Chapter 3 Audit Planning, Types of Audit Tests, and Materiality

Question 1

Types of Audit Procedures

Answer 1

risk assessment procedures

test of controls

substantive procedures

dual-purpose tests

audit data analytics

Question 2

Risk Assessment Procedures

Answer 2

include inquiries of mgmt. and others, preliminary analytical procedures, and observation and inspection

Question 3

Test of Controls (6)

Examples

Answer 3

audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level

Examples:

inquiries- of appropriate mgmt., supervisory, and staff personnel

inspection- of docs, reports, and electronic files

observation- of the application of specific controls

walkthroughs- involve tracing a transaction from its origination to its inclusion in the FS through a combo of audit procedures, including inquiry, observation, and inspection

reperformance- of the application of the control by the auditor

Question 4

Substantive Procedures

its 2 categories

Answer 4

designed to detect material misstatements in a class of transactions, account balance, and disclosure component of the FS

2 categories:

Test of details
(1) substantive tests of transactions- test for errors or fraud in individual transactions
(2) tests of details of account balances and disclosures- focus on the items that are contained in the ending FS account balances and disclosures

Substantive analytical procedures
evaluations of financial info through analysis of plausible relationships ( look at trends and ratios) among both financial and nonfinancial data

Question 5

Dual-Purpose Tests

Answer 5

test of transactions that both evaluate the effectiveness of controls and detect monetary errors

Question 6

Audit Data Analytics

Answer 6

includes procedures that use analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other info in data in the context of the audit

Question 7

Materiality

Answer 7

A difference between the amount, classification, presentation, or disclosure of a reported FS item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.

Question 8

Steps in Applying Materiality

Answer 8

Step 1
Determine overall materiality

Step 2
Determine tolerable misstatement

Step 3
Evaluate audit findings

Question 9

An auditor’s objective is to examine documentary evidence that supports the assertion of completeness. Which of the following procedures is he or she most likely to apply?

Answer 9

tracing

Question 10

How does an audit procedure differ from an audit objective?

Answer 10

A procedure is an act to be performed that meets an audit objective.

Question 11

Which of the following audit procedures provides the more reliable evidence?

Answer 11

Confirmation of accounts receivable

Question 12

Which of the following procedures is a test of controls?

Answer 12

Vouching approvals of purchases of inventory to the initials of the purchasing agent on the purchase order.

Question 13

Which of the following is a dual-purpose test?

Answer 13

Checking the math on a sales invoice.

Question 14

Materiality considerations usually arise in which stage of the audit?

Answer 14

All stages of the audit

Question 15

An auditor should design a written audit program so that

Answer 15

The audit procedures selected will achieve specific audit objectives

Question 16

An auditor scans a client’ investment records for the period just before and just after the year-end to determine that transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management’s financial statement assertions of

Answer 16

Classification, as well as valuation

Question 17

Which of the following procedures would an auditor LEAST likely perform before the balance sheet date?

Answer 17

Confirmation of accounts payable

Question 18

Which of the following would an auditor mostly likely use in determining the auditor’s preliminary judgment about materiality?

Answer 18

The entity’s annualized interim financial statements

Question 19

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions of the auditor is the most appropriate?

Answer 19

Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

Question 20

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s:

Answer 20

understanding as to the reasons for the change of auditors.

Question 21

A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n):

Answer 21

Engagement letter

Question 22

If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors’:

Answer 22

Competency and objectivity

Question 23

During the initial planning phase of an audit, a CPA most likely would:

Answer 23

discuss the timing of the audit procedures with the entity’s management.

Question 24

As generally conceived, the audit committee of a publicly held company should be made up of:

Answer 24

members of the board of directors who are not officers or employees.

Question 25

When planning an audit, an auditor should:

Answer 25

determine overall materiality for audit purposes.

Question 26

Which of these statements concerning illegal acts by clients is correct?

Answer 26

An auditor’s responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

Question 27

The engagement partner and manager review the work of engagement team members to evaluate which of the following?

Answer 27

The objectives of the procedures were achieved.

The work was performed and documented.

The results of the work support the conclusions reached.

Question 28

Tolerable misstatement is:

Answer 28

materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

Question 29

Which of the following would an auditor most likely use in determining overall materiality when planning the audit?

Answer 29

The entity’s income before taxes for the period-to-date (e.g., 6 months)

Question 30

Successor auditors need to communicate with predecessor auditors __________ accepting the engagement.

Answer 30

Before

Question 31

If predecessor auditors refuse communication, successor auditors __________ accept the engagement.

Answer 31

Can

Question 32

Communication between predecessor and successor auditors aids in evaluating the __________ of management.

Answer 32

Integrity