Planning Activities

Question 1

What specifics does the audit “engagement letter” address

Answer 1

a. The objective and scope of the audit;
b. The auditor’s responsibilities;
c. Management’s responsibilities;
d. A statement about the inherent limitations of an audit;
e. A statement identifying the applicable financial reporting framework;
f. Reference to the expected content of any reports to be issued; and
g. Other matters as warranted in the auditor’s judgment.

Question 2

What are the 5 matters the successor auditor should inquire of the predecessor auditor?

Answer 2

(1) information that might bear on the integrity of management; (2) disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; (3) communications to those charged with governance regarding fraud and illegal acts by clients; (4) communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control; and (5) the predecessor auditor’s understanding as to the reasons for the change of auditors.

Question 3

A successor auditor ordinarily should request to review the predecessor’s audit documentation relating to

Answer 3

The successor auditor normally reviews the predecessor’s audit documentation relating to planning, internal control, audit results, balance sheet accounts, and contingencies.

Question 4

List the audit procedures that should occur during the planning phase of an audit.

Answer 4

1. Review client records
2. Inquire of client personnel
3. Coordinate client assistance
4. Determine if specialists are needed
5. Coordinate staffing requirements.

Question 5

List several circumstances that impact the extent of planning activities.

Answer 5

1. Size and complexity of the entity
2. Auditor’s experience with that entity
3. Auditor’s understanding of the entity and its environment, including its internal control.

Question 6

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

Answer 6

A. Smallest

Question 7

The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Answer 7

performance materiality.

Question 8

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Answer 8

Audit Risk

Question 9

Inherent risk (IR)

Answer 9

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.

Question 10

Control risk (CR)

Answer 10

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.

Question 11

Detection risk (DR)

Answer 11

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (that is, an undetected material misstatement exists in a relevant assertion).

Question 12

The only component risk that is specifically the auditor’s responsibility

Answer 12

Detection risk

Question 13

The two risks that exist independently of the financial statement audit.

Answer 13

Inherent risk and control risk are environmental risks pertaining to the client.

Question 14

Detection risk is inversely related to the assurance provided by this

Answer 14

substantive tests. The lower the detection risk, the more assurance needed from substantive testing.

Question 15

Why are tests of control performed

Answer 15

Tests of controls are performed to reduce substantive testing.

Question 16

What does it mean when an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective.

Answer 16

An increase in the assessed level of control risk means that the risk of a material misstatement occurring and not being detected has increased. To offset that increased risk, the auditor should make decisions that decrease the level of detection risk. Increasing the emphasis on tests of details would decrease detection risk.

Question 17

What is the relationship between control risk and detection risk

Answer 17

The relationship between control risk and detection risk is inverse.If control risk is increased, detection risk must decrease to achieve the same audit risk as originally planned.

Question 18

What is the audit risk model that is applicable to classes of transactions or to account balances?

Answer 18

Audit Risk = inherent risk x control risk x detection risk.

Question 19

Define “risk of material misstatement.”

Answer 19

The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)

Question 20

List the variables of planned audit procedures that can be adjusted to change detection risk

Answer 20

1. Nature
2. Timing
3. Extent of substantive testing.

Question 21

For all audits of financial statements made in accordance with GAAS, the use of analytical procedures is required when?

Answer 21

Required in planning and in the overall review. They may be used but are not required as substantive tests.

Question 22

AICPA Professional Standards state, “The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on, among other things,

Answer 22

(a) nature of assertion,
(b) plausibility and predictability of the relationship,
(c) availability and reliability of data used to develop the expectation, and
(d) the precision of the expectation.”

Question 23

What matters must be documented in connection with analytical procedures?

Answer 23

1. The auditor’s expectation and the factors considered in developing it;
2. The results of the comparison of the recorded amounts (or ratios) with the expectations; and
3. Any additional auditing procedures performed to investigate significant differences identified by that comparison.

Question 24

What is the auditor required to communicate to the audit committee or those charged with governance

Answer 24

Significant accounting policies, management judgments and accounting estimates, significant audit adjustments, disagreements with management, consultation with other accountants, and difficulties encountered in performing the audit.