Chapter 3 Flashcards
Before accepting an engagement to audit a new client, what is a CPA required to obtain?
The prospective client’s consent to make inquiries of the predecessor auditor
After management requests permission of the predecessor auditor to communicate with the successor auditor, what are the next steps?
The initiative to communicate with the predecessor auditor rests with the successor auditor
What is the AICPA’s Accounting Trends & Techniques?
An annual survey of accounting practices followed in 600 stockholders’ annual report
What element of the audit planning process is most likely agreed upon with the client before implementation of the audit strategy?
the timing of inventory observation procedures to be performed (the auditor would have to coordinate schedules with the client).
When can an auditor refer to the work of a specialist in their audit report when auditing a non-issuer?
If, as a result of the specialist’s findings, the auditor issued a modified opinion
Why is the review of an assistants work necessary?
to determine whether it was performed in a satisfactory manner and to determine whether the work supports the conclusions presented in the auditors report
In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:
Financial Statement Assertions
The existence of audit risk is recognized by what statement in the standard audit report?
“auditor obtains reasonable assurance about whether the financial statements are free of material misstatement”
As the acceptable level of detection risk decreases, an auditor may?
Postpone the planned timing of substantive tests from interim dates to the year-end
As acceptable level of detection risk decreases, what should happen with substantive tests?
The extent of substantive tests should INCREASE!
As the acceptable level of detection risk decreases, assurance directly provided from …
Substantive test increases
What is inherent risk?
It is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
How do inherent risk and control risk differ from detection risk?
They exist independently of the audit of financial statements, but detection risk is related to the auditors procedures and can be changed at the auditor’s sole discretion
How can an auditor increase the effectiveness of substantive procedures?
- Change the nature of substantive tests from a less effective to a more effective procedure
- Change the timing of the substantive tests, such as performing them at year end rather than at an interim date
- Change the extent of substantive tests, such as using a larger sample size
What does the control environment reflect?
It reflects the overall attitude, awareness, and actions of those charged with governance (BOD, management, owners and others) concerning the importance of control and it’s emphasis in the entity
