Question

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.

3-do all of the listed actions.

4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.

3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.

2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.

3-internal controls are not adequate to prevent or detect material errors.

4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.

2-a less expensive audit.

3-reduced substantive testing.

4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.

2-approval of items for payment.

3-authorized request for goods and services.

4-cash receipts.

Answer 1

Answers: (a) 4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

(b) 2-amount of misstatement on the financial statements that would influence a decision maker.

(c) 1-contact the predecessor auditor

(d) 4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization

(e) 4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect

(f) 3-reduced substantive testing

(g) 4-cash receipts