Audit - Exam 2

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in

A more efficient manner.

Which of the following would not necessarily be a related party transaction?

A sale to another corporation with a similar name.

Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

Additional audit procedures are required.

When should the auditor most likely prepare the audit plan?

After development of the overall audit strategy.

Which of the following statements would least likely appear in an auditor's engagement letter?

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

Which of the following is required documentation in an audit in accordance with auditing standards?

An audit plan documenting the procedures to be used to reduce audit risk.

Which of the following statements about analytical procedures is true?

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive procedures.

Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true?

Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.

If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors'

Competence and objectivity.

Which of the following factors would most likely cause an auditor not to accept a new audit engagement?

Concluding that the entity's management probably lacks integrity.

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Consider the possibility of a misstatement in the financial statements.

Which result of an analytical procedure suggests the existence of obsolete merchandise?

Decrease in the inventory turnover rate.

One of the primary roles of an audit plan (program) is to

Document the engagement's objectives, scope, timing, and resource allocations.

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business?

Earnings per share.

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the

Engagement letter.

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

Inherent risk.

Which of the following steps should an auditor perform first to determine the existence of related parties?

Inquire about the existence of related parties from management.

Which of the following is not considered an auditor's specialist?

Internal auditor.

Which of the following events most likely indicates the existence of related parties?

Making a loan without scheduled terms for repayment of the funds.

An auditor's engagement letter most likely will include

Management's acknowledgment of its responsibility for maintaining effective internal control.

Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than forNassau. This is an example of the auditor's concept of

Materiality.

As the acceptable level of detection risk decreases, an auditor may change the

Nature of substantive procedures from a less effective to a more effective procedure.

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions.

Which of the following statements about materiality is most likely to be true?

Performance materiality is less than materiality for the financial statements as a whole.

Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive procedures?

Relationships involving income statement accounts.

The concept of materiality with respect to financial statement auditing

Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial statements.

Analytical procedures can best be categorized as

Substantive procedures.

Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should

Suggest that the auditor obtain the client's permission to discuss the reasons

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

The applicability of the same confidentiality requirements to the auditor and the specialist.

When a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

Which of the following statements is true about related party transactions?

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

Which of the following statements is true about the use of the work of an auditor's specialist?

The auditor should obtain an understanding of the methods and assumptions used by the specialist.

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

The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true?

The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditor's belief that the financial statements as a whole are not materially misstated.

Which of the following is correct regarding the communication between successor and predecessor auditors?

The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.

Inherent risk is

The susceptibility of an assertion to a material misstatement before consideration of related internal controls.

Which of the following statements is true concerning an auditor's use of the work of a specialist?

The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except

Tracing transactions through the system to determine whether procedures are being applied as prescribed.

Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purposes of analytical procedures?

Whether the data were processed in a computer system or in a manual accounting system.