Gleim Module 3 (Chapter 6)

Which of the following matters does an auditor usually include in the engagement letter? - Arrangements regarding fees and billing. - Identification of working capital deficiencies. - Indications of negative cash flows from operating activities. - Analytical procedures that the auditor plans to perform.

- Arrangements regarding fees and billing

Which of the following statements would least likely appear in an auditor's engagement letter? - Our engagement is subject to the risk that material fraud or errors, if they exist, will not be detected. - Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. - After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. - Management is responsible for making all financial records and related information available to us.

- After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed - Prior to beginning the actual audit work. - After reviewing the activities of the board of directors. - After the auditor has obtained an understanding of existing internal control. - When the audit engagement letter is prepared

- After the auditor has obtained an understanding of existing internal control

Which of the following is required documentation in an audit in accordance with auditing standards? - A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting. - An audit plan documenting the procedures to be used to reduce audit risk. - An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved. - A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel

- An audit plan documenting the procedures to be used to reduce audit risk (An audit plan should be developed and documented based on the overall audit strategy. This strategy, the audit plan, significant changes in them, and the reasons for changes are documented. The audit plan records the nature, timing, and extent of risk assessment procedures and further procedures performed at the assertion level to respond to assessed risks. It also records other planned procedures required by GAAS. Thus, the audit plan is a record of the planning of the audit procedures that can be reviewed prior to their performance (AU-C 300 and AS 2101)

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is - Audit risk. - Inherent risk. - Detection risk. - Control risk

- Detection risk

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are - Considered at the assertion level, but detection risk is not. - Elements of audit risk, but detection risk is not. - Functions of the client and its environment, but detection risk is not. - Changed at the auditor's discretion, but detection risk is not

- Functions of the client and its environment, but detection risk is not

An auditor most likely obtains an understanding of a new client to - Develop an attitude of professional skepticism concerning management's financial statement assertions. - Make constructive suggestions concerning improvements to the client's internal control. - Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. - Identify areas of audit emphasis.

- Identify areas of audit emphasis

An auditor should design the audit plan to - Minimize substantive testing prior to the balance sheet date. - Perform either tests of controls or tests of transactions on each account balance. - Select all material transactions for substantive testing. - Implement the audit strategy.

- Implement the audit strategy

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if - Documentation that is necessary to prove that the bribes were paid does not exist. - Management fails to take the appropriate remedial action. - The payments violated the client's policies regarding the prevention of illegal acts. - The client receives financial assistance from a federal government agency.

- Management fails to take the appropriate remedial action

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? - Management's disregard of its responsibility to maintain an adequate internal control environment. - The CPA's inability to determine whether related-party transactions were consummated on terms equivalent to arm's-length transactions. - The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. - Management's refusal to permit the CPA to perform substantive procedures before year end.

- Management's disregard of its responsibility to maintain an adequate internal control environment

Which of the following matters generally is included in an auditor's engagement letter? - Management's responsibility for the entity's compliance with laws and regulations. - Management's vicarious liability for illegal acts committed by its employees. - The factors to be considered in setting preliminary judgments about materiality. - The auditor's acceptance of the responsibility to search for significant internal control deficiencies.

- Management's responsibility for the entity's compliance with laws and regulations

An auditor's engagement letter most likely would include a statement regarding - Conditions under which the auditor may modify the preliminary judgment about materiality. - Management's responsibility to provide certain written representations to the auditor. - Materiality matters that could modify the auditor's preliminary assessment of fraud risk. - Internal control activities that would reduce the auditor's assessment of control risk

- Management's responsibility to provide certain written representations to the auditor

The ultimate purpose of assessing control risk in a financial statement audit is to contribute to the auditor's evaluation of the risk that - Tests of controls may fail to identify activities relevant to assertions. - Material misstatements may exist in the financial statements. - The collective effect of the control environment may not achieve the control objectives. - Specific internal control activities are not operating as designed.

- Material misstatements may exist in the financial statements

The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that - The auditor will apply an inappropriate measure of audit materiality. - Material misstatements that occur will not be detected by the audit. - The auditor will apply an inappropriate audit procedure. - The auditor will reject a correct account balance as incorrect.

