Audit Exam 2 Chapter 8-13

Which of the following procedures would a CPA most likely perform during the planning stage of the audit? 1. Evaluate the reasonableness of management's allowance for doubtful accounts 2. Determine areas where there is a higher risk of material misstatement 3. Evaluate the significance of uncorrected misstatements 4. Confirm a sample of accounts receivable

2

When developing the overall strategy for the audit, the auditor will A) decide whether to accept a new client. B) determine if any audit specialists will be required. C) identify why the auditor needs an audit. D) obtain an engagement letter.

B

A client decides not to record an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation? 1. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements 2. The financial statements do not conform with GAAP 3. The financial statements contain unadjusted misstatements that should result in a qualified opinion 4. The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.

1

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to (1) find smaller misstatements. (2) find larger misstatements. (3) increase the performance materiality in the accounts. (4) increase inherent risk in the accounts.

1

Which of the following is least likely to be included in the auditor's engagement letter? 1. Details about the preliminary audit strategy 2. Overview of the objectives of the engagement 3. Statement that management is responsible for the financial statements 4. Description of the level of assurance obtained when conducting the audit

1

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and business risk. A) I only B) II only C) I and II D) None of the above

A

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should A) investigate the possibility the client may have made an error in their cost of goods sold computation. B) assist management in developing greater cost efficiencies in their product line. C) prepare a going concern opinion for the client. D) advise the client to have extensive disclosure to alleviate investor concerns.

A

When setting a preliminary judgment about materiality, A) more evidence is required for a low dollar amount than for a high dollar amount. B) less evidence is required for a low dollar amount than for a high dollar amount. C) the same amount of evidence is required for either low or high dollar amounts. D) there is no relationship between materiality and the dollar amount of evidence needed.

A

When setting a preliminary judgment about materiality: A) more evidence is required for a low dollar amount than for a high dollar amount. B) less evidence is required for a low dollar amount than for a high dollar amount. C) the same amount of evidence is required for either low or high dollar amounts. D) there is no relationship between it and the dollar amount of evidence needed.

A

Which is usually included in an engagement letter? A) The objectives of the engagement: Y Identification of the financial reporting framework used by management: Y B) The objectives of the engagement: N Identification of the financial reporting framework used by management: N C) The objectives of the engagement: Y Identification of the financial reporting framework used by management: N D) The objectives of the engagement: N Identification of the financial reporting framework used by management: Y Answer: A

A

Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II

C

When may the auditor refer to a specialist in the audit report? A) Only if the specialist's report results in a modification of the audit opinion: Y Only if the specialist assisted in the audit of an account material to the financial statements: Y B) Only if the specialist's report results in a modification of the audit opinion: N Only if the specialist assisted in the audit of an account material to the financial statements: N C) Only if the specialist's report results in a modification of the audit opinion: Y Only if the specialist assisted in the audit of an account material to the financial statements: N D) Only if the specialist's report results in a modification of the audit opinion: N Only if the specialist assisted in the audit of an account material to the financial statements: Y

C

Which of the following is a correct statement regarding analytical procedures? A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. B) Common-size financial statements display all items as a percentage change from a base year. C) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios. D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

C

Which of the following is an accurate statement regarding a public company's code of ethics? A) A code of ethics is required under The Foreign Corrupt Practices Act. B) A code of ethics is required only for mid-level managers and below. C) The SEC requires companies to disclose amendments and waivers to the code of ethics for the CEO, CFO and principal accounting officer. D) The PCAOB requires companies to review their code of ethics every five years.

C

Which of the following is the primary basis used to decide materiality for a for-profit entity? A) Net sales B) Net assets C) Net income before tax D) All of the above

C

Why do auditors establish a preliminary judgment about materiality? A) To determine the appropriate level of staff to assign to the audit B) So that the client can know what records to make available to the auditor C) To help plan the appropriate evidence to accumulate D) To finalize the control risk assessment

C

________ misstatements are those where the auditor can determine the amount of the misstatement in the account. A) Potential B) Likely C) Known D) Projecte

C

Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts. A) less B) no less C) no more D) more

D

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence. A) directly, inversely B) directly, directly C) inversely, inversely D) inversely, directly

D

Auditors are ________ to document the known and likely misstatements in the financial statements under audit. A) permitted B) required C) not allowed D) strongly encouraged

B

Inherent risk and control risk: A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk.

