Audit Chapter 5/6 GLEIM
Which of the following is an analytical procedure? A. Comparing current-year balances to prior-year balances. B. Matching sales invoices to shipping documents. C. Confirming accounts receivable. D. Making inquiries of client management.
Answer (A) is correct. Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. Comparing current-year balances to prior-year balances is a study of a plausible relationship between these activities.
The acceptable level of detection risk is inversely related to the A. Assurance provided by substantive procedures. B. Risk of misapplying auditing procedures. C. Preliminary judgment about materiality levels. D. Risk of failing to discover material misstatements.
Answer (A) is correct. For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS 2301).
Which of the following is an example of an inherent risk that an auditor should consider? A. Technological developments that may render inventory obsolete. B. Posting of unauthorized journal entries. C. An incorrect formula in a worksheet used to calculate a LIFO inventory reserve. D. Inaccurate physical inventory count.
Answer (A) is correct. Inherent risk is the susceptibility of a financial statement assertion to a material misstatement before consideration of any related controls. Inherent risk is higher for some assertions and related transactions, balances, and disclosures. For example, it may be higher for complex calculations or amounts with significant estimation uncertainty. Business risks also may affect inherent risk. For example, technological developments might make a product obsolete, causing inventory to be overstated.
Which result of an analytical procedure suggests the existence of obsolete merchandise? A. Decrease in the inventory turnover rate. B. Decrease in the ratio of gross profit to sales. C. Decrease in the ratio of inventory to accounts payable. D. Decrease in the ratio of inventory to accounts receivable.
Answer (A) is correct. Inventory turnover is equal to cost of sales divided by average inventory. If inventory is increasing at a faster rate than sales, the turnover rate decreases and suggests a buildup of unsalable inventory.
For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as Risk Assessment Procedures Substantive Procedures In the Review Stage A. Yes No Yes B. No Yes No C. No No Yes D. Yes Yes No
Answer (A) is correct. The auditor obtains an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. Risk assessment procedures are performed to obtain the understanding. They include (1) inquiries of management and others within the entity, (2) analytical procedures (analytical procedures used to plan the audit), and (3) observation and inspection. Substantive procedures are designed to detect material misstatements in assertions. They consist of tests of details and substantive analytical procedures. Analytical procedures are required to be used as risk assessment procedures (AU-C 315). However, the decision to use analytical procedures as substantive procedures is based on the auditor's judgment about their effectiveness and efficiency in reducing the risks of material misstatement to an acceptably low level (AU-C 520).
The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to A. Refer the disagreement to the AICPA's Peer Review Board. B. Document the details of the disagreement with the conclusion reached. C. Discuss the disagreement with the entity's management or its audit committee. D. Report the disagreement to an impartial peer review monitoring team.
Answer (B) is correct. According to AU-C 220 and QC 10, difference of opinion (1) within the engagement team, (2) with a consultant, or (3) between the engagement partner and the quality control reviewer should be resolved by following the firm's related policies and procedures. A member of the engagement team should be able to document his or her disagreement with the conclusions reached after appropriate consultation. Moreover, (1) conclusions should be documented and implemented, and (2) the report should be released only after resolution of the matter. According to AS 1201, in applying due professional care, each engagement team member has a responsibility to bring to the attention of appropriate persons any disagreements or concerns about accounting and auditing issues that (s)he believes are significant to the statements or the report regardless of how they may have arisen. The PCAOB's AS 1215 requires documentation of disagreements among members of the engagement team or with consultants about final conclusions on significant accounting or auditing matters.
Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? A. Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts. B. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. C. Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions. D. Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.
Answer (B) is correct. Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. Plausible relationships among data are reasonably expected to exist and continue in the absence of known conditions to the contrary. Relationships in stable environments are more predictable than those in unstable environments, and income statement amounts tend to be more predictable than balance sheet amounts. The reason is that income statement amounts are based on transactions over a period of time, but balance sheet amounts are for a moment in time. Also, amounts subject to management discretion tend to be less predictable.
