Ch. 3 LS

For public companies, a relative percentage for establishing overall materiality is typically:

3% to 10% of income before taxes

True of False: The work of internal auditors should not effect the nature, timing, and extent of the audit procedures performed by the auditor.

False

True or False: the extent of effort that goes into evaluating a new client is normally much less than the decision to continue with an existing client.

False

A significant aspect of most audit engagements is the use of a(n):

IT specialist

_____________ _____________ are designed to detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements.

Substantive procedures

When a company is faced with fluctuating net income, the auditor should consider basing materiality on:

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

Materiality is assessed in terms of potential effect of a misstatement on decisions made by:

a reasonable user of financial statements

Auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in:

all material respects

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

an understanding of the internal auditor function

Evaluations of financial information through analysis of plausible relationships among financial and non-financial data is done using ________ ___________.

analytical procedures

The investigation, if necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount are part of substantive _________ __________.

analytical procedures

Engagement letters may include:

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

A subcommittee of the board of directors that is responsible for the financial reporting and disclosure process is the:

audit committee

The auditor is required to establish an understanding of the terms of the audit engagement with the:

audit committee

Once the audit strategy has been established, the auditor develops a more detailed _______ _______.

audit plan

Engagement planning involves all of the issues with the auditor should consider in developing an overall _______ ________ for conducting the audit.

audit strategy

The terms of the audit engagement should include:

auditor's responsibilities; limitations of the engagement; the objectives of the engagement; management's responsibilities

An individual or organization possessing expertise in a field other than accounting or auditing whose work is used to assist the auditor in obtaining sufficient, appropriate evidence is defined by auditing standards as a(n) __________ ___________.

auditor's specialist

In practice, auditors commonly set tolerable misstatement for each account at:

between 50% and 75% of overall materiality

Based on an understanding of the entity and environment, the auditor identifies those __________ risks that may result in material misstatements.

business

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

client acceptance and continuance

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

complexity of the entity; size of the entity; auditor's previous experience with the entity

Wotf is not a factor that auditor should consider when evaluating the reliability of the internal audit function?

composition

Generally, the three preliminary engagement activities are:

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

Auditing standards distinguish between illegal acts that have _________ and material effects on the financial statements and those that have ______ but _______ effects.

direct; material; indirect

Wotf statements are correct?

dual-purpose tests can improve audit efficiency; tests of controls check the operating effectiveness of controls; substantive tests of transactions are concerned with monetary misstatements; the lower the tolerable misstatement, the more extensive the required audit testing; audits must be completed in a reasonable length of time at reasonable cost; overall financial statement materiality serves as a safety net

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

engagement letter

Overall responsibility for an audit engagement rests with the:

engagement partner

An auditor may not accept a prospective client because the:

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

If the entity's management does not provide satisfactory information about possible illegal acts, the auditor should consult with the:

entity's legal counsel

Substantive tests of transactions test for ________ or _______ in individual transactions.

errors; fraud

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

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

When the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented:

fairly

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 acts

A public accounting firm should document independence compliance by having all personnel complete an annual ______________ ____________.

independence questionnaire

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

inputs used; objectivity; competence

Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public company:

is directly responsible for the hiring, paying and oversight of the public accounting firm employed by the company; must have the authority to engage independent counsel to carry out duties as necessary; must approve all audit and non-audit services provided by the auditors

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:

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

In deciding the appropriate percentage to apply to a selected 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

Information regarding related parties may be found in:

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

Auditing standards provide _______ assurance that illegal acts will be detected or that any contingent liability that may result will be disclosed.

no

Risk assessment procedures include:

observation and inspection; inquiries of management and others; preliminary analytical procedures

Examples of test of controls include:

observation of the application of specific controls; management, supervisory and staff personnel inquiries; auditor reperformance of the application of the control; document, report and electronic file inspection

Auditor risk assessment procedures are used to:

obtain an understanding of the entity and its environment

Wotf is way that the auditor can reduce audit risk to an acceptably low level?

obtain an understanding of the entity and its environment

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

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

As a part of which process does the auditor determine which locations or business units are to be audited and the extent of audit procedures to be performed?

planning process

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

preliminary engagement activities

The auditor's consideration of materiality on an audit is a matter of:

professional judgment

Audit personnel should be provided with the names of identified ________ ___________ so that transactions with them are identified and investigated.

related parties

Auditors should attempt to identify all ______ _______ because transactions with them may not be at "arm's length."

related parties

materiality is a __________ concept

relative

Engagement team members performing supervisory activities should:

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

The categories of substantive procedures are:

substantive analytical procedures; tests of details

Tests of details are usually categorized into:

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

Traditionally, value added services have included:

tax planning; system design and integration; internal reporting processes

Tests of controls are performed to:

test the operating effectiveness of controls

Operating effectiveness is checked using:

tests of controls only

Wotf is not an inquiry that a successor auditor should make to a predecessor auditor?

the predecessor auditor's fee charged for audit work

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

those charged with governance; the audit committee

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

timing of the work; personnel availability; engagement size; engagement complexity

An amount or amounts that reduced to an appropriately low level of the probability that the total of uncorrected and undetected misstatements that would result in material misstatements of the financial statements is ________ ___________.

tolerable misstatement

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

tolerable misstatement

The purpose of setting _______ _____________ is to establish a scope for the audit procedures for the individual account balance or disclosures.

tolerable misstatement

According to ASB standards, when assessing materiality, users are assumed to:

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

What should an auditor do if they receive evidence concerning material but indirect illegal acts?

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 ________-_________ services.

value-added