Chapter 3: Audit Planning, Tests, Materiality

The Code of Professional Conduct permits predecessor auditors to give information to the auditors without client consent.

False

The concept of materiality emphasizes the accountants' and managers' point of view, not the users' point of view.

False

The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of

planning.

Establish that the company has rights to the asset

Rights to cash can be verified by sending a confirmation.

Determine the appropriate financial statement presentation and disclosure of the asset

Reviewing subsequent events is an important step.

Engagement letter

Sets forth a contractual understanding with the client.

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on

relative size

An auditor would least likely use computer software to

assess information systems control risk.

The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.

smaller

Auditors should design the written audit plan so that

the audit procedures selected will achieve specific audit objectives.

A cutoff test that relates to plant assets typically affects __________.

the balance sheet

Errors in data processed in a batch computer system may not be detected immediately because

there are time delays in processing transactions in a batch system.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

completeness

Looking at vendors' invoices for particular information is an example of

inspection of documents.

Analytical procedures are the primary way to test data _______.

interrelationships

The primary source of evidence about pending litigation is the attorney ______.

letter

Engagement letters are not necessary for continuing clients.

False

In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating

$10,000

Permanent file

A file that contains information of continuing audit significance

The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?

Adequate planning and supervision

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

Allow the internal auditor to perform tests of internal controls.

Which of the following is not one of the four major cycles?

Cash receipts and disbursements

Which of the following is not a way in which auditors use the concept of overall materiality?

As a guide for assessing control risk

Which of the following would be a step in an internal control program?

Assess the control risk for sales and collections.

Audit trail

Chain of evidence found at an audit client

Verify the cutoff of transactions

Auditors examine transactions just before and just after year end.

Planning memorandum

Auditors's record of compliance with the planning and supervision provisions of GAAS.

Establish the existence of assets

Cash can be verified by physical inspection.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Compare financial information with nonfinancial operating data.

Data Interrelationships

Comparison between the relationships among financial or nonfinancial data

Establish completeness of the recorded assets

Examining shipping documents helps to determine if assets are properly recorded.

An auditor's permanent file audit documentation most likely will contain

Excerpts of the corporate charter and bylaws.

CAATs software requires auditors to do the original programming.

False

When auditing the existence assertion for an asset, auditors proceed from the

General ledger back to the supporting original transaction documents.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?

Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Inspect agreements for evidence of inventory held on consignment.

Third-party Representations

Representations or evidence from outside parties

With respect to the concept of materiality, which of the following statements is correct?

Materiality is a matter of professional judgment.

Accounting Information Systems

Methods and records to process, summarize, and report the company's transactions

An auditor would most likely use word processing software for what purpose?

Preparing an audit plan

______ may be involved in some testing of calculations.

Specialists

Physical Evidence

Tangible asset from examination

Which of the following is not a category of audit documentation?

Temporary files

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence?

The educational level and professional experiences of the internal auditor

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?

The integrity of entity's management is suspect.

In the preparation of an audit plan, which of the following items is not essential?

The preparation of a budget identifying the costs of resources needed

Audit documentation

The written basis for the auditor's conclusions

A first-time audit typically requires more work than a repeat engagement.

True

CAATs software may be utilized to read, compute, and operate on machine-readable records.

True

The degree of computer complexity and use may influence the nature, timing, and extent of audit procedures.

True

The most important facet of the current audit evidence files is the requirement that they show the auditor's decision-making process and conclusions reached.

True

When management can exercise discretion over an accounting treatment, auditors tend to exercise more care and use a more stringent materiality criterion.

True

Documentary Evidence

Variety of records in support of the company's business and accounting information system

Determine the appropriate valuation of the assets

Vouch the cost of acquisition to paid checks.

Client representations

Written documentation and representation from clients

The characteristics that distinguish computer processing from manual processing would not include

a decrease of management supervision of operations.

An engagement letter is used primarily to

ensure a clear contractual understanding of the services to be provided by the CPA.

An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of

existence or occurrence.

Fair values can be evaluated by comparing to prices on _______ markets.

existing

Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.

numbered

Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs) to determine whether comparable information is in agreement. Examples of such comparisons would not include

observation of inventory accounts.

To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to

obtain market quotations from The Wall Street Journal or another independent source.

Which of the following use of computer-assisted audit techniques (CAATs) would most likely be considered a search for fraudulent activities?

Comparing a list of vendor addresses to employee address files

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results

Computations

Computations made independently to prove arithmetical accuracy of client records

Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

Concluding that the entity's management probably lacks integrity

Which of the following is not considered an accounting estimate?

Credit sales

Which of the following types of transactions would be routine and computerized?

Credit sales and billings

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

Current file audit documentation.

The basic auditing application of the personal computer as an audit tool would not include

continuous monitoring of a client's internal control system.

Inventory can be observed as it is ______ by client personnel.

counted

Management's responsibility in a computer system would not include

assessing the control risk.

This year, Blakeney Enterprises engaged a new auditor who must

attempt to communicate with the predecessor auditor before accepting the engagement.

Representation letters are dated as of the date of the ________.

audit report

An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about

presentation and disclosure.

Before accepting an engagement to audit a new client, an auditor is required to

make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

In determining whether transactions have been recorded, the direction of the audit testing should start from the

original source documents.

Auditors may use audit ______ to test clerical accuracy.

software

The essential advantages of a computer-assisted audit techniques (CAATs) package would not include the fact that

software packages are always inexpensive.