Which of the following statements is true concerning analytical procedures used as risk assessment procedures? A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management. B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level. C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk. D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.
Answer (B) is correct. Analytical procedures used as risk assessment procedures may use data aggregated at a high level.
As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from a less effective to a more effective procedure. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of inherent risk to a higher amount.
Answer (B) is correct. For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS 2301).
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A. A high turnover of senior management. B. A lack of independent checks. C. A strained relationship between management and the predecessor auditor. D. An inability to generate cash flow from operations.
Answer (B) is correct. Fraud in financial statements results from either fraudulent financial reporting by management or the misappropriation of assets by employees or others. Misappropriation of assets is mitigated by internal controls, including independent checks.
Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities? A. Unrecorded purchases. B. Unrecorded sales. C. Merchandise purchases being charged to selling and general expense. D. Fictitious sales.
Answer (B) is correct. Fraud or error that decreases gross profit relative to sales (or increases sales relative to gross profit) causes the ratio to decline. Unrecorded sales cause inventory to decrease and cost of sales to increase with no increase in sales, thereby decreasing gross profit relative to sales and lowering the ratio.
Which of the following statements about materiality is most likely to be true? A. Materiality requires that relatively more time be directed to those areas that are more susceptible to fraud. B. Performance materiality is less than materiality for the financial statements as a whole. C. Materiality at the assertion level is larger than for the financial statements as a whole. D. Materiality is measured according to specific AICPA standards.
Answer (B) is correct. Performance materiality is one or more amounts set by the auditor at less than the materiality for the statements as a whole. Performance materiality also refers to amounts set at less than materiality for particular classes of transactions, balances, or disclosures. Performance materiality is set to reduce to an appropriately low level the probability that the sum of uncorrected and undetected misstatements exceeds the applicable materiality. Accordingly, performance materiality is an adjustment for (1) individually immaterial misstatements and (2) possible undetected misstatements.
When planning an audit, an auditor should A. Consider whether substantive procedures may be reduced based on the results of the internal control questionnaire. B. Determine materiality for the financial statements as a whole. C. Conclude whether changes in compliance with prescribed controls require a change in the reliance on controls. D. Prepare a preliminary draft of the management representation letter.
Answer (B) is correct. Planning involves establishing an overall audit strategy. For this purpose, the auditor determines materiality for the financial statements as a whole. Circumstances also may indicate that misstatements of classes of transactions, balances, or disclosures of lesser amounts would influence the judgment made by a reasonable user. In those cases, the auditor also determines materiality for particular classes of transactions, balances, and disclosures.
In an audit of a nonissuer's financial statements, projected misstatement is A. The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. B. An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. C. The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. D. An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.
Answer (B) is correct. Projected misstatement is the auditor's best estimate of the misstatement in populations based on audit samples.
For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn? A. Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance. B. Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance. C. Accounts receivable turnovers are 14.3 and 8.0, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance. D. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.
Answer (B) is correct. The accounts receivable turnover equals sales divided by average gross receivables. Thus, it equals 10.0 ($1,000,000 ÷ $100,000) and 6.7 ($2,000,000 ÷ $300,000) for the prior year and current year, respectively. The ratio of allowance for uncollectible accounts receivable to gross accounts receivable is .30 ($30,000 ÷ $100,000) for the prior year and .17 ($50,000 ÷ $300,000) for the current year. The gross accounts receivable tripled in the second year, yet the allowance for uncollectible accounts receivable increased by only 67%. This could be an indication that the allowance for uncollectible accounts receivable is understated.
An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods: Year 3 Year 2 Year 1 4.3 6.2 7.3 Which of the following is the most likely cause of the decrease in accounts receivable turnover? A. Increase in the cash discount offered. B. Liberalization of credit policy. C. Shortening of due date terms. D. Increased cash sales.
Answer (B) is correct. The accounts receivable turnover ratio equals net credit sales over average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increase. Liberalization of credit policy will increase receivables.
