auditing chapter 3
For public companies, a relative percentage for establishing overall materiality is typically __.
3% to 5% of income before taxes
When should the evaluation of client continuance take place?
At or near the completion of the audit. When a significant event occurs.
Which of the following statements are correct?
Audits must be completed in a reasonable length of time at reasonable cost. Overall financial statement materiality serves as a safety net. Audits of individual accounts are conducted simultaneously. The lower the tolerable misstatement, the more extensive the required audit testing.
When should the audit committee meet with external auditors to discuss the auditor's responsibilities and significant accounting policies?
Before the engagement starts
he investigation, if necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount are part of substantive ----------- ---------
Blank 1: analytical Blank 2: procedures
Evaluations of financial information through analysis of plausible relationships among financial and non-financial data is the meaning of the term --- ----
Blank 1: analytical Blank 2: procedures or procedure
A subgroup of the board of directors that is responsible for the financial reporting and disclosure process is called the ------ ------
Blank 1: audit Blank 2: committee
Once the audit strategy has been established, the auditor develops a more detailed ---- ------
Blank 1: audit Blank 2: plan
Auditing standards distinguish between illegal acts that have ---- and material effects on the financial statements and those that have material but ---- effects
Blank 1: direct Blank 2: indirect
Serving as a contract, the ------ -------outlines responsibilities and prevents misunderstandings between the auditor and client
Blank 1: engagement Blank 2: letter
Substantive tests of transactions test for --- or --- in individual transactions
Blank 1: errors or error Blank 2: fraud
Substantive tests of transactions test for ---- or ---------- in individual transactions.
Blank 1: errors or error Blank 2: fraud
Violations of laws or regulations are referred to as ---- ----
Blank 1: illegal Blank 2: acts
Information about an auditor's financial or business relationships with the firm's clients is documented by having all personnel complete an annual ----------- report
Blank 1: independence
Audit personnel should be provided with the names of identified --- --so that transactions with them are identified and investigated
Blank 1: related Blank 2: parties
To detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements, the auditor designs ------ -----
Blank 1: substantive Blank 2: procedures or procedure
An amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements that would result in material misstatement of the financial statements is ----- ----
Blank 1: tolerable Blank 2: misstatement
The purpose of setting --- ---- is to establish a scope for the audit procedures for the individual account balance or disclosures
Blank 1: tolerable Blank 2: misstatement
Risk assessment, benchmarking and recommendations based on the assessment of ----- business risk are all examples of - services
Blank 1: value Blank 2: added
Which of the following is not a factor that auditors should consider when evaluating the reliability of the internal audit function?
Composition
Which of the following statements are correct?
Dual-purpose tests can improve audit efficiency. Substantive tests of transactions are concerned with monetary misstatements. Tests of controls check the operating effectiveness of controls.
The arrangements reached between the auditor and the entity are formalized in a(n)
Engagement letter
True or false: Both the PCAOB and ASB follow an auditor perspective in considering what is material.
False
True or false: If current year pretax income is not stable, auditors should not base materiality on an income measure.
False
True or false: The audit team a public accounting firm uses for an engagement does not tend to vary from client to client.
False
True or false: The extent of effort that goes into evaluating a new client is normally much less than the decision to continue with an existing client.
False
A significant aspect of most audit engagements is the use of a(n) ______ specialist.
IT
Which of the following statements regarding using an entity's internal audit function (IAF) during an external audit are correct?
Part of the IAF work may include confirming accounts receivables. When internal auditors work directly for the auditor, the auditor should supervise their work. Materiality and audit risk may determine reliance on the IAF's work.
An individual or organization possessing expertise in a field other than accounting or auditing whose work is used to assist the auditor in obtaining sufficient, appropriate evidence is defined by auditing standards as an auditor's ------
Specialist
Which of the follow is not an inquiry that a successor auditor should make to a predecessor auditor?
The predecessor auditor's fee charged for audit work.
Which of the following should NOT be included in an engagement letter?
The type of audit opinion the auditor expects to issue to the client.
