Studied by 9 people
c. False, False
The audit plan sets the scope, timing and direction of the audit, and guides the development of the more detailed audit strategy.
The audit strategy is more detailed than the audit plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
a. True, True
b. True, False
c. False, False
d. False, True
d. To enable proper on-the-job training of employees.
Which of the following is not one of the three main reasons why the auditor should properly plan engagements?
a. To enable the auditor to obtain sufficient appropriate evidence.
b. To avoid misunderstandings with the client.
c. To help keep audit costs reasonable.
d. To enable proper on-the-job training of employees.
a. D, B, C, A
In what order should the following steps occur?
A. Set preliminary judgment of materiality and performance materiality.
B. Understand the client's business and industry.
C. Perform preliminary analytical procedures.
D. Accept the client and perform initial audit planning.
a. D, B, C, A
b. B, A, C, D
c. B, D, A, C
d. D, C, B, A
a. client business risk
The auditor uses knowledge gained from the understanding of the client's business and industry to assess
a. client business risk
b. control risk
c. inherent risk
d. audit risk
c. True, True
As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
The risk of material misstatement is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit.
a. True, False
b. False, True
c. True, True
d. False, False
b. Request that bank balances be confirmed.
Initial audit planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy.
b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client's reason for the audit.
d. Methods to be used in selecting items for testing.
Which of the following will an auditor least likely discuss with the former auditors of a potential client prior to acceptance?
a. Integrity of management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. Methods to be used in selecting items for testing.
b. Disclose the fact that the permission to disclose is denied by the client.
If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:
a. Keep silent of the denial.
b. Disclose the fact that the permission to disclose is denied by the client.
c. Disclose adequately to proposed auditor all noncompliance made by the client.
d. Seek legal advice before responding to the proposed auditor
b. The commencement of the engagement.
It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before
a. The performance of substantive testing.
b. The commencement of the engagement.
c. The completion of audit.
d. Before the issuance of audit report.
a. Yes, Yes
Which is usually included in an engagement letter?
The objectives of the engagement | Identification of the financial reporting framework used by management |
|---|---|
a. Yes | Yes |
b. No | No |
c. Yes | No |
d. No | Yes |
d. All of the above
When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on the revised engagement
a. Should not contain a separate paragraph that refers to the original engagement.
b. Should not refer to any procedures that may have been performed in the original engagement.
c. Omits reference to the original engagement.
d. All of the above
c. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should
a. Continue with the revised engagement, but make explicit reference about the original engagement.
b. Continue with the revised engagement, and not make explicit reference about the original engagement.
c. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
d. Withdraw from the engagement.
b. guides the development of the audit plan.
The preliminary audit strategy
a. is set before the auditor understands the client's reasons for the audit.
b. guides the development of the audit plan.
c. is determined after the engagement staffing is set.
d. is the detailed steps to be followed for the substantive audit tests.
c. the client's business risk and the risk of material misstatements in the financial statements.
In order to obtain an understanding of the client's business, the audit firm will consider
a. inherent and control risk of the client.
b. audit risk to the CPA firm.
c. the client's business risk and the risk of material misstatements in the financial statements.
d. the CPA firm's potential ongoing revenue from the audit client.
c. True, True
Many risks are common to all clients in certain industries.
Management's philosophy and operating style influence the risk of material misstatements in the financial statements.
a. True, False
b. False, True
c. True, True
d. False, False
b. of the lack of independence between the parties.
Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because
a. of the unique classification of related-party transactions required on the balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.
a. an advance of one week's salary to an employee
Which of the following would most likely not be classified as a related-party transaction?
a. an advance of one week's salary to an employee
b. sales of merchandise between affiliated companies
c. loans or credit sales to the principal owner of the client company
d. exchanges of equipment between two companies owned by the same person
d. all of the above.
A tour of the client's facilities provides the auditor an opportunity to
a. meet key personnel.
b. observe operations.
c. assess physical safeguards over assets.
d. all of the above.
c. minutes.
An official record of meetings of the board of directors and stockholders is included in the corporate
a. bylaws.
b. charter.
c. minutes.
d. license.
a. official record of the meetings of the board of directors and the stockholders
Which of the following best describes the corporate minutes of an entity?
a. official record of the meetings of the board of directors and the stockholders
b. unofficial record of the meeting of the board of directors
c. official record of management meeting with investors and creditors of the company
d. unofficial record of the board of directors' meetings
d. all of the above.
