Chapter 3 audit

Engagement planning involves all of the issues the auditor should consider in developing an overall ____________ __________ for conducting the audit.

Audit Strategy

Which of the following should be included in an engagement letter?

Additional services to be provided relating to regulatory requirements. Arrangements involving the use of specialists or internal auditors. Any limitation of liability for the auditor or client. Arrangements regarding other services (e.g., assurance, tax, or consulting services).

Which of the following is not a factor that auditors should consider when evaluating the reliability of the internal audit function?

Competence Objectivity Systematic and disciplined approach

A significant aspect of most audit engagements is the use of a(n) ______ specialist.

IT Specialist

Which of the following statements regarding using an entity's internal audit function (IAF) during an external audit are correct?

Materiality and audit risk may determine reliance on the IAF's work. When internal auditors work directly for the auditor, the auditor should supervise their work. Part of the IAF work may include confirming accounts receivables.

Which of the following statements are correct pt2

Overall financial statement materiality serves as a safety net. Audits must be completed in a reasonable length of time at reasonable cost. The lower the tolerable misstatement, the more extensive the required audit testing.

Which of the following statements are correct?

Substantive tests of transactions are concerned with monetary misstatements. Dual-purpose tests can improve audit efficiency. Tests of controls check the operating effectiveness of controls.

Which of the follow is not an inquiry that a successor auditor should make to a predecessor auditor?

The predecessor auditor's fee charged for audit work.

When should the evaluation of client continuance take place?

When a significant event occurs. At or near the completion of the audit.

When determining whether to use the work of the entity's internal auditors, the external auditor must obtain

an understanding of the internal audit function

If the auditor determines that the work of the internal audit function (IAF) can be used for purposes of the audit, the auditor must evaluate the ______.

application by the IAF of a systematic and disciplined approach quality control approach of the IAF level of competence of the IAF

When the aggregated misstatement are greater than overall materiality the auditor should ______.

ask the entity to adjust the financial statements

A subgroup of the board of directors that is responsible for the financial reporting and disclosure process is called the

audit committee

Once the audit strategy has been established, the auditor develops a more detailed _________ ________

audit plan

The nature and extent of planning activities that are necessary depend on the ______ the entity

auditor's previous experience with Complexity of size of

If an entity has not previously been audited, the prospective auditor should ______

carefully assess management integrity before accepting the engagement

The first phase of the audit process that relates to audit planning is

client acceptance and continuance

An auditor's independence would be considered impaired if the ______.

client owes money to the auditor that has the characteristics of a loan spouse of the auditor is an accounting supervisor for the entity

In establishing the audit strategy, the auditor should ______.

determine the scope of the engagement consider the factors that will determine the focus of the audit team's efforts ascertain the reporting objectives to plan the timing of the audit

Auditors should consider laws and regulations that are generally recognized as having ______ effects on the determination of financial statement amounts.

direct and material

A public accounting firm may disassociate itself from an auditing client due to ______.

disputes over fees auditing issues accounting issues

Factors that should be considered in the determination of staffing requirements for an audit include ______.

engagement complexity timing of the work engagement size personnel availability

The arrangements reached between the auditor and the entity are formalized in a(n)

engagement letter

During the documenting stage, the auditor ______.

ensures that the identified risks have been addressed records how the entity is managing its risks complies his or her knowledge about the entity's business objectives and strategies

An auditor may not accept a prospective client because the

entity has unusual business risks client refuses to allow contact with the predecessor auditor

Substantive tests of transactions test for _________ or _________ in individual transactions

error, fraud

Generally, the three preliminary engagement activities are ______.

establishing an understanding with the entity ensuring the audit team and firm are in compliance with ethical and independence requirements determining the audit engagement team requirements

Information regarding related parties may be found in ______.

financial and reporting information provided to creditors, investors and regulators minutes of the board of directors meetings conflict-of-interest statements from management and others

When a prospective client refuses to permit the predecessor auditor to respond, the successor auditor should

have reservations about accepting the client

Factors that would cause the auditor to use a lower percentage for tolerable misstatement include a ______.

history of material weaknesses in internal control high risk of misstatement within the account balance

Violations of laws or regulations are referred to as

illegal act

Information about an auditor's financial or business relationships with the firm's clients is documented by having all personnel complete an annual

independence questionaire

In relying on a specialist, the auditor should evaluate the specialist's ______.

inputs used objectivity competence

Risk assessment procedures include ______.

inquiries of management and others observation and inspection preliminary analytical procedures

According to ASB standards, when assessing materiality, users are assumed to ______.

make appropriate economic decisions on the basis of the financial statements understand financial statements are prepared and audited to levels of materiality recognize uncertainties inherent in the measurement of amounts based on estimates

In deciding the appropriate percentage to apply to a selected materiality benchmark, the auditor would choose a lower percentage within the range for qualitative factors such as ______.

material misstatements in prior years the entity is close to violating a covenant in a loan agreement high risk of fraud

When net income is fluctuating, the auditor should consider basing materiality on ______

normalized earnings for the past three years a benchmark other than net income

Examples of tests of controls include ______.

observation of the application of specific controls inspecting documents, reports and electronic files reperformance of the application of the control inquiries of management, supervisory and staff personnel

When an auditor becomes aware of a possible illegal act, the auditor should ______.

obtain an understanding of the nature of the act discuss the matter with the appropriate level of management evaluate its effect on the financial statements

Auditors can reduce audit risk to an acceptably low level by ______.

obtaining an understanding of the entity and its environment.

Public accounting firms should ______.

periodically evaluate whether to continue their relationship with current clients

When a client has multiple locations, the auditor determines which locations or business units to audit and the extent of audit procedures to be performed during the ______ process.

planning

Ensuring that members of the audit team meet independence requirements generally take place as part of

preliminary engagement activities

The consideration of materiality is a matter of ______.

professional judgment

Auditors should establish an understanding with the entity about the terms of the engagement to ______.

reduce the risk of misinterpretation between the two parties

Auditors should attempt to identify all__________ ________ because transactions with them may not be at "arm's length.

related party

Ideally, the head of of internal auditing (chief audit executive) should ______.

report functionally to the audit committee and administratively to senior management

If an entity has not previously been audited, the prospective auditor should

review the client's financial information before accepting the engagement

Engagement team members performing supervisory activities should ______.

review the work of engagement team members inform engagement team members of their responsibilities

When auditing a company with multiple locations, the amount of audit attention devoted to various locations depends upon the ______.

risk of material misstatement

To detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements, the auditor designs ___________ _____________

substantive procedure

Traditionally, value added services have included ______.

tax planning internal reporting processes system design and integration

Tests of controls are performed to ______.

test the operating effectiveness of controls

Operating effectiveness is checked using ______.

tests of controls only

The categories of substantive procedures are ______.

tests of details substantive analytical procedures

Tests of details are usually categorized into ______.

tests of details of account balances and disclosures substantive test of transactions

When an auditor becomes aware of significant illegal acts, the auditor should make sure that ______ (is) are adequately informed.

the audit committee those charged with governance

In establishing an understanding about the terms of the engagement with potential clients, ______ should be discussed.

the engagement letter using the work of internal auditors the role of the client's audit committee

In documenting the overall audit strategy and audit plan, auditors should document the ______.

timing of audit tests extent of audit tests nature of audit tests

The amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is called _________ _________

tollerable misstatement

An auditor who receives evidence concerning material but indirect illegal acts should ______.

use audit procedures to determine whether the illegal acts have occurred

Risk assessment, benchmarking and recommendations based on the assessment of business risk are all examples of ______ ______ _______

value added services