PRACTICE UNIT 3 & 4
An auditor determined performance materiality for fixed assets should be calculated at 1/3 of total materiality (6% of total gross fixed assets). Calculate performance materiality for year end 20X2 based on the following: Fixed assets (gross) at 1/1/20X2 $750,000 Capital expenditures 187,500 Dispositions 150,000 Accumulated depreciation at 1/1/20X2 300,000 Accumulated depreciation at 12/31/20X2 277,500
$15,750 (fixed assets + cap exp - dispositions * total mat * PM)
A CPA auditing CBX Co.'s 12/31/2017 financials determined performance materiality for current liabilities should be calculated at 1/4 of total materiality (3% of total current liabilities) and noncurrent liabilities should be calculated at 1/3 of total materiality (7% of total noncurrent liabilities). Calculate performance materiality for current liabilities based on the following: Accounts payable $900,000 Loan payable (due 3/17/2019) 400,000 Interest payable (due 3/31/2018) 20,000 Reserve for returns 50,000 Note payable (due 1/1/2019) 150,000
$7,275 (accts pay + interest pay + reserve * total mat * PM)
Based on past experience with a client, for fixed assets should be calculated at 1/4 of total materiality (3% of total net fixed assets). Calculate performance materiality based on the following: Fixed assets (gross) at 1/1/2017 $2,000,000 Capital expenditures 250,000 Dispositions 200,000 Accumulated depreciation at 1/1/2017 800,000 Accumulated depreciation at 12/31/2017 770,000
$9,600. (fixed assets + cap exp - dispositions - accum depr * total mat * PM)
Which of the following is a true statement about the required documentation in an audit performed in accordance with generally accepted auditing standards?
A documented audit plan describing the necessary procedures to be performed isrequired.
The provisions of some laws and regulations have a direct effect on the financial statements in determining the reported amounts and disclosures in the financial statements. Which of the following is least likely to have a direct effect on the financial statements of the entity identified?
A manufacturer's compliance with the occupational and safety code.
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.
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.
Financial statement audit plans usually should be developed
After the auditor has established the overall audit strategy.
n which of the following instances would it be appropriate for the auditor to refer to the work of an appraiser in the auditor's report?
An adverse opinion is expressed based on a difference of opinion between the client and the auditor's external specialist about the value of certain assets.
Which of the following statements best describes an auditor's responsibility to detectfraud or error?
An auditor should design an audit to provide reasonable assurance of detecting fraudor error that is material to the financial statements.
Which of the following statements reflects an auditor's responsibility for detecting fraud and errors?
An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.
Which of the following individuals would be considered a predecessor auditor?
An independent CPA who was engaged to perform, but did not complete an audit of financial statements.
What is the definition of fraud in an audit of financial statements?
An intentional act that results in a material misstatement in financial statements that are the subject of an audit.
Auditing standards require that sufficient appropriate evidence be obtained byperforming audit procedures to afford a reasonable basis for an opinion regarding thefinancial statements under audit. The substantive evidence required may be obtained, inpart, through
Analytical procedures.
Which of the following is ordinarily designed to detect possible material dollar misstatements in the financial statements?
Analytical procedures.
In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?
Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.
Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel?
Arrange a preliminary conference with the client to discuss audit objectives, fees,timing, and other information.
Which of the following actions should be taken by a CPA who has been asked to audit the financial statements of a company whose fiscal year has ended?
Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion.
A management's specialist most likely is useful to
Assist the client in preparing the financial statements.
Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?
Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.
An auditor who uses the work of an auditor's external specialist may refer to and identify the specialist in the auditor's report if the
Auditor expresses a qualified opinion or an adverse opinion related to the work of the specialist
An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the
Auditor's report contains a qualified opinion.
When one auditor succeeds another, the auditor should request the
Client to authorize the predecessor auditor to allow a review of the predecessor auditor's audit documentation.
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
Communicate the matter to those charged with governance.
Which of the following is an analytical procedure?
Comparing current-year balances to prior-year balances.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
If the auditors plan to use the work of the internal auditors to obtain audit evidence orto provide direct assistance, they should assess the internal auditors'
Competence and objectivity.
When assessing an internal auditor's objectivity, an auditor should
Consider the organizational level to which the internal auditor reports.
When assessing an internal auditor's objectivity, an independent auditor should
Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions.
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.
An auditor's response to the assessment of the risks of material misstatement due to fraud takes various forms. A response with an overall effect on the conduct of the audit isto
Consider whether management's applications of accounting principles indicates abias.
During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years.The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should
Consider withdrawing from the audit engagement and disassociating from future relationships with the client.
If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warrant withdrawing from the engagement, the auditor would likely
Consult with legal counsel as to what other action, if any, should be taken.
Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to
Contingencies: yes Balance Sheet Accounts: yes
An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for credit losses in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for credit losses and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences?
Debit credit loss expense $700,000; credit allowance for credit losses $700,000.
Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
Detection.
In assessing the objectivity of internal auditors, an independent auditor should
Determine the organizational level to which the internal auditors report.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
Determining the extent of involvement of the client's internal auditors.
In evaluating the reasonableness of an entity's accounting estimates, an auditor considers whether assumptions are significant. These are most likely to be
Deviations from past experience.
Each of the following is a type of known misstatement, except
Differences between management and the auditor's judgment regarding estimates.
A document in an auditor's audit documentation includes the following statement:"Our audit is subject to the inherent risk that material misstatements, if they exist, will not be detected." The above passage is most likely from a(n)
Engagement letter.