B

Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because A) of the unique classification of related-party transactions required on the balance sheet. B) of the lack of independence between the parties. C) of the unique classification of related-party transactions required on the income statement. D) it is required by generally accepted accounting principles.

B

When allocating materiality, most practitioners choose to allocate to: A) the income statement accounts because they are more important. B) the balance sheet accounts because most audits focus on the balance sheet. C) both balance sheet and income statement accounts because there could be errors on either. D) all of the financial statements because it is required by GAAS.

B

When evaluating the audit findings, the auditor should be satisfied that the A) amount of known misstatement is documented in the management representation letter. B) estimate of the total known and likely misstatements is less than a material amount. C) estimate of the total likely misstatement includes sample error. D) amount of known misstatement is acknowledged and recorded by the client.

B

Which is usually included in the engagement letter? A) List of audit procedures to be used in inventory observation: Y The auditors' assessment of audit risk: Y B) List of audit procedures to be used in inventory observation: N The auditors' assessment of audit risk: N C) List of audit procedures to be used in inventory observation: Y The auditors' assessment of audit risk: N D) List of audit procedures to be used in inventory observation: N The auditors' assessment of audit risk: Y

B

Which is usually included in the engagement letter? A) The projected type of opinion on the financial statement to be audited: Y Name(s) of the client personnel responsible for supplying the auditor with information: Y B) The projected type of opinion on the financial statement to be audited: N Name(s) of the client personnel responsible for supplying the auditor with information: N C) The projected type of opinion on the financial statement to be audited: Y Name(s) of the client personnel responsible for supplying the auditor with information: N D) The projected type of opinion on the financial statement to be audited: N Name(s) of the client personnel responsible for supplying the auditor with information: Y

B

Auditing standards define ________ as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements. A) fraud B) inherent risk C) materiality D) significant

C

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________. A) detection risk B) audit report risk C) acceptable audit risk D) inherent risk

C

Why do auditors establish a preliminary judgment about materiality? A) to determine the appropriate level of staff to assign to the audit B) so the client can know what records to make available to the auditor C) to help plan the appropriate evidence to accumulate D) to finalize the control risk assessment

C

The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related. A) directly B) indirectly C) not D) inversely

D

The risk that audit evidence for a segment will fail to detect misstatements exceeding performance materiality levels is: A) audit risk. B) control risk. C) inherent risk. D) planned detection risk.

D

When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality.

D

When dealing with materiality, A) if the client refuses to correct a material misstatement, the auditor is required to adjust the financial statements. B) management is responsible for determining whether financial statements are materially misstated. C) materiality must be determined as as percentage of sales. D) the auditor must bring any material misstatements to the client's attention.

D

Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this? A) Amounts involving frauds are considered more important than errors of equal amount: Y Misstatements that are otherwise immaterial may be material if they affect a trend in earnings: Y B) Amounts involving frauds are considered more important than errors of equal amount: N Misstatements that are otherwise immaterial may be material if they affect a trend in earnings: N C) Amounts involving frauds are considered more important than errors of equal amount: Y Misstatements that are otherwise immaterial may be material if they affect a trend in earnings: N D) Amounts involving frauds are considered more important than errors of equal amount: N Misstatements that are otherwise immaterial may be material if they affect a trend in earnings: Y Answer: A

A

If planned detection risk is reduced, the amount of evidence the auditor accumulates will: A) increase. B) decrease. C) remain unchanged. D) be indeterminate.

A

In what order should the following steps occur? A. Set preliminary judgment of materiality and performance materiality. B. Understand the clients business and industry. C. Perform preliminary analytical procedures. D. Accept the client and perform initial audit planning. A) D, B, C, A B) B, A, C, D C) B, D, A, C D) D, C, B, A

A

Inherent risk is often high for an account such as: A) inventory. B) land. C) capital stock. D) notes payable.

A

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for A) Engagement objectives: Y Engagement limitations: Y B) Engagement objectives: N Engagement limitations: N C) Engagement objectives: Y Engagement limitations: N D) Engagement objectives: N Engagement limitations: Y Answer: A The auditor is

A

The auditor is likely to accumulate more evidence when the audit is for a company A) Which has large amounts of debt: Y Which is to be sold in the near future: Y B) Which has large amounts of debt: N Which is to be sold in the near future: N C) Which has large amounts of debt: Y Which is to be sold in the near future: N D) Which has large amounts of debt: N Which is to be sold in the near future: Y

A

The auditor uses knowledge gained from the understanding of the client's business and industry to assess A) client business risk. B) control risk. C) inherent risk. D) audit risk

A

The first phase in planning an audit and designing an audit approach is to A) accept the client and perform initial audit planning. B) set the preliminary judgment of materiality. C) understand the client's business and industry. D) perform preliminary audit procedures.

