Section D Question Sets

which of the following statements would most likely appear in an auditor’s engagement letter

management is responsible for making all financial records and related information available to us

which of the following statements most likely would be included in an engagement letter from an auditor to a client

the CPA firm will involve information technology specialists in the performance of the audit

an accountant had begun to audit the financial statements of a nonissuer. which of the following circumstances most likely would be considered a reasonable basis of agreeing to the entity’s request to change the engagement to a compilation

the entity’s principal creditors no longer require the entity to furnish audited financial statements

a CPA started to audit the financial statements of a nonissuer. after completing certain audit procedures, the client request the CPA to change the engagement to a review because of a scope limitation. the CPA concludes that there is reasonable justification for the change. under these circumstances, the CPA’s review report should include a

statement that a review is substantially less in scope than an audit

which of the following matters generally is included in an auditor’s engagement letter

management’s responsibility for the fair presentation of the financial statement

an auditor’s engagement letter most likely would include

management’s acknowledgment of its responsibility for maintaining effective internal control

which of the following is not a required part of the understanding between the client and the auditor

management’s responsibility to correct deficiencies in internal control identified by the auditor

an engagement letter generally includes which of the following

the objectives of the audit

the responsibilities of the auditor

the responsibilities of management

fee arrangements

any limitations of the engagement

in order to avoid violating the AICPAs ban on Contingent Fees an engagement letter should specify the specific dollar amount being charged to the client

false

an accountant who had begun an audit of the financial statements of a nonissue was asked to change the engagement to a review because of a restriction on the scope of the audit. if there is reasonable justification for the change, the accountant’s review should not include reference to the

scope of limitation that caused the changed engagement or original engagement that was agreed to

an auditor’s engagement letter most likely would include a statement regarding

management’s responsibility to provide certain written representations to the auditor

when an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except

whether there has been any turnover of the component’s board members

which of the following matters does an auditor usually include in the engagement letter

arrangements regarding fees and billing

which of the following is most likely to occur first with respect to an audit engagement

client acceptance procedures as part of the firm‘s quality control procedures

the purpose of an engagement letter is to

document the terms of engagment

which of the following statements is not true about engagement letters

an engagement letter generally includes specific audit procedures

an auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. this understanding generally includes

the auditor’s responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor’s attention

an auditors engagement letter should include acknowledgment of management’s responsibility for maintaining effective internal control

true

auditing standards require audit termination decision be in writing

false

the understanding with the client regarding a financial statement audit generally includes which of the following matters

the responsibilities of the auditor

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

schedules and analyses to be prepared by the client’s employees

which of the following statements would least likely appear in an auditor’s engagement letter

after performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement

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

an engagement letter

an auditor’s engagement letter most likely would include a statement that

limits the auditor’s responsibility to detect errors and fraud

at a minimum, an understanding with a client should include

the objectives and limitations of the engagement, as well as the responsibilities of management of the auditor

which of the following statements is correct about the auditor’s use of the work of a specialist

the auditor should obtain an understanding of the methods and assumptions used by the specialist

when assessing the competence of the internal auditors, an independent CPA should obtain information about the

quality of the internal auditors’ working paper documentation

in connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. which of the following tasks could most appropriately be delegated to the internal audit staff

preparation of schedules of negative accounts receivable responses

under which of the following circumstances would an auditor be considered to be using the work of a specialist

the auditor engages a lawyer to interpret the provisions of a complex contract

after testing a client’s internal control activities, an auditor discovers a number of deficiencies in the internal controls. under these circumstances the auditor most likely would

increase the assessment of control risk and increase the extent of substantive test

which of the following is true about the auditor’s use of an internal auditor and a specialist

the auditor must assess the competency of both the internal auditor and the specialist

in designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the

financial statement assertions

as part of understanding internal control, an auditor is not required to

obtain knowledge about the operating effectiveness of internal control

during an audit an internal auditor may provide direct assistance to an independent CPA in

obtaining an understanding of internal control

performing tests of controls

performing substantive test

the work of internal auditors may affect the independent auditor’s

nature, timing, and extent of the audit

an independent auditor might consider the procedures performed by the internal auditors because

there are employees whose work might be used to modify the nature, timing, or extent of audit procedures to be performed by the independent auditor

in planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to

identify the types of potential misstatements that could occur

which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations

the auditor is required to understand the objectives and scope of the actuary’s work

an auditor evaluates the existing system of internal control in order to

determine the extent of substantive test which must be performed

how the the auditor refer to a specialist’s work in the audit report

mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions

which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit

determining the extent of involvement of the client’s internal auditors

which of the following is always necessary in a financial statement audit

analytical procedures

risk assessment procedures

in an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive test of transactions. under these circumstances, the auditor most likely would

perform tests of controls to support a lower level of assessed control risk

which of the following statements is correct regarding an independent auditor’s reliance on a client’s internal audit staff

an independent auditor should assess the organizational status of the director of internal audit

before the external auditors decide to use the work performed by internal auditors, the external auditors must first assess

the competence and objectivity of the internal audit function

obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

implemented

when an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate

testing the operating effectiveness of such controls in the current audit

in which of the following circumstances is an auditor most likely to rely on work done by internal auditors

for financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence

which of the following statements is correct concerning an auditor’s use of the work of a specialist

the work of a management specialist who has a contractual relationship with the client may be acceptable under certain circumstances

during an audit of a nonissuer’s financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if

substantive procedures alone cannot provide sufficient appropriate audit evidence

misstatements discovered by the auditor were immaterial in the aggregate in prior years. such misstatements should be

considered in the evaluation of audit findings in the current year

if new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should

raise or lower the materiality level as appropriate to the situation

medium to high level of tolerance for misstatements and most interested in earnings: overall materiality

profit before tax \* applicable percentage

\
250,000 \* 0.06 = 15,000

at what stage of an audit is an auditor most likely to consider materiablity

risk assessment

reporting

fieldwork

planning

expects high likelihood of uncorrected and undetected misstatements, used 1% of revenue as benchmark to calculate overall materiality

applicable bench mark \* applicable percentage

\
1,325,000 \* 0.01 = 13,250 (overall materiality)

\
overall materiality \* applicable percentage

\
13,250 \* 0.6 = 7,950 (performance materiality)

which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client’s financial statements

differences between reconciliations of control accounts and subsidiary records are not investigated

an auditor who uses 7% of income before taxes as a basis for overall materiality would be basing judgement on

relative size

in order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, an auditor should establish a

component materiality that is lower than the materiality for the group financial statements

according to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements

the client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed timeframe

which of the following would an auditor most likely use in determining the auditor’s preliminary judgement about materiality

the entity’s financial statements of the prior year

which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements

an illegal payment to a foreign official that was not recorded

an auditor has set the materiality level for the financial statements as a whole at $125,000. which of the following misstatements would the auditor most likely consider material

the client did not disclose $45,000 of related party transactions in the footnotes

auditors of issuers are required to use the materiality tables from the Auditing Standards on Materiality (ASMs) developed by the PCAOB

false (no such thing as ASMs; materiality is professional judgement)

according to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement

the dollar amount of the error

in considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating

$10,000 (lesser amount)

in developing an overall audit strategy, an auditor should consider

preliminary evaluations of materiality, audit risk, and internal control

an auditor of a nonisser is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it

changes the company’s operating results from a net loss to a net incom

which of the following is not correct about materiality

an auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

concept of materiality

information that is likely to be viewed by a reasonable investor as altering the mix of available information

what is not a way in which auditors use the concept of overall materiality

as a guide for assessing control risk

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

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

what GAAS principle is most directly associated with materiality

performance principle

materiality in a financial statement audit

materiality levels are generally considered in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements

an external confirmation sent to a bank

requests info about interest rates paid on deposits and charged on loans

is relevant to the audit of interest revenue and expense

requests info about the bank balances and load amounts

analytical procedures performed during an audit indicate that AR doubled since the end of the prior year. however, allowance for doubtful accounts as a percentage of AR remained about the same. which of the following client explanations would satisfy the auditor

the client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet

which audit procedure is being used when an auditor checks that calculation in a client-prepared spreadsheet

recalculation

an entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. according to generally accepted gov auditing standards, what would this situation typically indicate to the auditors

a heightened risk of fraud

which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks

testing the operating effectiveness of relevant controls would not be efficient

which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion

the auditor’s judgement

which of the following procedures would an auditor most likely use to identify unusual year-end transactions

performing analytical procedures

an auditor’s analytical procedures indicate a lower than expected return on an equity method investment. this situation most likely could have been caused by

an error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value

the objective of test of details of transactions performed as substantive tests is to

detect material misstatements in the financial statements

which of the following procedures would an auditor most likely perform when auditing the statement of cash flows

reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts

in the context of an audit of financial statements, substantive tests are audit procedures that

may be either test of transactions, direct test of financial balances, or analytical test

when auditing the existence assertion for an asset, auditors proceed from the

general ledger back to the supporting original transaction documents

in an audit of financial statements for which an auditor’s assessment of risk of judgemental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions

perform substantive procedures for all relevant assertions related to each material class of transactions

if an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

an inspection

confirmations of AR provide evidence primarily about which two assertions

existence and rights and obligations

an auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following

the planned level of assurance at the relevant assertion level

auditors try to identify predictable relationships when using analytical procedures. relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence

interest expense

what type of audit procedures does interviewing the controller and verifying the proper preparation of a bank reconciliation by reviewing the sign off

inquiry and inspection of records

the understatement of sales and AR is best uncovered by

test of transactions for shipments made but not recorded

each of the following might, in itself, form a valid basis for an auditor to decide to omit a test except that

difficulty and expense involved in testing a particular item

the objective of tests of details of transactions performed as test of controls is to

evaluate whether internal controls operated effectively

an auditor has identified a risk of material misstatement due to fraud related to the inventory function. which is least likely to be an appropriate response

requesting that management more closely monitored the inventory function

an auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. given this result, which of the following expectations of recorded amounts would be unreasonable

a decrease in retained earnings

the particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as

audit procedures

which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit

relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts

audit documentation should provide support for

the audit report

ordinarily, audit documentation can be provided to someone else only with the express permission of the client

true