3.5 Flashcards
The objective of analytical procedures performed as risk assessment procedures is to
Enhance the auditor’s understanding of the client’s business.
Analytical procedures applied as risk assessment procedures may (1) improve the understanding of the client’s business and significant transactions and events and (2) identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit ramifications (AU-C 315).
An attestation engagement is one in which a CPA is engaged to
Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
An attestation engagement is one in which a practitioner is engaged to issue, or does issue, an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party. The conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.
Which of the following is a misstatement arising from fraud or an error as defined by the auditing standards?
Selecting an accounting policy that the auditor considers inappropriate.
Misstatements may result from fraud or error. Examples are (1) an inaccuracy in obtaining or processing data on which the financial statements are based, (2) an omission of an amount or disclosure, (3) a disclosure not presented in accordance with the applicable reporting framework, (4) an incorrect accounting estimate arising from overlooking or clearly misinterpreting facts, and (5) management judgments about accounting estimates that the auditor considers unreasonable, and (6) management’s selection or application of accounting policies that the auditor considers inappropriate (AU-C 450).
Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to
Perform the planned auditing procedures closer to the balance sheet date.
A decrease in the acceptable level of detection risk or in the amount considered material will result in the auditor’s modifying the audit plan to obtain greater assurance from substantive testing by (1) selecting a more effective audit procedure, (2) applying procedures nearer to year-end, or (3) increasing the extent of particular tests. The reduction in materiality requires greater assurance from substantive testing.
An auditor most likely would make specific inquiries of the predecessor auditor regarding
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).
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.
The auditor is responsible for providing reasonable assurance that the financial statements are free from material misstatements. These include material misstatements resulting from noncompliance with laws and regulations generally recognized to have a direct effect on the determination of amounts and disclosures in the financial statements. Occupational and safety laws and regulations do not directly affect the determination of financial statement amounts and disclosures.
Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities?
Unrecorded sales.
Fraud or error that decreases gross profit relative to sales (or increases sales relative to gross profit) causes the ratio to decline. Unrecorded sales cause inventory to decrease and cost of sales to increase with no increase in sales, thereby decreasing gross profit relative to sales and lowering the ratio.
Which of the following is an auditor least likely to perform in planning a financial statement audit?
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.
After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on
Whether the financial statements are consistent with the auditor’s understanding of the entity.
Analytical procedures should be used to assist the auditor to form an overall conclusion. The purpose of those procedures is to determine whether the statements are consistent with the auditor’s understanding of the entity (AU-C 520).
An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this irregularity by
Performing analytical procedures designed to disclose differences from expectations.
Analytical procedures may be effective when tests of details do not indicate potential misstatements. For example, accounts are not likely to be complete when improper journal entries have been made. Analytical procedures comparing prior amounts with expected amounts would likely disclose unexpected differences.
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.
Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or combined with other misstatements, before consideration of any related controls. Some assertions and related balances or classes of transactions have greater inherent risk. Thus, cash has a greater inherent risk than less liquid assets.
In developing an audit plan, an auditor should
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.
A CPA wishes to determine how various issuers have complied with the disclosure requirements in a new Accounting Standards Update. Which of the following information sources would the CPA most likely consult for this information?
AICPA Accounting Trends & Techniques.
Practical guidance for conducting accounting and audit engagements can be found in various nonauthoritative publications, such as Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.
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.
Detection risk is the risk that procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement. It relates to the nature, timing, and extent of audit procedures and is therefore the auditor’s risk. For example, performing an audit procedure at an interim date instead of year-end increases detection risk because of the need to cover the interim period.
Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted?
The integrity of the entity’s management is suspect.
The financial statements contain assertions by management, so the integrity of management is crucial to the auditor’s evaluation of the (1) sufficiency and (2) appropriateness (relevance and reliability) of the evidence obtained to support those assertions. Thus, if the integrity of management is suspect, the auditor may be unable to obtain sufficient appropriate evidence to support an opinion.
