Chapter 3

Question 1

A review of the predecessor’s audit documentation related to matters of continuing accounting and auditing significance includes documentation concerning

Answer 1

contingencies and internal controls.

Question 2

Management may consult with several accounting firms, and this would not be cause for

Answer 2

rejecting a potential audit engagement.

Question 3

Management’s responsibility for the fair presentation of the financials is generally included in the

Answer 3

auditor’s engagement letter.

Question 4

Before accepting an engagement to audit a new client, a CPA is required to obtain

Answer 4

the prospective client’s consent to make inquires of the predecessor’s auditor.

Question 5

If, during an audit, the successor auditor becomes aware of information reported by the predecessor auditor may require revision, then they should

Answer 5

request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.

Question 6

An auditor is required to establish an understanding with the client regarding the services to be performed for each engagement. This understanding generally includes

Answer 6

the auditor’s responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal controls that the come to the auditor’s attention.

Question 7

Management may choose not to correct internal control deficiencies due to cost-benefit considerations, and this is

Answer 7

not part of the understanding between the auditor and the client.

Question 8

Making inquires of the predecessor auditor regarding matters that may affect the conduct of the audit and understanding the prospective client’s business and industry in which it operates are

Answer 8

tasks that are performed after the acceptance of the engagement. Not before accepting a new audit engagement.

Question 9

This survey will help a CPA determine how publicly held companies comply with the new disclosure requirements for a new financial accounting standard:

Answer 9

The AICPA’s Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholder’s annual reports.

Question 10

The internal auditor’s work may effect the nature, timing, and extent of the auditor, including the procedures.

Answer 10

procedures the auditor performs when obtaining an understanding of the entity’s internal control, when assessing risk, and when performing substantive.

Question 11

In making judgements about the extent of the effect of the internal auditor’s work on the auditor’s procedures, the auditor considers

Answer 11

the materiality of the financials amounts, the risk of material misstatement of the assertion related to these financials amount, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertion. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases.

Question 12

An internal auditor may perform

Answer 12

tests of controls and perform substantive tests.

Question 13

Referencing a specialists work in the auditor’s report would only happen when the auditor is expressing a(n)

Answer 13

modified opinion. If the auditor is expressing an unmodified opinion then the auditor should not reference the specialists work in their report.

Question 14

The auditor develops specific audit objectives based on

Answer 14

financial statement assertions. The methods used to process accounting information would not be relevant to the development of the objectives.

Question 15

Both the risk of material misstatement (including control risk and inherent risk) and detection risk can be assessed in

Answer 15

quantitative (percentages) and non-quantitative terms that range (min to Max).

Question 16

Control risk should be assessed in terms of

Answer 16

financial statement assertions. Not control environment factors.

Question 17

The acceptable level of detection risk is inversely related to

Answer 17

the assurance provided by substantive tests. If detection risk decreases, more assurance is required from substantive test.

Question 18

An auditor uses the assessed level of control risk to determine

Answer 18

the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions. Detection risk should bear an inverse relationship to control risk. The auditor’s evaluation of the effectiveness of the entity’s internal control is what the auditor uses to assess control risk, not visa versa.

Question 19

Detection risk is

Answer 19

the risk that an auditor will not detect a material misstatement that exists in an assertion.

Question 20

Inherent risk and control risk differ from detection risk in that they

Answer 20

exist independently of the financial statements, whereas detection risk is related to the auditor’s procedures and can be changed at the auditor’s sole discretion.

Question 21

An auditor should respond to fraud risk by

Answer 21

designing appropriate audit procedures. Requesting that management more closely monitor the inventory function does not improve the auditors likelihood of detecting fraud.

Question 22

During the overall review stage, the auditor should consider whether the results of

Answer 22

any audit procedures affect the assessment of the risk of material misstatement due to fraud. The auditor should consider the assessment of the risk of material misstatement during every stage of an audit.

Question 23

The auditor should design the audit to provide what kind of assurance that direct effect acts of noncompliance are detected?

Answer 23

Reasonable Assurance. However, because of the nature of acts of noncompliance with laws and regulations having an indirect effect on the financial statements, the audits provides no assurance that indirect acts of noncompliance will be detected.

Question 24

If specific information concerning a possible act of noncompliance with laws and regulations comes to the auditor’s attention, the auditor should

Answer 24

apply additional audit procedures to determine whether an act of noncompliance has occurred.

Question 25

A requirement during planning is to perform

Answer 25

analytical procedures, which involve comparisons of recorded amounts to expectations.

Question 26

When performing analytical procedures, the auditor considers relevant nonfinancial information, which

Answer 26

generally relates to financial data some way. For example, a relationship may exist between square footage of selling space and the level of sales.

Question 27

When the auditor’s risk assessment is based on effective functioning of internal controls, the auditor should

Answer 27

identify specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements of those assertions.

Question 28

As part of understanding internal controls, an auditor is not required to

Answer 28

obtain a knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely on.

Question 29

If interim substantive procedures for an account identified no exceptions, then the auditor does not need to

Answer 29

test details for the entire year under audit at year end.

Question 30

When obtaining an understanding of a client’s internal controls, an auditor should focus on the substance of the controls rather than the form because

Answer 30

when appropriate procedures are established, management may not enforce compliance. Substance over form concerns relates to controls that appear on the surface to exist but in reality are not operating effectively/being enforces.

Question 31

The cost-benefit relationship is a

Answer 31

primary criterion that should be considered when designing internal controls.

Question 32

Procedures to reduce inefficiencies on the production line relate to

Answer 32

operational objectives, and not necessarily to financial reporting objectives. Therefore, not relevant to a financial statement audit.