Audit Planning:

Nonprofit organizations are required to have a Single Audit under the Uniform Guidance rules if the organization expends: $500,000 or more in a year in federal awards. $300,000 or more in a year in federal awards. $1 million or more in a year in federal awards. $750,000 or more in a year in federal awards.

$750,000 or more in a year in federal awards.

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 costs of goods sold as a percentage of sales A decrease in accounts payable A decrease in retained earnings A decrease in notes payable

A decrease in retained earnings

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards? A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved

An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives

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 uncollectible account receivable that was not written off A petty cash fund disbursement that was not properly authorized A piece of obsolete office equipment that was not retired

An illegal payment to a foreign official that was not recorded

Which of the following matters does an auditor usually communicate to management? Arrangements involving a predecessor auditor Indications of adverse key financial ratios An agreement regarding preliminary materiality thresholds Identification of recurring operating losses

Arrangements involving a predecessor auditor

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? Obtaining a written representation letter from the client's management Examining documents to detect noncompliance with laws and regulations having a material effect on the financial statements Considering whether the client's accounting estimates are reasonable in the circumstances Determining the extent of involvement of the client's internal auditors

Determining the extent of involvement of the client's internal auditors

The work of internal auditors may affect the independent auditor's: procedures performed in obtaining an understanding of internal control. procedures performed in assessing risk. substantive procedures performed in gathering direct evidence. I and III only II and III only I, II, and III I and II only

I, II, and III

Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit? I Pell reviews Smith's workpapers and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements. II Pell is unable to review Smith's workpapers; however, Pell's inquiries indicated that Smith has an excellent reputation for professional competence and integrity. I only II only Both I and II Neither I nor II

II only

Inherent risk and control risk differ from detection risk in which of the following ways? Inherent risk and control risk are calculated by the client. Inherent risk and control risk exist independently of the audit. Inherent risk and control risk are controlled by the auditor. Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

Inherent risk and control risk exist independently of the audit.

An accountant agreed to perform a compilation of a company's financial statements under the Statements of Standards for Accounting and Review Services (SSARS). During fieldwork, the accountant decided to perform some analytical procedures. Which of the following would the accountant do related to the compilation engagement? Issue a compilation report even though review procedures were performed on the engagement. Issue a review report because review procedures were performed. Withdraw from the engagement because review procedures were performed on a compilation engagement. Issue an audit report because audit procedures were performed.

Issue a compilation report even though review procedures were performed on the engagement.

Which of the following procedures would the principal auditor most likely perform after deciding to make reference to another CPA who audited a subsidiary of the entity? Visit the other CPA and discuss the results of the other CPA's audit procedures. Make inquiries about the professional reputation and independence of the other CPA. Determine that the other CPA has a sufficient understanding of the subsidiary's internal control. Review the working papers and the audit programs of the other CPA.

Make inquiries about the professional reputation and independence of the other CPA.

Which of the following statements is correct concerning materiality in a financial statement audit? Analytical procedures performed during an audit's review stage usually decrease materiality levels. If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests. The auditor's materiality judgments generally involve quantitative, but not qualitative, considerations. Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

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

Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate? The auditor is required to reperform audit procedures already completed on the audit using the revised materiality. The auditor should consider disclaiming an opinion due to a scope limitation. The revision of materiality at the financial statement levels will not affect the planned nature and timing of audit procedures, only the extent of those procedures. Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? I Assessment of inherent risk II Assessment of control risk Both I and II I only II only Neither I nor II

Neither I nor II

During an audit, an internal auditor may provide direct assistance to an independent CPA in: Obtaining an understanding of internal control Obtaining an understanding of internal control and performing tests of controls Obtaining an understanding of internal control, performing tests of controls, and performing substantive tests None of the answer choices are correct.

