Chapter 3

Question 1

Responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client.

Answer 1

The successor auditor should obtain permission from the prospective client to contact the predecessor auditor

Question 2

In a financial statement audit, inherent risk is evaluated to help the auditor assess

Answer 2

the susceptibility of financial statement assertion to a material misstatement assuming there are no related controls.

Question 3

An attitude of professional skepticism

Answer 3

any indicator of fraud is properly investigated

Question 4

component of audit risk that an auditor can control

Answer 4

Detection risk

Question 5

Substantive approach

Answer 5

the auditor will conduct some interim testing and minimal year-end account balance testing

Question 6

reliance on controls approach

Answer 6

requires the auditor to conduct extensive control testing

Question 7

examples of incentive or pressure increasing the risk of fraud

Answer 7

The client operating in a highly competitive industry.
History of reporting losses
percentage of management pay tied to earnings

Question 8

Phase involving gaining an understanding of the client, identifying risk factors, setting a materiality level, and developing an audit strategy

Answer 8

Risk assessment phase

Question 9

Process associated with the reporting phase

Answer 9

Conclusions are drawn when testing the client’s controls

Question 10

Information is considered quantitatively material if it exceeds

Answer 10

planning materiality assessment

Question 11

Misstatements that impact a user’s decision-making process for a reason other than its magnitude constitute

Answer 11

qualitative materiality

Question 12

amount set by the auditor that is used to make decisions about the extent of audit procedures of a particular class of transaction, account balance, or disclosure.

Answer 12

Performance materiality

Question 13

Information is considered material if it

Answer 13

impacts the decision-making process of users of the financial statements.

Question 14

When setting planning materiality

Answer 14

auditors rely heavily on their professional judgment

Question 15

At an assertion level, the risk of material misstatement refers to risks that affect classes of

Answer 15

transactions, account balances, and disclosures