audit- chapter 3
a dual purpose test
A procedure that serves as both a test of control and a substantive test of transactions.
BDK Accounting is auditing a new client, A La Carte Catering. BDK could save audit time by using work from A La Carte's internal audit staff. the staff consists of three accountants with public accounting experience and certification. A La Carte requires every member of its accounting department to spent two out of every 5 years on internal audit staff. then the employee is rotated back into accounting department for a couple of years. what factors should BDK consider when determining whether or not it can use work of internal audit staff? in this case, what should BDK decide?
BDK should consider whether it will use the work of the internal audit staff by determining if the work was performed by internal auditors who are competent, reliable, organized, and can provide quality work by looking at their financial statements. However, BDK is associated with other positions within the company. to maintain independence, BDK would not be able to use work of internal audit staff in place of BDK's work
When planning an audit, an auditor should
Determine overall materiality for audit purposes
tolerable misstatement
Materiality allocated to a specific account
which of these statements concerning illegal acts by clients is correct?
an auditor's responsibility to detect illegal acts that have direct and material effect on financial statements is the same as that for errors and fraud
which of the following relatively small misstatements most likely would have a material effect on entitys financial statements
an illegal payment to a foreign official that was not recorded
which of the following procedures would an auditor most likely include in the initial planning on an examination of financial statements
assess the need for the use of specialists in the audit
To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the:
audit committee of the board of the directors
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's
audit working papers
in the planning stages of an audit, what information does an auditor gain through analytical procedures?
auditor gains to accomplish risk assessment procedures that help understand the business to plan the nature, timing, and extent of audit procedures. it also helps to accomplish substantive analytical procedures to obtain evidential matter, and lastly, final analytical procedures that is used to review the financial information for the final review state
test of controls include the following except a. walkthroughs b. analytical proceudres c. inspection of documents, files d. observation
b. analytical procedures
which of the following would most likely indicate the existence of related parties?
borrowing money at an interest rate substantially below the prevailing market rate of interest
When likely misstatements are greater than overall materiality, the auditor should
both request that auditee adjust financial statements and modify the opinion if auditee will not adjust financial statements
Evaluating a prospective client requires which of the following steps?
communicate with the predecessor auditpr
Evaluating a prospective client requires which of the following steps?
determine if firm is independent of the client
which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
determining the extent of involvement of the client's internal audit function
during the initial planning phase of an audit, a cpa most likely would
discuss the timing of the audit procedures with entity's management
during the initial planning phase of an audit, a CPA most likely would
discuss timing of audit procedures with client's management
A written understanding between the auditor and the entity concerning the auditor's responsibility for fraud is usually set forth in a(n)
engagement letter
which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
facts that might bear on management integrity
To emphasize auditor independence from management, publicly traded corporations are required to
have independent auditor report to an audit committee of independent members of the board of directors
in assessing whether to accept a client for an audit engagement, a CPA should consider
integrity of management cpa's overall engagement risk current financial health of prospective client
which of the following would most likely require special audit planning a. some items of factory and office equipment do not bear identification numbers b. depreciation methods used on clients tax return differ from those used on the books c. inventory is compromised of precious stones d. assets costing less than $500 are expensed even through the expected life exceeds one year
inventory is compromised of precious stones
a dual-purporse test
is both substantive test of transactions and a test of controls
which of the following factors most likely would lead a cpa to conclude that a potential audit engagement should be rejected
it is unlikely that sufficient appropriate evidence is available to support an opinion on financial statements
an auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from engagement if
management fails to take appropriate remedial actions
which of the following factors most likely would cause a cpa to decide not to accept a new audit engagement?
managements disregard of its responsibility to maintain an adequate control environment
which of the following matters generally is included in an auditor engagement letter
managements responsibilitie for entity's compliance with laws and regulations
tolerable misstatement
materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.
In the context of an audit of financial statements, substantive tests are audit procedures that:
may be either tests of derails of transactions, test of derails of account balances, or analytical procedures
As generally conceived, the audit committee of a publicly held company should be made up of
members of the board of directors who are not officers or employees
which of the following arranges general types of audit tests in order they are normally performed in an audit?
risk assessment procedures, test of controls, and substantive procedures
under the sarbanes-oxley act, the audit committee of public company has the following requirements
the audit commitee must preapprove all audit and non audit services the audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing each member of the committee must be board of the member and shall be independent
define the engagement letter and discuss importance
the audit engagement letter is used to formalize arrangements that are reached between auditor and entity. this letter is important since its practically a contract between auditor and entity that outlines responsibilities of both parties and prevent misunderstanding
which of the following would an auditor most likely use in determining overall materiality when planning the audit
the entity's income before taxes for the period-to-date (e.g 6 monts)
The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning
the integrity of management
which of the following is the most qualitative factor that auditors should consider when making materiality judgements?
the misstatement will cause the client to fail to meet an earnings forecast
which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?
the nature of the audit software documentation used by internal auditors
which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
the prospective client refuses to let the predecessor auditor respond to communication from the sucessor auditor
Before accepting an engagement to audit a new client, a CPA is required to obtain
the prospective clients consent to make inquiries of the predecessor auditor
which of the following is correct with regard to the predecessor-successor communications?
the successor auditor should obtain permission from the entity before contacting the predessor auditor
The engagement partner and manager review the work of engagement team members to evaluate which of the following?
the work was performed and documented the objectives of the procedures were achieved and results of the work support the conclusions reached
which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees
they communicate and clarify the expectations and responsibilities of both the auditee and the auditor
according to the text, the first step in applying materiality to an audit is
to determine a materiality level for the overall financial statements
An auditor obtains knowledge about a new client's business and its industry in order to
understand the events and transactions that may have an effect on client's financial statements
When a CPA is approachePA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining
whether the engagement should be accepted
