Chapter 3

Question 1

When initiating communication with predecessor auditors prospective auditors should expect

(3)

Answer 1

• Take responsibility for obtaining clients premission for predecessor auditor to give info about prior audits
• conduct interviews with partners and managers of the predecessor accounting firms engagement team
• obtain copies of prior auditors audit documentation

Question 2

GAAS requires that auditors always prepare and use?

Answer 2

A written audit plan

Question 3

Factors that affect auditors decisions about the quantity, type and content of audit documentation

Answer 3

• Document compliance with GAAS
• Existence of new sales contracts important to clients business
• auditors judgement about materiality

Question 4

Where would audit documentatino taht shows the detailed evidence and procedures regarding the balance in accum depr accnt for the year under audit be found?

Answer 4

Current file audit documentation

Question 5

Premanent file most likely to contain

Answer 5

• client organizational chart
• compies or exerpts of corp or assn. charter, bylaws, or pship agreement
• copies or exerpts of continuing contracts (leases, bond indentures, royalty agreements)
• history of company, products, markets and background
• copies or exerpts of minutes of meetings of stockholders & or directors on matters of lasting interest
• continuing schedule of accounts whos balances are carried foreward for several years (retained earnings, pship capital, owners equity)
• copies of prior year finan statements and audit reports

Question 6

Benefits of determining materiality in the initial planning stage of an audit

Answer 6

• fine tune work for effectiveness and efficiency
• avoiding over auditing
• avoiding underauditing

Question 7

Advantages of using CAATs

Answer 7

• can be used for audits of clients that use different computer equipment or file formats
• utilizes speed and accuracy of computer

Question 8

Engagement letters should set forth the understanding of:

Answer 8

• objectives of the engagement
• mgmt’s repsonsiblities
• auditors responsibilities
• limitations of the engagment

Question 9

Auditors report should mention the use of a specialist only when:

Answer 9

specialists findings affect auditors conclusions

Question 10

3 goals of audit planning

Answer 10

• make sure firm has requisite staff to conduct the audit in accordance with prof standards in a timely and profitable manner
• determine materiality
• outline specific audit procedures including control tests & substantive tests that need to be executed properly in order to comply with prof standards

Question 11

Prior to accepting a new audit engagement an audit firm should

Answer 11

• Attempt to contact predecessor auditor
• evaluate integrity of mgmt
• assessss the firms resources

Question 12

An Audit plan contains

Answer 12

specificatinos of procedures the auditors belive appropriate for the financial statments

Question 13

The Revenue cycle contains?

Answer 13

• Cash
• A/R
• Sales

Question 14

When auditing existence assertion for an asset, audtiors proceed from the…

Answer 14

general ledger back to the supporting original transaction documents

Question 15

Confirmations of A/R provide evicence primarily about which two assertions?

Answer 15

Existence - customer is admitting that it owes client

Rights & Obligations - ownership of A/R

Question 16

Materiality is a matter of?

Answer 16

Professional Judgement

Question 17

When evaluating reasonableness of acct estimates by mgmt the audit team would be interested in?

Answer 17

evidence of systematic bias (aggressive or conservative)

Question 18

Purposes or functions of an audit documentation

Answer 18

Aid CPA in the conduct of the audit work and to provide support for the auditors opinion and compliance with aditing standards

Question 19

Audit Documentation

(Definition)

Answer 19

auditors record of the procedures perfromed and conclusions reached in the audit

Question 20

What records may be included in audit documentation?

Answer 20

• Current Files
• Permanent Files
• Detailed support for decisions regarding planning and performing the audit, procedures perfromed, evidence obtained, and conclusions reached

Question 21

Permanent files

Answer 21

info of continuing audit significans over many years of audits of the same client

relevent to ongoing client relationship

Question 22

Current files

Answer 22

all client acceptance or continuance documentation along with planning documentation for the year under audit

relevant to just one year of the client relationship

Question 23

Planning Memorandum summarizes data contained in what files?

Answer 23

Current

Question 24

“Special Events Report” that is filed with the SEC whenever certain significant corporate events occur such as changes in control, legal proceedings and changes of auditor.

Answer 24

Form 8-K

auditor must sumbit a letter stating whenther they agree/disagree with the explanation if not provide details

Question 25

Financial info inquiry sources

Answer 25

* Annual reports to shareholders * Interim finan statements * securities registration statements * annual report on SEC form 10-k * reports to regulatory agencies

Question 26

Inquiries to detect business accociates sources

Answer 26

* Banker * Legal Cousel * Underwriter * Customers * Suppliers

Question 27

Info regarding integrity of mgmt and disagreements with mgmt can be obtained from

Answer 27

predecessor auditors

Question 28

Independence in fact

Answer 28

state of mind of the auditor regarding their independence

Question 29

Independence in appearance

Answer 29

Others (particularly shareholders) perception of the auditors independence

Question 30

Engagement letter sets forth understanding with the client regarding?

