Audit Chapter 3 LearnSmart

Which of the following statements are correct?

Any type of management fraud is considered material regardless of the amount, the nature or an item or issue impacts materiality considerations

True or false: Auditors should resist using analytical procedures during the substantive testing of balances.

False

True or false: The primary reason for engagement planning is to determine the number of hours that will be needed to adequately form an audit opinion.

False

True or false: One objective of a financial statement audit is to determine if, in all material respects, the entity being audited is reporting the one true net income.

False. (A range of potential net income figures is allowable under both GAAP and IFRS.)

True or false: If internal auditors are objective, they can be considered independent in the same sense that external auditors are considered independent.

False. (Because they are either directly employed or paid as contractors by the client, they can never be considered independent in the same sense that external auditors are.

True or false: Client continuance decisions are generally very different than client acceptance decisions.

False. (The two decisions are similar.)

Which of the following statements is correct?

If time is taken to find all inaccuracies, the issuing of financial statements will be delayed

The first step in the engagement planning process is:

a detailed understanding of the client's business, industry and strategy

The SEC recommends auditors:

not put too much reliance on quantitative benchmarks when assessing materiality

Viewing a client's physical facilities and participating in a surprise payroll distributions are examples of the audit procedure known as __.

observation

Information to familiarize new audit team members with a client, company history, continuing schedules and prior years financial statements and audit reports may all be found in the __ files.

permanent

The two categories of audit documentation are __ files and __ files.

permanent, current

All important overall planning information and documentation that the audit team is following generally accepted auditing standards is often summarized in a(n) __.

planning memorandum

Analytical procedures are required during:

planning, final evaluation

The nature and extent of work completed during engagement planning depends on the:

prior experience with the company being audited, company's industry and complexity, size of the company being audited

Materiality is based on:

professional judgement

Analytical procedures:

provide evidence about management's financial statement assertions, are required when performing the financial statement review, require independent, reliable information

When the audit team recomputes computations previously performed by client personnel, the audit procedure is called __.

recalculation

The most reliable form of documentary evidence is a document:

received directly from an independent outside party

According to the professional standards, if as assertion has "a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated," it must be categorized as __.

relevant

An audit procedure that is similar to recalculation but much broader in approach is called __.

reperformance

Computerized audit trails may

require the auditor to alter the timing of testing, require the auditor to alter the nature of testing

Inspection of tangible assets does not necessarily provide evidence of:

rights

The basis to determine the nature, timing, and extent of internal control tests and substantive tests of account balances and disclosures is the:

risk assessment process

The assignment of staff to an audit engagement depends on the:

riskiness of the engagement

Cloud computing

saves computing costs but has additional risks

An "eyes-open" approach of looking for anything unusual that can raise questions related to evidence that needs to be obtained is called __.

scanning

Debits to revenue accounts and credits to expense accounts are generally found using:

scanning

AS 1215 requires that audit documentation be retained for __ years following the conclusion of the engagements.

seven

According to the professional standards, if there is a chance an account could contain a material misstatement, it should be identified as __.

significant

A list of audit procedures for gathering evidence related to the relevant assertions identified for an audit client's financial statement accounts and disclosures is a(n) __ plan.

substantive audit

Audit evidence documentation must show:

sufficient evidence was obtained as a basis for the operation, an understanding of internal controls was obtained, management assertions that were audited, work was adequately planned and supervised

When an auditor/client relationship ends a(n) __ letter should be prepared that details the subject of future services and circumstances that caused the conflict.

termination

Substantive testing can be done using:

tests of details, analytical procedures

According to professional standards,

the auditor must determine if particular accounts require a lower materiality amount than that established for the overall financial statements

When an audit specialist is engaged during an audit:

the auditor must gain a detailed understanding of the methods and assumptions used by the specialist, the external auditors must know about his or her qualifications, experience and reputation

The most important facet of the current audit evidence documentation files is the requirement that they show:

the auditor's conclusions

When a public company changes auditors:

the board of directors must approve the change, any pertinent disagreements with the former auditor must be disclosed, documents filed regarding the change are available to the public

