Chapter 8: Audit Planning and Materiality Flashcards
A 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 is the
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
B) acceptable audit risk.
The first phase in planning an audit and designing an audit approach is to
A) accept the client and perform initial audit planning.
B) set the preliminary judgment of materiality.
C) understand the client’s business and industry.
D) perform preliminary audit procedures.
A) accept the client and perform initial audit planning.
_______ is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit.
A) Inherent risk
B) Client business risk
C) Acceptable audit risk
D) Risk of material misstatement
D) Risk of material misstatement
In what order should the following steps occur?
A. Set preliminary judgment of materiality and performance materiality.
B. Understand the clients business and industry.
C. Perform preliminary analytical procedures.
D. Accept the client and perform initial audit planning.
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A
A) D, B, C, A
The auditor uses knowledge gained from the understanding of the client’s business and industry to assess
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
A) client business risk.
When an auditor sets a low acceptable audit risk, it means that he wants to be more certain that the financial statements are notmaterially misstated.
TRUE OR FALSE
TRUE
As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
TRUE OR FALSE
TRUE
Assessing acceptable audit risk, client business risk, and risk of material misstatement helps determine the audit procedures that will be needed.
TRUE OR FALSE
TRUE
A 100 % audit risk is complete certainty.
TRUE OR FALSE
FALSE
Initial audit planning involves four matters. Which of the following is notone of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client’s reason for the audit.
B) Request that bank balances be confirmed.
Smith, CPA, has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client’s refusal to allow this communication to occur would impact Smith’s decision concerning
A) the auditor’s ability to design audit tests.
B) possible scope exception due to lack of access.
C) the desirability of accepting the prospective engagement.
D) violation of the GAAP rules concerning consistency and comparability of financial information.
C) the desirability of accepting the prospective engagement.
When dealing with audit risk,
A) audit risk should not be a factor when determining if a new client should be accepted.
B) audits with a low acceptable audit risk generally result in lower audit fees.
C) if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client.
D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.
D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.
A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the
A) management letter requested by the auditor.
B) engagement letter.
C) audit Plan.
D) audit Strategy for the client.
B) engagement letter.
For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act.
A) client’s management
B) client’s chief executive officer
C) client’s chief financial officer
D) client’s audit committee
D) client’s audit committee
Which of the following statements is true regarding communications between predecessor and successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor’s response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.
B) The predecessor’s response can be limited to stating that no information will be provided.
The purpose of an engagement letter is to
A) document the CPA firm’s responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
D) emphasize management’s responsibility for approving the audit program.
B) document the terms of the engagement.
The written communication stating the auditor cannotguarantee that all acts of fraud will be discovered is found in the
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter.
A) engagement letter.
Which of the following normally signs the engagement letter for an audit of a private company?
A) management
B) board of directors representative
C) audit committee representative
D) corporate treasurer
A) management
The two major factors affecting acceptable audit risk are
A) inherent risk and the intended uses of the financial statements.
B) control risk and the intended uses of the financial statements.
C) the likely statement users and their intended uses of the statements.
D) the audit firm and the intended uses of the statements
C) the likely statement users and their intended uses of the statements.
An engagement letter sent to a publicly held audit client usually would notinclude a(n)
A) reference to the auditor’s responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management’s responsibility for the financial statements.
C) statement that management advisory services would be made available upon request.
The preliminary audit strategy
A) is set before the auditor understands the client’s reasons for the audit.
B) guides the development of the audit plan.
C) is determined after the engagement staffing is set.
D) is the detailed steps to be followed for the substantive audit tests.
B) guides the development of the audit plan.
The purpose of the requirement in having communication between the predecessor and successor auditors is to
A) allow the predecessor to disclose information which would otherwise be confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
B) help the successor auditor to evaluate whether to accept the engagement.
The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor’s work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity.
C) there are actual or potential legal problems between the client and the predecessor.
Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?
A) Management asserts there are no errors, material or immaterial, in the general ledger.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company’s financial statements.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.