Obtaining an understanding of internal control, performing tests of controls, and performing substantive tests

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan? Procedures performed to assess independence and the ability to perform the engagement The understanding of the terms of the engagement, including scope, fees, and resource allocation Other audit procedures to be performed to comply with generally accepted auditing standards Issues with management integrity that could affect the decision to continue the audit engagement

Other audit procedures to be performed to comply with generally accepted auditing standards

While performing an audit, the auditor should allow for some misstatements of lesser value than the assessed materiality level so that in total the misstatements might not result in a material misstatement to the financial statements. In order to do so, the auditor sets which of the following lower than the materiality level(s)? Test of internal controls Differences in comparison of current year amounts to prior-year amounts Performance materiality Sampling unit

Performance materiality

Which of the following internal control procedures most likely would justify a reduced assessed level of control risk concerning property, plant, and equipment acquisitions? Approval of periodic depreciation entries by a supervisor independent of the accounting department Periodic physical inspection of property, plant, and equipment by the internal audit staff The review of prenumbered purchase orders to detect unrecorded trade-ins Comparison of current-year property, plant, and equipment account balances with prior-year actual balances

Periodic physical inspection of property, plant, and equipment by the internal audit staff

A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm's audit work? Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions Reference the reliance on the other firm's work in a footnote disclosure to the financial statements Reference the reliance on the other firm's work in the first paragraph of the opinion in the audit report Obtain and attach a copy of the other firm's representation letter and audit report to the opinion that the CPA firm issues

Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions

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. The auditor makes inquiries of the client's lawyer regarding pending litigation. A tax expert employed by the auditor's CPA firm reviews the client's tax accruals. The client engages an outside computer service organization to prepare its payroll.

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

An entity has an internal audit staff that the independent auditor assessed to be both competent and objective. Which of the following statements is correct about the independent auditor's use of the internal auditors to provide direct assistance in performing tests of controls? The auditor cannot rely on any of the work of the internal auditors. The internal auditors should not be performing any audit procedures that the auditor is able to perform. The auditor can use internal auditors to assess control risk, but cannot rely on their tests of controls. The auditor should supervise, review, evaluate, and test the work performed by the internal auditors.

The auditor should supervise, review, evaluate, and test the work performed by the internal auditors.

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? The appropriateness of the entity's plans for dealing with adverse economic conditions The determination of the fraud risk factors that exist within the client's operations The control weaknesses to be included in the communication with the audit committee The coordination of the assistance of the client's personnel in data preparation

The coordination of the assistance of the client's personnel in data preparation

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? The reporting status of the internal auditor within the organization The educational level and professional experiences of the internal auditor Whether policies prohibit the internal auditor from auditing areas where relatives are employed Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor

The educational level and professional experiences of the internal auditor

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time? The specific matters to be included in the communication with the audit committee The minimum amount of misstatements that may be considered to be significant deficiencies The schedules and analyses that the client's staff should prepare The effects that inadequate controls may have over the safeguarding of assets

The schedules and analyses that the client's staff should prepare

Which of the following statements is correct concerning an auditor's use of the work of a specialist? The auditor need not obtain an understanding of the methods and assumptions used by the specialist. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements. The reasonableness of the specialist's assumptions and their applications is strictly the auditor's responsibility. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

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

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor: desires to disclose the specialist's findings, which imply that a more thorough audit was performed. makes suggestions to management that are likely to improve the entity's internal control. corroborates another specialist's findings that were consistent with management's assertions. adds an emphasis-of-matter or other-matter paragraph to the auditor's report to emphasize an unusually important subsequent event.

adds an emphasis-of-matter or other-matter paragraph to the auditor's report to emphasize an unusually important subsequent event.

The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may: allow the internal auditor to perform tests of internal controls. allow the internal auditor to audit a major subsidiary of the company. not assign any task to the internal auditor because of the internal auditor's lack of independence. allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.

allow the internal auditor to perform tests of internal controls.

An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the: auditor believes that the specialist's findings are reasonable in the circumstances. specialist's findings support the related assertions in the financial statements. auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset. specialist's findings provide the auditor with greater assurance of reliability about management's representations.

auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset.

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor: becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern. desires to disclose the specialist's findings, which imply that a more thorough audit was performed. is able to corroborate another specialist's earlier findings that were consistent with management's written representations. discovers significant deficiencies in the design of the entity's internal control that management does not correct.

becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern.

When assessing internal auditors' objectivity, an independent auditor should: consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. review the internal auditors' reports to determine that their conclusions are consistent with the work performed. verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment. evaluate the quality of the internal auditors' working-paper documentation and their recent audit recommendations.

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor's client. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would: document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work. obtain written permission from the other CPA to omit the reference in the principal auditor's report. contact the other CPA and review the audit programs and working papers pertaining to the subsidiary. add an emphasis-of-matter or other-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.

