Deck 8: Audit Planning and Analytical Procedures

Question 1

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.

Answer 1

B

Question 2

A 100 % audit risk is complete certainty.

Answer 2

False

Question 3

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

Answer 3

True

Question 4

Smith, CPA has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client.The new audit client's refusal to allow this communication to occur would impact Rodgers decision concerning:

A)the auditor's ability to design audit tests.
B)possible scope exception due to lack of access.
C)the desirability of accepting the prospective engagement.
D)violation of the GAAP rules concerning consistency and comparability of financial information.

Question 5

In what order should the following steps occur?
A)Assess client business risk
B)Understand the client's business and industry
C)Perform preliminary analytical procedures
D)Assess acceptable audit risk

A)D, B, C, A
B)B, A, C, D
C)B, D, A, C
D)D, C, B, A

Question 6

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.

Question 7

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:

A)management letter requested by the auditor.
B)engagement letter.
C)Audit Plan.
D)Audit Strategy for the client.

Question 8

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:

A)inherent risk.
B)acceptable audit risk.
C)statistical risk.
D)financial risk.

Question 9

Which of the following statements is true regarding communications between predecessor and successor auditors?

A)The burden of initiating the communication rests with the predecessor.
B)The predecessor's response can be limited to stating that no information will be provided.
C)The predecessor should communicate with the successor only if the client is public.
D)The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.

Question 10

When inherent risk is high, there will need to be:

A)
B)
C)
D)

Question 11

If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?

A)The client's management
B)The client's chief executive officer
C)The client's chief financial officer
D)The client's audit committee

Question 12

The purpose of an engagement letter is to:

A)document the CPA firm's responsibility to external users of the audited financial statements.
B)document the terms of the engagement.
C)notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
D)emphasize management's responsibility for approving the audit program.

Question 13

When dealing with audit risk:

A)audit risk should not be a factor when determining if a new client should be accepted.
B)audits with a low acceptable audit risk generally result in lower audit fees.
C)if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client.
D)if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the audit fee.

Question 14

A successor auditor may perform which of the following for a new audit client?

A)
B)
C)
D)

Question 15

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

A)control risk.
B)acceptable audit risk.
C)statistical risk.
D)inherent risk.

Question 16

The auditor is likely to accumulate more evidence when the audit is for a company:

A)
B)
C)
D)

Question 17

There are three main reasons why an auditor should properly plan audit engagements.Discuss each of these reasons.

Question 18

When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.

Question 19

Obtaining sufficient appropriate evidence is essential if the CPA firm is to minimize legal liability.

Question 20

One of the purposes of an engagement letter is to avoid misunderstandings with the client.This is important for:

A)
B)
C)
D)

Question 21

Which is usually included in an engagement letter?

A)
B)
C)
D)

Question 22

Discuss the essential activities involved in the initial planning of an audit.

Question 23

Which is usually included in an engagement letter?

A)
B)
C)
D)

Question 24

Discuss the required communications between predecessor and successor auditors.

Question 25

Which is usually included in the engagement letter?

A)
B)
C)
D)

Question 26

The two major factors affecting acceptable audit risk are:

A)inherent risk and the intended uses of the financial statements.
B)control risk and the intended uses of the financial statements.
C)the likely statement users and the intended uses of the statements.
D)the audit firm and the intended uses of the statements

Question 27

Which is usually included in the engagement letter?

A)
B)
C)
D)

Question 28

Discuss the factors an auditor should consider before accepting a company as an audit client.

Question 29

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.

Question 30

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

A)engage financial experts familiar with the nature of the business entity.
B)obtain a knowledge of matters that relate to the nature of the entity's business.
C)refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D)first inform management that an unqualified opinion cannot be issued.

Question 31

An engagement letter sent to a publicly held audit client usually would not include a:

A)reference to the auditor's responsibility for the detection of errors or irregularities.
B)estimation of the time to be spent on the audit work by audit staff and management.
C)statement that management advisory services would be made available upon request.
D)reference to management's responsibility for the financial statements.

Question 32

Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:

A)engagement letter.
B)representation letter.
C)responsibility letter.
D)client letter.

Question 33

Discuss the primary purpose of an audit engagement letter.Is an engagement letter required?

Question 34

Which of the following normally signs the engagement letter for an audit of a private company?

A)Management
B)Board of directors representative
C)Audit committee representative
D)Corporate treasurer

Question 35

The purpose of the requirement in having communication between the predecessor and successor auditors is to:

A)allow the predecessor to disclose information which would otherwise be confidential.
B)help the successor auditor to evaluate whether to accept the engagement.
C)help the client by facilitating the change of auditors.
D)ensure the predecessor collects all unpaid fees prior to a change in auditor.

Question 36

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

A)Management asserts there are no errors, material or immaterial, in the general ledger.
B)Auditors assert that the primary audit goal is audit efficiency.
C)Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D)Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

Question 37

When may the auditor refer to a specialist in the audit report?

A)
B)
C)
D)

Question 38

When selecting staff for the audit engagement:

A)only staff members who are CPAs should be assigned to the audit.
B)only managers and above need to have appropriate competence and capabilities to perform the audit.
C)continuity of staff members from year to year should not be a factor.
D)staff assigned to the audit must be knowledgeable about the client's industry.

