Study Unit 3: questions

Question 1

What is an audit plan?

Answer 1

An audit plan is developed and documented based on the overall audit strategy. It is more detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed. The plan includes

(1) risk assessment procedures,
(2) further audit procedures at the assertion level, and
(3) other procedures to comply with GAAS. Audit planning has many benefits, such as helping to organize and manage the audit so it is performed effectively and efficiently

Question 2

If specialized skills are needed, the auditor determines whether a professional with such skills is on the audit staff or an external specialist must be hired. For this purpose, the auditor should be able to:

Answer 2

(1) communicate the objectives of the work of the other professional,
(2) evaluate whether the procedures performed meet the audit objectives, and
(3) evaluate the results of those procedures

Question 3

The engagement partner responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to

Answer 3

A pre-audit conference is useful to provide guidance to the staff regarding such technical issues as the expected use of client personnel and the expectations of the audit team.

Question 4

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed:

Answer 4

After the auditor has obtained an understanding of existing internal control. The effectiveness of a client’s internal control has an inverse relationship with the evidence that must be gathered to support an opinion. Only after the understanding of the entity and its environment, including its internal control, is obtained and the risks of material misstatement have been assessed can the auditor determine the nature, timing, and extent of further audit procedures

Question 5

When should a mgmt letter be obtained?

Answer 5

Mgmt rep letter should be obtained near the end of the audit.

Question 6

is a written engagement letter required?

Answer 6

A written engagement letter is required by GAAS.

Question 7

What ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

Answer 7

The auditor’s professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.

Question 8

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed when?

Answer 8

After the auditor has obtained an understanding of existing internal control.

Question 9

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Answer 9

Most audit work consists of obtaining and evaluating evidence about relevant financial statement assertions. They are management representations embodied in the financial statements that are used by the auditor to consider the types of possible material misstatements.

Question 10

The predecessor’s denial or limitation of access to documentation may affect:

Answer 10

(1) the auditor’s assessment of risk regarding the opening balances or
(2) the nature, timing, and extent of the auditor’s procedures with respect to the opening balances and consistency of accounting principles.

Question 11

An auditor should design the audit plan to

Answer 11

An audit plan is developed and documented based on the overall audit strategy. It is more detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed. The plan includes

(1) risk assessment procedures,
(2) further audit procedures at the assertion level, and
(3) other procedures to comply with GAAS.

Question 12

What is an audit plan?

Answer 12

The audit plan is a tool for scheduling and controlling the audit. It should contain a detailed set of procedures for accomplishing audit objectives, estimated times for each step, and the personnel required. Thus, it can be used to document the progress of the audit and the auditor’s compliance with requirements for planning and supervision.

Question 13

Financial statement audit plans usually should be developed when?

Answer 13

After the auditor has established the overall audit strategy.

Question 14

The audit plan usually cannot be finalized until the

Answer 14

Understanding of the entity and its environment has been completed.

Question 15

The internal auditors’ work is:

Answer 15

The independent auditor’s objective is limited to expressing an opinion on the fairness of the financial statements however, the internal auditors’ work is more comprehensive because they must evaluate and help to improve the effectiveness of the organization’s governance, risk management, and control processes. Accordingly, they evaluate risks and the adequacy and effectiveness of controls regarding

(1) the reliability and integrity of operational and financial information;
(2) the effectiveness and efficiency of operations;
(3) the safeguarding of assets; and
(4) compliance with laws, regulations, and contracts.

Question 16

First-year audits involve additional planning considerations such as:

Answer 16

(1) communication with the predecessor auditor,
(2) audit procedures regarding opening balances,
(3) assignment of firm personnel with appropriate qualifications, and
(4) procedures required by the firm’s system of quality control for initial engagements.

Question 17

True or False: Detection risk is a function of the efficiency of an auditing procedure.

Answer 17

FALSE: Detection risk is a function of auditing effectiveness (achieving results), not efficiency.

Question 18

When planning an audit, an auditor should determine materiality for the financial statements as a:

Answer 18

whole.

Question 19

The auditor requires more persuasive audit evidence. The auditor may:

Answer 19

(1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it;
(2) change the timing of substantive procedures, such as from an interim date to year end; or
(3) change the extent of testing, such as by using a larger sample

Question 20

Reasonable assurance means that:

Answer 20

Reasonable assurance means that audit risk is reduced to an acceptably low level.

Question 21

Differences between management and the auditor’s judgment regarding estimates is a known misstatement?

