Chapter 8 Flashcards
8-24 b
A successor would most likely make specific inquiries of the predecessor auditor regarding
- Specialized accounting principles of the client’s industry
- The competency of the client’s internal audit staff
- The uncertainty inherent in applying sampling procedures
- Disagreements with management as to auditing procedures
- Disagreements with management as to auditing procedures
8-24 c
Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement?
- Staff will need to be rescheduled to cover this new client
- There will be a client-imposed scope limitation
- The firm will have to hire a specialist in one audit area
- The client’s financial reporting system has been in place for 10 years
- There will be a client-imposed scope limitation
8-25 a
Which one of the following statements is correct concerning the concept of materiality?
- Materiality is determined by reference to guidelines established by the AICPA
- Materiality depends only on the dollar amount of an item relative to other items in the financial statements
- Materiality depends on the nature of an item rather than the dollar amount
- Materiality is a matter of professional judgment
- Materiality is a matter of professional judgment
8-25 b
In considering materiality for planning purposes, an auditor believes the misstatements aggregating $10,000 will have a material effect on an entity’s income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily it is appropriate to design audit procedures that are expected to detect misstatements tat aggregate
- $20,000
- $15,000
- $10,000
- $30,000
- $10,000
8-25 c
A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
- The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements
- The financial statements do not conform with GAAP
- The financial statements contain unadjusted misstatements that should result in a qualified opinion
- The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.
- The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements
8-26 a
In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels?
- the materiality level was established based on preliminary financial statement amounts that differ significantly from actual amounts
- The client disposed of a major portion of the client’s business
- The client released third-quarter results before the SEC-perscribed deadline
- Significant new contractual arrangements draw attention to a particular aspect of a client’s business that is separately disclosed in the financial statements.
- The client released third-quarter results before the SEC-perscribed deadline
8-26 b
Which of the following procedures would a CPA least likely perform during the planning stage of the audit?
- Determine the timing of testing
- Take a tour of the client’s facilities
- Perform inquiries of outside legal counsel regarding pending litigation
- Determine the effect of information technology on the audit
- Perform inquiries of outside legal counsel regarding pending litigation
8-26 c
A successor auditor’s inquiries of the predecessor auditor should include questions regarding:
- the number of engagement personnel the predecessor assigned to the engagement
- the assessment of the objectivity of the client’s internal audit function
- communications to management and those charged with governance regarding significant deficiencies in internal control
- the response rate for confirmations of accounts receivable
- communications to management and those charged with governance regarding significant deficiencies in internal control
8-24a
When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether
- the predecessor’s work should be used.
- the company follows the policy of rotating its auditors.
- in the predecessor’s opinion, internal control of the company has been satisfactory.
- the engagement should be accepted.
- the engagement should be accepted.
8-23a
Analytical procedures used in planning an audit should focus on identifying
- material weaknesses in internal control.
- the predictability of financial data from individual transactions.
- the various assertions that are embodied in the financial statements.
- areas that may represent specific risks relevant to the audit.
- areas that may represent specific risks relevant to the audit.
8-23b
Which of the following will most likely indicate the existence of related parties?
- Writing down obsolete inventory prior to year-end.
- Failing to correct deficiencies in the client’s internal control.
- An unexplained increase in gross margin.
- Borrowing money at a rate significantly below the market rate.
- Borrowing money at a rate significantly below the market rate.
8-23c
Which of the following is least likely to be included in the auditor’s engagement letter?
- Details about the preliminary audit strategy
- Overview of the objectives of engagement
- Statement that management is responsible for the financial statements
- Description of the level of assurance obtained when conducting the audit
- Details about the preliminary audit strategy
