Question 1

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  True

Question 2

The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.

Accepted Answer

A) True 
 B)False  True

Question 3

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent ________.

Accepted Answer

A)   as a substantive test and in the final review stage
B)   as a substantive test but not in the final review stage
C)   in the final review stage but not as a substantive test
D)   neither in the final review stage nor as a substantive test A

Question 4

Since auditing is a public profession, auditors are obligated to continue auditing a client once they start.

Accepted Answer

A) True 
 B)False

Question 5

What is meant by materiality?

Accepted Answer

The answer of What is meant by materiality?...

Question 6

Audit risk can be offset by ________.

Accepted Answer

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

Question 7

What is the best description of the engagement letter?

Accepted Answer

A)   The letter soliciting a potential client.
B)   A letter from a successor auditor to a predecessor auditor asking to review the working papers for the previous year.
C)   The audit contract, which may include special requests.
D)   The letter at the end of the audit engagement reviewing any concerns the auditors wish management to be aware of.

Question 8

If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on ________.

Accepted Answer

A)   absolute size
B)   relative size
C)   nature of the item
D)   cumulative effects

Question 9

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

Question 10

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

The answer of Analytical procedures consist of evaluating financial information...

Question 11

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-market valuation of the year-end inventory.

Accepted Answer

A) True 
 B)False

Question 12

An "accountable party" can be all of the following at the same time except ________.

Accepted Answer

A)   an auditor
B)   an entity
C)   a client
D)   an auditee

Question 13

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 lead someone to make a poor decision and suffer a loss
D)   an amount of risk in an organization sufficient to offset the expected returns of any investment in the company

Question 14

Analytical procedures are required at both the beginning and the end of an audit.

Accepted Answer

A) True 
 B)False

Question 15

The detailed audit plan guides development of the overall audit strategy.

Accepted Answer

A) True 
 B)False

Question 16

An auditor should assess a client's business risks ________.

Accepted Answer

A)   early in the engagement, based on discussion with management
B)   at the end of the engagement after all evidence has been assembled
C)   as part of the year-end evidence gathering
D)   only if the client requests the auditor to do so in the engagement letter

Question 17

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

Question 18

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

Question 19

When there is a change in auditors, the Rules of Professional Conduct do not permit the predecessor auditor to give information to the successor auditor without explicit approval by the client.

Accepted Answer

A) True 
 B)False

Question 20

This question is about the auditor's concept of materiality considered in the planning stage of the audit.
Required:
A) Define or describe the independent auditor's concept of "planning materiality."
B) Name (but do not describe or explain) three common relationships or considerations used by the auditor quantifying materiality.

Accepted Answer

The answer of This question is about the auditor's concept...

Exam 5: Preliminary Audit Planning: Understanding the Auditees Business

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

The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent ________.

Since auditing is a public profession, auditors are obligated to continue auditing a client once they start.

What is meant by materiality?

Audit risk can be offset by ________.

What is the best description of the engagement letter?

If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on ________.

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

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-market valuation of the year-end inventory.

An "accountable party" can be all of the following at the same time except ________.

The concept of materiality refers to ________.

Analytical procedures are required at both the beginning and the end of an audit.

The detailed audit plan guides development of the overall audit strategy.

An auditor should assess a client's business risks ________.

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 ________.

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

When there is a change in auditors, the Rules of Professional Conduct do not permit the predecessor auditor to give information to the successor auditor without explicit approval by the client.