Answer 21

No, known misstatements are specifically identified during the audit. In contrast with known misstatements, the amount of likely misstatements cannot be specifically identified. A likely misstatement may derive from differences between the auditor’s and management’s judgments about accounting estimates or extrapolations from audit evidence.

Question 22

A decrease in the acceptable level of detection risk or in the amount considered material will result in the auditor’s modifying the audit plan to obtain greater assurance from substantive testing by:

Answer 22

(1) selecting a more effective audit procedure,
(2) applying procedures nearer to year-end, or
(3) increasing the extent of particular tests. The reduction in materiality requires greater assurance from substantive testing.

Question 23

What is detection risk?

Answer 23

Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements (AU-C 200 and AS No. 8).

Question 24

What affects the development of an overall audit strategy?

Answer 24

Materiality and audit risk affect the development of an overall audit strategy. The auditor must make judgments about materiality and audit risk in determining the nature, timing, and extent of procedures to apply.

Question 25

What is inherent risk?

Answer 25

Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or combined with other misstatements, before consideration of any related controls.

Question 26

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it

Answer 26

Changes the company’s operating results from a net loss to a net income.

Question 27

As the acceptable level of audit risk decreases, an auditor may:

Answer 27

Postpone the planned timing of substantive tests from interim dates to the year end. Substantive testing should be increased when the acceptable level of audit risk decreases.

Question 28

The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including internal control. They include:

Answer 28

(1) inquiries within the entity,
(2) analytical procedures, and
(3) observation and inspection. An example of observation and inspection is touring the client’s facilities.

Question 29

Consulting with the predecessor auditor should be completed when?

Answer 29

before accepting the engagement. The auditor should request permission from the client to make appropriate inquires (AU-C 210).

Question 30

The auditor performs risk assessment procedures to obtain the understanding of the entity and its environment, including its internal control. These include, for example, reading:

Answer 30

(1) internal audit reports,
(2) interim statements,
(3) quarterly reports, and
(4) minutes of board meetings.

Question 31

A CPA wishes to determine how various issuers have complied with the disclosure requirements in a new Accounting Standards Update. Which source would the CPA most likely consult for this information?

Answer 31

AICPA Accounting Trends & Techniques.

Question 32

The objective of analytical procedures is to identify such things as:

Answer 32

The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications.

Question 33

Analytical procedures provide the best evidence regarding interest expense because:

Answer 33

analytical procedures provide the best evidence regarding interest expense because the relationship among recorded debt, interest charged on the debt, and the passage of time (the factors determining interest expense for the period) is known by the auditor. Hence, interest expense is reasonably predictable.

Question 34

Can analytical procedures alone be used on assertions to reduce audit risk to an acceptable low level?

Answer 34

For some assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor’s risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor’s professional judgment about the expected effectiveness and efficiency of the available procedures.

Question 35

Relationships involving transactions subject to management discretion are predictable or not?

Answer 35

relationships involving transactions subject to management discretion, e.g., advertising expense, also tend to be less predictable.

Question 36

Analytical procedures used to form an overall conclusion should ordinarily include reading the financial statements and considering:

Answer 36

Analytical procedures used to form an overall conclusion should ordinarily include 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 37

What must be done first in applying analytical procedures?

Answer 37

Develop an expectation of a balance or ratio by using relationships that are expected to exist.

Question 38

When performing analytical procedures as risk assessment procedures, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Answer 38

Unaudited information from internal quarterly reports.

Question 39

What type of fraud is communicated to those charged with governance?

Answer 39

(1) Material fraud, (2) fraud involving management, or (3) fraud involving employees with significant roles in internal control is communicated to those charged with governance (e.g., the audit committee).

Question 40

When immaterial fraud is committed by an accounting clerkc, who should it be communicated to?

Answer 40

An appropriate level of management.

Question 41

To whom is the discovery of fraud communicated?

Answer 41

The auditor should refer the matter of an immaterial fraud to an appropriate level of management. The appropriate level of management ordinary is at least one level above the highest level involved. However, any fraud involving (1) management, (2) employees significantly involved in internal control, or (3) others when fraud materially misstates the financial statements, is reported to those charged with governance.

Question 42

What are the 2 types of fraud?

Answer 42

Two types of fraud that are relevant to the auditor are (1) misstatements arising from fraudulent financial reporting and (2) misstatements arising from misappropriation of assets.

Question 43

What is the primary objective of the fraud brainstorming session?

Answer 43

Assess the potential for material misstatement due to fraud.

Question 44

If there is an indication of immaterial fraud, what should the auditor do?

Answer 44

any INDICATION of FRAUD (even immaterial fraud) should be discussed with an appropriate level of mgmt.

