Chapter 8

Question 1

three main reasons for audit planning

Answer 1

enable auditor to obtain sufficient appropriate evidence for the circumstances,
help keep audit costs reasonable
avoid misunderstandings with the client

Question 2

acceptable audit risk

Answer 2

measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued

Question 3

inherent risk

Answer 3

measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control

Question 4

initial audit planning

Answer 4

1. the auditor decides whether to accept a new client or continue serving an existing one
2. auditor identifies why the client wants or needs an audit
3. to avoid misunderstandings, the auditor obtains an understanding with the client about the terms of the engagement
4. the auditor develops an overall strategy for the audit, including engagement staffing and any required audit specialists

Question 5

new client investigation

Answer 5

you must communicate with the prior auditor of any new client, the prior auditor must consult the client first though

Question 6

continuing clients

Answer 6

sometimes auditors evaluate existing customers

Question 7

engagement letter

Answer 7

including the engagement’s objectives, the responsibilities of the auditor and management, reference to the expected form and content of the audit report, and the engagement’s limitations

Question 8

audit strategy

Answer 8

sets the scope, timing, and direction of the audit and that guides the development of the audit plan

Question 9

select staff for audit

Answer 9

staff has to be competent

Question 10

evaluate need for outside specialists

Answer 10

if there is specific knowledge the auditor would consult a specialist

Question 11

three reasons to obtain a knowledge of the clients industry

Answer 11

1. risks associated with a specific industry
2. inherent risks associated with industry
3. unique accounting requirements

Question 12

related party

Answer 12

an affiliated company, a principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other

Question 13

related party transaction

Answer 13

any transaction between the client and a related party

Question 14

related parties

Answer 14

should be found and included in the permanent section

Question 15

corporate minutes

Answer 15

official record of the meetings of the board of directors and stockholders

Question 16

client business risk

Answer 16

the risk that the client will fail to achieve its objectives

Question 17

audit planning process

Answer 17

accept client and perform initial audit planning
understand the client’s business and industry
assess client business risk
perform preliminary analytical procedures
set materiality and assess acceptable audit risk and inherent risk
understand internal control and assess control risk
gather information to assess fraud risks
develop overall audit strategy and audit program

Question 18

analytical procedures

Answer 18

evaluations of financial info through analysis of plausible relationships among financial and nonfinancial data

Question 19

five types of analytical procedures

Answer 19

industry data
similar prior period data
client determined expected results
auditor determined expected results
expected results using nonfinancial data

Question 20

ratios?

Answer 20

do we need to know them?