Planning Activities Flashcards
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes
The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor’s attention.
Professional standards require that the auditor establish an understanding with the client regarding the services to be performed. The understanding would generally include:
the objective of the audit;
management’s responsibilities with regard to the financial statements, internal control, compliance with laws and regulations, availability of records, and the management representation letter;
the auditor’s responsibilities for GAAS and reportable conditions;
a description of an audit; and
management’s responsibilities regarding correction of material misstatements and evaluation of immaterial adjustments.
Before accepting an engagement to audit a new client, a CPA is required to obtain
The prospective client’s consent to make inquiries of the predecessor, if any.
AICPA standards addressing required communications between successor and predecessor auditors state that an auditor should not accept an engagement until the successor auditor’s required communications with the predecessor auditor have been evaluated.
An auditor’s engagement letter most likely would include
Management’s acknowledgment of its responsibility for maintaining effective internal control.
The engagement letter would typically refer to:
the objective of the audit;
management’s responsibilities for the financial statements, for internal control over financial reporting, and for compliance with laws and regulations;
availability of financial records;
representation letter;
auditor’s responsibilities;
components of an audit; and
correction of misstatements.
The engagement letter would include management’s acknowledgment of its responsibility for maintaining effective internal control over financial reporting.
Which of the following procedures would an auditor most likely include in the planning phase of a financial statement audit?
Obtain an understanding of the entity’s risk assessment process.
The auditor is required to obtain an understanding of the entity’s environment, including internal control sufficient to plan the audit. Risk assessment is one of the five components of the internal control structure. Obtaining an understanding of the entity’s risk assessment process would be part of obtaining an understanding of internal control.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
How the results of various auditing procedures performed by the assistants should be evaluated.
The in-charge auditor, most likely, would have a supervisory responsibility to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. Evaluation of the results is a matter of professional judgment, which the assistants will acquire over time and through training.
In planning a new engagement, which of the following is not a factor that affects the auditor’s judgment as to the quantity, type, and content of audit documentation?
The content of the client’s representation letter.
In planning a new engagement, an auditor would consider:
the nature of the engagement;
the type of report to be issued;
the nature of the financial statements, schedules, or other information on which the auditor is reporting;
the nature and condition of the client’s records;
the assessed level of control risk (including the estimated occurrence rate of attributes); and
the needs in the particular circumstances for supervision and review of the work.
The auditor would NOT consider the content of the management representation letter obtained at the end of the engagement.
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s financial statements of the prior year.
Materiality refers to a cutoff amount for a misstatement over which the financial statements would be unfairly presented. In determining this amount, out of the choices given, the most likely source is the prior year financial statements. The statements would provide the auditor with the most information to use in setting materiality.
Which of the following is a definition of control risk?
The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
The failure of internal control to prevent or detect a material misstatement on a timely basis is the meaning of control risk.
The acceptable level of detection risk is inversely related to the
Assurance provided by substantive tests.
Detection risk is inversely related to the assurance provided by substantive tests. The lower the detection risk, the more assurance needed from substantive testing.
Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
The timing of an auditor’s substantive procedures has implications to the resulting level of detection risk. When important substantive procedures are moved from year-end testing to an interim date, the auditor’s detection risk increases.
As the acceptable level of detection risk increases, an auditor may change the
Timing of substantive tests from year end to an interim date.
Performing substantive tests at an interim date increases the risk that misstatements that exist at the balance sheet date will not be detected by the auditor. Evidence collected at an interim date is therefore less strong than evidence collected at year end. Increasing detection risk means that the auditor can obtain less or weaker evidence. As a result, the auditor may be able to push the timing of substantive tests from year end to an interim date.
When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the
Extent of tests of details.
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.
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
Unaudited information from internal quarterly reports.
For some entities, the auditor’s performance of analytical procedures may consist of reviewing changes in account balances from the prior to the current year using information from quarterly financial statements to develop expectations.
An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts.
The auditor most likely could have detected this irregularity by
Performing analytical procedures designed to disclose differences from expectations.
Analytical procedures aid in the identification of unusual transactions and events. The recording of debits and credits to an unusual combination of revenue and expense accounts would cause these accounts to behave differently than expected. The performance of analytical procedures designed to disclose differences from expectations would have helped to detect this irregularity.
An auditor’s analytical procedures most likely would be facilitated if the entity
Uses a standard cost system that produces variance reports.
Analytical procedures involve the prediction of an amount and comparison to actual. The prediction is based on the premise that plausible relationships exist among data that are expected to continue. This is the only answer that would enable an auditor to compare actual results to a prediction - use of a standard cost system (producing the estimate) and production of variance reports (giving the comparison to actual).
