Chapter 3 Set 1 Flashcards
What factor would likely cause a CPA to decide not to accept a new audit engagement?
The control environment is the foundation for all other components of internal control. Management’s disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk that the financial framework used by the client may be unacceptable is great enough that an audit should not be conducted.
What is generally is included in an auditor’s engagement letter?
An understanding with the client should be established regarding management’s responsibilities, which include the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. The understanding should be documented through a written communication, such as an engagement letter.
Before accepting an engagement to audit a new client, a CPA is required to obtain what?
Inquiry of the predecessor auditor is a required pre-acceptance procedure. However, consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor.
What inquiries would a successor auditor make to a predecessor auditor?
Inquiries should include specific questions regarding, among other things, facts that might bear on the integrity of management; disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; communications with those charged with governance regarding fraud, acts of noncompliance with laws and regulations, and matters relating to internal control; and the predecessor’s understanding as to the reasons for the change of auditors.
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff. This is part of establishing an understanding with the client.
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes?
An understanding between the auditor and the client generally includes the auditor’s responsibilities. One of the auditor’s responsibilities is to ensure that those charged with governance (e.g., the audit committee) are aware of any significant deficiencies in internal control that come to the auditor’s attention.
What statement would be included in an engagement letter from an auditor to a client?
The auditor’s understanding with the client often includes discussion of any specialists who will be involved in the engagement.
What circumstance would permit an independent auditor to accept an engagement after the close of the fiscal year?
An independent auditor may accept an engagement after the close of the fiscal year as long as he or she can address any limitations resulting from accepting the engagement at that time. For example, the auditor may not be able to observe the ending inventory count, but may be able to perform acceptable alternative procedures sufficient to support the year-end inventory balance.
What activity would be most helpful to a CPA in deciding whether to accept a new audit client?
Evaluating the CPA’s ability to properly service the client would be most helpful to a CPA in deciding whether to accept a new audit client.
Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements considers?
information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors).
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?
The AICPA’s Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders’ annual reports.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about the?
In making judgments about the extent of the effect of the internal auditor’s work on the auditor’s procedures, the auditor considers the materiality of financial statement amounts, the risk of material misstatement of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases. Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor’s testing in this area.
An auditor of a nonissuer may refer to the specialist in the auditor’s report if, as a result of the specialist findings, the auditor issues a?
modified opinion, in such circumstances, the auditor may need the permission of the auditor’s specialist before making such a reference.
The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to?
Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods?
The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures.
