Auditing Chapters 3-6

The arrangements reached between the auditor and the entity are formalized in a(n) _______ _________

Engagement letter

Auditor's responsibility for detecting illegal acts having a direct and material effect on the financial statements is the same as that for ___________ and __________________ .

Errors; fraud

True or false: A predecessor auditor should always fully respond to the inquiries of a successor auditor.

False

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.

False

True or false: An auditor obtains an understanding of the client and its environment to identify audit risks that may result in material misstatements.

False Reason: This is done to assess business risks, not audit risks.

Which of the following statements regarding using an entity's internal audit function (IAF) during an external audit are correct? (Choose 3)

Part of the IAF work may include confirming accounts receivables. 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.

To detect material misstatements in a class of transactions, account balance and disclosure component of the financial statements, the auditor designs __________________ _______________.

Substantive procedures

The purpose of setting ________________ _____________ is to establish a scope for the audit procedures for the individual account balance or disclosures.

Tolerable misstatement

Both the PCAOB and ASB follow ______ perspective in considering what is material.

a user's

When should the evaluation of client continuance take place?

at or near the completion of the audit when a significant event occurs

The terms of the audit engagement that are documented in the engagement letter should include ______. (Choose 4)

auditor's responsibilities limitations of the engagement the objectives of the engagement management's responsibilities

When should the audit committee meet with external auditors to discuss the auditor's responsibilities and significant accounting policies?

before the engagement starts

An auditor's independence would be considered impaired if the ______. (Choose 2)

client owes money to the auditor that has the characteristics of a loan spouse of the auditor is an accounting supervisor for the entity

Factors that should be considered when determining the staffing requirements for an audit include ______. (Choose 4)

engagement size timing of the work engagement complexity personnel availability

An auditor may not accept a prospective client because the ______.

entity has unusual business risks client refuses to allow contact with the predecessor auditor

If the entity's management does not provide satisfactory information about possible illegal acts, the auditor should consult with the ______.

entity's legal counsel

When the aggregated misstatements are less than the overall materiality, the auditor can conclude that the financial statements are presented ______.

fairly

Select all that apply Before accepting a new client, a public accounting firm must determine if it ______. (Choose 2)

has the capabilities to perform the audit complies with legal and relevant ethical requirements

It is generally______ for the auditor to simply subdivide materiality proportionally to each account.

inefficient

Engagement team members performing supervisory activities should _______________ (two answers)

inform engagement team members of their responsibilities review the work of engagement team members

Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public company ______. (Choose 3)

must preapprove all audit and nonaudit services provided by the auditors must have the authority to engage independent counsel to carry out duties as necessary is directly responsible for the hiring, paying, and oversight of the public accounting firm employed by the company

Auditor risk assessment procedures are used to ______.

obtain an understanding of the entity and its environment

Auditors can reduce audit risk to an acceptably low level by ______.

obtaining an understanding of the entity and its environment

Ensuring that members of the audit team meet independence requirements generally take places as part of ______.

preliminary engagement activities

Ideally, the head of internal auditing (chief audit executive) should______.

report functionally to the audit committee and administratively to senior management

When auditing a company with multiple locations, the amount of audit attention devoted to various locations depends upon the ______.

risk of material misstatement

The nature and extent of planning activities that are necessary depend on the ______ the entity.

size of auditor's previous experience with complexity of

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 an auditor's ______________

specialist

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

In establishing an understanding about the terms of the engagement with potential clients, ______ should be discussed (choose 3)

the role of the client's audit committee using the work of internal auditors the engagement letter

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