Question 1

Which of the following statements concerning materiality is incorrect?

Accepted Answer

A) Overall materiality represents the maximum amount of accumulated misstatements in the financial statements before the auditor can conclude they are materially misstated. 
B) Performance materiality is an amount that is applied uniformly to all accounts. 
C) Two auditors,auditing the same company at the exact same time,can both come up with completely different materiality figures. 
D) Materiality affects the risk assessment,risk response,and concluding ad reporting phases of the audit. 
A) Overall materiality represents the maximum amount of accumulated misstatements in the financial statements before the auditor can conclude they are materially misstated. 
B) Performance materiality is an amount that is applied uniformly to all accounts. 
C) Two auditors,auditing the same company at the exact same time,can both come up with completely different materiality figures. 
D) Materiality affects the risk assessment,risk response,and concluding ad reporting phases of the audit. C

Question 2

Which of the following most indicates a situation where an organization would be deemed by the PA to be "not auditable"?

Accepted Answer

A) As part of an aggressive growth strategy,the company's operations will soon extend to multiple countries. 
B) Management's intention is to take the company global within the next three years. 
C) Due to what it perceives as unacceptably high legal liability exposure,company management will not commit to providing the auditor with written representations. 
D) Because the company's shares are traded on the New York Stock Exchange,its financial statements are prepared according to U.S.GAAP. 
A) As part of an aggressive growth strategy,the company's operations will soon extend to multiple countries. 
B) Management's intention is to take the company global within the next three years. 
C) Due to what it perceives as unacceptably high legal liability exposure,company management will not commit to providing the auditor with written representations. 
D) Because the company's shares are traded on the New York Stock Exchange,its financial statements are prepared according to U.S.GAAP. C

Question 3

The concept of materiality refers to ________.

Accepted Answer

A) any misstatement in the financial statements 
B) the overall degree of risk in an organization 
C) an amount of misstatement that could affect the decisions of a financial statement user. 
D) an amount of risk in an organization sufficient to offset the expected returns of any investment in the company 
A) any misstatement in the financial statements 
B) the overall degree of risk in an organization 
C) an amount of misstatement that could affect the decisions of a financial statement user. 
D) an amount of risk in an organization sufficient to offset the expected returns of any investment in the company C

Question 4

How should auditors use the concept of materiality?

Accepted Answer

A) As a guide to assessing inherent risk 
B) As a guide in assessing control risk. 
C) As a guide in deciding to report a deficiency to the audit committee. 
D) As a guide in planning the audit program. 
A) As a guide to assessing inherent risk 
B) As a guide in assessing control risk. 
C) As a guide in deciding to report a deficiency to the audit committee. 
D) As a guide in planning the audit program.

Question 5

All but which of the following statements concerning communication between predecessor and successor auditors is correct?

Accepted Answer

A) The predecessor auditor must obtain the auditee's permission before granting the successor auditor access to the prior year's audit file. 
B) The predecessor auditor is required to initiate contact with the successor auditor. 
C) Information provided by the predecessor auditor may lead the successor to reject the new auditee as a client. 
D) The minimum information the predecessor is required to report to the successor is if there is any known reason why the successor should not accept the engagement. 
A) The predecessor auditor must obtain the auditee's permission before granting the successor auditor access to the prior year's audit file. 
B) The predecessor auditor is required to initiate contact with the successor auditor. 
C) Information provided by the predecessor auditor may lead the successor to reject the new auditee as a client. 
D) The minimum information the predecessor is required to report to the successor is if there is any known reason why the successor should not accept the engagement.

Question 6

Preliminary analytical procedures revealed that the gross profit margin increased unexpectedly from last year.As a result,the auditor should consider an increased risk of material misstatement in both sales and inventory.

Accepted Answer

A) True 
 B)False

Question 7

A bank with a large loan would most likely be interested in materiality based on ________.

Accepted Answer

A) operating cash flows 
B) normalized net income 
C) sales revenue 
D) net assets 
A) operating cash flows 
B) normalized net income 
C) sales revenue 
D) net assets

Question 8

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense,________.

Accepted Answer

A) income would be overstated 
B) income would be understated 
C) income would not be misstated 
D) accounts receivable would be understated 
A) income would be overstated 
B) income would be understated 
C) income would not be misstated 
D) accounts receivable would be understated

Question 9

In the planning stage,analytical procedures are used to ________.

Accepted Answer

A) assess overall reasonableness of the financial statements 
B) identify potential problem areas 
C) determine the mathematical correctness of the financial statements 
D) provide direct evidence about the balances in accounts 
A) assess overall reasonableness of the financial statements 
B) identify potential problem areas 
C) determine the mathematical correctness of the financial statements 
D) provide direct evidence about the balances in accounts

Question 10

Generally accepted auditing standards require that analytical procedures ________.

Accepted Answer

A) Be used in the planning and final review stages,as well as during the audit as a substantive test. 
B) Be used in the planning and final review stages of the audit and optionally they can be used as a substantive test during the audit. 
C) Be used in the planning stage only,with the option to use them as a substantive test and in the final review stage. 
D) Be used in the final review stage,and can optionally be applied as a substantive test in the planning stage 
A) Be used in the planning and final review stages,as well as during the audit as a substantive test. 
B) Be used in the planning and final review stages of the audit and optionally they can be used as a substantive test during the audit. 
C) Be used in the planning stage only,with the option to use them as a substantive test and in the final review stage. 
D) Be used in the final review stage,and can optionally be applied as a substantive test in the planning stage

Question 11

Audit risk can be offset by ________.