Question 39

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:

A)the predecessor auditor has poor relations with the successor auditor.
B)the client is dissatisfied with the predecessor's work.
C)there are actual or potential legal problems between the client and the predecessor.
D)the predecessor believes that the client lacks integrity.

Question 40

Which is usually included in an engagement letter?

A)
B)
C)
D)

Question 41

If a prospective client has been audited in the past, the successor auditor will typically rely solely on the representations about the client by the predecessor auditor.

Question 42

Because of the requirements of Rule 201 of the AICPA's Code of Professional Conduct which state that auditors should "undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence," auditors are not normally permitted to consult with, or rely on the work of, outside specialists during an audit engagement.

Question 43

An engagement letter can affect the CPA firm's legal responsibilities to the client, but does not affect responsibility to external users of audited financial statements.

Question 44

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

Question 45

Before accepting a new client, most CPA firms investigate the company to determine its acceptability.However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties-namely the company's attorneys and bankers-during this investigation.

Question 46

A major consideration in audit staffing is the need for continuity from year to year.

Question 47

The auditor determines that Mathews Company occupies the 3ʳᵈ floor of an office tower for which it pays no rent.The most likely explanation is:

A)they got lucky the landlord hasn't noticed the lack of payments.
B)landlord has weak internal controls over billings.
C)a related party transaction in which a major shareholder owns the office tower.
D)Matthews Company is engaging in fraudulent activities.

Question 48

Discuss four of the matters that should be specified in an engagement letter.

Question 49

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

Question 50

An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work.

Question 51

Most auditors assess inherent risk 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.

Question 52

In making client acceptance decisions, 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)CPA Firm's potential ongoing revenue from the audit client.

Question 53

For prospective clients that have previously been audited by another CPA firm, the predecessor auditor is required to communicate with the successor auditor.

Question 54

When a successor auditor requests information from a company's previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor's response to the new auditor may be limited to stating that no information will be provided.

Question 55

A related party transaction may be indicated when another company:

A)subsidizes certain operating expenses of the company.
B)purchases its securities at their fair value.
C)loans to company at market rates.
D)has had a distributor relationship with the company for 10 years.

Question 56

When a successor auditor contacts a company's previous auditor, the predecessor auditor is required to respond fully and without limit to the request for information.

Question 57

The audit team gathers information about a new client's business and industry in order to obtain:

A)an understanding of the clients internal control system for financial reporting.
B)an understanding of how economic events and transactions have an effect on the company's financial statements.
C)information about control risk.
D)information regarding whether the company is engaging in financial statement fraud.

Question 58

A predecessor auditor who has been contacted by a successor auditor for information about the client does not have to obtain permission from the former client before providing any confidential information to the successor auditor because the confidentiality requirement does not extend to former clients.

Question 59

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.

Question 60

Because of audit risk, some CPA firms now refuse any new clients in certain high-risk industries.

Question 61

Related party:

A)transactions must be disclosed in the footnotes even if the amounts are immaterial.
B)disclosures include the nature of the related party relationship and a description of the transaction.
C)transactions are considered arms-length transactions.
D)disclosures are required only for public companies.

Question 62

Material transactions between the client and the client's related parties must be disclosed in the auditor's report.

Question 63

Management's philosophy and operating style influence the risk of material misstatements in the financial statements.

Question 64

Which of the following is not a primary reason for obtaining a good understanding of the client's industry and external environment?

A)Risk associated with a specific industry may affect the auditor's assessment of client business risk.
B)Risk associated with a specific industry may affect the auditor's assessment of acceptable audit risk.
C)Risk associated with a specific industry may affect the auditor's assessment of acceptable control risk.
D)Many control risks are common to all clients in certain industries.

Question 65

An auditor should examine minutes of the board of directors' meetings:

A)through the date of the financial statements.
B)through the date of the audit report.
C)only at the beginning of the audit.
D)on a test basis.

Question 66

Business risk:

A)is the risk after considering the effectiveness of top management controls.
B)is the risk that the client's internal controls will fail.
C)can include a new technology which threatens to erode a company's competitive advantage.
D)cannot be mitigated by management.

Question 67

An auditor has accessed client business risk and the risk of material misstatements to the clients financial statements.These are done in order to:

A)apply the audit risk model to determine the appropriate extent of audit evidence.
B)determine the reliance on the company's internal control systems for financial reporting.
C)determine the test of balances to be performed by the audit team.
D)assure the CPA firm that they can perform the audit effectively and efficiently.

Question 68

All know related parties must be identified and included in the auditor's permanent files related to the client.

Question 69

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Question 70

Auditors should obtain copies of the client's code of ethics and minutes of the meetings of the board of directors to aid in their understanding of the company's management and governance structure.

Question 71

Ordinarily, the auditor should review corporate minutes during the later stages of an audit.

Question 72

Because of the lack of independence between related parties, the Sarbanes-Oxley Act prohibits all related party transactions.

Question 73

There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment.What are these reasons?

Question 74

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

Question 75

Many inherent risks are common to all clients in certain industries.

Question 76

What documents do auditors routinely obtain to aid in their understanding of a client's governance system?
Briefly discuss each of these documents.

Question 77

Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.

Question 78

Define the term "related party" and discuss why an auditor should identify the client's related parties early in the audit.

Question 79

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

Question 80

What are three factors that have increased the importance of obtaining an understanding of a client's business and industry?
How can an auditor obtain this understanding?