When auditors use sampling, performance materiality is referred to as __.

tolerable misstatement

Testing the completeness assertation by following a sample of shipping documents forward to sales invoices, the sales journal and revenue earned is called __.

tracing

Testing the completeness assertion by following a sample of shipping documents forward to sales invoices, the sales journal and revenue earned is called __.

tracing

The auditor selects a basic source document and follows its processing path forward to its final recording and to the financial statements when engaged in:

tracing

Some inaccuracy is allowed in financial statements because:

unimportant inaccuracies are immaterial, issuing financial statements could be delayed, the cost of finding small misstatements is high

Reperformance is a representative audit procedure used to test the PCAOB and ASB assertion of:

valuation and allocation

Confirmation can provide evidence regarding:

valuation, cutoff, existence, rights and obligations

Assertions that can be tested by vouching include:

valuation, occurrence, allocation

Computer-Assisted Audit Techniques (CAAT) cannot be used for:

vouching

The auditor begins the search for evidence by focusing on transactions that have already been recorded in the financial statements and following them back to the source when engaged in:

vouching

Procedures performed shortly before and after the financial statement date is referred to as __ audit work.

year-end

Relevant considerations when determining materiality include:

amounts that allow the company to meet earnings expectations, the likelihood of being selected for PCAOB inspection, matters surrounded by uncertainty of future outcomes, how widely the financial statements will be used, political events in foreign countries, the auditors' legal liability

External-internal documentary evidence means the documents were originally prepared by:

an external third party, received by the client and passed on to the auditor

When an auditor compares his or her expectation to a recorded balance, __ are being performed.

analytical procedures

Firms often engage private investigators to conduct searches for additional information when prospective clients:

are financial institutions, are under some type of investigation, have been shown recent loss

Documents prepared and processed by the client:

are referred to as internal evidence, require additional audit testing to be considered reliable

Confirmations:

are typically printed on the client's letterhead, should be returned directly to the audit firm, request information the recipient can supply

Professional standards now require that the materiality level of the financial statement as a whole needs to be expressed:

as a specified amount

The audit planning process is required to be led by the:

assigned engagement partner

IT auditors:

assist with understanding software packages, provide specialized skills related to programming languages, may be needed to evaluate computerized processes

Persons skilled in areas outside of accounting are sometimes used to acquire information. Such individuals are called __ and may include actuaries, attorneys and environmental engineers.

audit specialists

When the external auditor is gaining an understanding of the business, information may be needed from individuals skilled in areas other than accounting and auditing who are not members of the audit team. Such individuals are referred to as:

audit specialists

A chain of evidence provided through coding, cross-references, and documentation connecting account balances and other summary results with the original transaction source documents is a(n) __.

audit trail

Risk management activities are undertaken:

before beginning any audit engagement

Auditors spend a considerable amount of time on risk assessment at:

both the financial statement and management assertion level

To plan the nature, timing, and extent of further audit procedures to be performed, an auditor "should establish a(n) __ level for the financial statements as a whole that is appropriate in light of the company's earnings and other relevant factors."

materiality

Time budgets:

may be based on a predecessor auditor's experience, are often based on prior years audits, identify problem areas early in the engagement

Computerized processing of similar transactions:

may result in all transactions being processed incorrectly

Analytical procedures __ during the substantive testing of balances.

can be very effective

A computerized environment:

can enhance the system of internal controls, reduces the potential for observing errors or fraud, can result in errors remaining undetected for long periods of time

A lack of auditor independence:

can result in disciplinary actions, can lead to investor and client lawsuits

Recalculation:

can use computer-assisted audit techniques, produces compelling evidence, provides evidence of valuation when used with other procedures

External auditors:

cannot delegate tasks that require professional judgment, may rely on some work completed by the internal audit department, must review evaluate and perform independent testing of the internal audit work

Reported net income under GAAP is not one "true" figure but a possible range of measure influenced by the choice of:

classification of marketable securities, fixed asset lives, depreciation methods

Obtaining evidence about their education, experience, and certifications, along with review of department policies and procedures enables external auditors to investigate internal auditors':

competence

Inspecting records or documents (tracing) prepared by the client is a representative audit procedures of the PCAOB assertion of __.

