Ch 6 LearnSmart - Audit Planning

What are common rules of thumbs used by auditors for materiality?

- 5-10% of Net Income before Taxes - 0.5-1% of Total Assets - 0.5-1% of Total Revenue - 1% of Total Equity

What does a typical transaction cycle include?

- Revenue cycle - Acquisition cycle - Conversion cycle - Payroll cycle - Investing cycle - Financing cycle

What might the client's staff prepare during an audit?

-Aging of accounts receivable -Trial balance -Analysis of accounts written off

When auditors are aware of a fraud risk, what may they do?

-Increase sample sizes for substantive procedures -Apply procedures that provide more reliable evidence -Interview personnel involved in areas where risks are identified

If auditors identify fraud risks, the auditors may modify their overall approach to the audit by doing what?

-Increasing third-party confirmations -Adding specialized audit staff

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

-Internal control deficiencies -Fraud and noncompliance with laws and regulations

For recurring audits, a revision in terms of audit engagement may be indicated when there is a change in what?

-Senior management -Reporting requirements -Significant change in size of client

What can be indicators of fraud?

-Unsupported transactions -Unwillingness to allow auditor access to files/testing -Missing Documents

Top management fraud usually occurs from what?

-Unusual transactions that involve related parties -Intentionally misstating accounting estimates

List the steps of an audit:

1. Plan the audit 2. Obtain an understanding of the client and its environment 3. Assess the risk of misstatement and design further audit procedures 4. Perform further audit procedures 5. Complete the audit (final procedures) 6. Form an opinion and issue the audit report

What should an engagement letter establish?

1. The objective and scope of the audit 2. Auditor and management responsibilities 3. Inherent limitation of an audit 4. The applicable financial reporting framework (US GAAP, etc.) 5. The expected form and content of reports to be issued by the auditors

Many firms have developed one of these that uses a combination of financial and nonfinancial performance measures to assess the organization.

Balanced scorecard

Increases in materiality result in __________ in the scope of audit procedures

Decreases. An example includes auditors gathering less audit evidence if the materiality was $500,000 versus $10,000. $10,000 is more precise than $500,000.

An audit procedure that serves as a serves as a test of controls and substantive procedures is known as what?

Dual-purpose procedure

What is tracing?

Testing for completeness from source documents to ledgers.

A test of controls is a test directed toward the operation of a control to assess its effectiveness in preventing what?

Material misstatement of financial statement assertion.

What concept recognizes that some matters are important to the fair presentation of financial statements while others are not?

Materiality

A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by what?

The time budget

At what stage of the audit do auditors consider materiality to determine the scope of their audit?

Planning stage

Reviewing related party transactions to confirm that they are properly recorded is an example of verifying financial statement ________ of assets

Presentation of assets

The time interval from the beginning of audit work to the balance sheet date is called what?

The Interim Period

What is the auditor's objective if they follow the stream of evidence back to its source?

To test existence

What must a successor auditor do before engaging in an audit?

Obtain client's consent to communicate with the predecessor auditor

The audit ______ is a description of the nature, timing and extent of the audit procedures to be performed in an audit.

Plan

What is the auditor's objective if they follow the stream of evidence from its source to the ledgers?

To test completeness

The application of performance materiality to a particular audit procedure is known as what?

Tolerable misstatement

What is vouching?

When you start at the ledgers and work your way back to the source documents. This tests existence/occurrence.