Auditing Chapter 6

Regulations of the SEC require companies subject to its jurisdiction to file a ___ reporting changes in independent auditors and the reasons therefore.

Form 8-K

In an audit engagement, assessing the risks of misstatement and designing further audit procedures comes __ obtaining an understanding of the client and its environment, including internal control.

after

___ involve comparisons of financial statement balances and ratios for the period under audit with auditor expectations developed from sources such as the client's prior years' financial statements, published industry statistics, and budgets.

analytical procedures

Arrangements for the audit should be made through contact with the company's ___.

audit committee

The audit plan is documented with an ___, which is a detailed list of the audit procedures to be performed in the course of the audit.

audit program

Many firms have developed a ___ that uses a combination of financial and nonfinancial performance measures to assess the financial, customer, internal business process, and learning and growth perspectives of the organization.

balanced scorecard

Many inherent risks arise because of ____ faced by management, including the possibility of material misstatement due to fraud.

business risk

AICPA AU 510 (PCAOB 315) requires that the auditors determine whether the prior period's ___ were properly brought forward to the current period, and whether they reflect the application of appropriate accounting policies.

closing balances

When the engagement letter is accepted by the authorized client official, it presents an ___ between the auditor and the client.

executor letter

When the auditors have obtained a sufficient understanding of the client, they establish an ____ that considers those characteristics of the audit which determine its scope, such as industry reporting requirements, client locations, and the basis of reporting followed by the client.

overall audit strategy

AICPA AU 210 (PCAOB 315) requires the auditors to attempt to communicate with the ___ before accepting the engagement.

predecessor

____ include inquiries of management, analytical procedures, observation and inspection, and other procedures to assess the risks of material misstatement.

risk assessment procedures

A tentative audit program is developed based on the auditors' initial ___.

risk assessments

In audit planning auditors use a ___ approach in which they are continually considering the possibility of material financial statement misstatements.

risk-based

A ___ for an audit is constructed by estimating the time required for each step in the audit program for each of the various levels of auditors and totaling those estimated amounts.

time budget

The second communication to the predecessors auditors, after accepting the client, usually concerns the predecessors' ___.

working papers

At the ___ level, auditors examine what could go wrong and how likely it is to go wrong.

assertion

Inherent risk is the risk of material misstatement of an ___ without considering internal control.

assertion

The ___ must be responsible for appointment, compensation, and oversight of the auditors.

audit committee

When the overall audit strategy has been established, the auditors are able to start developing the ___.

audit plan

___ risk is increased when the client company is in a weak financial position or is greatly in need of additional capital.

engagement

At least one member of the audit committee must be a ___.

financial expert

If the auditors believe that inherent risk is higher for an important area and internal control is weak, they will assess the risk of material misstatement as ___.

high

Planning is ___ in that it continues throughout the audit as the auditors modify planned procedures in response to circumstances identified throughout the audit.

iterative

In the first audit of the client, the auditors should obtain sufficient appropriate evidence about whether the ___ for the various accounts contain misstatements that materially affect the current period's financial statements.

opening balances

If inherent risk is assessed as low and controls seem capable of preventing or detecting and correcting misstatements, the auditors may decide to ___ to support an assessment that control risk is low.

perform tests of controls

The required understanding of the client is used by the auditors to help plan the audit and to assess the risks of material misstatement at the financial statement and ___ levels.

relevant assertion

___ is the basic unit of measurement for audit fees.

staff time

A test of a control does not ___ the dollar amount of an account balance.

substantiate

___ are performed to restrict detection risk, the risk that auditors will not detect a material misstatement.

substantive procedures

___ include direct tests of account balances, transactions and disclosures, as well as substantive analytical procedures.

substantive procedures

Not until ___ have been completed can a final version of the audit program be completed.

tests of controls

___ are performed to determine whether key controls are properly designed and operating effectively.

tests of controls

Audit committees must be composed of at least ___.

three independent auditors