Chapter 3-5
A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include Consideration of the business reputation of the client's principal owners, key management, related parties, and those charged with governance Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily. Consideration of whether internal control is sufficiently effective to permit a reduction in the extent of required substantive tests. Consideration of whether sufficient appropriate audit evidence may be obtained to afford a reasonable basis for an opinion.
Consideration of the business reputation of the client's principal owners, key management, related parties, and those charged with governance. This answer is correct.CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm's policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with the applicable requirements (QC 10).
In every audit, which of the following must be identified as a potential risk of material misstatement due to fraud? Falsification of documentation. Improper revenue recognition. Collusion. Management override of controls.
Management override of controls. This answer is correct.The auditor should address the risk of management override of controls in all audits because of its unpredictability and ordinarily should assume the existence of a fraud risk relating to improper revenue recognition. In the second case, the contrary conclusion must be documented. Accordingly, even if specific fraud risks are not identified, the possibility of management override of controls is always deemed to exist. AU-C 240 states that the auditor's procedures should address that risk apart from any conclusions regarding the existence of more specifically identifiable risks.
Which of the following procedures would an auditor most likely perform before auditing the balance sheet? Obtain an understanding of the client's internal control activities. Determine whether there are any liens or encumbrances on assets that have been pledged as collateral. Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor. Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations.
Obtain an understanding of the client's internal control activities.This answer is correct.Planning an audit initially requires developing an overall strategy and an audit plan. Planning includes obtaining an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement (RMMs) of the financial statements, whether due to fraud or error. The understanding provides a basis for designing and implementing responses to the assessed RMMs. Risk assessment procedures are performed to obtain the understanding. They include (1) inquiries of management, appropriate individuals in the internal audit function, and others within the entity; (2) analytical procedures; and (3) observation and inspection. The plan also includes further procedures at the relevant assertion levels for material transaction classes, account balances, and disclosures. Thus, initial planning activities occur before procedures are applied to amounts reported in the balance sheet.
As part of understanding the system of internal control relevant to the audit of a non issuer, an auditor does not need to Determine whether controls have been implemented. Identify the risks of material misstatement. Consider factors that affect the risks of material misstatement. Obtain knowledge about the operating effectiveness of the system of internal control.
Obtain knowledge about the operating effectiveness of the system of internal control. This answer is correct.Understanding the system of internal controls relevant to the audit involves evaluating the design of the controls and determining whether they have been implemented. The auditor of a nonissuer need not obtain an understanding about operating effectiveness as part of understanding the system of internal control. However, (1) the auditor's assessment of the risks of material misstatement (RMMs) may include an expectation of the operating effectiveness of controls, or (2) substantive procedures may not provide sufficient appropriate evidence at the relevant assertion level about operating effectiveness. In these circumstances, the auditor should test controls (AU-C 330).
The existence of audit risk is recognized by the statement in the auditor's report that the auditor Is required to be independent of the client. Obtains reasonable assurance about whether the financial statements are free of material misstatement. Is responsible for expressing an opinion on the financial statements. Evaluates the accounting policies used.
Obtains reasonable assurance about whether the financial statements are free of material misstatement. This answer is correct.The existence of audit risk is recognized by the statement in the auditor's report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk exists because the assurance is not absolute. Reasonable assurance is obtained when the auditor has obtained sufficient appropriate evidence to reduce audit risk to an acceptably low level (AU-C 200).
Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of Professional skepticism. Integrity. Objective judgment. Impartial conservatism.
Professional skepticism. This answer is correct. The auditor should maintain professional skepticism throughout the audit. Professional skepticism is an "attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence" (AU-C 200).
Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management. Assess control risk for the assertions embodied in the financial statements. Tour the client's facilities. Prepare a rough draft of the financial statement and of the auditor's report.
Tour the client's facilities. This answer is correct.The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including internal control. They include (1) inquiries within the entity, (2) analytical procedures, and (3) observation and inspection. An example of observation and inspection is touring the client's facilities.
