Audit 4110 Ch 3 -
If a company has income before taxes of $15,000,000 and the auditor decides that 7% of that amount would be material, what would be the overall materiality for the audit engagement. $ 1,050,000 $ 1,000,500 $ 1,005,000 $ 1,500,000
$ 1,050,000
To detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements, the auditor designs Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: substantive Blank 2: procedures or procedure
The amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is called Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: tolerable Blank 2: misstatement
A significant aspect of most audit engagements is the use of a(n) ______ specialist. valuation IT legal environmental tax
IT
It is generally ______ for the auditor to simply subdivide materiality proportionally to each account inefficient efficient
inefficient
When an entity operates in a highly regulated industry, the auditor would choose a _____ percentage in deciding the appropriate percentage to apply to a selected materiality benchmark. lower higher
lower
Once the audit strategy has been established, the auditor develops a more detailed Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: audit Blank 2: plan
Many public accounting firms adopt a policy of not completing the current audit until ______ fees have been paid. most of the prior year's most of the current year's all of the current year's all of the prior year's
all of the prior year's
In relying on a specialist, the auditor should evaluate the specialist's ______. competence reputation cost inputs used objectivity
competence inputs used objectivity
Overall responsibility for an audit engagement rests with the ______. engagement partner internal auditors audit committee senior auditor
engagement partner
When the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented ______. fairly without error accurately
fairly
Auditor risk assessment procedures are used to ______. obtain an understanding of the entity and its environment determine whether or not to accept a client determine the type of opinion to issue set audit fees
obtain an understanding of the entity and its environment
Risk assessment, benchmarking and recommendations based on the assessment of business risk are all examples of Blank 1 of 2-Blank 2 of 2 services. (Enter only one word per blank.)
Blank 1: value Blank 2: added
When should the audit committee meet with external auditors to discuss the auditor's responsibilities and significant accounting policies? Before the engagement starts At the end of the engagement During the engagement
Before the engagement starts
A subgroup of the board of directors that is responsible for the financial reporting and disclosure process is called the Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: audit Blank 2: committee
True or false: Both the PCAOB and ASB follow an auditor perspective in considering what is material. True False
False Reason: Both follow a user perspective.
Which of the following statements are correct? Overall financial statement materiality serves as a safety net. 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. It is generally efficient for an auditor to subdivide materiality proportionally to each account.
Overall financial statement materiality serves as a safety net. 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.
Serving as a contract, the Blank 1 of 2 Blank 2 of 2 outlines responsibilities and prevents misunderstandings between the auditor and client. (Enter only one word per blank.)
Blank 1: engagement Blank 2: letter
Substantive tests of transactions test for Blank 1 of 2 or Blank 2 of 2 in individual transactions. (Enter only one word per blank.)
Blank 1: errors or error Blank 2: fraud
True or false: A public accounting firm should investigate a prospective client prior to accepting the engagement. True False
True
True or false: In some cases, fraud may consist of illegal acts. True False
True
Materiality is assessed in terms of potential effect of a misstatement on decisions made by ______. any potential lender or creditor a reasonable user of financial statements employees and suppliers all stockholders of the corporation
a reasonable user of financial statements
For public companies, the auditor is required to establish an understanding of the terms of the audit engagement with the ______. audit committee chief executive officer (CEO) board of directors chief financial officer (CFO)
audit committee
If an entity has not previously been audited, the prospective auditor should ______. accept the audit engagement without any investigation not accept the audit engagement carefully assess management integrity before accepting the engagement
carefully assess management integrity before accepting the engagement
An auditor may not accept a prospective client because the ______. client refuses to allow contact with the predecessor auditor entity has unusual business risks level of engagement risk is minimal
client refuses to allow contact with the predecessor auditor entity has unusual business risks
Steps that should be performed as part of audit planning activities include ______. assess the need for an audit partner identify non-related parties consider violations of laws and regulations assess business risk establish materiality
consider violations of laws and regulations assess business risk establish materiality
When a prospective client refuses to permit the predecessor auditor to respond, the successor auditor should ______. have reservations about accepting the client accept the client and note the refusal in the working papers definitely refuse to accept the client report the matter to the SEC or other appropriate authority
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 low turnover of senior management high risk of misstatement within the account balance lower number of accounting issues requiring judgment or estimates
history of material weaknesses in internal control high risk of misstatement within the account balance
The terms of the audit engagement should include ______. the role of the board of directors management's responsibilities limitations of the engagement the objectives of the engagement auditor's responsibilities
management's responsibilities limitations of the engagement the objectives of the engagement auditor's responsibilities
Public accounting firms should ______. periodically evaluate whether to continue their relationship with current clients only evaluate continuing their relationship with current clients when conflicts arise not continue their relationship with current clients when conflicts arise
periodically evaluate whether to continue their relationship with current clients
Auditors should attempt to identify all related parties during the ______ phase of the audit. testing evaluation planning client acceptance
planning
When auditing a company with multiple locations, the amount of audit attention devoted to various locations depends upon the ______. revenue generated at each location recommendations of the audit committee size of various locations risk of material misstatement number of locations
risk of material misstatement
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 Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: analytical Blank 2: procedures
Evaluations of financial information through analysis of plausible relationships among financial and non-financial data is the meaning of the term Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: analytical Blank 2: procedures or procedure
Engagement planning involves all of the issues the auditor should consider in developing an overall Blank 1 of 2 Blank 2 of 2 for conducting the audit. (Enter only one word per blank.)
