Planning Activities

Question 1

What papers can the successor analyze from the predecessor?

Answer 1

planning, internal control, audit results, balance sheet accounts, and contingencies

Question 2

Auditor’s engagement letter includes statement that

Answer 2

-limits auditors responsibility to detect errors and fraud

Question 3

Before an auditor accepts an engagement what must he/she do?

Answer 3

make inquires from predecessor after obtaining consent from prospective client

Question 4

Engagement Letter

Answer 4

1) objective of the audit
2) management responsibilities (I/C and laws/reg)
3) availability of financial records
4) representation letter
5) auditor responsibilities (fee-related issues)
6) components of an audit
7) correction of misstatements

(scope, nature)

Question 5

A successors inquiries to a predecessor should be regarding?

Answer 5

1) information that might bear on the integrity of management
2) disagreements with management regarding accounting principles, procedures, etc.
3) communications with governance regarding fraud or illegal acts by clients
4) communications with management regarding deficiencies and weaknesses in internal control
5) predecessors understanding for the reason for the change of auditors

Question 6

In planning an engagement, what does the auditor consider?

Answer 6

1) nature of the engagement
2) type of report to be issued
3) nature of f/s, schedules, or other information of which the auditor is reporting
4) nature and condition of the clients records
5) assessed level of control risk
6) needs of particular circumstances of supervision and review of work

Question 7

Analytical procedures

Answer 7

study of plausible relationships among both financial and nonfinancial data, consistent with this answer which take place in planning the audit engagement

Question 8

Pre-Audit Conferences

Answer 8

provide information about the client, the audit areas they have been assigned, the critical audit areas; guidance in both technical and personnel parts of the audit

Question 9

Audit Programs

Answer 9

audit evidence must support the conclusion

Question 10

Client imposed scope limitation

Answer 10

anything in this area is a problem

Question 11

Planning an Audit

Answer 11

coordinate client assistance to be rendered
discuss matters that may affect the audit with consulting and tax staff
read the current year’s interim financial statements

Question 12

What are the two levels that an audit discusses the risk of RMM?

Answer 12

overall response

response at a relevant assertion level

Question 13

In-charge Auditor

Answer 13

explains to staff assistants how the results of the procedures should be evaluated

Question 14

Immaterial statements must be documented in the area of uncorrected areas.

Answer 14

true

Question 15

what aggregate level does an auditor consider materiality for planning purposes?

Answer 15

An auditor considers materiality for planning purposes in terms of the SMALLEST aggregate level of misstatements that could be material to any one of the financial statements.

Question 16

What does the requirement for misstatement have to be in terms of an unqualified opinion?

Answer 16

misstatement must be less than the material amount

Question 17

When planning a substantive test of details for audit the auditors consideration of tolerable misstatement should be related to what?

Answer 17

preliminary judgments about materiality levels

Question 18

Detection risk increases when procedures are moved from year-end to interim date.

Detection risk decreases when procedures are moved from interim date to year-end.

Answer 18

true

Question 19

What does an increased level of control risk mean?

Answer 19

risk of mm occurring and not being detected has increased and one must decrease the level of detection risk or increase tests of details

Question 20

How can one decrease detection risk?

Answer 20

Increase tests of details

Question 21

What should the auditor do when the level of tolerable misstatements decreases?

Answer 21

increase substantive testing to ensure that all mm are detected and one can do this by performing procedures closer to the balance sheet date

Question 22

Audit Risk

Answer 22

the risk that the auditor will issue an unqualified opinion on f/s when in fact the f/s are materially misstated

Question 23

Inherent Risk

Answer 23

“…the susceptibility of an assertion about a class of transactions, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.”

Question 24

Detection Risk is inversely related to?

Answer 24

assurance provided by substantive tests

Question 25

How do IR/CR differ from DR?

Answer 25

IR/CR are functions of the client and its environment; and exist independently of the f/s audit

Question 26

Detection Risk

Answer 26

the risk that an auditor will conclude that a material error does not exist in an account balance

Question 27

What should one do if there is a high risk of mm?

Answer 27

select more effective substantive tests

Question 28

What stages are analytical procedures required?

Answer 28

planning and review stage; may not be required for substantive tests

Question 29

Who should perform analytical procedures in the review stage?

Answer 29

someone who is experienced and has knowledge of the business/industry

Question 30

Why are analytical procedures used in the review stage?

Answer 30

evaluates the overall presentation of the f/s

Question 31

Which relationships are more predictable in analytical procedures?

Answer 31

relationships involving income statement accounts are more predictable than balance sheet accounts because i/s accounts involve transactions over a period of time rather than a point of time

Question 32

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity?

Answer 32

ratio analysis

Question 33

Analytical procedures used in planning often use data aggregated at a high level.

Answer 33

true

Question 34

Analytical procedures

Answer 34

auditors expectations/ratios and a recorded balance

Question 35

What most likely represents the highest risk of a misstatement arising from misappropriations of assets?

Answer 35

easily convertible assets such as bearer bonds (not fraud)

Question 36

What is a sign of management override?

Answer 36

spending over the limits

Question 37

An auditor should design the audit to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements. OR The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements, and design the audit to provide reasonable assurance of detecting material errors and irregularities.

Answer 37

true

Question 38

What can cause material misstatement?

Answer 38

- a manager may place special emphasis on something | - lack of proper documentation

Question 39

What is the reason that an auditor may not detect a fraud?

Answer 39

forgery and collusion

Question 40

An auditor can refer to a specialist in their report if the auditor does what?

Answer 40

adds an explanatory paragraph to an unqualified opinion or departure of an unqualified opinion (meaning a qualified opinion) AICPA Professional Standards indicate that reference to the work of a specialist may be made in the auditor's report if the auditor believes such reference will facilitate an understanding of the reason for a modified opinion.

Question 41

What happens when an auditor uses the work of a specialist who has a relationship with the client?

Answer 41

auditor should assess the risk that the actuary's objectivity might be impaired; corroborative evidence

Question 42

A CPA can hire a non-CPA under what circumstance?

Answer 42

if the CPA can supervise the specialist and evaluate the end product

Question 43

The auditor's determination of materiality levels is generally NOT discussed with the audit committee.

Answer 43

true

Question 44

What must an auditor communicate to the audit committee about?

Answer 44

MUST NOT DISCUSS - control risk - definitely not material things - substantive procedures at interim dates MUST DISCUSS - auditors responsibilities under GAAS - management judgement and accounting estimates - significant errors that have been corrected by management - any disagreements with management about matters that affect the f/s or have been resolved - accounting adjustments - consultation with other accountants - difficulties encountered in performing the audit - significant accounting policies (perhaps have no guidance) such as deficiencies