Chapter 3 Homework

When initiating communications with predecessor auditors, prospective auditors should expect:

Multiple Choice

To take responsibility for obtaining the client’s consent for the predecessor to give information about prior audits.

To conduct interviews with the partner and manager in charge of the predecessor public accounting firm’s engagement.

To obtain copies of some or all of the predecessor auditors’ audit documentation.

All of the choices are correct.

All of the choices are correct.

Generally accepted auditing standards require that auditors always prepare and use:

Multiple Choice
A written planning memorandum explaining the auditors' understanding of the client's business.
A written audit plan.
The written time budgets and schedules for performing each audit.
A written client consent to discuss audit matters with prospective auditors.

A written audit plan

A written audit plan is required to be documented by U.S. GAAS (Clarified Standards SectionAU-C 300.14).

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

Multiple Choice

-The auditors’ need to verify the existence of new sales contracts important for the client’s business.

-The auditors' need to document compliance with generally accepted auditing standards.

-The auditors’ judgment about their independence with regard to the client.

-The auditors’ judgments about materiality.

The auditors' judgment about their independence with regard to the client.

While independence is clearly an important consideration, it is not a factor that dictates the quantity, type and content of audit documentation.

An auditor's permanent file audit documentation most likely will contain:

Multiple Choice
Memoranda of conference with management.
Excerpts of the corporate charter and bylaws.
Internal control analysis for the current year.
The most recent engagement letter.

Excerpts of the corporate charter and bylaws

Excerpts of the corporate charter and bylaws would not change often and would therefore likely be found in the permanent file.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Multiple Choice
Methods of statistical sampling the auditor will use.
Schedules and analyses to be prepared by the client's employees.
Client representations about availability of all minutes of meetings of the board of directors.
Specification of litigation in progress against the client.

Schedules and analyses to be prepared by the client's employees.

Client cooperation should be specified in the engagement letter. This is a key purpose of the letter.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

Multiple Choice
-Reviewing accounting records for recurring transactions occurring near year-end.
-Interviewing internal auditors about their reporting responsibilities.
-Scanning the minutes for significant transactions with members of the board of directors.
-Inspecting communications with the client's legal counsel regarding recorded contingent liabilities.

Scanning the minutes for significant transactions with members of the board of directors.

(Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.)

Which of the following communications is most likely to be written before the balance-sheet date?

Multiple Choice
Confirmation letters to vendors confirming the amounts they owe to the client.
A report to the audit committee on the results of testing of internal control over cash receipts.
An attorney's letter regarding contingent liabilities.
An engagement letter.

An engagement letter

(An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.)

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

Multiple Choice
Being able to fine-tune the audit work for effectiveness and efficiency.
Avoiding the problem of doing more work than necessary (overauditing).
Avoiding the problem of doing too little work (underauditing).
Being able to decide early what type of audit opinion to issue.

Being able to decide early what type of audit opinion to issue

The kind of opinion to issue cannot be determined until all the evidence is obtained and evaluated

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Multiple Choice
Methods of statistical sampling the auditor will use.
Schedules and analyses to be prepared by the client's employees.
Client representations about availability of all minutes of meetings of the board of directors.
Specification of litigation in progress against the client.

Schedules and analyses to be prepared by the client's employees.

Client cooperation should be specified in the engagement letter. This is a key purpose of the letter.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

Multiple Choice
-Reviewing accounting records for recurring transactions occurring near year-end.
-Interviewing internal auditors about their reporting responsibilities.
-Scanning the minutes for significant transactions with members of the board of directors.
-Inspecting communications with the client's legal counsel regarding recorded contingent liabilities.

Scanning the minutes for significant transactions with members of the board of directors.

(Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.)

Which of the following communications is most likely to be written before the balance-sheet date?

Multiple Choice
Confirmation letters to vendors confirming the amounts they owe to the client.
A report to the audit committee on the results of testing of internal control over cash receipts.
An attorney's letter regarding contingent liabilities.
An engagement letter.

An engagement letter

(An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.)

Prior to accepting a new audit engagement, a public accounting firm should:

Multiple Choice
Attempt to contact the predecessor auditors.
Evaluate the integrity of management.
Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement.
All of the choices are correct.

All of the choices are correct

(Prior to accepting a new audit engagement, an audit firm should "attempt to contact the predecessor auditor," "evaluate the integrity of management," and "assess the firm's resources." So, "all of the choices are correct is the correct response.")

An audit plan contains:

Multiple Choice
-Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger.
-Specifications of audit standards relevant to the financial statements being audited.
-Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.
-Specifications of procedures the auditors believe appropriate for the financial statements under audit.

Specifications of procedures the auditors believe appropriate for the financial statements under audit.