Blank 1: audit Blank 2: strategy
Violations of laws or regulations are referred to as Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: illegal Blank 2: acts
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. True False
False
When should the evaluation of client continuance take place? At the beginning of the audit. When a significant event occurs. At or near the completion of the audit.
When a significant event occurs. At or near the completion of the audit.
Which of the following statements regarding using an entity's internal audit function (IAF) during an external audit are correct? When internal auditors work directly for the auditor, the auditor should supervise their work. Materiality and audit risk may determine reliance on the IAF's work. Part of the IAF work may include confirming accounts receivables. The IAF's work should never affect the nature, timing and extent of audit procedures performed by the external auditors.
When internal auditors work directly for the auditor, the auditor should supervise their work. Materiality and audit risk may determine reliance on the IAF's work. Part of the IAF work may include confirming accounts receivables.
Auditors consider materiality from a reasonable user perspective and communicate to users that "the financial statements present fairly in ______ material respects. all no some most
all
Engagement letters may include: ______. any limitation of liability for the auditor or client arrangements regarding other services (e.g., assurance, tax, or consulting services) the type of audit opinion the auditor expects to issue to the client. additional services to be provided relating to regulatory requirements the type of audit opinion the client expects to receive from the auditor. 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) additional services to be provided relating to regulatory requirements arrangements involving the use of specialists or internal auditors
The nature and extent of planning activities that are necessary depend on the ______ the entity auditor's previous experience with size of market value of complexity of compensation to be received from
auditor's previous experience with size of complexity of
In practice, auditors commonly set tolerable misstatement for each account at ______. less than 25% of overall materiality 100% of overall materiality between 50% and 75% of overall materiality between 25% and 50% of overall materiality
between 50% and 75% of overall materiality
The first phase of the audit process that relates to audit planning is ______. planning the audit client acceptance and continuance preliminary engagement activities
client acceptance and continuance
An auditor's independence would be considered impaired if the ______. cousin of the auditor is a maintenance worker for the entity client owes money to the auditor that has the characteristics of a loan auditor received a casual lunch paid for by the client being audited spouse of the auditor is an accounting supervisor for the entity
client owes money to the auditor that has the characteristics of a loan spouse of the auditor is an accounting supervisor for the entity
Information regarding related parties may be found in ______. conflict-of-interest statements from management and others contracts and other agreements representing significant ordinary transactions 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 financial and reporting information provided to creditors, investors and regulators minutes of the board of directors meetings
When an auditor becomes aware of a possible illegal act, the auditor should ______. discuss the matter with the appropriate level of management obtain an understanding of the nature of the act contact the predecessor auditor to inquire about the act evaluate its effect on the financial statements
discuss the matter with the appropriate level of management obtain an understanding of the nature of the act evaluate its effect on the financial statements
Tests of details of account balances and disclosures focus on the items that are contained in the ______ financial statement account balances and disclosures. beginning prior year ending historical
ending
Factors that should be considered in the determination of staffing requirements for an audit include ______. level of certainty engagement complexity timing of the work engagement size personnel availability
engagement complexity timing of the work engagement size personnel availability
If the entity's management does not provide satisfactory information about possible illegal acts, the auditor should consult with the ______. entity's internal auditors auditor's legal counsel entity's board of directors entity's legal counsel
entity's legal counsel
Examples of tests of controls include ______. inquiries of management, supervisory and staff personnel observation of the application of specific controls copying prior year auditing working papers inspecting documents, reports and electronic files reperformance of the application of the control
inquiries of management, supervisory and staff personnel observation of the application of specific controls inspecting documents, reports and electronic files reperformance of the application of the control
Work performed by the internal audit function ______ affect(s) the nature, timing and extent of audit procedures performed by the external auditors. always never should not may
may
Auditing standards provide ______ assurance that illegal acts will be detected and that any contingent liability that may result will be disclosed. full no limited
no
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 the highest net income for the past three years the lowest net income for the past three years
normalized earnings for the past three years a benchmark other than net income
Risk assessment procedures include ______. observation and inspection completing industry benchmarking comparisons inquiries of management and others establishing materiality preliminary analytical procedures
observation and inspection inquiries of management and others preliminary analytical procedures
Auditors can reduce audit risk to an acceptably low level by ______. consulting with top-level management increase the amount charged for performing the audit obtaining an understanding of the entity and its environment. using the internal audit function as part of the audit team
obtaining an understanding of the entity and its environment.
