Planning Activities Flashcards
Before accepting an engagement to audit a new client, an auditor is required to
A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
B. Obtain the prospective client’s signature to the engagement letter.
C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D. Discuss the management representation letter with the prospective client’s audit committee.
A
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes
A. Management’s responsibility for errors and the illegal activities of employees that may cause material misstatement.
B. 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.
C. Management’s responsibility for providing the auditor with an assessment of control risk associated with the entity’s financial statements.
D. The auditor’s responsibility for determining preliminary judgments about materiality and audit risk factors
B - Professional standards require that the auditor establish an understanding with the client regarding the services to be performed. The understanding would generally include: 1.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
A. An assessment of fraud risk factors likely to cause material misstatements.
B. An understanding of the prospective client’s industry and business.
C. The prospective client’s signature to a written engagement letter.
D. The prospective client’s consent to make inquiries of the predecessor, if any
D - 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
The successor auditor normally reviews the predecessor’s audit documentation relating to:
- Planning,
- Internal control,
- Audit results,
- Balance sheet accounts, and
- Contingencies.
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?
I. Financial statement accounts likely to contain a misstatement.
II. Conditions that require extension of audit tests
Both - In planning an audit, a CPA should identify where misstatements are likely to exist and the audit tests to be performed. The CPA would then prepare a time budget allocating time to be spent by audit area.
The financial statement accounts likely to contain a misstatement should be considered in order to determine which areas to focus on and what tests to perform.
Conditions that might require extension of audit tests should also be considered as they will impact the time budget and the selection of audit tests
The audit program usually cannot be finalized until the
A. Consideration of the entity’s internal control structure has been completed.
B. Engagement letter has been signed by the auditor and the client.
C. Significant deficiencies have been communicated to the audit committee of the board of directors.
D. Search for unrecorded liabilities has been performed and documented
A - The audit program documents the auditing procedures to be performed. It cannot be finalized until consideration of the entity and its environment, including internal control, has been completed. Recall that the auditors are required to obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to plan the audit and allow determination of the nature, timing, and extent of the tests to be performed. Thus, knowledge of the internal control structure is needed for the auditor to select the auditing procedures and decide when and how extensively to perform them.
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of A. A substantive response. B. Further audit procedures. C. Tests of controls. D. An overall response
D - AICPA Professional Standards discuss responses to the auditor’s assessment of the risks of material misstatement at two levels: (1) overall response; and (2) response at the relevant assertion level. Increasing the extent of supervision would be an example of an overall response
Audit programs should be designed so that
A. Most of the required procedures can be performed as interim work.
B. Inherent risk is assessed at a sufficiently low level.
C. The auditor can make constructive suggestions to management.
D. The audit evidence gathered supports the auditor’s conclusions
D
Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
A. Make a preliminary judgment about materiality.
B. Confirm a sample of the entity’s accounts payable with known creditors.
C. Obtain written representations from management that there are NO unrecorded transactions.
D. Communicate management’s initial selection of accounting policies to the audit committee.
A
The acceptable level of detection risk is inversely related to the
A. Assurance provided by substantive tests.
B. Risk of misapplying auditing procedures.
C. Preliminary judgment about materiality levels.
D. Risk of failing to discover material misstatements.
A - Detection risk is inversely related to the assurance provided by substantive tests. The lower the detection risk, the more assurance needed from substantive testing.
As the acceptable level of detection risk decreases, an auditor may
A. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
B. Postpone the planned timing of substantive tests from interim dates to the year-end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk from the maximum level to below the maximum.
B - Decreases in the acceptable level of detection risk result in an increase in the assurance to be obtained from substantive testing. Performing substantive tests at year-end, rather than at interim, will provide increased assurance.
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.
C - Relationships involving income statement accounts tend to be more predictable for analytical review purposes because the income statement accounts represent transactions occurring over a period of time
Which of the following statements is correct concerning analytical procedures?
A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management.
B. Analytical procedures used in planning an audit generally use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions
B - Analytical procedures used for planning purposes aid the auditor in identifying the auditing procedures that will be used. The data used for this type of analytical procedure is generally highly aggregated
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
A. Tracing a sample of journal entries to the general ledger.
B. Evaluating the effectiveness of the internal control structure policies and procedures.
C. Investigating the reconciliations between controlling accounts and subsidiary records.
D. Performing analytical procedures designed to disclose differences from expectations.
D - 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
While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company’s sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial indication about the potential for fraud in sales revenue?
A. There is a broad indication of misappropriation of assets.
B. There is an indication of theft of the entity’s assets.
C. There is an indication of embezzling receipts.
D. There is a broad indication of financial reporting fraud
D
