Chapter 5 Audit

The completeness assertion is typically the more relevant assertion for assets.

False. Existence is a more relevant assertion for assets. Completeness would be more relevant assertion for liabilities and expenses, as management would be more likely to understate these accounts.

Which mgmt assertion addresses whether the components of the fin stmts are properly classified, described, and disclosed? a.Completeness b. Existence c.Rights and obligations d. Presentation and disclosure. E. none of the above

d. Presentation and disclosure

Which of the following tests of controls would not typically be used in assessing control design effectiveness? a.Inquiry b. observation c.inspection of documentation. d.reperformance.

d.reperformance.

Within each cycle, the audit is designed to test management assertions.

True.

An important aspect of the audit opinion formulation process is the client's responsibilities for internal control over financial reporting and the financial statements.

True.

For an audit firm to accept a client, mgmt needs to agree to provide the auditor with access to all relevant information, such as records, documentation, and so on, and unrestricted access to persons within the organization.

True.

Substantive procedures include substantive analytical procedures and tests of details.

True.

There is not much commonality among the auditing standards set by the PCAOB, AICPA, and IAASB.

False. All standards start from the same fundamental principles on how an audit engagement should be planned and performed and how the results should be communicated.

Risk assessment procedures alone provide sufficient appropriate audit evidence on which to base an audit opinion.

False. Audit evidence is obtained by performing audit procedures which fall into three categories: 1) Risk assessment procedures 2) test of controls 3) substantive procedures

Once the auditor completes the substantive procedures in Phase IV, the auditor is in a position to issue the audit opinion.

False. In Phase 4, the auditor completes various review and communication activities and makes a decision about what types of opinion to be issued. Hence on completion of substantive procedures the auditor is not ready to issue an opinion prior to that it is needed to assess any detected misstatement reviewing the adequacy of financial statement disclosures etc,.

The auditor is expected to obtain evidence about the operating effectiveness of internal control on all audits.

False. In an integrated audit, the auditor is expected to obtain evidence about the operating effectiveness of internal control. However, for a financial statement audit the auditor may or may not obtain evidence about the operating effectiveness of internal control.

If the auditor issues an opinion on the client's internal controls and the client's financial statements, the auditor is required to issue two separate reports.

False. It can be issued in one report or two separate reports.

The auditor asseses the risk of material misstatements at only the assertion level.

False. The auditor assesses the risk of material misstatement at the financial statement level and the assertion level.

When testing controls, the auditor tests only transaction controls.

False. The auditor tests both entity wide and transaction controls.

The ten standards underlying the PCAOB's auditing standards fall within four different categories.

False. They fall within three different categories: General Standards, Fieldwork Standards and Reporting Standards.

Auditors are encouraged, but not required, to prepare audit documentation.

False. This necessary to perform an audit in accordance with auditing standards.

The purpose of an audit is to enhance the degree of confidence that users can place on the financial statements.

True.

Auditors of U.S. public companies should follow PCAOB's auditing standards.

True

The auditor's selection of audit procedures depends on the accounts and assertions being tested.

True

Within a particular cycle, the auditor focuses on the flow of transactions within that cycle, including how transactions are initiated, authorized, recorded, and reported.

True

Audit checklists and audit programs are examples of audit documentation.

True. Examples of audit documentation include: Audit programs, analyses prepared by the client or the auditor, memorandum, summaries of significant finding or issues, checklists, correspondence which includes e-mail concerning significant findings

The audit opinion formulation process is described as consisting of five phases.

True. Phase 1-Making client acceptance and continuance decisions. Phase 2-Performing Risk Assesment. Phase 3-Obtaining evidence about internal control operating effectiveness if applicable. Phase 4-Obtaining Substantive Evidence about accounts, disclosures and assertions. Phase 5-Complenting the audit and making reporting decisions.

The cycle approach to auditing provides a way for breaking the audit up into manageable components.

True. Similar transactions that are linked by procedures and controls and that affect related accounts are often grouped together for analysis (and audit) purposes and are referred to as an accounting cycle.

During risk assessment, the auditor focuses on understanding the risks of all misstatements in the financial statements and related disclosures.

True. The auditor needs to thoroughly understand the client, with a focus on understanding the risk of material misstatements due to either fraud or errors in the financial statement and in related disclosures.

The auditor is expecte to perform substantive procedures for each relevant assertion of each significant account and disclosure.

True. The substantive audit procedure begins with identification of significant account balances and disclosures and their relevant assertions.

Which of the following is a precondition for an audit? a.Mgmt has used an acceptable financial reporting framework b.Mgmt has used U.S. GAAP for its financial reporting framework. c.Mgmt cannot have any responsibility for designing internal controls. d.All of the following are preconditions.

a.Mgmt has used an acceptable financial reporting framework

In performing substantive procedures, which of the following statements provides appropriate guidance to the auditor? a.The auditor can perform both substantive analytical procedures and substantive tests of details. b. The auditor should perform substantive procedures for all assertions of all fin stmt accounts. c.The auditor should perform more (or more rigorous) substantive procedures when control risk is low than when control risk is high. d.All of the above statements provide appropriate guidance.

a.The auditor can perform both substantive analytical procedures and substantive tests of details.

Which of the following procedures is least likely to be performed during Phase 4 of the audit opinion formulation process? a.Assessment of misstatements detected during the performance of substantive procedures and tests of controls. b.Performance of preliminary analytical review procedures. c.Performance of an engagement quality review. d.Determination of the appropriate audit opinion(s) to issue.

b.Performance of preliminary analytical review procedures