completeness

A widely used auditing procedure is __ by direct correspondence with independent parties.

confirmation

The permanent files are also called __ files.

continuing audit

Observation is commonly used as a test of:

control

To simplify the audit plan, auditors typically group the accounts into __ which are sets of logically grouped accounts.

cycles

To simply put the audit plan, auditors typically group the accounts into __ which are sets of logically grouped accounts.

cycles

An auditor set overall materiality at $60,000. During the audit, no individual material misstatements were discovered. However, four misstatements that are individually immaterial were found. As a result of their misstatements, net income increased by $70,000. The auditor:

must factor is the probability that the aggregate of uncorrected and undetected misstatements could exceed overall materiality

With respect to a predecessor auditor, a perspective auditor:

must initiate contact and attempt to obtain certain basic information

Public accounting firms are:

not obligated to provide services for any new or existing client

Engagement letters:

define management and auditor responsibilities, reduce the risk of misunderstandings, set forth audit objectives

Reported net income under GAAP is not one "true" figure but a possible range of measure influenced by the choice of:

depreciation methods, fixed asset lives, classifications of marketable securities

The goals of audit planning are to:

ensure proper staffing, outline specific audit procedures, determine materiality

The physical presence of assets is an example of evidence available to test the ASB assertion of __.

existence

Physical inspection of tangible assets provides strong evidence regarding the assertion of __ and may provide some evidence related to the assertion of __.

existence, valuation

Whether or not information is material is based on the __ point of view.

financial statement users'

The audit team uses materiality as a guide:

for making audit report decisions, for determining performance materiality, to planning substantive testing procedures

Inquiry:

generally involves the collection of verbal evidence, is never enough on its own to reach an audit conclusion

The term predecessor auditor refers to the public accounting firm that

has been terminated or voluntarily withdrawn from an audit engagement

Giving each document a title including the name of the company, balance sheet date, and a descriptive title is called:

heading

The primary reason for engagement planning is to:

identify the risks of material misstatements for each relevant financial statement assertion

Computer-initiated transactions:

include invoice and purchase order generation, can be generated without human review, make it difficult to trace authorizations

A planning memorandum:

includes specific directions related to the audit, summarizes all important planning information

The audit planning process:

includes the establishment of overall strategy, details the nature, timing and extent of control and substantive tests designed to mitigate risk

Perceptions of others in regards to an auditor being unbiased is referred to as __ in __.

independence, appearance

An auditor's unbiased "state of mind" towards the financial statements and other information audited is referred to as the auditor possessing __ in __.

independence, fact

Client acceptance and continuation policies and procedures generally include:

inquiries of persons who do business with the entity, considering if any unusual risk is involved in the engagement, searching for lawsuits and court cases involving the entity, considering the need for individuals with special skills or knowledge

The collection of verbal evidence from independent parties and management is the audit procedure known as __.

inquiry

A prospective auditor should attempt to obtain basic information directly from the predecessor auditor regarding issues that reflect directly on the:

integrity of management

Procedures performed weeks or months before the financial statement date is referred to as __ work.

interim audit

External auditors should consider the objectivity and competence of __ before relying on their work.

internal auditors

A(n) __ audit plan contains specific procedures needed to obtain an understanding of the client's internal control system and test that understanding for those controls that relate to the relevant financial statement assertions.

internal control

An audit plan:

is a comprehensive list of specific procedures needed to gather sufficient appropriate evidence

The descriptive nature of an item or issue __ when setting performance materiality.

is an important qualitative factor

Reperformance:

is commonly used when completing internal control system walkthroughs, can be completed for any client control procedure

A summary of the accounts or components in an account group is called a(n) __.

lead schedule

As a general rule, analytical procedures are __ detailed, document-oriented procedures.

less costly than

The primary reason for accepting or not accepting an audit engagement is:

management integrity

Information is considered important or __ if it is likely to influence financial statement users' decisions.

material