Question 45

True or False : The disclosure of fraudulent activities to parties other than the client’s senior management and its audit committee is not ordinarily part of the auditor’s responsibility.

Answer 45

The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. However, if noncompliance or fraud is found, disclosure of these acts to outside parties ordinarily is not the auditor’s responsibility and would violate the duty of confidentiality (AU-C 240).

Question 46

In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion

Answer 46

Includes brainstorming about how assets can be misappropriated. Key engagement personnel should discuss the risk of fraud. The discussion should emphasize professional skepticism and continual alertness to potential fraud. The discussion may occur before or during information gathering, and communication should be ongoing. The discussion should include brainstorming about (1) factors that might create the conditions for errors or fraud, (2) how and where the statements might be misstated, (3) how assets might be misappropriated or financial reports misstated, (4) how fraud could be concealed, and (5) how the auditors might respond to fraud risks.

Question 47

Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?
A. Performing tests of details of transactions.
B. Reviewing an internal control questionnaire.
C. Reading the minutes of the board of directors’ meetings.
D. Making inquiries of the client’s management.

Answer 47

Answer (B) is correct.
Auditors should design the audit to provide reasonable assurance of detecting noncompliance having a material effect on the financial statements. Internal control questionnaires document the auditor’s understanding of internal control. Reviewing the responses to the questionnaire may reveal control deficiencies but not noncompliance.

Question 48

Deciding whether to contact parties other than personnel within the client’s organization about noncompliance with laws and regulations is the responsibility of:

Answer 48

management

Question 49

Some examples of information raising questions about possible noncompliance with laws and regulations are:

Answer 49

Some examples of information raising questions about possible noncompliance with laws and regulations are unauthorized or improperly recorded transactions,
a governmental investigation,
violations reported by regulators,
large payments for unspecified services to consultants, excessive commissions or fees,
unusual cash payments or checks payable to cash, unexplained payments to government officials or employees,
and failure to file tax returns or pay governmental duties or similar fees.

Question 50

If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warrant withdrawing from the engagement, the auditor would likely

Answer 50

According to AU-C 250, the auditor should consider consulting legal counsel in these circumstances. Such consultation may be necessary in determining the effects of continued association with the client or whether the auditor may have a duty to notify parties outside the client that overrides his or her duty of confidentiality to the client.

Question 51

The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor’s attention is that

Answer 51

Noncompliance by clients often relates to operating aspects rather than accounting aspects.
Some noncompliance, such as violations of tax law, has a direct effect on the financial statements. Other noncompliance, such as violations of environmental protection laws, relates more to an entity’s operating aspects than to its financial and accounting aspects, and their financial statement effect is indirect. An audit in accordance with GAAS usually does not include audit procedures specifically designed to detect noncompliance that has such indirect effects. Thus, no assurance is provided that such noncompliance will be detected or that resulting contingent liabilities will be disclosed. However, an audit should be designed to provide reasonable assurance that noncompliance having a direct and material effect on the financial statements will be detected.

Question 52

If specific information that implies the existence of possible noncompliance with laws and regulations that could have a material effect on the financial statements comes to an auditor’s attention, the auditor should next

Answer 52

Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred. The auditor should apply audit procedures specifically directed to ascertaining whether noncompliance has occurred. When the auditor becomes aware of information about possible noncompliance, the auditor should obtain (1) an understanding of the nature of the act and the circumstances in which it occurred and (2) further information to evaluate the effect on the financial statements.

Question 53

True or False: The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that there are no instances of noncompliance with laws and regulations.

Answer 53

FALSE: The auditor is only responsible for detecting misstatements arising from noncompliance having direct and material effects.

Question 54

A difference between International Standards on Auditing (ISAs) and GAAS relating to violations of laws and regulations is that

Answer 54

The ISAs do not differentiate between violations of laws and regulations having direct and indirect effects. The ISAs do not differentiate between violations of laws and regulations having direct and indirect effects; however, GAAS do.

Question 55

The Client’s internal auditors can be involved with:

Answer 55

The Client’s internal auditors can be involved with tests of controls and test of details

Question 56

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Answer 56

the prospective client’s consent to make inquiries of the predecessor, if any.

Question 57

What is the primary objective of the fraud brainstorming session?

Answer 57

Assess the potential for material misstatement due to fraud.

Question 58

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

Answer 58

An overall response. Providing more supervision does not refer to adding more specific procedures. It reflects increased professional skepticism, therefore, is an overall response. The rest of the answers all relate to specific audit procedures.