Question 1

Materiality is based only on a quantitative analysis of the financial statements.

Accepted Answer

A) True 
 B)False

Question 2

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the

Accepted Answer

A)  Securities and Exchange Commission. 
B)  Client's legal counsel. 
C)  Stock exchanges where the company's stock is traded. 
D)  Audit committee of the board of directors. 
A)  Securities and Exchange Commission. 
B)  Client's legal counsel. 
C)  Stock exchanges where the company's stock is traded. 
D)  Audit committee of the board of directors.

Question 3

Discuss the purposes for planning the audit and identify the steps that are performed during this phase of the engagement.

Accepted Answer

Engagement planning involves all of the

Question 4

If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas.

Accepted Answer

A) True 
 B)False

Question 5

As generally conceived, the audit committee of a publicly held company should be made up of

Accepted Answer

A)  Representatives of the major equity interests (preferred stock, common stock). 
B)  The audit partner, the chief financial officer, the legal counsel, and at least one outsider. 
C)  Representatives from the client's management, investors, suppliers, and customers. 
D)  Members of the board of directors who are not officers or employees. 
A)  Representatives of the major equity interests (preferred stock, common stock). 
B)  The audit partner, the chief financial officer, the legal counsel, and at least one outsider. 
C)  Representatives from the client's management, investors, suppliers, and customers. 
D)  Members of the board of directors who are not officers or employees.

Question 6

Define the engagement letter and discuss its importance.

Accepted Answer

An engagement letter formalizes the arra

Question 7

During the initial planning phase of an audit, a CPA most likely would

Accepted Answer

A)  Identify specific internal control activities that are likely to prevent fraud. 
B)  Evaluate the reasonableness of the client's accounting estimates. 
C)  Discuss the timing of the audit procedures with the client's management. 
D)  Inquire of the client's attorney as to any unrecorded claims. 
A)  Identify specific internal control activities that are likely to prevent fraud. 
B)  Evaluate the reasonableness of the client's accounting estimates. 
C)  Discuss the timing of the audit procedures with the client's management. 
D)  Inquire of the client's attorney as to any unrecorded claims.

Question 8

Which of the following is an example of a related party transaction?

Accepted Answer

A) An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A. 
B) A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor. 
C) A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A. 
D) A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A. 
A) An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A. 
B) A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor. 
C) A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A. 
D) A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.

Question 9

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

Accepted Answer

A)  The payments violated the client's policies regarding the prevention of illegal acts. 
B)  The client receives financial assistance from a federal government agency. 
C)  Documentation that is necessary to prove that the bribes were paid does not exist. 
D)  Management fails to take the appropriate remedial action. 
A)  The payments violated the client's policies regarding the prevention of illegal acts. 
B)  The client receives financial assistance from a federal government agency. 
C)  Documentation that is necessary to prove that the bribes were paid does not exist. 
D)  Management fails to take the appropriate remedial action.

Question 10

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?

Accepted Answer

A)  A misstatement exceeded five percent of net income. 
B)  The auditor also provides consulting services to the audit client. 
C)  The misstatement will cause the client to fail to meet an earnings forecast. 
D)  The audit committee is not well-educated about the accounting principle in question. 
A)  A misstatement exceeded five percent of net income. 
B)  The auditor also provides consulting services to the audit client. 
C)  The misstatement will cause the client to fail to meet an earnings forecast. 
D)  The audit committee is not well-educated about the accounting principle in question.

Question 11

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's

Accepted Answer

A)  Engagement letter. 
B)  Audit working papers. 
C)  Engagement letter and audit working papers. 
D)  It would not be typical to allow a review of either the engagement letter or the audit working papers. 
A)  Engagement letter. 
B)  Audit working papers. 
C)  Engagement letter and audit working papers. 
D)  It would not be typical to allow a review of either the engagement letter or the audit working papers.

Question 12

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

Accepted Answer

A)  That immaterial fraud is not to be reported to the client's audit committee. 
B)  How the results of various auditing procedures performed by the assistants should be evaluated. 
C)  How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. 
D)  How overall materiality was selected. 
A)  That immaterial fraud is not to be reported to the client's audit committee. 
B)  How the results of various auditing procedures performed by the assistants should be evaluated. 
C)  How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. 
D)  How overall materiality was selected.

Question 13

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

Accepted Answer

A) True 
 B)False

Question 14

Tolerable misstatement is

Accepted Answer

A)  Materiality allocated to an assertion. 
B)  Materiality for the balance sheet as a whole. 
C)  Materiality for the income statement as a whole. 
D)  Materiality allocated to a specific account. 
A)  Materiality allocated to an assertion. 
B)  Materiality for the balance sheet as a whole. 
C)  Materiality for the income statement as a whole. 
D)  Materiality allocated to a specific account.

Question 15

All companies must have an audit committee.

Accepted Answer

A) True 
 B)False

Question 16

How would an auditor identify related parties and what is the importance of doing so?

Accepted Answer

Transactions between an entity and any r

Question 17

In the planning stages of an audit, what information does an auditor gain through analytical procedures?

Accepted Answer

An auditor is required to apply analytic

Question 18

The engagement partner is typically responsible for doing the detailed audit testing.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?

Accepted Answer

A)  Analysis of balance sheet accounts. 
B)  Analysis of income statement accounts. 
C)  All matters of continuing accounting significance. 
D)  Facts that might bear on management integrity. 
A)  Analysis of balance sheet accounts. 
B)  Analysis of income statement accounts. 
C)  All matters of continuing accounting significance. 
D)  Facts that might bear on management integrity.

Question 20

Name three Sarbanes-Oxley Act requirements of the members and duties of the audit committee of a public company.

Accepted Answer

Students must provide three of the follo

Exam 3: Audit Planning, Types of Audit Tests, and Materiality

Materiality is based only on a quantitative analysis of the financial statements.

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the

Discuss the purposes for planning the audit and identify the steps that are performed during this phase of the engagement.

If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas.

As generally conceived, the audit committee of a publicly held company should be made up of

Define the engagement letter and discuss its importance.

During the initial planning phase of an audit, a CPA most likely would

Which of the following is an example of a related party transaction?

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

Tolerable misstatement is

All companies must have an audit committee.

How would an auditor identify related parties and what is the importance of doing so?

In the planning stages of an audit, what information does an auditor gain through analytical procedures?

The engagement partner is typically responsible for doing the detailed audit testing.

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?

Name three Sarbanes-Oxley Act requirements of the members and duties of the audit committee of a public company.

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing Process: Long-Term Liabilities Stockholders Equity and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

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