Audit Chapter 6

Planning materiality is commonly based on

% of net income % of total equity % of total assets

During the audit the client's staff may prepare a(n)

Analysis of account written off, trial balance, aging of accounts receivable

Auditors should document several elements of risk assessment including

Audit team discussion Nature, timing, and extent of further audit procedures Understanding of the entity and it's environment

Relevant assertions include

Completeness, valuation or allocation, existence or occurence

Identify the types of further audit procedures performed

Confirmation, inspection, inquiry

(T/F) Performing audit work during the interim period reduces the total amount of substantive procedures that must be completed

False

Potential significant business risks for a client include

Interest rate increases, competition, changes in government regulations, material price volatility

Planning materiality is commonly based on % of

Net income, total revenues, total assets

Which of the following is not a facet of the overall audit strategy?

Setting a date when the final audit fees will be paid

Further audit procedures include

Test of controls and substantive procedures

The audit plan should include

a description of the nature, timing, and extent of planned risk assessment procedures

Tests that involve comparisons of financial data of the current year to the prior years, budgets, and industry averages are called

analytical procedures

The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called

audit risk

During the planning stage of an audit, the auditors establish an understanding with their client as to nature of services to be provided and the responsibilities of the

auditor and client

Many firms have developed a ________ _________ that uses a combination of financial and non-financial performance measures to assess the organization

balanced scorecard

Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ________ of assets

completeness

Auditors vouch cash receipt transactions occurring near period end to verify

cutoff of transactions

Some tests of controls provide substantive evidence about an account or class of transactions. These procedures are referred to as

dual-purpose tests

If the auditors' objective is to test _________, they follow the stream of evidence back to its source

existence

The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ______ of assets

existence

Successor auditors seek information from the predecessor auditors on communication with the client and those charged with governance regarding

fraud and noncompliance with laws and regulation internal control deficiencies and material weakness

(1) Incentive or pressure, (2) opportunity and (3) attitude to rationalize the act are three fundamental conditions of

fraud risk triangle

The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis of the auditor's selection of

further audit procedures

The risk of material misstatement of an assertion without considering internal control is called

inherent risk

Advantages of interim audit work include

more uniform workload for the CPA firm Increased assessment of internal control timely release of audited financial statements

When a successor auditor is offered an auditing engagement, the successor auditor

must obtain the client's consent before discussing confidential information with the predecessor auditor

An audit committee must be composed of at least three

outside directors

When materiality is allocated to a particular account, it is refer to

performance materiality

Auditors consider materiality to determine their scope of the audit during the _________ stage of an audit

planning

During the second stage of the audit process, auditors use ________ __________ procedures to gather information to assess the risk of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures

risk assessment

An increase in the level of planning materiality results a decrease in

scope of audit procedures

a dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a

test of controls

The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a

transaction cycle

(T/F) Physical examination of plant and equipment verifies ownership

False

The overall risk of association with a particular business is often referred to as

engagement risk

Items that are identified by the text as conditions indicative of fraud

Missing documents Unsupported transactions Unwillingness to allow auditor access to files or testing

All of the following are common indications of fraud except: Related party transactions Tips to auditors about fraud Complaints by management about the conduct of the audit Missing inventory

Related party transactions