Chapter 3

Question 1

What factor would most likely cause a CPA not to accept a new audit engagement?

Answer 1

Management’s disregard of its responsibility to maintain an adequate internal control environment.

Question 2

What do auditors prepare engement letters to be signed by the auditees?

Answer 2

TO communicate and clarify the expectations and responsibilities of both the auditee and the auditor.

Question 3

What are 3 key factors to consider when using the work of internal auditors?

Answer 3

1) Competence and objectivity
2) Materiality or significance of the accounts examined by the internal audit function
3) Audit risk associated with the accounts examined by the internal auditors

Question 4

The audit committee of a company should consist of who?

Answer 4

Individuals of the board of directors that are not officers or employees, including a financial expert.

Question 5

Borrowing money at an interest rate substantially below the prevailing market rate could indicate what?

Answer 5

Related party transacations

Question 6

Test of controls includes what?

Answer 6

1) Inspection of documents
2) Walkthroughs
3) Observations
4) Inquires of personnel
5) Reperformance of the control by the auditor

Question 7

Audit Supervisor Activities should include the following

Answer 7

1) Inform team of responsibilities including:
a. Objectives
b. Nature, timing, & extent of procedures
c. Matters the could affect procedures
2) Direct team memebers to present significant issues
3) Review work of team to evaluate
a. the work was performed and documented
b. objectives of the procedures were achieved
c. the results of the work support the conclusion

Question 8

What is affected by how the financial statement users may be influenced in decision making

Answer 8

Materiality

Question 9

What is the first step in apply Materiality?

Answer 9

Determine Materiality level for the overall financial statements

Question 10

Which laws & regulations does the auditor have the same responsibility as that for errors and fraud?

Answer 10

Laws and regulations that have a direct and material effect on the financial statements.

Question 11

What is a dual-purpose test?

Answer 11

1. Test of control

2. Substantive test of transactions.

Question 12

When likely misstatments are greater than overall materiality, what should the auditor do?

Answer 12

1) Request that the auditee adjust the financial statements

or

2) Modify the opinion if the auditee will not adjust the financial statements

Question 13

What is more detailed, the audit plan or the audit strategy

Answer 13

The audit plan is more detailed.

Question 14

The use of what type of specialist is significant in most engagements?

Answer 14

IT Specialist

Question 15

When are related parties initially identified?

Answer 15

Audit Planning

Question 16

What are the two types of Test of Details?

Answer 16

1) Substantive test of transactions

2) Test of Details of account balances and disclosure

Question 17

Test to detect errors or fraud in individual transactions.

Answer 17

Substantive test of transactions

Question 18

Substantive test that concentrate on the details of items contained in the account balance and disclosure

Answer 18

Test of Details

Question 19

Audit procedures performed to test material misstatements in an account balance, transaction class, or disclosure component of the financial statements.

Answer 19

Substantive procedures

Question 20

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

Answer 20

Analytical procedures

Question 21

Materiality allocated to a specific account.

Answer 21

Tolerable Misstatement

Question 22

An auditor has withdrawn from an audit engagement of a public company after finding fraud that may materially affect the financial statements. The auditor set forth the reasons and findings in correspondence with who?

Answer 22

Audit committee of the board of directors

Question 23

The auditor discuss the timing of the audit procedures with the client’s management during the initial planning phase of the audit (T/F)

Answer 23

True

Question 24

Purchases from another corporation that is controlled by the corporations chief stockholder, Loan from the corporation to a major stockholder, and Sales of land to the corporation by the spouse of a director are referred to as what?

Answer 24

Related Party Transactions

Question 25

The party in the entity to which the internal auditor reports is a matter of the internal auditor’s competence (T/F)

Answer 25

False

Question 26

An small misstatement of an illegal payment to a foreign official that was not recorded with have a materiel effect on an entity’s financial statements (T/F)

Answer 26

True

Question 27

A written understanding between the auditor and the client concerning the auditor’s responsibility for the discovery of illegal acts is usually set forth in what?

Answer 27

Engagement Letter

Question 28

Types of Audit Test

Answer 28

1. Risk Assessment
2. Test of Controls
3. Substantive Test

Question 29

Two types of substantive Test

Answer 29

1. Test of Details

2. Substantive Analytical Procedures