A

The written communication stating the auditor cannot guarantee that all acts of fraud will be discovered is found in the A) engagement letter. B) representation letter. C) responsibility letter. D) client letter.

A

When dealing with audit risk: A) auditors accept some level of risk in performing the audit function. B) most risks that auditors encounter are relatively easy to measure. C) the audit risk model is only used for classes of transactions. D) most audit firms prefer to use a quantitative assessment for risk.

A

Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts? A) Certain accounts contain more misstatements than others: Y Only overstatements need be considered: N Audit costs can affect allocation: Y B) Certain accounts contain more misstatements than others: Y Only overstatements need be considered: Y Audit costs can affect allocation: N C) Certain accounts contain more misstatements than others: Y Only overstatements need be considered: Y Audit costs can affect allocation: Y D) Certain accounts contain more misstatements than others: N Only overstatements need be considered: Y Audit costs can affect allocation: N Answer: A When allocating performance materiality, A) it is easy to predict in advance which accounts are most likely to be misstated. B) only overstatements need to be considered. C) professional judgment is critical. D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

A

Which of the following is a correct statement regarding performance materiality? A) Determining performance materiality is necessary because auditors accumulate evidence by segments. B) The level of performance materiality does not affect the amount of evidence needed. C) Performance materiality cannot vary for different classes of transactions. D) Performance materiality is required for public companies, but not for private companies.

A

Which of the following is a correct statement regarding performance materiality? A) Determining performance materiality is necessary because auditors accumulate evidence by segments. B) The level of performance materiality does not affect the amount of evidence needed. C) Performance materiality cannot vary for different classes of transactions. D) Performance materiality is required for public companies, but not for private companies. A. determining performance materiality is necessary because auditors accumulate evidence by segments

A

Which of the following is part of planning? A) Set materiality for the financial statements as a whole. B) Estimate total misstatement in the segment. C) Estimate the combined misstatement. D) Compare the combined estimated with preliminary judgment.

A

After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor's desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned? 1. Auditor's Desired Level of Detection Risk?Decrease Overall Level of Audit Risk?Same 2.Auditor's Desired Level of Detection Risk?Increase Overall Level of Audit Risk?Same 3.Auditor's Desired Level of Detection Risk?Same Overall Level of Audit Risk?Higher 4.Auditor's Desired Level of Detection Risk?Decrease Overall Level of Audit Risk?Lower

1

As lower acceptable levels of both audit risk and materiallity are established, the auditor should plan more work on individual accounts to 1. find smaller misstatements 2. find larger misstatements 3. increase the performance materiality in the accounts 4. increase inherent risk in the accounts

1

Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could (1) decrease detection risk. (2) increase materiality levels. (3) decrease substantive testing. (4) increase inherent risk.

1

Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk leve, the auditor could 1. decrease detection risk 2. increase materiality levels 3. decrease substantive test 4. increase inherent risk

1

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate.... 1. $10,000 2. $15,000 3. $20,000 4. $30,000

1

Dan, CPA has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? 1. The furniture industry has experienced in an increase risk? 2. Modern Home recently engaged in a complex derivative transaction. 3. Modern Home experienced an increase in working capital 4. Modern Home purchased expensive new equipment in the current year.

2

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? 1. The entity's management places no emphasis on meeting publicized earnings projections 2. Significant differences between the physical inventory count and the accounting records are not investigated. 3.Monthly bank reconciliations ordinarily include several large outstanding checks 4. Cash transactions are electronically processed and recorded, leaving no paper audit trail

2

Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement? 1. Staff will need to be rescheduled to cover this new client 2. There will be a client-imposed scope limitation 3. The firm will have to hire a specialist in one audit area 4. The client's financial reporting system has been in place for 10 years

2

A successor auditor's inquiries of the predecessor auditor should include questions regarding... 1. The number of engagement personnel the predecessor assigned to the engagement 2. The assessment of the objectivity of the client's internal audit function 3. Communications to management and those charged with governance regarding significant deficiencies in internal control 4. The response rate for confirmations of A/R

3

In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels? 1. The materiality level was established based on preliminary financial statement amounts that differ significantly from actual amounts 2. The client disposed of a major portion of the client's business 3. The client released third-quarter results before the SEC-prescribed deadline 4. Significant new contractual arrangements draw attention to a particular aspect of a client's business that is separately disclosed in the financial statements.