Auditors should understand client objectives related to
a. reliability of financial reporting.
b. effectiveness and efficiency of operations.
c. compliance with laws and regulations.
d. all of the above.
d. ratio analysis and benchmarking against key competitors are utilized.
When analyzing a client's performance measurement system,
a. only income statement numbers are used.
b. inherent risk of financial statement misstatements may be decreased if the performance measurement system encourages aggressive accounting.
c. the auditor is likely to decrease the extent of testing if the client has set unreasonable objectives.
d. ratio analysis and benchmarking against key competitors are utilized.
b. Investigation of significant variations and unusual relationships.
The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the:
a. Vouching of all data supporting various ratios.
b. Investigation of significant variations and unusual relationships.
c. Comparison of client-computed statistics with industry data on a quarterly and full-year basis.
d. Recalculation of industry date.
c. Enhancing the auditor’s understanding of the client’ s business required to identify areas of heightened risk.
Analytical procedures used in planning an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’ s business required to identify areas of heightened risk.
d. Assessing the adequacy of the available evidence.
d. reconciling equipment dispositions with the equipment master schedule
Which of the following would not be classified as an analytical procedure?
a. benchmarking the company's profitability ratios against others in the industry
b. preparing common size financial statements
c. calculating income statement account balances as a percent of sales when the level of sales has changed from the prior year
d. reconciling equipment dispositions with the equipment master schedule
c. Square footage of selling space.
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
a. Turnover of personnel in the accounting department.
b. Objectivity of audit committee members.
c. Square footage of selling space.
d. Management's plans to repurchase stock.
a. investigate the possibility the client may have made an error in their cost of goods sold computation.
When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should
a. investigate the possibility the client may have made an error in their cost of goods sold computation.
b. assist management in developing greater cost efficiencies in their product line.
c. prepare a going concern opinion for the client.
d. advise the client to have extensive disclosure to alleviate investor concerns.
c. Payroll expense
Auditors try to identify predictable relationships when using analytical procedures. Which of the following accounts would most likely yield the highest level of evidence regarding relationships that involve transactions?
a. Accounts payable
b. Accounts receivable
c. Payroll expense
d. Advertising expense
a. Set materiality for the financial statements as a whole.
Which of the following is part of planning?
a. Set materiality for the financial statements as a whole.
b. Estimate total misstatement in the segment.
c. Estimate the combined misstatement.
d. Compare the combined estimated with preliminary judgment.
b. Users of the financial statements.
Materiality is a matter of professional judgment influenced by the needs of
a. Management of the entity.
b. Users of the financial statements.
c. Auditor of the financial statements.
d. Regulatory bodies.
a. Materiality is determined by references to guidelines established by the AASC and PICPA.
Which one of the following statements is incorrect concerning the concept of materiality?
a. Materiality is determined by references to guidelines established by the AASC and PICPA.
b. Materiality depends on the size and nature of an item or misstatement relative to other items in the financial statements.
c. Materiality thresholds may change between the planning and review stages of an audit.
d. Materiality is a matter of professional judgment.
d. the auditor must bring any material misstatements to the client's attention.
When dealing with materiality,
a. if the client refuses to correct a material misstatement, the auditor is required to adjust the financial statements.
b. management is responsible for determining whether financial statements are materially misstated.
c. materiality must be determined as a percentage of sales.
d. the auditor must bring any material misstatements to the client's attention.
c. to help plan the appropriate evidence to accumulate
Why do auditors establish a preliminary judgment about materiality?
a. to determine the appropriate level of staff to assign to the audit
b. so the client can know what records to make available to the auditor
c. to help plan the appropriate evidence to accumulate
d. to finalize the control risk assessment
d. All of the above.
In determining a materiality level for the financial statements as a whole, a percentage is often applied to a chosen benchmark as a starting point in that determination. Which of the following factors may affect the identification of an appropriate benchmark?
a. The elements of the financial statements (e.g., assets, liabilities, equity, income, expenses).
b. Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused (e.g., for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets).
c. The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates.
d. All of the above.
d. All of the above.
In determining a materiality level for the financial statements as a whole, a percentage is often applied to a chosen benchmark as a starting point in that determination. Which of the following factors may affect the identification of an appropriate benchmark?
a. Entity’s ownership structure and financing.
b. Volatility of the benchmark.
c. The need to normalize the benchmark.
d. All of the above.
a. Yes, Yes, Yes, Yes, Yes
The auditor establishes a materiality level for the financial statements as a whole when developing the overall audit strategy. But identified misstatements below this level are not necessarily immaterial due to qualitative considerations, such as
a. | b. | c. | d. | |
|---|---|---|---|---|
Possible bias of management | YES | YES | YES | YES |
The cumulative effect in the future | YES | YES | YES | NO |
Regulatory or contractual requirements | YES | YES | YES | YES |
Occurrence of fraud or illegal acts | YES | NO | NO | YES |
Whether the misstatement conceals a negative trend in profitability | YES | YES | NO | NO |
c. profit before tax
Which of the following is the primary basis used to decide materiality for a profit-oriented entity?
a. net sales
b. net assets
c. profit before tax
d. all of the above
d. the application of guidelines requires considerable professional judgment.
When determining materiality,
a. the preliminary judgment about materiality can be increased, but not decreased during the audit.
b. auditing standards provide specific materiality guidelines to practitioners.
c. only one benchmark can be used.
d. the application of guidelines requires considerable professional judgment.
a. True, False
CPA firms can establish policy guidelines to help their auditors determine materiality.
Profit before taxes is the normal base used to determine materiality for a not-for-profit organization.
a. True, False
b. False, True
c. True, True
d. False, False
b. Performance materiality refers to the amounts set by the auditor at higher than the materiality level for particular classes of transactions, account balances or disclosures where the materiality level might otherwise mean that such items are not tested.
Having set the level of materiality for the financial statements as a whole, the auditor now turns his attention to determining performance materiality. Which of the following statements about performance materiality is NOT true?
a. Performance materiality is used to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole to an acceptable level
b. Performance materiality refers to the amounts set by the auditor at higher than the materiality level for particular classes of transactions, account balances or disclosures where the materiality level might otherwise mean that such items are not tested.
c. Once the materiality for the financial statements as whole has been set, a lower level of performance materiality is determined by the auditor using his or her professional judgement.
d. The performance materiality level is affected by the auditor's understanding of the entity and the nature and extent of misstatements identified in prior audits.
c. Both a and b
Performance materiality should be considered when
a. Identifying and assessing the risks of material misstatements
b. Determining the nature, timing and extent of auditor’s further procedures
c. Both a and b
d. Neither a nor b
b. Tolerable misstatement.
Which of the following terms refers to the application of performance materiality when performing variables audit sampling procedure (i.e., test of details)?
a. Tolerable deviation rate.
b. Tolerable misstatement.
c. Expected deviation rate.
d. Expected misstatement.
c. Equal
Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) _____ effect on the balance sheet.
a. Reduced
b. Undetermined
c. Equal
d. Increased
b. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.
Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?
a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.
c. Auditors expect to identify overstatements as well as understatements in the accounts.
d. Relative audit costs affect the allocation.
d. all of the above
The materiality level for the financial statements as a whole (or the materiality level for a particular class of transactions, account balance or disclosure, if applicable) may need to be revised (adjusted either downward or upward) as a result of the following
a. a change in circumstances that occurred during the audit
b. new information
c. a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.
d. all of the above
b. required
Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
a. permitted
b. required
c. not allowed
d. strongly encouraged
c. Known
________ misstatements are those where the auditor can determine the amount of the misstatement in the account.
a. Potential
b. Likely
c. Known
d. Projected
a. No, Yes, Yes
Likely misstatements can result from
Computation of the sampling error for the cash account | Differences between management's and an auditor's judgment about account balances | Projections of misstatements based on an auditor's tests of a sample from a population | |
|---|---|---|---|
a. | NO | YES | YES |
b. | YES | YES | NO |
c. | NO | NO | YES |
d. | YES | NO | NO |
b. estimate of the total known and likely misstatements is less than a material amount.
When evaluating the audit findings, the auditor should be satisfied that the
a. amount of known misstatement is documented in the management representation letter.
b. estimate of the total known and likely misstatements is less than a material amount.
c. estimate of the total likely misstatement includes sample error.
d. amount of known misstatement is acknowledged and recorded by the client.
c. True, True
The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.
Total estimated misstatements include known misstatements and projected misstatements plus a sampling error.
a. True, False
b. False, True
c. True, True
d. False, False