True or false: A public accounting firm should investigate a prospective client prior to accepting the engagement.
True
True or false: In some cases, fraud may consist of illegal acts.
True
Materiality is assessed in terms of potential effect of a misstatement on decisions made by ______.
a reasonable user of financial statements
A public accounting firm may disassociate itself from an auditing client due to ______.
accounting issues auditing issues disputes over fees
Auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in ______ material respects.
all
Many public accounting firms adopt a policy of not completing the current audit until ______ fees have been paid.
all of the prior year's
When determining whether to use the work of the entity's internal auditors, the external auditor must obtain ______.
an understanding of the internal audit function
Engagement letters may include: ______.
arrangements regarding other services (e.g., assurance, tax, or consulting services) additional services to be provided relating to regulatory requirements any limitation of liability for the auditor or client arrangements involving the use of specialists or internal auditors
In establishing the audit strategy, the auditor should ______.
ascertain the reporting objectives to plan the timing of the audit determine the scope of the engagement consider the factors that will determine the focus of the audit team's efforts
When the aggregated misstatement are greater than overall materiality the auditor should ______.
ask the entity to adjust the financial statements
Steps that should be performed as part of audit planning activities include ______.
assess business risk consider violations of laws and regulations establish materiality
For public companies, the auditor is required to establish an understanding of the terms of the audit engagement with the ______.
audit committee
In practice, auditors commonly set tolerable misstatement for each account at ______ of overall materiality.
between 50% and 75%
Based on an understanding of the entity and environment, the auditor identifies those ------ risks that may result in material misstatements.
business
If an entity has not previously been audited, the prospective auditor should ______.
carefully assess management integrity before accepting the engagement
The first phase of the audit process that relates to audit planning is ______.
client acceptance and continuance
An auditor's independence would be considered impaired if the ______.
client owes money to the auditor that has the characteristics of a loan spouse of the auditor is an accounting supervisor for the entity
Information regarding related parties may be found in ______.
conflict-of-interest statements from management and others minutes of the board of directors meetings financial and reporting information provided to creditors, investors and regulators
Generally, the three preliminary engagement activities are ______.
determining the audit engagement team requirements establishing an understanding with the entity ensuring the audit team and firm are in compliance with ethical and independence requirements
Auditors should consider laws and regulations that are generally recognized as having ______ effects on the determination of financial statement amounts.
direct and material
Overall responsibility for an audit engagement rests with the ______.
engagement partner
Factors that should be considered when determining the staffing requirements for an audit include ______.
engagement size personnel availability engagement complexity timing of the work
An auditor may not accept a prospective client because the ______.
entity has unusual business risks client refuses to allow contact with the predecessor auditor
If the entity's management does not provide satisfactory information about possible illegal acts, the auditor should consult with the ______.
entity's legal counsel
When the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented ______.
fairly
True or false: The audit team a public accounting firm uses for an engagement does not tend to vary from client to client.
false
When a prospective client refuses to permit the predecessor auditor to respond, the successor auditor should ______.
have reservations about accepting the client
Factors that would cause the auditor to use a lower percentage for tolerable misstatement include a ______.
high risk of misstatement within the account balance history of material weaknesses in internal control
When an entity operates in a highly regulated industry, the auditor would choose a _____ percentage in deciding the appropriate percentage to apply to a selected materiality benchmark.
higher
It is generally ______ for the auditor to simply subdivide materiality proportionally to each account
inefficient
Engagement team members performing supervisory activities should ______.
inform engagement team members of their responsibilities review the work of engagement team members
According to ASB standards, when assessing materiality, users are assumed to ______.
make appropriate economic decisions on the basis of the financial statements recognize uncertainties inherent in the measurement of amounts based on estimates understand financial statements are prepared and audited to levels of materiality
The terms of the audit engagement that are documented in the engagement letter should include ______.
management's responsibilities the objectives of the engagement auditor's responsibilities limitations of the engagement
In deciding the appropriate percentage to apply to a selected materiality benchmark, the auditor would choose a lower percentage within the range for qualitative factors such as ______.