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. fee setting client acceptance implementation planning
planning
Ensuring that members of the audit team meet independence requirements generally take place as part of ______. audit strategy and planning evaluating audit findings preliminary engagement activities client acceptance and continuance
preliminary engagement activities
The auditor's consideration of materiality on an audit is a matter of ______. industry related benchmarking financial statement analysis fees charged for the audit professional judgment
professional judgment
The consideration of materiality is a matter of ______. cost effectiveness professional judgment audit fees charged engagement efficiency
professional judgment
During the documenting stage, the auditor ______. records how the entity is managing its risks decides upon the nature, timing and extend of audit tests ensures that the identified risks have been addressed compiles his or her knowledge about the entity's business objectives and strategies
records how the entity is managing its risks ensures that the identified risks have been addressed compiles his or her knowledge about the entity's business objectives and strategies
Auditors should establish an understanding with the entity about the terms of the engagement to ______. discuss the type of audit opinion expected document the understanding in the working papers increase the billable hours charged to the client reduce the risk of misinterpretation between the two parties
reduce the risk of misinterpretation between the two parties
The categories of substantive procedures are ______. inquiries of management tests of financial statements substantive analytical procedures tests of details
substantive analytical procedures tests of details
Question Mode Multiple Choice Question Tests of controls are performed to ______. test the operating effectiveness of controls increase the audit fees charged to the client determine the type of audit opinion to issue comply with accounting standards
test the operating effectiveness of controls
In establishing an understanding about the terms of the engagement with potential clients, ______ should be discussed. the role of the client's audit committee the engagement letter using the work of internal auditors the type of opinion the audit firm expects to issue
the role of the client's audit committee the engagement letter using the work of internal auditors
In documenting the overall audit strategy and audit plan, auditors should document the ______. timing of audit tests outcomes of prior audit tests extent of audit tests prior audit fees nature of audit tests
timing of audit tests extent of audit tests nature of audit tests
An auditor who receives evidence concerning material but indirect illegal acts should ______. immediately notify the appropriate authorities of the acts notify the internal auditors of the illegal acts resign as the auditor for the entity use audit procedures to determine whether the illegal acts have occurred
use audit procedures to determine whether the illegal acts have occurred
For public companies, a relative percentage for establishing overall materiality is typically __. 3% to 5% of income before taxes 5% to 10% of total revenue 3% to 5% of total assets 5 to 10% of total equity
3% to 5% of income before taxes
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)Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: auditor's or auditor Blank 2: specialist
Based on an understanding of the entity and environment, the auditor identifies those Blank 1 of 1 risks that may result in material misstatements. (Enter only one word per blank.)
Blank 1: business
Auditing standards distinguish between illegal acts that have Blank 1 of 2 and material effects on the financial statements and those that have material but Blank 2 of 2 effects. (Enter only one word per blank.)
Blank 1: direct Blank 2: indirect
The arrangements reached between the auditor and the entity are formalized in a(n) Blank 1Blank 1 Blank 2Blank 2. (Enter only one word per blank.)
Blank 1: engagement Blank 2: letter
Auditor's responsibility for detecting illegal acts having a direct and material effect on the financial statements is the same as that for Blank 1 of 2and Blank 2 of 2. (Enter only one word per blank.)
Blank 1: errors or error Blank 2: fraud
Information about an auditor's financial or business relationships with the firm's clients is documented by having all personnel complete an annual Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: independence Blank 2: questionnaire
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decision of users is overall Blank 1 of 1. (Enter only one word per blank.)
Blank 1: materiality
Audit personnel should be provided with the names of identified Blank 1 of 2 Blank 2 of 2 so that transactions with them are identified and investigated. (Enter only one word per blank.)
