid an audit risk that is too high.
- proceed with the audit in a similar manner to the prior year as this is a recurring engagement and the auditor is familiar with the client.
- adjust the audit work performed in the current year as compared to the prior year to reduce audit risk to an acceptable level.
The risk that the auditors' own work will lead to the decision that material misstatements do not exist in the financial statements, when in fact such misstatements do exist, is:
Multiple Choice
- control risk.
- audit risk.
- detection risk.
- inherent risk.
If the XYZ company reports a $355,000 balance of accounts receivable, the existence assertion means that:
Multiple Choice
- there are no accounts receivable by XYZ that have not been included in the balance.
- all the amounts included in the $355,000 balance represent valid sales on account that are still outstanding and due to the company.
- the receivables have not been sold to another company.
- all the amounts making up the $355,000 balance will be collected in full, in cash.
Auditors find it easier to audit related accounts with a set of coordinated procedures instead of attacking each account on its own because:
Multiple Choice
- CASs require the auditor to proceed this way.
- it represents significant cost savings.
- it is a personal preference.
- predictable relationships should exist among these accounts.
In the audit risk model, inherent risk refers to:
Multiple Choice
- the probability that audit procedures will not catch a misstatement that has occurred and was not caught by the auditee's internal control.
- a misstatement that would probably affect users of the financial statements.
- the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially misstated.
- the probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.
In the audit risk model, audit risk refers to:
Multiple Choice
- the probability that management's internal controls do not catch a misstatement once it has occurred.
- the probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.
- the probability that audit procedures do not catch a misstatement that has occurred and was not caught by the auditee's internal control.
- the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially misstated.
Assertions are used in financial statement auditing for:
Multiple Choice
- supporting the auditor's conclusions and the opinion in the auditor's report regarding what could have gone wrong in the financial statements.
- defining aspects of the classes of transactions, account balances, and disclosures in the financial statements to help auditors specify the impact of business risks on fair presentation.
- providing auditors with independent evidence and reasonable assurance about whether the financial statement information is fairly presented.
- providing specific substantive evidence auditors can rely on to indicate material misstatements.
Harrington coat company produces a wide variety of coats. A change in customer taste in the current year has led to lower sales of coats with real fur trim. Harrington hasn't adjusted the value of the inventory for fur-trimmed coats because the CFO indicated that the change in customer taste is temporary. The assertion that may be materially misstated for Harrington's inventory balance is:
Multiple Choice
- the ownership assertion.
- the completeness assertion.
- the valuation assertion.
- the existence/occurrence assertion.
Management assertions are:
Multiple Choice
- provided to the auditor in the assertions letter, but not disclosed on the financial statements.
- explicitly expressed representations about the financial statements.
- implied or expressed representations about the financial statements.
- stated in the footnotes to the financial statements.
Evelyn is the controller of Mylan Connections (MC), a public relations firm with 50 account managers. Travel expenses for the consultants represent one of the largest expenses for MC. Evelyn does a thorough review of each expense report at the end of the month to ensure that all expenses are valid. The expense reports are then passed on to the VP Operations for his approval. When Evelyn is on vacation, the VP Operations simply approves the expense reports to ensure that there are no delays in reimbursing the consultants. The situation above best describes what kind of risk?
Multiple Choice
- Inherent risk
- Control risk
- Detection risk
- Audit risk
The cash account is included in more than one accounting process because:
Multiple Choice
- cash is the most difficult asset to control.
- all of the business processes involve either receiving or paying out cash at some point.
- cash can be either an asset or a liability.
- cash is the easiest asset to steal.
The auditor assesses a business risk as high when:
Multiple Choice
- it is likely and insignificant.
- it is possible and insignificant.
- it is unlikely and moderate.
- it is likely and significant.
LMN Co. is holding consignment inventory for another company, which must be excluded from LMN's financial statements to comply with:
Multiple Choice
- the valuation assertion.
- the existence/occurrence assertion.
- the ownership/rights and obligations assertion.
- the completeness assertion.
If XYZ Co. records sales revenues in its current-year financial statements for shipments that were made the first day of its following fiscal year, the assertion affected is:
Multiple Choice
- valuation (the sales amounts are not correctly calculated).
- existence/occurrence (the sales did not occur during the fiscal year).
- completeness (the sales were not completed at year-end).
- ownership/rights and obligations (XYZ does not have the rights to the sales at year-end).
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