material misstatements in prior years the entity is close to violating a covenant in a loan agreement high risk of fraud
Work performed by the internal audit function ______ affect(s) the nature, timing and extent of audit procedures performed by the external auditors.
may
In documenting the overall audit strategy and audit plan, auditors should document the ______.
nature of audit tests extent of audit tests timing of audit tests
Auditing standards provide ______ assurance that illegal acts will be detected and that any contingent liability that may result will be disclosed.
no
When net income is fluctuating, the auditor should consider basing materiality on ______
normalized earnings for the past three years a benchmark other than net income
Risk assessment procedures include ______.
observation and inspection inquiries of management and others preliminary analytical procedures
Auditor risk assessment procedures are used to ______.
obtain an understanding of the entity and its environment
Auditors can reduce audit risk to an acceptably low level by ______.
obtaining an understanding of the entity and its environment.
Public accounting firms should ______.
periodically evaluate whether to continue their relationship with current clients
Factors that should be considered when determining the staffing requirements for an audit include ______.
personnel availability engagement complexity timing of the work engagement size
Auditors should attempt to identify all related parties during the ______ phase of the audit.
planning
When a client has multiple locations, the auditor determines which locations or business units to audit and the extent of audit procedures to be performed during the ______ process.
planning
Ensuring that members of the audit team meet independence requirements generally take place as part of ______.
preliminary engagement activities
The auditor's consideration of materiality on an audit is a matter of ______.
professional judgment
The consideration of materiality is a matter of ______.
professional judgment
If the auditor determines that the work of the internal audit function (IAF) can be used for purposes of the audit, the auditor must evaluate the ______.
quality control approach of the IAF level of competence of the IAF application by the IAF of a systematic and disciplined approach
During the documenting stage, the auditor ______.
records how the entity is managing its risks compiles his or her knowledge about the entity's business objectives and strategies ensures that the identified risks have been addressed
Auditors should establish an understanding with the entity about the terms of the engagement to ______.
reduce the risk of misinterpretation between the two parties
Auditors should attempt to identify all ------ ------because transactions with them may not be at "arm's length."
related parties
Materiality is a(n) __ concept.
relative
Examples of tests of controls include ______.
reperformance of the application of the control inquiries of management, supervisory and staff personnel observation of the application of specific controls inspecting documents, reports and electronic files
Ideally, the head of of internal auditing (chief audit executive) should ______.
report functionally to the audit committee and administratively to senior management
if an entity has not previously been audited, the prospective auditor should ______.
review the client's financial information before accepting the engagement
When auditing a company with multiple locations, the amount of audit attention devoted to various locations depends upon the ______.
risk of material misstatement
The nature and extent of planning activities that are necessary depend on the ______ the entity
size of auditor's previous experience with complexity of
Engagement planning involves all of the issues the auditor should consider in developing an overall audit -------- for conducting the audit.
strategy
Traditionally, value-added services have included ______.
system design and integration internal reporting processes tax planning
Tests of controls are performed to ______.
test the operating effectiveness of controls
Operating effectiveness is checked using ______.
tests of controls only
The categories of substantive procedures are ______.
tests of details substantive analytical procedures
Tests of details are usually categorized into ______.
tests of details of account balances and disclosures substantive test of transaction
When an auditor becomes aware of significant illegal acts, the auditor should make sure that ______ (is) are adequately informed.
the audit committee those charged with governance
When an auditor is asked to accept a new client, ______
the auditor must ask permission of the client before contacting the predecessor auditor an entity acceptance questionnaire, checklist or memo is generally prepared to document the investigation
When an auditor is asked to accept a new client, ______.
the auditor must ask permission of the client before contacting the predecessor auditor an entity acceptance questionnaire, checklist or memo is generally prepared to document the investigation
An auditor who receives evidence concerning material but indirect illegal acts should ______.
use audit procedures to determine whether the illegal acts have occurred
In establishing an understanding about the terms of the engagement with potential clients, ______ should be discussed.
using the work of internal auditors the engagement letter the role of the client's audit committee