Analytical procedures used in planning an audit should focus on
Enhancing the auditor's understanding of the client's business.
What assurance does the auditor provide that errors, fraud, and direct-effect noncompliance with laws and regulations that are material to the financial statements will be detected?
Errors: reasonable Fraud: reasonable direct-effect noncompliance: reasonable
Which of the following factors most likely would cause an auditor to decline a new audit engagement?
Failure of management to satisfy the preconditions for an audit.
If accounts receivable turned over 7.1 times in Year 1 as compared with only 5.6times in Year 2, it is possible that there were
Fictitious sales in Year 2.
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 thatPost's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
Hill, the auditor.
Inherent risk and control risk differ from detection risk in which of the following ways?
Inherent risk and control risk exist independently of the audit.
An auditor performing analytical audit procedures for a retailer discovers an increase in inventory turnover of 20%. But net sales have not grown over the same period. The result of the procedure most likely indicates that
Inventory is being stolen.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?
Management had frequent disputes with the auditor on accounting matters.
In every audit, which of the following must be identified as a potential risk of material misstatement due to fraud?
Management override of controls.
An auditor's engagement letter most likely would include a statement regarding
Management's responsibility to provide certain written representations to the auditor.
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.
Which of the following ratios would be the least useful in reviewing the overal lprofitability of a manufacturing company?
Net income to working capital.
Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely will
Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high.
Analytical procedures reveal significant unexpected differences between recorded amounts and the expectations developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should
Perform additional audit procedures to investigate the matter further.
In developing an audit plan, an auditor should
Perform risk assessment procedures.
An auditor may be able to reduce audit risk to an acceptably low level for some relevant assertions by
Performing analytical procedures.
Audit planning for an initial audit most likely includes
Performing procedures involving opening balances.
Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
Professional skepticism.
If not already done to form an overall conclusion, the auditor should perform analytical procedures relating to which of the following transaction cycles?
Revenue.
Which of the following procedures most likely could assist an auditor in identifying related party transactions?
Reviewing confirmations of compensating balance arrangements.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing confirmations of loans receivable and payable.
Which of the following events most likely would indicate the existence of related party transactions?
Selling real estate at a price that differs significantly from its appraised value.
Which of the following items most likely would be included in the engagement letter prepared by an auditor?
Services to be provided in addition to the audit.
In connection with an audit of a nonissuer, the auditor would ordinarily use an engagement letter to
Specify any arrangements concerning the involvement of the company's internal auditors on the audit.
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
Square footage of selling space.
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?
Supporting accounting records and files that should be readily available are not produced promptly when requested.
In evaluating the reasonableness of an entity's accounting estimates, an auditor normally is concerned about assumptions that are
Susceptible to bias.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
The CPA's inability to review the predecessor auditor's working papers.
In a financial statement audit, substantial consideration must be given to potential fraud. The conditions for fraud ordinarily include
The ability to rationalize commission of fraud.
Which of the following statements is correct regarding the auditor's responsibility to detect errors and fraud?
The auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
An auditor compares this year's revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that
The client changed its capitalization policy for small tools this year.
An auditor has set the materiality level for the financial statements as a whole at$125,000. Which of the following misstatements would the auditor most likely consider material?
The client did not disclose $45,000 of related party transactions in the footnotes.
When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except
The cost of correcting the misstatements.
Which of the following information that comes to an auditor's attention most likely would raise a question about noncompliance with laws and regulations?
The discovery of unexplained payments made to government employees.
Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence?
The educational level and professional experiences of the internal auditor.
An auditor concludes that a client has failed to comply with a law that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the
The effect of the noncompliance on the financial statements is material, and the client refuses to accept the auditor's report as modified for the noncompliance.
Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into transactions with high estimation uncertainty.
For which one of the following purposes does an internal auditor not evaluate the risks and the adequacy and effectiveness of controls?
The opinion expressed on financial information.
The concepts of audit risk and materiality are interrelated and must be consideredtogether 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 factors is most important concerning an auditor's responsibility for considering fraud?
The possibility that the misappropriation of assets may indicate the existence of noncompliance with laws and regulations.
An auditor's inquiries of the predecessor auditor should include questions regarding
The predecessor's understanding as to the reasons for the change in auditors.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
The prospective client is unwilling to make all financial records available to the CPA.
The understanding with the client regarding a financial statement audit generally includes which of the following matters?
The responsibilities of the auditor.
Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements?
The results of an analytical procedure disclose unexpected differences.
Which of the following is a definition of control risk?
The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.
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.
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.
The independent auditor should understand the internal audit function as it relates to internal control because
The work performed by internal auditors may be a factor in determining the nature,timing, and extent of the independent auditor's procedures.
An auditor might consider the procedures performed by the internal auditors because
They are employees whose work may affect the nature, timing, and extent of audit procedures.
What is the primary purpose of reviewing conflict-of-interest statements signed by members of management?
To identify transactions with related parties.
Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement?
Tour the client's facilities.
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.
When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether
Uncorrected misstatements are material.
An auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's
Understanding of the reasons for the change in auditors.
Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud?
Unusual discrepancies between the entity's records and confirmation replies.
One reason the independent auditor applies analytical procedures with regard to the client's operations is to identify
Unusual transactions.
Which of the following statements is true concerning analytical procedures?
When expectations are more precise, significant variances are more likely to be dueto misstatements.
Which of the following factors most likely would heighten an auditor's concern aboutthe risk of fraudulent financial reporting?
Year-end adjustments by the entity that significantly affect financial results.