- Material misstatements that occur will not be detected by the audit

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

- Materiality is a matter of professional judgment

In comparison with the detailed audit plan of the independent auditor who is engaged to audit the financial statements of a large publicly held company, the audit client's comprehensive internal audit plan is - Less detailed and covers fewer areas than are normally considered by the independent auditor. - More detailed although it covers fewer areas than are normally covered by the independent auditor. - Substantially identical to the audit plan used by the independent auditor because both consider substantially identical areas. - More detailed and covers areas that normally are not considered by the independent auditor.

- More detailed and covers areas that normally are not considered the independent auditor

Which of the following procedures would an auditor most likely perform before auditing the balance sheet? - Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations. - Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor. - Determine whether there are any liens or encumbrances on assets that have been pledged as collateral. - Obtain an understanding of the client's internal control activities.

- Obtain an understanding of the client's internal activities

In developing an audit plan, an auditor should - Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. - Perform risk assessment procedures. - Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. - Evaluate findings from substantive procedures performed at interim dates.

- Perform risk assessment procedures

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should - Reduce audit risk by lowering initial levels of materiality. - Engage financial experts familiar with the nature of the industry. - Perform risk assessment procedures. - Design special substantive procedures to compensate for the lack of industry expertise

- Perform risk assessment procedures

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should - Raise or lower the materiality level as appropriate to the situation. - Not change the materiality level once it has been established. - Raise the materiality level, but not lower it. - Lower the materiality level, but not raise it

- Raise or lower the materiality level as appropriate to the situation

To obtain an understanding of a continuing client in planning an audit, an auditor most likely would - Reevaluate the risks of material misstatement. - Perform tests of details of transactions and balances. - Read internal audit reports. - Read specialized industry journals.

- Read internal audit reports

Which of the following is an example of an inherent risk that an auditor should consider? - Technological developments that may render inventory obsolete. - Inaccurate physical inventory count. - An incorrect formula in a worksheet used to calculate a LIFO inventory reserve. - Posting of unauthorized journal entries

- Technological developments that may render inventory obsolete

Which of the following statements most likely would be included in an engagement letter from an auditor to a client? - The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement. - The CPA firm is responsible for ensuring that the client complies with applicable laws. - The CPA firm will adjust the financial statements to correct misstatements before issuing a report. - The CPA firm will involve information technology specialists in the performance of the audit

- The CPA firm will involve information technology specialists in the performance of the audit

Audit plans should be designed so that - The audit evidence gathered supports the auditor's conclusions. - The risks of material misstatement are assessed at a sufficiently low level. - The auditor can make constructive suggestions to management. - Most of the required procedures can be performed as interim work

- The audit evidence gathered supports the auditor's conclusions

An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes - Management's responsibility for errors and the illegal activities of employees that may cause material misstatement. - Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. - The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors. - The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention

- The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? - The contents of the representation letter. - The entity's year-to-date financial results and position. - The results of the internal control questionnaire. - The anticipated sample size of the planned substantive procedures.

- The entity's year-to-date financial results and position

Which of the following is a definition of control risk? - The risk that the auditor will not detect a material misstatement. - The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. - The risk that the auditor's assessment of internal controls will be at less than the maximum level. - The susceptibility of material misstatement assuming there are no related internal control policies or procedures.

- The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? - Prepare a rough draft of the financial statement and of the auditor's report. - Assess control risk for the assertions embodied in the financial statements. - Tour the client's facilities. - Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

- Tour the client's facilities

The audit plan usually cannot be finalized until the - Search for unrecorded liabilities has been performed and documented. - Control deficiencies have been communicated to those charged with governance. - Engagement letter has been signed by the auditor and the client. - Understanding of the entity and its environment has been completed

- Understanding of the entity and its environment has been completed

An auditor reviews an audit client's accounting policies when considering which of the following matters? - Understanding the entity and its environment, including its internal control. - Nature of reports to be issued. - Method of sampling to be used. - Preliminary judgments about materiality levels.

- Understanding the entity and its environment, including its internal control