Question 1 (3 points) Ward & Clark, CPAs discovered that an audit client overstated the value of its inventory at one of its divisions. Further, Ward & Clark suspect that this may have been done intentionally. Which of the following would NOT be a proper response to this situation? O Contact senior management of the company to make them aware of the problem Warn the company's bank that there may be misstatements in the inventory account. Do additional testing of the inventory at other branches. Consider withdrawing from the audit engagement. Question 2 (3 points) Listed below are several issues that resulted in a material misstatement in the financial statements. Which of these WOULD NOT be considered an error? O an accountant made a mistake when creating a formula in the inventory valuation spreadsheet which affected the calculation of the net realizable value of the inventory at the end of the year, there was a truckload of inventory in transit between the warehouse and a branch location that was inadvertently included in the physical inventory of both locations O an accounts payable clerk has a friend that works at a vendor that sells raw materials to the company. The clerk directs his friend to send occasional duplicate invoices to the company, which the clerk approves for payment. The clerk and his friend split the extra amounts paid to the vendor when evaluating the allowance for doubtful accounts, the company management evaluate government data about the future economic condition of the region. The management misunderstood the data and did not interpret the data correctly, which resulted in an understatement in the allowance for doubtful accounts Question 3 (3 points) Abernathy & Foote, CPAs, (A&F) is auditing the financial statements of D'Augusta Company. In the audit of the accounts receivable account, the audit firm chose a sample of 40 customer accounts to confirm. In total, the accounts receivable balance of D'Augusta was materially misstated, with 10% of the individual customer accounts being misstated. However, only one of the 40 accounts chosen by (A&F) was misstated, and accordingly, A&F concluded that the accounts receivable account was not misstated. This scenario best illustrates which of the following concepts: O control risk inherent risk sampling risk Ononsampling risk O engagement risk Question 4 (3 points) On the audit of Waymire Company, the auditors decided they were willing to take a 4% risk of issuing an inappropriate audit opinion on the company's financial statements. After studying the company's internal controls, the auditors decided that there was a 90% probability that the internal controls would work effectively in prevent/detecting misstatements in the financial statements. In addition, the auditors thought that the financial statements were very susceptible to misstatement before considering the internal controls, and accordingly, they assigned this risk at the maximum level. The auditors use a quantitative approach to evaluating planned detection risk. Given these assessments, what is the appropriate level of planned detection risk? (round to nearest one-tenth of one percent). 4.4% 3.6% 36,0% 4.0% 40.0% Question 5 (3 points) Which of the following procedures would be least likely to be used when assessing an entity's business risks? Observation of entity activities Confirmation with third parties Inspecting the company's documents and records Inquiry of management Analytical procedures Question 6 (3 points) All of the following would increase audit risk, except: the company implemented a new accounting system the inventory turnover ratio increased from the prior year the number of days of sales outstanding in accounts receivable has increased the company acquired a new subsidiary during the year