Audit Chapter 6
Planning materiality is commonly based on
% of net income % of total equity % of total assets
During the audit the client's staff may prepare a(n)
Analysis of account written off, trial balance, aging of accounts receivable
Auditors should document several elements of risk assessment including
Audit team discussion Nature, timing, and extent of further audit procedures Understanding of the entity and it's environment
Relevant assertions include
Completeness, valuation or allocation, existence or occurence
Identify the types of further audit procedures performed
Confirmation, inspection, inquiry
(T/F) Performing audit work during the interim period reduces the total amount of substantive procedures that must be completed
False
Potential significant business risks for a client include
Interest rate increases, competition, changes in government regulations, material price volatility
Planning materiality is commonly based on % of
Net income, total revenues, total assets
Which of the following is not a facet of the overall audit strategy?
Setting a date when the final audit fees will be paid
Further audit procedures include
Test of controls and substantive procedures
The audit plan should include
a description of the nature, timing, and extent of planned risk assessment procedures
Tests that involve comparisons of financial data of the current year to the prior years, budgets, and industry averages are called
analytical procedures
The risk that auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is called
audit risk
During the planning stage of an audit, the auditors establish an understanding with their client as to nature of services to be provided and the responsibilities of the
auditor and client
Many firms have developed a ________ _________ that uses a combination of financial and non-financial performance measures to assess the organization
balanced scorecard
Auditor review of subsequent period invoices to verify all receivables are recorded is verification of ________ of assets
completeness
Auditors vouch cash receipt transactions occurring near period end to verify
cutoff of transactions
Some tests of controls provide substantive evidence about an account or class of transactions. These procedures are referred to as
dual-purpose tests
If the auditors' objective is to test _________, they follow the stream of evidence back to its source
existence
The confirmation of receivables with debtors to verify that all recorded receivables are legitimate is verifying the audit assertion ______ of assets
existence
Successor auditors seek information from the predecessor auditors on communication with the client and those charged with governance regarding
fraud and noncompliance with laws and regulation internal control deficiencies and material weakness
(1) Incentive or pressure, (2) opportunity and (3) attitude to rationalize the act are three fundamental conditions of
fraud risk triangle
The materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement is the basis of the auditor's selection of
further audit procedures
The risk of material misstatement of an assertion without considering internal control is called
inherent risk
Advantages of interim audit work include
more uniform workload for the CPA firm Increased assessment of internal control timely release of audited financial statements
When a successor auditor is offered an auditing engagement, the successor auditor
must obtain the client's consent before discussing confidential information with the predecessor auditor
An audit committee must be composed of at least three
outside directors
When materiality is allocated to a particular account, it is refer to
performance materiality
Auditors consider materiality to determine their scope of the audit during the _________ stage of an audit
planning
During the second stage of the audit process, auditors use ________ __________ procedures to gather information to assess the risk of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures
risk assessment
An increase in the level of planning materiality results a decrease in
scope of audit procedures
a dual-purpose procedure serves as a substantive test of the details of the transactions that occurred during the year and a
test of controls
The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a
transaction cycle
(T/F) Physical examination of plant and equipment verifies ownership
False
The overall risk of association with a particular business is often referred to as
engagement risk
Items that are identified by the text as conditions indicative of fraud
Missing documents Unsupported transactions Unwillingness to allow auditor access to files or testing
All of the following are common indications of fraud except: Related party transactions Tips to auditors about fraud Complaints by management about the conduct of the audit Missing inventory
Related party transactions