Audit Quiz 2
Although planning continues throughout the audit, it initially involves A Developing an overall audit strategy. B Requesting management to sign an engagement letter. C Gathering evidence. D Testing the effectiveness of the client's internal control system.
A Developing an overall audit strategy. The audit plan is based on the overall audit strategy. It addresses, among other things, the reporting objectives, the timing of the audit, areas of high risk, industry specific issues, and the audit resources required.
The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the A Engagement letter. B Management representation letter. C Introductory paragraph of the auditor's report. D Scope paragraph of the auditor's report.
A Engagement letter. The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise.
In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the A Financial statement assertions. B Timing of the audit. C Financial statements as a whole. D Costs and benefits of gathering evidence.
A Financial statement assertions. Most audit work consists of obtaining and evaluating evidence about relevant financial statement assertions. They are management representations embodied in the financial statements that are used by the auditor to consider the types of possible material misstatements.
Which of the following procedures would an auditor most likely perform in the planning stage of an audit? A Make a preliminary judgment about materiality. B Communicate management's initial selection of accounting policies to the audit committee. C Confirm a sample of the entity's accounts payable with known creditors. D Obtain written representations from management that there are no unrecorded transactions.
A Make a preliminary judgment about materiality. Materiality should be established for planning purposes. The concept of materiality recognizes that some but not all matters are important for fair presentation of the financial statements. The auditor is responsible for planning and performing the audit to obtain reasonable assurance that material misstatements are detected.
In developing an audit plan, an auditor should A Perform risk assessment procedures. B Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. C Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D Evaluate findings from substantive procedures performed at interim dates.
A Perform risk assessment procedures. The audit plan is based on the overall audit strategy. It describes (1) the nature and extent of risk assessment procedures; (2) the nature, timing, and extent of further audit procedures at the assertion level; and (3) other procedures required by GAAS. Risk assessment procedures are performed to obtain an understanding of the entity and its environment (including its internal control). Their purpose is to identify and assess the risks of material misstatement (whether due to fraud or error) at the financial statement and relevant assertion levels.
Which of the following is an auditor least likely to perform in planning a financial statement audit? A Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. B Selecting a sample of vendors' invoices for comparison with receiving reports. C Coordinating the assistance of entity personnel in data preparation. D Reading the current year's interim financial statements.
B Selecting a sample of vendors' invoices for comparison with receiving reports. Selecting a sample of vendors' invoices for comparison with receiving reports is a test of details (a substantive procedure). It is a further audit procedure performed to test relevant assertions.
Audit plans should be designed so that A The auditor can make constructive suggestions to management. B The audit evidence gathered supports the auditor's conclusions. C Most of the required procedures can be performed as interim work. D The risks of material misstatement are assessed at a sufficiently low level.
B The audit evidence gathered supports the auditor's conclusions. The auditor is responsible for collecting sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the opinion. Audit plans describe the steps involved in that process. Thus, the evidence should support the auditor's conclusions.
The auditor should establish an overall audit strategy. Which one of the following statements is most consistent with this requirement? A The auditor must be independent of the client. B The auditor should plan the audit so that it will be performed effectively. C The auditor should communicate certain issues to those charged with governance. D The auditor should have appropriate proficiency to perform the audit.
B The auditor should plan the audit so that it will be performed effectively. An audit plan is developed and documented based on the overall audit strategy. It is more detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed. The plan includes (1) risk assessment procedures, (2) further audit procedures at the assertion level, and (3) other procedures to comply with GAAS.
In planning the audit engagement, the auditor should consider each of the following except A Risks of material misstatement due to fraud. B The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed. C The auditor's independence. D Anticipated levels of audit risk and materiality.
B The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
The understanding with the client regarding a financial statement audit generally includes which of the following matters? A The preliminary judgment about materiality. B The responsibilities of the auditor. C The contingency fee structure. D The expected opinion to be issued.
B The responsibilities of the auditor. The auditor should establish an understanding with the client through a written communication regarding the services to be performed. The objectives and limitations of the audit as well as the responsibilities of the auditor and management should be described in a contract stated in an engagement letter.
When one auditor succeeds another, the auditor should request the A Predecessor auditor to submit a list of internal control related matters noted in an audit but have not been corrected. B Client to instruct its lawyer to send a letter of audit inquiry concerning the status of the prior year's litigation, claims, and assessments. C Client to authorize the predecessor auditor to allow a review of the predecessor auditor's audit documentation. D Predecessor auditor to update the prior year's report to the date of the change of auditors.
C Client to authorize the predecessor auditor to allow a review of the predecessor auditor's audit documentation. Answer C is correct. The Code of Professional Conduct protects the confidentiality of client information. Hence, the auditor should seek the client's specific consent for the predecessor auditor to respond fully to the auditor's inquiries. The auditor should communicate with the predecessor to determine whether to accept the engagement (AU-C 210). If the engagement is accepted, the audit may be facilitated by making specific inquiries of the predecessor and by reviewing the predecessor's audit documentation. The auditor also should request the client to authorize this review.
Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding the predecessor's A Awareness of the consistency in the application of generally accepted accounting principles between periods. B Evaluation of all matters of continuing accounting significance. C Understanding as to the reasons for the change of auditors. D Opinion of any subsequent events occurring since the predecessor's audit report was issued.
C Understanding as to the reasons for the change of auditors. Answer C is correct. According to AU-C 210, the auditor should make specific and reasonable inquiries of the predecessor auditor regarding issues bearing upon acceptance of the engagement. The inquiries should include specific questions regarding, among other things, the predecessor's understanding as to the reasons for the change of auditors.
Which of the following is a true statement about the required documentation in an audit performed in accordance with generally accepted auditing standards? A A memorandum setting forth the scope of the audit is required. B A written engagement letter formalizing the level of service to be rendered is recommended but not required. C A flowchart depicting the segregation of duties and authorization of transactions is required. D A documented audit plan describing the necessary procedures to be performed is required.
D A documented audit plan describing the necessary procedures to be performed is required. 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
An auditor most likely would make specific inquiries of the predecessor auditor regarding A Specialized accounting principles of the client's industry. B The competency of the client's internal audit staff. C The uncertainty inherent in applying sampling procedures. D Disagreements with management as to auditing procedures.
D Disagreements with management as to auditing procedures. The auditor should make specific and reasonable inquiries of the predecessor auditor about (1) the reasons for the change in auditors; (2) disagreements with management about accounting principles, auditing procedures, or similarly significant matters; (3) information that might bear on management's integrity; (4) communication to those charged with governance about fraud and noncompliance with laws and regulations; and (5) to management and those charged with governance about internal-control-related matters (AU-C 210).
Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? A Post, the predecessor auditor. B Monday's controller or CFO. C The chair of Monday's board of directors. D Hill, the auditor.
D Hill, the auditor. Answer D is correct. AU-C 210 indicates that the auditor should communicate with the predecessor auditor before accepting the engagement. Initiation of the communication is the responsibility of the auditor. Moreover, the auditor should seek permission from the prospective client to inquire of the predecessor before final engagement acceptance. Thus, the auditor should ask the client to authorize the predecessor to make a full response.
