Chapter 3: Additional Practice Questions Flashcards
When initiating communications with predecessor auditors, prospective auditors should expect:
- to take responsibility for obtaining the client’s consent for the predecessor to give information about prior audits.
- to conduct interviews with the partner and manager in charge of the predecessor public accounting firm’s engagement.
- to obtain copies of some or all of the predecessor auditors’ audit documentation.
Generally accepted auditing standards require that auditors always prepare and use:
a written audit plan
When planning an audit, which of the following is not a factor that affects auditors’ decisions about the quantity, type, and content of audit documentation?
While independence is clearly an important consideration, it is not a factor that dictates the quantity, type and content of audit documentation.
When planning an audit, which of the following is not a factor that affects auditors’ decisions about the quantity, type, and content of audit documentation?
The auditors’ judgment about their independence with regard to the client
When planning an audit, which of the following is a factor that affects auditors’ decisions about the quantity, type, and content of audit documentation?
- The auditors’ need to document compliance with generally accepted auditing standards
- The auditors’ judgments about materiality
- The auditors’ need to verify the existence of new sales contracts important for the client’s business
Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the:
current file audit documentation.
- Since this is evidence that relates directly on the year under audit, the current file is appropriate.
An auditor’s permanent file audit documentation most likely will contain:
excerpts of the corporate charter and bylaws.
- Excerpts of the corporate charter and bylaws would not change often and would therefore likely be found in the permanent file.
An auditor’s permanent file audit documentation most likely will not contain:
- memoranda of conference with management.
- internal control analysis for the current year.
- the most recent engagement letter.
Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?
Being able to decide early what type of audit opinion to issue
- The kind of opinion to issue cannot be determined until all the evidence is obtained and evaluated.
Which of the following is an advantage of computer-assisted audit techniques (CAATs)?
The software can be used for audits of clients that use differing computer equipment and file formats.
- CAATs can be transported and used on different types of clients that utilize different types of computing systems.
An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?
Schedules and analyses to be prepared by the client’s employees.
- Client cooperation should be specified in the engagement letter. This is a key purpose of the letter.
When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes’s work in the audit report?
The auditors’ report should mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions.
- The auditors’ report should only mention the use of the specialist when the specialist’s findings affect the auditors’ conclusions.
Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?
Scanning the minutes for significant transactions with members of the board of directors
- Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.
Which of the following communications is most likely to be written before the balance-sheet date?
An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.
Which of the following procedures would most likely be performed during planning?
Identifying related parties
- Identifying related parties is an important part of the audit planning process.
Which of the following procedures would most likely not be performed during planning?
- Performing a search for unrecorded liabilities
- Surprise counting of the client’s petty cash fund
- Reporting internal control deficiencies to the audit committee
Prior to accepting a new audit engagement, a public accounting firm should:
- attempt to contact the predecessor auditors.
- evaluate the integrity of management.
- assess the firm’s resources to ensure that they are sufficient to permit the firm to accept the engagement.
An audit plan contains:
specifications of procedures the auditors believe appropriate for the financial statements under audit.
- This is exactly what an audit plan consists of – that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit.
The revenue cycle of a company generally includes which accounts?
Cash, accounts receivable, and sales
When auditing the existence assertion for an asset, auditors proceed from the:
general ledger back to the supporting original transaction documents.
- By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded.
Confirmations of accounts receivable provide evidence primarily about which two assertions?
Existence and rights and obligations
- Confirmation of accounts receivable does produce evidence of existence because the customer is admitting that it owes the client money and some evidence of rights to the accounts receivable amount is also supported because the customer is admitting that it owes the client the money (thus, they own the receivable).
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following?
Evidence of a conservative systematic bias
- Evidence of a systematic bias, whether aggressive or conservative, would be of most concern to the audit team.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities
- One example of an analytical procedure is when auditors evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant financial and nonfinancial data. When examining the inventory balance, the auditor would expect a lower balance if there was significant sales activity. Thus, this is an example of an analytical procedure.
Which of the following would not be considered an analytical procedure?
- Testing purchasing, shipping, and receiving cutoff activities
- Reconciling physical counts to perpetual records and general ledger balances
- Projecting the deviation rate of a statistical sample to the population
Which of the following procedures would a CPA most likely perform in planning a financial statement audit?
Compare financial information with nonfinancial operating data.
- Comparing the financial information with nonfinancial operating data is a step that may be completed during preliminary analytical procedures. This is done during the planning phase of the audit.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They typically use financial and nonfinancial data aggregated at a high level.
- The use of financial and nonfinancial data aggregated at a high level is commonly used during preliminary analytical procedures.
The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:
allow the internal auditor to perform certain tests of internal controls.
- If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests, like certain tests of internal control.