3

Inherent risk and control risk differ from planned detection risk in that they (1) arise from the misapplication of auditing procedures. (2) may be assessed in either quantitative or nonquantitative terms. (3) exist independently of the financial statement audit. (4) can be changed at the auditor's discretion.

3

Inherent risk and control risk differ from planned detection risk in that they 1. arise from the misapplication of auditing procedures 2. may be assessed in either quantitative or non quantitative terms 3. exist independently of the financial statement audit 4. can be changed at the auditor's discretion

3

Some account balances, such as those for pension and leases, are the results of complex calculations. The susceptibility to material misstatement in these types of accounts is defined as 1. audit risk 2. detection risk 3. inherent risk 4. sampling risk

3

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as (1) audit risk. (2) detection risk. (3) inherent risk. (4) sampling risk.

3

Which of the following procedures would a CPA least likely perform during the planning stage of the audit? 1. Determine the timing of testing 2. Take a tour of the clients facilities 3. Perform inquiries of outside legal counsel regarding pending litigation 4. Determine the effect of information technology on the audit

3

A successor would most likely make specific inquiries of the predecessor auditor regarding 1. The specialized accounting principles of the client's industry 2. The competency of the client's internal audit staff 3. The uncertainty inherent in applying sampling procedures 4. Disagreements with management as to auditing procedures

4

Analytical Procedures used in planning an audit should focus on identifying 1. Material weaknesses in internal control 2. the predictability of financial data from individual transactions 3. The various assertions that are embodied in the financial statements 4. Areas that may represent specific risks relevant to the audit

4

As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the (1) nature of audit procedures to more effective procedures. (2) timing of audit procedures, by perhaps performing them at year-end rather than an interim date. (3) extent of audit procedures, by perhaps using larger sample sizes. (4) assurances provided by audit procedures to a lower level.

4

As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the 1. nature of the audit procedures to more effective procedures 2. timing of audit procedures, by perhaps performing them at year-end rather than an interim date 3. extent of audit procedures, by perhaps using larger sample sizes 4. assurance provided by audit procedures to a lower level

4

When approached to perform an audit for the first time, the CPA 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 1. The predecessor's work should be used 2. The company follows the policy of rotating its auditors 3. In the predecessor's opinion, internal control of the company has been satisfactory 4. The engagement should be accepted

4

Which of the following does not increase the need for sufficient appropriate audit evidence? (1) A lower acceptable level of detection risk (2) An increase in the assessed control risk (3) A lower acceptable audit risk (4) A decrease in the assessed inherent risk

4

Which of the following does not increase the need for sufficient appropriate audit evidence? 1. A lower acceptable level of detection risk 2. An increase in the assessed control risk 3. A lower acceptable audit risk 4. A decreased in the assessed inherent risk

4

Which of the following will most likely indicate the existence of related parties? 1. Writing down obsolete inventory prior to year end 2. Failing to correct deficiencies in the client's internal control 3. An unexplained increase in gross margin 4. Borrowing money at a significant rate below the market rate

4

Which one of the following statements is correct concerning the concept of materiality? 1. Materiality is determined by reference to guidelines established by the AICPA 2. Materiality depends only on the dollar amount of an item relative to other items in the financial statements 3. Materiality depends on the nature of an item rather than the dollar amount 4. Materiality is a matter of professional judgment

4

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the A) inherent risk. B) acceptable audit risk. C) statistical risk. D) financial risk.

B

A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the A) management letter requested by the auditor. B) engagement letter. C) audit Plan. D) audit Strategy for the client.

B

An auditor should examine minutes of the board of directors' meetings A) through the date of the financial statements. B) through the date of the audit report. C) only at the beginning of the audit. D) on a test basis.

B

As the risk of material misstatement increases, detection risk should: A) medium increase. B) decrease. C) stay the same. D) Is indeterminate.

B

If an auditor establishes a relatively high level for materiality, then the auditor will A) accumulate more evidence than if a lower level had been set. B) accumulate less evidence than if a lower level had been set. C) accumulate approximately the same evidence as would be the case were materiality lower. D) accumulate an undetermined amount of evidence.

