Chaptet 3

Question 1

What are the preconditions of an audit?

Answer 1

1) Use of acceptable accounting framework.
2) agreement on the premise of the audit.

The premise relates to the fundamental responsibilities of management and if appropriate, those charges with governance.

Question 2

When does an auditor usually communicate to management?

Answer 2

Before contacting a predecessor auditor

Question 3

Where is the scope and nature of an auditors contractual obligation to a client set forth?

Answer 3

It is documented in the engagement letter

Question 4

What should a CPA do before accepting an engagement near or after the close of the fiscal year?

Answer 4

Determine whether circumstances permit him/her to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and express an I modified opinion.

Question 5

The auditor is required to establish an understanding with the client in writing usually documented in the engagement letter. What does this understanding generally include?

Answer 5

The Auditor is responsible for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in control that comes to the auditors attention

Question 6

What would cause a CPA to decline to accept a new audit engagement?

Answer 6

Management is unwilling to permit the inquiry of legal counsel.

Question 7

After accepting an audit engagement what would the successor auditor ask the predecessor auditor to provide?

Answer 7

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Question 8

Why would an auditor be least likely to perform selecting samples of vendors invoices for comparison with receiving reports in planning a financial statement audit?

Answer 8

Because it is a further audit procedure performed to test relevant assertions.

Selecting samples of vendors invoices for comparison with receiving reports is a test of details, (a substantive procedure)

Question 9

What are risk assessment procedures?

Answer 9

Assess the risk of material misstatement of financial statements.

Question 10

Why are risk assessments performed?

Answer 10

To obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risk of material misstatements at the level of

1. The Financial statements as a whole,
2. Relevant Assertions

Question 11

When should ‘determining the kind of opinion to be expressed occur in an audit’?

Answer 11

After completion of the audit procedures.

Question 12

What does audit planning for an initial audit most likely includes?

Answer 12

First year audit planning involves additional planning considerations:

1) Communication with the predecessor auditor
2) Audit procedures regarding opening balances
3) Assignment of firm personnel with appropriate qualifications
4) Procedures required by the firms system of quality control for initial engagements.

Question 13

What questions should be included in the auditors inquiry of the predecessor auditor?

Answer 13

1) Facts relevant to the integrity of management.
2) Disagreements with management about accounting principles, audit procedures, and any other similar matters.
3) Communication to those charged with governance about fraud and noncompliance with laws and regulations
4) Communication to management and those charged with governance about significant deficiencies and material weaknesses in internal control.
5) Predecessors understanding as to the change in auditors.

Question 14

When should the financial statement audit plan usually be developed?

Answer 14

After the auditor has established the overall audit strategy.

Question 15

Before accepting an audit, what should the CPA obtain?

Answer 15

Prospective client consent to communicate with the predecessor auditor

Question 16

In an initial planning of a Financial Statement Audit, what should be included in the procedure?

Answer 16

Determining the extent of involvement of the clients internal auditors.

An internal audit function is one of many to be considered in determining the nature, timing, and extent of audit procedures.

Question 17

How does early appointment of the auditor benefit the client?

Answer 17

Client benefits from more efficient scheduling of the audit and early completion of the work after the year end of the fiscal report.

The auditor benefits in planning the work, especially those needed to be done before year end.

Question 18

Which of the following audit risk components may be assessed in non-quantitative terms?

Control risk
Detection risk
Inherent risk

Answer 18

All of them.

The components may be assessed in quantitative or non quantitative terms.

Question 19

How does detection risk differ from control and inherent risk?

Answer 19

Detection risk can be changed at anytime based on the auditor discretion.

Question 20

What is detection risk?

Answer 20

Risk that procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exist that can be material individually or combined with other misstatements.

Question 21

What is inherent risk?

Answer 21

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, individually or combined with other misstatements, before consideration of related controls.

Question 22

What is control risk?

Answer 22

The risk that internal control will not timely prevent or detect and correct, a material misstatement that could occur in an assertion.

Question 23

What is performance materiality?

Answer 23

The amount set by the auditor at less than the materiality for

1) the statements as a whole or
2) particular classes of transactions, balances or disclosures.

Question 24

What should be considered in determining whether uncorrected misstatements are material, individually or in the aggregate?

Answer 24

Auditor should consider the size and nature of the misstatements relative to:

1) Classes of transactions, account balances, or disclosures, and
2) The Financial Statement as a whole.

The auditor also considers the circumstances for each misstatement and the effect of uncorrected misstatements in prior periods on the relevant classes of transaction.

Question 25

What is projected misstatements?

Answer 25

The auditors best estimate of misstatements in populations based on audit samples

Question 26

if management took no action, after the CPA notified the board, because the amounts were immaterial to the Financial Statements… what should the CPA do?

Answer 26

Consider withdrawing. if no remedial action is taken.

even if illegal act is immaterial, the auditor should consider withdrawing

Question 27

what are some things an auditor should consider when planning an audit?

Answer 27

Among others:
1) The financial statement accounts likely to contain misstatements

2) Conditions that require extensions of audit tests.

Question 28

is the predecessors engagement letter useful to the auditor?

Answer 28

No it is not. However the documentation provides useful information for an auditor.

Question 29

What does the auditor professional judgement do?

Answer 29

determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate audit evidence to reduce risk to an acceptably low level.

Which enables auditor to draw reasonable conclusions on which to base the opinion

Question 30

Why does an auditor obtain an understanding of a new client?

Answer 30

To identify areas of audit emphasis.

Question 31

The acceptable level of detection risk is inversely related to

Answer 31

the assurance provided by substantive procedures. or

the assessed risk of material misstatements

Question 32

What are some non-financial information an auditor would consider during the planing phase of the audit?

Answer 32

number of employees, square footage of selling space, volume of goods produced, etc…

Question 33

What is the objective of analytical procedures performed as risk assessment procedures?

Answer 33

1) Enhance the auditors understanding of the clients business, and significant transaction and events.
2) Identify unusual transactions or events and amounts, ratios and trends that might indicate matters with audit ramifications.

Question 34

What are analytical procedures?

Answer 34

Evaluations of financial information made by a study and comparison of the relationships among data.

Question 35

Auditors try to identify predictable relationships when using analytical procedure. Which accounts tend to be more predictable?

Answer 35

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

Relationships involving transactions that’s subject to mgmt discretion is also less predictable (eg. Advertising expense,)

Question 36

In the planning stage of an audit, what are some of the things that should be considered?

Answer 36

The financial statement accounts likely to require adjustments, and the conditions that requires extension or modification of audit procedures. (eg. risk of material misstatements)

Question 37

When an auditor obtains an understanding of an entity, in what order is the steps carried out?

Answer 37

1. Obtain understanding of internal control.
2. Assess the risk of material misstatements. (Test of controls)
3. Auditor performs further audit procedures (substantive procedures).

Question 38

The accounts receivable turnover is?

Answer 38

the ratio of sales to average receivables.

Question 39

Analytical procedures used to perform an overall conclusion should ordinarily include:

Answer 39

Reading the financial statements and considering:

1) The adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit, and
2) unusual or unexpected balances or relationships not previously detected.

Question 40

What does this symbol represent on the flow chart?

Attach Symbol

Answer 40

It indicates manual operations or offline processes.

Question 41

Risk assessment procedures are?

Answer 41

procedures performed to obtain an understanding of the environment.

Risk assessment procedures inclues:

1. Inquiries of management, and others within the entity.
2. Analytical procedures (used to plan the audit).
3. Observation and inspection.