Answer 30

* Objectives of engagement * mgmts responsibilites * auditors repsonsibilites

Question 31

Terminiation letters provide opportunity to deal with the subject of future services such as

Answer 31

* access to audit documentation by successor auditors * reissuance of auditors report when required for SEC reporting or comparative finan reporting * Fee arrangements for future services * report of auditors understanding of the circumstances of termination

Question 32

Audit Plan | (definition)

Answer 32

comprehensive list of the specifc audit procedures that the audit team must perform to gather sufficient appropriate evidence on which to base an opinion on finan statements

Question 33

Risk assessment test provides the basis to determine (3 things) of internal controls test and substantive test of acct balances and disclosures

Answer 33

nature timing and extent

Question 34

Staffing the Audit Team consists of?

Answer 34

* Engagement Partner * Audit Manager * Quality assurance partner * I.T. auditor * Audit Staff * tax partner

Question 35

Staff assignment depends on?

Answer 35

Risk and experience High risk, high experience Low Risk, low experience

Question 36

Considering work of internal auditors, external auditors should take into account

Answer 36

Internal auditors objectivitiy and competence objectivity - do they report to BOD audit committe or mgmt? Competence - what education and certifications do they have

Question 37

Use of specialist in an audit

Answer 37

* Specialists should be unrelated to company * auditor must obtain understanding of specialits methods or assumptions * auditor must know specialists qualification, experience and reputation

Question 38

Time Budget

Answer 38

* Usually based on prior years work for continuing clients and adjusted for changes in clients business * 1st time audit client: consider predecessor auditors work or experience with another client in similar field

Question 39

Interim Audit Work

Answer 39

Audit work done weeks or months before the balance sheet date

Question 40

Year end audit work

Answer 40

Performed shortly before balance sheet date

Question 41

most public audit firms busy season is from

Answer 41

September to march

Question 42

Purpose of time reports

Answer 42

* Evaluate efficiency of audit team * compile a record for billing * compile a record fro planning next audit

Question 43

Materiality is based on?

Answer 43

Professional judgement

Question 44

Performance Materiality | (Tolerable Misstatement)

Answer 44

amount to make sure that the aggregate of uncorrected/undetected immaterial missatatments do not exceed material for finan statements as a whole

Question 45

When calculating materiality consider

Answer 45

nature of item or issue engagement circumstances possible cumulative effects

Question 46

Auditor selects an item of finan info from a journal or ledger and follows its path back through the process to the beginning

Answer 46

vouching

Question 47

Auditor selects a source document and follows it forward to its final recording

Answer 47

Tracing

Question 48

An "eyes-open" approach looking for anything unusual

Answer 48

scanning

Question 49

Inspection of tangible assets provides strong evidence of (blank) and may provide tentative evidence of (blank)

Answer 49

Existence Valuation

Question 50

Evidence gathered by formal and informal (blank) generally cannot stand alone as convincing ausitors should

Answer 50

inquiries corroborate responses with independent findings based on other procudures

Question 51

Confirmatino by direct correspondence with independent parties can produce evidence of (blank & blank) and sometimes of (blank & blank)

Answer 51

existence and ownership valuation and cutoff

Question 52

Important points about confirmations

Answer 52

should be printed on clients letterhead and signed by client should seek info receipient is able to supply should be handled (mailed and received) by audit team

Question 53

Recalculation can provide evidence of (blank & blank)

Answer 53

Existence and valuation

Question 54

Evaluating finan statement accounts by sutyding and comparing relationships among finan and nonfinan data

Answer 54

Analytical Procedures

Question 55

Because of their effectiveness in direction attention to high risk areas, prof standards REQUIRE that analytical procedures be performed during the (blank) & (blank) stages of the audit

Answer 55

Planning Final Evaluation

Question 56

Things to consider when evaluating clients computerized environment

Answer 56

* Possibility of temp transaction trails * uniform processing of transactions * potential for error or fraud * potential for increased mgmt supervision * initiation or subsequent execution of transactions by computer * use of cloud

Question 57

Computer Assisted Audit Techniques (CAATs)

Answer 57

* Auditor can complete tasks with their own laptop * auditor can directly access clients data set for the entire year under audit * have spreadsheet and word processing capabilities