Blank 1: related Blank 2: parties
Auditors should attempt to identify all Blank 1 of 2 Blank 2 of 2 because transactions with them may not be at "arm's length." (Enter only one word per blank.)
Blank 1: related Blank 2: parties
An amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements that would result in material misstatement of the financial statements is Blank 1 of 2 Blank 2 of 2. (Enter only one word per blank.)
Blank 1: tolerable Blank 2: misstatement
The purpose of setting Blank 1 of 2 Blank 2 of 2 is to establish a scope for the audit procedures for the individual account balance or disclosures. (Enter only one word per blank.)
Blank 1: tolerable Blank 2: misstatement
True or false: The audit team a public accounting firm uses for an engagement does not tend to vary from client to client. True False
False Reason: Pubic account firms need to ensure that engagements are completed by auditors having the proper degree of technical training and proficiency given the circumstances of the entity.
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 are concerned with monetary misstatements. Tests of controls check the operating effectiveness of controls. An audit procedure should either be a test of controls or a substantive test of transactions. Substantive tests of transactions check the operating effectiveness of controls.
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? Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control. Disagreements with management about accounting policies, auditing procedures or other similarly significant matters. Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity. Information that might bear on the integrity of management. The predecessor auditor's fee charged for audit work.
The predecessor auditor's fee charged for audit work.
Which of the following should NOT be included in an engagement letter? The type of audit opinion the auditor expects to issue to the client. 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).
The type of audit opinion the auditor expects to issue to the client.
When determining whether to use the work of the entity's internal auditors, the external auditor must obtain ______. working papers from the internal auditors resumes of the internal auditors an understanding of the internal audit function certifications held by the internal auditors
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 ______. extent to which the IAF's status and policies support the financial objectives of the client application by the IAF of a systematic and disciplined approach quality control approach of the IAF level of competence of the IAF
application by the IAF of a systematic and disciplined approach quality control approach of the IAF level of competence of the IAF
In establishing the audit strategy, the auditor should ______. document a description of the nature, timing and extent of the planned audit procedures ascertain the reporting objectives to plan the timing of the audit 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 determine the scope of the engagement consider the factors that will determine the focus of the audit team's efforts
When the aggregated misstatement are greater than overall materiality the auditor should ______. issue an unqualified opinion with reservation ask the entity to adjust the financial statements withdrawal from the audit and refuse to issue an opinion issue a qualified or adverse opinion
ask the entity to adjust the financial statements
Generally, the three preliminary engagement activities are ______. charging clients for preliminary audit work completed documenting prior audit opinions that have been issued to the client ensuring the audit team and firm are in compliance with ethical and independence requirements establishing an understanding with the entity determining the audit engagement team requirements
ensuring the audit team and firm are in compliance with ethical and independence requirements establishing an understanding with the entity determining the audit engagement team requirements
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 ______. high risk of fraud the entity is close to violating a covenant in a loan agreement material misstatements in prior years the entity operates in a non-regulated industry
high risk of fraud the entity is close to violating a covenant in a loan agreement material misstatements in prior years
Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public company ______. must preapprove all audit and nonaudit services provided by the auditors must consist of members who are part of the company's upper management 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 preapprove all audit and nonaudit services provided by the auditors 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
Materiality is a(n) __ concept. absolute relative statistical analytical
relative
Ideally, the head of of internal auditing (chief audit executive) should ______. only report to senior management (CEO and CFO) report administratively to the audit committee and functionally to senior management only report to the audit committee report functionally to the audit committee and administratively to senior management
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 not accept the audit engagement accept the audit engagement without any investigation
review the client's financial information before accepting the engagement
Engagement team members performing supervisory activities should ______. direct audit team members to bring any significant accounting or auditing issues to the audit committee review the work of engagement team members inform engagement team members of their responsibilities
review the work of engagement team members inform engagement team members of their responsibilities
Traditionally, value added services have included ______. tax planning internal auditing services system design and integration internal reporting processes financial statement preparation
tax planning system design and integration internal reporting processes
Operating effectiveness is checked using ______. substantive tests only tests of controls only neither tests of controls nor substantive tests both tests of controls and substantive tests
tests of controls only
Tests of details are usually categorized into ______. tests of details of account balances and disclosures tests of internal controls tests of financial statement accuracy substantive test of transactions
tests of details of account balances and disclosures substantive test of transactions
According to ASB standards, when assessing materiality, users are assumed to ______. have limited knowledge of accounting and financial statement preparation 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
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