Financial statement audit plans usually should be developed A. Prior to performing risk assessment procedures. B. After the auditor has established the overall audit strategy. C. After obtaining an understanding of the information and communication and control activities components of internal control. D. When the engagement letter is prepared. A
Answer (B) is correct. The audit plan is guided by the overall audit strategy. The auditor's planning activities for establishing this strategy include considering (1) characteristics of the engagement and reporting objectives, (2) significant factors in directing engagement efforts, (3) relevant knowledge from preliminary activities and other engagements, and (4) the audit resources required. Among the significant factors, preliminary activities, and knowledge from other engagements are (1) determinations of materiality; (2) areas of higher risk; (3) evaluations of internal control; (4) changes in accounting standards (e.g., significant new disclosures); (5) significant business, industry, and legal developments; and (6) management processes for identifying and preparing disclosures.
The components of internal control include A. Monitoring of controls that sets the tone of the organization. B. A process of managing risks relevant to preparing financial statements. C. A control environment consisting of policies and procedures to help ensure that management directives are carried out. D. Control activities that identify, capture, and exchange information.
Answer (B) is correct. The risk assessment process is the entity's identification, analysis, and management of risks relevant to preparation of financial statements.
The objective of analytical procedures performed as risk assessment procedures is to A. Evaluate the adequacy of evidence gathered in response to unusual balances identified during the audit. B. Test individual account balances that depend on accounting estimates. C. Enhance the auditor's understanding of the client's business. D. Identify material weaknesses in internal control.
Answer (C) is correct. Analytical procedures applied as risk assessment procedures may (1) improve the understanding of the client's business and significant transactions and events and (2) identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit ramifications (AU-C 315).
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? A. Substantive procedures and analytical procedures. B. Substantive analytical procedures and tests of controls. C. Tests of controls and tests of details. D. Tests of details and substantive procedures.
Answer (C) is correct. Dual-purpose testing involves performing (1) a test of details and (2) a test of controls on the same transaction. Tests of controls are used to determine whether controls are operating effectively. Determining whether the invoice was approved verifies that the control was effective. Ascertaining the amount and terms of the invoice is used to detect material misstatements in financial statement assertions, which is a test of details.
Audit planning for an initial audit most likely includes A. Determining the opinion to be expressed. B. Obtaining an engagement letter prepared by the auditee. C. Performing procedures involving opening balances. D. Selecting a sample of invoices for comparison with shipping reports.
Answer (C) is correct. First-year audits involve additional planning considerations. Examples are (1) communication with the predecessor auditor, (2) audit procedures regarding opening balances, (3) assignment of firm personnel with appropriate qualifications, and (4) procedures required by the firm's system of quality control for initial engagements.
Which of the following types of evidence should an auditor most likely examine to determine whether internal controls are operating as designed? A. Gross margin information regarding the client's industry. B. Confirmations of receivables verifying account balances. C. Client records documenting the use of computer programs. D. Anticipated results documented in budgets or forecasts.
Answer (C) is correct. In testing controls over the computer processing function, the auditor should obtain evidence of proper authorization of access to computer programs and files.
Parallel simulation (the audit model technique) is an appropriate audit approach for A. Testing for the presence of authorized signatures on documents. B. Summarizing the results of accounts receivable confirmation work. C. Calculating amounts for declining-balance depreciation charges. D. Scanning the general ledger file for unusual transactions.
Answer (C) is correct. Parallel simulation involves duplicate processing of the client's data using a program developed by the auditor. The auditor's program simulates the logic of the client's application program. The auditor may thus enter data and compare simulated test results with those from the auditee's program. Parallel simulation is appropriate for auditing depreciation because controls such as limit or reasonableness tests can be tested by the auditor.
Analytical procedures used as risk assessment procedures should A. Focus on forming an overall conclusion. B. Provide a basis for the opinion. C. Address the risk of material misstatement of revenue due to fraudulent financial reporting. D. Assist in evaluating controls.