In assessing the objectivity of internal auditors, an independent auditor should: examine documentary evidence of the work performed by the internal auditors. evaluate the quality control program in effect for the internal auditors. determine the organizational level to which the internal auditors report. test a sample of the transactions and balances that the internal auditors examined.

determine the organizational level to which the internal auditors report.

During the initial planning phase of an audit, a CPA most likely would: identify specific internal control activities that are likely to prevent fraud. evaluate the reasonableness of the client's accounting estimates. discuss the timing of the audit procedures with the client's management. inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

discuss the timing of the audit procedures with the client's management.

When assessing the internal auditor's competence, the independent CPA should obtain information about the: organizational level to which the internal auditors report. educational background and professional certification of the internal auditors. policies prohibiting the internal auditors from auditing areas where relatives are employed. internal auditors' access to records and information that are considered sensitive.

educational background and professional certification of the internal auditors.

A written audit plan is required to be prepared by an auditor for: every account balance that is immaterial. every person who assists in the performance of the audit engagement. every audit. every audit where the opinion to be rendered by the auditor is likely to be other than unmodified.

every audit.

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the: existence of contingencies. valuation of intangible assets. existence of fixed asset additions. valuation of related party transactions.

existence of fixed asset additions.

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the: timing of audit procedures. cost-benefit of gathering evidence. selected audit techniques. financial statement assertions.

financial statement assertions.

The introductory paragraph of an auditor's report contains the following sentences: "We did not audit the financial statements of EZ, Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences: are an improper form of reporting. require a departure from an unmodified opinion. indicate a division of responsibility. assume responsibility for the other auditor.

indicate a division of responsibility.

After obtaining an understanding of the entity and its environment and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that: it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. there were many internal control weaknesses that could allow errors to enter the accounting system. an increase in the assessed level of control risk is justified for certain financial statement assertions. additional evidence to support a further reduction in control risk is not available.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the: level of compliance with internal auditing standards developed by The Institute of Internal Auditors. tests of internal control activities that could detect errors and fraud. materiality of the accounts recently inspected by the internal auditors. results of the tests of transactions recently performed by the internal auditors.

level of compliance with internal auditing standards developed by The Institute of Internal Auditors.

When planning an examination, an auditor should: consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire. make preliminary judgments about materiality levels for audit purposes. conclude whether changes in compliance with prescribed control procedures justify reliance on them. prepare a preliminary draft of the management representation letter.

make preliminary judgments about materiality levels for audit purposes.

Miller Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will: place limited reliance on the work performed by the internal auditors. decrease the extent of the tests of controls needed to support the assessed level of detection risk. increase the extent of the procedures needed to reduce control risk to an acceptable level. avoid using the work performed by the internal auditors.

place limited reliance on the work performed by the internal auditors.

When assessing the competence of the internal auditors, an independent CPA should obtain information about the: organizational level to which the internal auditors report. internal auditors' preliminary assessed level of control risk. quality of the internal auditors' working-paper documentation. policies prohibiting internal auditors from auditing sensitive matters.

quality of the internal auditors' working-paper documentation.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of inherent and control risk is high, an auditor would probably: increase the extent of tests of controls of the inventory cycle. request the client to schedule the physical inventory count at the end of the year. insist that the client perform physical counts of inventory items several times during the year. apply gross profit tests to ascertain the reasonableness of the physical counts.

request the client to schedule the physical inventory count at the end of the year.

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor: should assess the risk that the actuary's objectivity might be impaired. is required to disclose the contractual relationship in the auditor's report. is not permitted to rely on the actuary because of a lack of independence. should communicate this matter to the audit committee as a significant deficiency.

should assess the risk that the actuary's objectivity might be impaired.

Audit plans should be designed so that: most of the required procedures can be performed as interim work. inherent risk is assessed at a sufficiently low level. the auditor can make constructive suggestions to management. the audit evidence gathered supports the auditor's conclusions

the audit evidence gathered supports the auditor's conclusions.

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from: external quality reviews of the internal auditor's activities. the results of analytical procedures. previous experience with the internal auditor. discussions with management personnel.

the results of analytical procedures.

During the planning phase of an audit, an auditor is identifying matters for communication to the entity's audit committee. The auditor most likely would ask management whether: there was significant turnover in the accounting department. it consulted with another CPA firm about installing a new computer system. there were changes in the application of significant accounting policies. it agreed with the auditor's selection of fraud detection procedures.

there was significant turnover in the accounting department.