B

If an auditor establishes a relatively high level for materiality, then the auditor will: A) accumulate more evidence than if a lower level had been set. B) accumulate less evidence than if a lower level had been set. C) accumulate approximately the same evidence as would be the case were materiality lower. D) accumulate an undetermined amount of evidence. B. accumulate less evidence than if a lower level had been set

B

Related party A) transactions must be disclosed in the footnotes even if the amounts are immaterial. B) disclosures include the nature of the related party relationship and a description of the transaction. C) transactions are considered arm's-length transactions. D) disclosures are required only for public companies.

B

The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4

B

The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be: A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4

B

The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as: A) audit risk. B) inherent risk. C) sampling risk. D) detection risk.

B

The preliminary audit strategy A) is set before the auditor understands the client's reasons for the audit. B) guides the development of the audit plan. C) is determined after the engagement staffing is set. D) is the detailed steps to be followed for the substantive audit tests.

B

The purpose of an engagement letter is to A) document the CPA firm's responsibility to external users of the audited financial statements. B) document the terms of the engagement. C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. D) emphasize management's responsibility for approving the audit program. Answer: B

B

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A) I only B) II only C) both I and II D) neither I nor II

C

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A) I only B) II only C) both I and II D) neither are

C

Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. A) permit B) do not allow C) require D) strongly encourage

C

In order to obtain an understanding of the client's business, the audit firm will consider A) inherent and control risk of the client. B) audit risk to the CPA firm. C) the client's business risk and the risk of material misstatements in the financial statements. D) the CPA firm's potential ongoing revenue from the audit client.

C

The scope paragraph of the standard unqualified auditor's report states that "... the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement." What type of assurance is given? A) Immediate B) Limited C) Reasonable D) Absolute

C

The two major factors affecting acceptable audit risk are A) inherent risk and the intended uses of the financial statements. B) control risk and the intended uses of the financial statements. C) the likely statement users and their intended uses of the statements. D) the audit firm and the intended uses of the statements

C

When allocating performance materiality: A) it is easy to predict in advance which accounts are mot likely to be misstated. B) only overstatements need to be considered. C) professional judgment is critical. D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

C

Which is usually included in an engagement letter? A) The financial statements are the responsibility of the company's management: Y Ratios to be used by the auditor in the planning phase: Y B) The financial statements are the responsibility of the company's management: N Ratios to be used by the auditor in the planning phase: N C) The financial statements are the responsibility of the company's management: Y Ratios to be used by the auditor in the planning phase: N D) The financial statements are the responsibility of the company's management: N Ratios to be used by the auditor in the planning phase: Y Answer: C

C

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm? A) Management asserts there are no errors, material or immaterial, in the general ledger. B) Auditors assert that the primary audit goal is audit efficiency. C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

C

________ misstatements are those where the auditor can determine the amount of the misstatement in the account. A) Potential B) Likely C) Known D) Projected

C

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality.

D

When dealing with audit risk, A) audit risk should not be a factor when determining if a new client should be accepted. B) audits with a low acceptable audit risk generally result in lower audit fees. C) if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client. D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.

D

When determining materiality, A) the preliminary judgment about materiality can be increased, but not decreased during the audit. B) auditing standards provide specific materiality guidelines to practitioners. C) only one benchmark can be used. D) the application of guidelines requires considerable professional judgment.

D

Which is usually included in an engagement letter? A) Estimate of hours required to complete audit: Y Dollar estimate of fees to be billed to the client: Y B) Estimate of hours required to complete audit: N Dollar estimate of fees to be billed to the client: N C) Estimate of hours required to complete audit: Y Dollar estimate of fees to be billed to the client: N D) Estimate of hours required to complete audit: N Dollar estimate of fees to be billed to the client: Y

D

Which of the following statements is true concerning the allocation of preliminary materiality? A) It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. B) Preliminary materiality should be allocated to income statement accounts only. C) Preliminary materiality is required by the SEC. D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

D

Which of the following statements is true concerning the allocation of preliminary materiality? A) It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. B) Preliminary materiality should be allocated to income statement accounts only. C) Preliminary materiality is required by the SEC. D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement. D. the PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement

D

_______ is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit. A) Inherent risk B) Client business risk C) Acceptable audit risk D) Risk of material misstatement

D