This is exactly what an audit plan consists of - that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

When auditing the existence assertion for an asset, auditors proceed from the:

Multiple Choice
Supporting original transaction documents to the general ledger.
General ledger back to the supporting original transaction documents.
Potentially unrecorded items forward to the financial statement amounts.
Financial statement amounts back to the potentially unrecorded items.

General ledger back to the supporting original transaction documents.

By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded.

Confirmations of accounts receivable provide evidence primarily about which two assertions?

Multiple Choice
Existence and completeness.
Existence and rights and obligations.
Completeness and valuation.
Valuation and rights and obligations.

Existence and rights and obligations.

Confirmation of accounts receivable does produce evidence of existence because the customer is admitting that it owes the client money and some evidence of rights to the accounts receivable amount is also supported because the customer is admitting that it owes the client the money (thus, they own the receivable).

With respect to the concept of materiality, which of the following statements is correct?

Multiple Choice
-Materiality is determined by reference to AICPA guidelines.
-Materiality is a matter of professional judgment.
-Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.
-Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

Materiality is a matter of professional judgment.

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following?

Multiple Choice
Key factors that are consistent with prior periods.
Assumptions that are similar to industry guidelines.
Measurements that are objective and not susceptible to bias.
Evidence of a conservative systematic bias.

Evidence of a conservative systematic bias

Auditors are most concerned about bias in management’s accounting estimates, because bias (whether conservative or aggressive) can misstate the financial statements.

Which of the following would be considered an analytical procedure?

Multiple Choice
-Projecting the deviation rate of a statistical sample to the population.
-Testing purchasing, shipping, and receiving cutoff activities.
-Comparing inventory balances to recent sales activities.
-Reconciling physical counts to perpetual records and general ledger balances.

-Comparing inventory balances to recent sales activities.

One example of an analytical procedure is when auditors evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant financial and nonfinancial data. When examining the inventory balance, the auditor would expect a lower balance if there was significant sales activity. Thus, this is an example of an analytical procedure.

Which of the following procedures would a CPA most likely perform in planning a financial statement audit?

Multiple Choice
Compare financial information with nonfinancial operating data.
Make inquiries of the client's lawyer concerning pending litigation.
Perform cutoff tests of cash receipts and disbursements.
Recalculate the prior-years' accruals and deferrals.

Compare financial information with nonfinancial operating data.

Comparing the financial information with nonfinancial operating data is a step that may be completed during preliminary analytical procedures. This is done during the planning phase of the audit.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

Multiple Choice
-They typically use financial and nonfinancial data aggregated at a high level.
-They are often used to develop an auditor's preliminary judgment about materiality.
-They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.
-They often replace the tests of controls that are performed to assess control risk.

-They typically use financial and nonfinancial data aggregated at a high level.

The use of financial and nonfinancial data aggregated at a high level is commonly used during preliminary analytical procedures.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:

Multiple Choice
Not assign any task to the internal auditor because of the internal auditor's lack of independence.
Allow the internal auditor to perform analytical procedures but not be involved with any tests of details.
Allow the internal auditor to perform certain tests of internal controls.
Allow the internal auditor to audit a major subsidiary of the company.

Allow the internal auditor to perform certain tests of internal controls.

If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests, like certain tests of internal control.

Auditors frequently refer to the terms principles and procedures.



Required:

Auditors use different types of audit procedures to gather the evidence necessary to conclude that the risk of material misstatement for each relevant assertion has been reduced to an acceptably low level.



Identify the type of procedure used by auditors for each of the following examples.

(1) Find brokers' invoices and canceled checks showing agreement with record amounts for securities investments
- Document inspection (vouching)

(2) Observe test counting of client's physical inventory taking.
- Observation

(3) Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger.
- Document inspection (tracing)

(4) Ask client personnel about accounting events.
- Inquiry and written representations

(5) Study financial information in relation to nonfinancial information.
- Analytical procedures

(6) Scan expense accounts for credit entries.
- Document inspection (scanning)

(7) Compare financial information with that of prior periods.
- Analytical procedures

(8) Obtain written client representation letter.
- Inquiry and written representations

(9) Scan payroll check lists for unusually large checks.
- Document inspection (scanning)

(10) In internal control questionnaire.
- Inquiry and written representations

(11) Obtain client's lawyer's letter.
- Confirmation

(12) Study predictable financial information patterns (e.g., ratio analysis).
- Analytical procedures

(13) Analyze valuation of receivables by re-aging them by due date.
- Reperformance

(14) Obtain accounts receivable confirmations.
- Confirmation

(15) Compare financial information with budgets and forecasts.
- Analytical procedures

(16) Verify existence of fixed assets by locating them.
- Inspection of tangible assets

(17) Compare financial information to industry statistics.
- Analytical procedures

(18) Recompute the client's calculation of depreciation expense.
- Recalculation