Accepted Answer

A) general management 
B) engagement management 
C) audit management 
D) quality management 
A) general management 
B) engagement management 
C) audit management 
D) quality management

Question 12

Analytical procedures consist of evaluating financial information by studying financial and nonfinancial data and looking for plausible or implausible relationships.The procedures can range from making simple comparisons to using complex models involving many relationships and elements of data.They can involve time-series comparisons of recorded amounts and ratios developed from recorded amounts,and they always include comparison to expectations developed by the auditors.
Required: A)Describe the broad purposes of analytical procedures.
B)Identify the sources of information from which an auditor develops expectations.

Accepted Answer

A)Analytical procedures are used for the

Question 13

The auditor's objective in obtaining an understanding of the client's business and risks is to assess the overall risk of material misstatement in the financial statements.

Accepted Answer

A) True 
 B)False

Question 14

What are auditors referring to when they talk about the nature,timing,and extent of audit procedures?

Accepted Answer

The nature of audit procedures refers to

Question 15

Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.

Accepted Answer

A) True 
 B)False

Question 16

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation,the auditor should ________.

Accepted Answer

A) consider the matter a scope limitation 
B) perform additional audit procedures to investigate the matter further 
C) intensify the audit with the expectation of detecting management fraud 
D) withdraw from the engagement 
A) consider the matter a scope limitation 
B) perform additional audit procedures to investigate the matter further 
C) intensify the audit with the expectation of detecting management fraud 
D) withdraw from the engagement

Question 17

The overall audit process can be broken down into which of these three phases?

Accepted Answer

A) Client acceptance,risk analysis,and audit performance. 
B) Analytical review,test of details of balances,and tests of controls 
C) Risk identification,risk assessment and risk response. 
D) Risk assessment,risk response,and reporting of results 
A) Client acceptance,risk analysis,and audit performance. 
B) Analytical review,test of details of balances,and tests of controls 
C) Risk identification,risk assessment and risk response. 
D) Risk assessment,risk response,and reporting of results

Question 18

This question tests your ability to perceive the place(s)where potential problems may exist and the type of problem (overstatement or understatement)that may exist.
Required: For each of the items below,identify the account(s)that need(s)to be audited carefully and the reason;for example,"potential overstatement or understatement of _______."
A)Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same.
B)Current year inventory is larger than last year but the current year gross margin (profit)is larger.
C)Current year long-term liabilities are larger than last year but the interest expense is the same.
D)Current-year fixed assets total is larger than last year but current amortization expense is the same as last year.

Accepted Answer

A)The collectability of accounts receiva

Question 19

During the preliminary analytical review,the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold.The auditors should consider performing a careful lower-of-cost-or-net realizable value analysis of the year-end inventory.

Accepted Answer

A) True 
 B)False

Question 20

The enquiries of the client that result from preliminary analytical review provide direct evidence about the amounts in the financial statements.

Accepted Answer

A) True 
 B)False

Which of the following statements concerning materiality is incorrect?

Which of the following most indicates a situation where an organization would be deemed by the PA to be "not auditable"?

The concept of materiality refers to ________.

How should auditors use the concept of materiality?

All but which of the following statements concerning communication between predecessor and successor auditors is correct?

Preliminary analytical procedures revealed that the gross profit margin increased unexpectedly from last year.As a result,the auditor should consider an increased risk of material misstatement in both sales and inventory.

A bank with a large loan would most likely be interested in materiality based on ________.

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense,________.

In the planning stage,analytical procedures are used to ________.

Generally accepted auditing standards require that analytical procedures ________.

Audit risk can be offset by ________.

The auditor's objective in obtaining an understanding of the client's business and risks is to assess the overall risk of material misstatement in the financial statements.

What are auditors referring to when they talk about the nature,timing,and extent of audit procedures?

Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation,the auditor should ________.

The overall audit process can be broken down into which of these three phases?

During the preliminary analytical review,the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold.The auditors should consider performing a careful lower-of-cost-or-net realizable value analysis of the year-end inventory.

The enquiries of the client that result from preliminary analytical review provide direct evidence about the amounts in the financial statements.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, receivables, and Receipts Process and Cash Account Balance

The Purchases, payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue the Audit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Legal Liability Cases

Other Professional Accounting Services and Reports, including Fraud Auditing

Filters

Exam 5: Preliminary Audit Planning: Understanding the Auditees Business

Which of the following statements concerning materiality is incorrect?

Which of the following most indicates a situation where an organization would be deemed by the PA to be "not auditable"?

The concept of materiality refers to ________.

How should auditors use the concept of materiality?

All but which of the following statements concerning communication between predecessor and successor auditors is correct?

Preliminary analytical procedures revealed that the gross profit margin increased unexpectedly from last year.As a result,the auditor should consider an increased risk of material misstatement in both sales and inventory.

A bank with a large loan would most likely be interested in materiality based on ________.

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense,________.

In the planning stage,analytical procedures are used to ________.

Generally accepted auditing standards require that analytical procedures ________.

Audit risk can be offset by ________.

The auditor's objective in obtaining an understanding of the client's business and risks is to assess the overall risk of material misstatement in the financial statements.

What are auditors referring to when they talk about the nature,timing,and extent of audit procedures?

Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation,the auditor should ________.

The overall audit process can be broken down into which of these three phases?

During the preliminary analytical review,the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold.The auditors should consider performing a careful lower-of-cost-or-net realizable value analysis of the year-end inventory.

The enquiries of the client that result from preliminary analytical review provide direct evidence about the amounts in the financial statements.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, receivables, and Receipts Process and Cash Account Balance

The Purchases, payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue the Audit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Legal Liability Cases

Other Professional Accounting Services and Reports, including Fraud Auditing

Filters