Answer (C) is correct. The audit plan includes a description of risk assessment procedures directed toward the risks of material misstatement (RMMs), whether due to fraud or error. The RMM is the combined assessment of inherent risk and control risk. Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, to assess the RMMs at the levels of (1) the financial statements as a whole and (2) relevant assertions about classes of transactions, account balances, and disclosures. They include (1) inquiries of management and others in the entity, (2) analytical procedures (also called analytical procedures used to plan the audit), and (3) observation and inspection (AU-C 315). The auditor specifically assesses the RMMs due to fraud at the financial statement and assertion levels. Moreover, the auditor should presume that risks of fraud exist in revenue recognition (AU-C 240).
Analytical procedures used as risk assessment procedures shoulda A. Focus on forming an overall conclusion. B. Provide a basis for the opinion. C. Address the risk of material misstatement of revenue due to fraudulent financial reporting. D. Assist in evaluating controls.
Answer (C) is correct. The audit plan includes a description of risk assessment procedures directed toward the risks of material misstatement (RMMs), whether due to fraud or error. The RMM is the combined assessment of inherent risk and control risk. Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, to assess the RMMs at the levels of (1) the financial statements as a whole and (2) relevant assertions about classes of transactions, account balances, and disclosures. They include (1) inquiries of management and others in the entity, (2) analytical procedures (also called analytical procedures used to plan the audit), and (3) observation and inspection (AU-C 315). The auditor specifically assesses the RMMs due to fraud at the financial statement and assertion levels. Moreover, the auditor should presume that risks of fraud exist in revenue recognition (AU-C 240).
When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client's internal control C = Substantive procedures A. ABC. B. ACB. C. BAC. D. BCA.
Answer (C) is correct. The auditor obtains an understanding of internal control. This understanding may include flowcharting the system. Next, the auditor must assess the risks of material misstatement, whether due to fraud or error. In response to this assessment, the auditor performs further audit procedures. These procedures ordinarily include tests of controls to evaluate their operating effectiveness when (1) the auditor intends to rely on the controls to determine substantive procedures or (2) substantive procedures alone are insufficient.
Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? A. Prepare a rough draft of the financial statement and of the auditor's report. B. Assess control risk for the assertions embodied in the financial statements. C. Tour the client's facilities. D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.
Answer (C) is correct. The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including internal control. They include (1) inquiries within the entity, (2) analytical procedures, and (3) observation and inspection. An example of observation and inspection is touring the client's facilities.
A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
Answer (D) is correct. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Variability in these relationships can be explained by, for example, unusual events or transactions, business or accounting changes, misstatements, or random fluctuations.
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether inadequate provisions for the safeguarding of assets have been corrected. D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
Answer (D) is correct. AU-C 240 and AS 2110 state that the identified risks of material misstatement due to fraud should be assessed at the financial statement and assertion levels. This assessment is ongoing. Thus, at the audit's conclusion, the results of the audit procedures should be evaluated to determine whether they alter the assessments or indicate an unrecognized fraud risk. Furthermore, if not already performed to determine the overall conclusion, analytical procedures related to revenue should be performed through the end of the period.
Which of the following statements about analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used as risk assessment procedures should not use nonfinancial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
Answer (D) is correct. For some assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor's risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor's professional judgment about the expected effectiveness and efficiency of the available procedures.
Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate? A. The auditor is required to reperform audit procedures already completed on the audit using the revised materiality. B. The auditor should consider disclaiming an opinion due to a scope limitation. C. The revision of materiality at the financial statement level will not affect the planned nature and timing of audit procedures, only the extent of those procedures. D. Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.
Answer (D) is correct. Materiality for the financial statements as a whole and, if applicable, the materiality level or levels for particular classes of transactions, account balances, or disclosures may need to be revised. Performance materiality also may need to be revised. Revision may result from (1) a change in circumstances that occurred during the audit, (2) new information, or (3) a change in the auditor's understanding of the entity and its operations after performing further audit procedures.
Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be A. Retested during the current-year tests of controls. B. Removed from the prior-year summary because they were immaterial. C. Disclosed by the client in the current-year financial statements. D. Considered in the evaluation of audit findings in the current year.
Answer (D) is correct. Misstatements, including omissions, are material if, individually or aggregated, they would influence the judgment of a reasonable user of the statements. Accordingly, the cumulative effect of immaterial uncorrected misstatements related to prior periods may have a material effect on the current period's financial statements.
An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered? A. Textbooks and periodicals related to the industry. B. AICPA Audit and Accounting Guides. C. Financial statements of other entities in the industry. D. Results of performing substantive procedures.
Answer (D) is correct. Substantive procedures are performed to detect material misstatements at the relevant assertion level. They include tests of details and substantive analytical procedures. They are performed after the auditor has obtained an understanding of the entity and its environment, including its internal control.
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 A. Reduce audit risk by lowering initial levels of materiality. B. Design special substantive procedures to compensate for the lack of industry expertise. C. Engage financial experts familiar with the nature of the industry. D. Perform risk assessment procedures.
Answer (D) is correct. The auditor should obtain an understanding of the entity and its environment, including its internal control. For this purpose, the auditor performs the following risk assessment procedures: (1) inquiries of management and others within the entity, (2) analytical procedures, and (3) observation and inspection.
An auditor most likely obtains an understanding of a new client to A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop an attitude of professional skepticism concerning management's financial statement assertions. C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Identify areas of audit emphasis.
Answer (D) is correct. The understanding provides a basis for assessing risks of material misstatement and responding to them in the exercise of professional judgment. For example, the auditor needs to identify areas related to amounts and disclosures in the statements that need special audit consideration. These may include related party transactions or management's evaluation (1) of the entity's ability to continue as a going concern or (2) when considering the business purpose of transactions.
Financial statement audit plans usually should be developed A. Prior to performing risk assessment procedures. B. After the auditor has established the overall audit strategy. C. After obtaining an understanding of the information and communication and control activities components of internal control. D. When the engagement letter is prepared.
B The audit plan is guided by the overall audit strategy. The auditor's planning activities for establishing this strategy include considering (1) characteristics of the engagement and reporting objectives, (2) significant factors in directing engagement efforts, (3) relevant knowledge from preliminary activities and other engagements, and (4) the audit resources required. Among the significant factors, preliminary activities, and knowledge from other engagements are (1) determinations of materiality; (2) areas of higher risk; (3) evaluations of internal control; (4) changes in accounting standards (e.g., significant new disclosures); (5) significant business, industry, and legal developments; and (6) management processes for identifying and preparing disclosures.
In developing an audit plan, an auditor should... A. Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. B. Evaluate findings from substantive procedures performed at interim dates. C. Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D. Perform risk assessment procedures.
D
In planning the audit engagement, the auditor should consider each of the following except A. The auditor's independence. B. Risks of material misstatement due to fraud. C. Anticipated levels of audit risk and materiality. D. The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
D Although the nature of the services expected to be rendered (e.g., a report on consolidated or consolidating financial statements or on compliance with contractual provisions) should be considered when establishing the understanding with the client, determining the kind of opinion to be expressed occurs after the completion of audit procedures.
Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as A. Audit risk. B. Detection risk. C. Sampling risk. D. Inherent risk.
D Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or in the aggregate, before consideration of any related controls. This risk is greater for some assertions and related balances, classes, or disclosures, than others. For example, complex calculations are more likely to be misstated than simple ones. Inherent risk exists independently of the audit (AU-C 200 and AS 1101).
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 A. Audit risk. B. Inherent risk. C. Control risk. D. Detection risk.
D Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements (AU-C 200 and AS 1101).
Acceptable Detection Risk
level of detection risk the auditor is willing to accept, If it decreases, RMM increases (Risk of Material Mistatement)
Projected misstatement
the auditor's best estimate of the misstatement in populations based on audit samples.
Risk Assessment procedures
audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement