Chapter 3 - Audit Exam 2

What factor most likely would cause an independent auditor to decide not to accept a new audit engagement?

Managements disregard of its responsibility to maintain an adequate internal control environment.

Before accepting an audit engagement, what should a successor auditor inquire about from the predecessor

Reasons for the change of auditors

What is correct regarding predecessor-successor communications?

The successor auditor must obtain permission from the entity before contacting the predecessor auditor. 

Preliminary engagement activities include all execpt

Ensuring that there is an independent audit committee

Why do auditors prepare engagement letters?

To communicate and clarify the expectations and responsibilities of both the auditor and client.

A written understanding between auditor and entity regarding responsibility for discovering non compliance is in a(n)

Engagement Letter

Which factor is least Important in determining reliance on internal auditors work?

The nature of the audit software documentation used by internal auditors

Which most likely indicates the existence of related parties?

Borrowing money at an interest rate substantially below market rate.

For which laws and regulations does the auditor have the same responsibility ad for errors and fraud?

Laws and regulations that have a direct and material effect on the financial statements. 

For which laws and regulations does the auditor have the same responsibility as for errors and fraud?

Laws and regulations that have a direct and material effect on the financial statements

When planning an audit, what must the auditor determine?

Overall materiality for audit purposes

Which statement about non-compliance is correct?

The auditors responsibility to detect non-compliance with laws that have a direct and material effect is the same as for errors and fraud.

The engagement partner reviews the work of team members to evaluate:

Performance, whether objectives were achieved, and whether conclusions are supported. 

Which is not typical supervisory activity for an audit?

Performing detailed testing of the accounts payable account.

A dual purpose test is

A procedure that serves as both a test of control and a substantive test of transactions.

The concept of materiality in a financial statement audit

Depends partly on how users of financial statements may be influenced by misstatements

The first step in applying materiality to an audit is

Determine a materiality level for the overall financial statements

Which is not a qualitative factor that may affect materiality?

Firm policy sets materiality at 4% of profit before tax

Performance materiality is

Materiality used to establish scope for procedures for individual balances or disclosures. 

When misstatements exceed overall materiality, what should the auditor do?

Require adjustments of financial statements and modify the opinion if management refuses

Engagement Risk

the risk of association with a client whose management lacks integrity or may harm the auditor’s reputation

Predecessor Auditor

the former CPA firm that previously audited the client’s financials.

Successor Auditor

the new auditor who replaces the predecessor in performing an audit.

Preliminary Engagement Activities

steps to evaluate client integrity, independence, and engagement terms before fieldwork begins

Engagement Letter

a written agreement outlining audit responsibilities, objectives, and limitations.

Internal Auditors

employees who provide independent assurance on the effectiveness of internal controls.

Related Parties

entities or individuals with influence over financial or operating decisions.

Direct and Material Effect Laws

regulations whose violations directly impact financial statement accuracy.

Audit Planning

determining the strategy, timing, and scope of audit procedures.

Materiality

the magnitude of an omission or misstatement that could influence users’ decisions.

Noncompliance

violations of laws or regulations by the entity being audited

Engagement Partner

the lead auditor responsible for signing the audit report

Audit Supervision

directing and reviewing audit work to ensure quality and compliance.

Dual-Purpose Test

an audit procedure that tests both controls and substantive details.

Performance Materiality

an amount lower than overall materiality used for specific accounts or disclosures.

Overall Materiality

the highest level at which misstatements may exist without impacting users’ decisions.

Qualitative Materiality Factors

characteristics of misstatements that make them significant beyond size.

Audit Opinion Modification

a change in the auditor’s report due to material misstatements or scope limitations.