The Financial Statement Audit: Client Acceptance and Planning Flashcards
- Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
A. The anticipated sample size of the planned substantive tests.
B. The entity’s annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.
B. The entity’s annualized interim financial statements.
- The auditor is required to determine three different levels of materiality: (1) materiality for the financial statements as a whole, (2) performance materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality
D. Specific materiality
- Which of the following statements concerning materiality is not correct?
A. When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to those particular classes of transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional judgment.
D. The materiality level for the financial statements as a whole determined in the planning stage of the audit should not be affected by changes in the circumstances of the engagement.
D. The materiality level for the financial statements as a whole determined in the planning stage of the audit should not be affected by changes in the circumstances of the engagement.
- Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business and identifying areas of potential risk.
D. Assessing the adequacy of the available evidential matter.
C. Enhancing the auditor’s understanding of the client’s business and identifying areas of potential risk.
- Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net receivables.
D. Developing the expected sales based on the sales trend of the prior five years.
B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
- Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
- Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.
D. Borrowing money at an interest rate significantly below the market rate.
- Which of the following is an incorrect statement concerning the relationship of the internal auditor and the scope of the external audit of an entity’s financial statements?
A. The external auditor is not required to give consideration to the internal audit function beyond obtaining a sufficient understanding to identify and assess the risks of material misstatement of the financial statements and to design and perform further audit procedures.
B. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor.
C. Under certain circumstances, the internal auditors may assist the external auditor in performing substantive tests and tests of controls.
D. The nature, timing, and extent of the external auditor’s substantive tests may be affected by the work of internal auditors.
B. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor.
- If the results of the auditor’s expert’s work do not provide sufficient appropriate audit evidence or are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
B. Resolve the matter.
- Which of the following matters should be considered by the auditor in developing the overall audit strategy?
A. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit.
B. Conditions requiring special attention, such as the existence of related parties.
C. The setting of materiality levels for audit purposes.
D. All of the above.
D. All of the above.
