Deck 5: Preliminary Audit Planning: Understanding the Auditees Business

Question 1

Which of the following is likely to be found in the minutes of the board of directors?

A) Approval of customer credit limits.
B) Approval of a new computer for the controller.
C) Authorization of employee salaries.
D) Authorization of executive salaries.

Answer 1

D

Question 2

The auditor's objective in obtaining an understanding of the client's business and risks is to design audit procedures that will serve as a basis for their report.

Answer 2

True

Question 3

If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on ________.

A) absolute size
B) relative size
C) nature of the item
D) cumulative effects

Answer 3

B

Question 4

The overall audit strategy typically includes ________.

A) the detailed audit plan
B) specific procedures for determining inherent and control risk
C) decisions about unusual client accounting principles
D) audit evidence gathering procedures

Question 5

When there is a change in auditors, the Rules of Professional Conduct do not permit the predecessor auditor to give information to the successor auditor without explicit approval by the client.

Question 6

The concept of materiality refers to ________.

A) any misstatement in the financial statements
B) the overall degree of risk in an organization
C) an amount of misstatement that could lead someone to make a poor decision and suffer a loss
D) an amount of risk in an organization sufficient to offset the expected returns of any investment in the company

Question 7

Audit risk can be offset by ________.

A) general management
B) engagement management
C) audit management
D) quality management

Question 8

Analytical procedures are required at both the beginning and the end of an audit.

Question 9

An auditor should assess a client's business risks ________.

A) early in the engagement, based on discussion with management
B) at the end of the engagement after all evidence has been assembled
C) as part of the year-end evidence gathering
D) only if the client requests the auditor to do so in the engagement letter

Question 10

Since auditing is a public profession, auditors are obligated to continue auditing a client once they start.

Question 11

Generally accepted auditing standards require that analytical procedures should be applied ________.

A) in the planning and final review stages of the audit and as a substantive test during the audit
B) in the planning and final review stages of the audit, and can be used as a substantive test during the audit
C) in the planning stage, and can be applied as a substantive test and in the final review stage
D) in the final review stage, and can be applied as a substantive test in the planning stage

Question 12

In the planning stage, analytical procedures are used to ________.

A) assess overall reasonableness of the financial statements
B) identify potential problem areas
C) determine the mathematical correctness of the financial statements
D) provide direct evidence about the balances in accounts

Question 13

How should auditors use the concept of materiality?

A) As a guide to assessing inherent risk
B) As a guide in assessing control risk.
C) As a guide in deciding to report a deficiency to the audit committee.
D) As a guide in planning the audit program.

Question 14

What is the best description of the engagement letter?

A) The letter soliciting a potential client.
B) A letter from a successor auditor to a predecessor auditor asking to review the working papers for the previous year.
C) The audit contract, which may include special requests.
D) The letter at the end of the audit engagement reviewing any concerns the auditors wish management to be aware of.

Question 15

The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.

Question 16

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations. If management is unable to provide an acceptable explanation, the auditor should ________.

A) consider the matter a scope limitation
B) perform additional audit procedures to investigate the matter further
C) intensify the audit with the expectation of detecting management fraud
D) withdraw from the engagement

Question 17

An "accountable party" can be all of the following at the same time except ________.

A) an auditor
B) an entity
C) a client
D) an auditee

Question 18

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense, ________.

A) income would be overstated
B) income would be understated
C) income would not be misstated
D) accounts receivable would be understated

Question 19

A bank with a large loan would most likely be interested in materiality based on ________.

A) operating cash flows
B) normalized net income
C) sales revenue
D) net assets

Question 20

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent ________.

A) as a substantive test and in the final review stage
B) as a substantive test but not in the final review stage
C) in the final review stage but not as a substantive test
D) neither in the final review stage nor as a substantive test

Question 21

What is meant by materiality?

Question 22

This question is about the auditor's concept of materiality considered in the planning stage of the audit.
Required:

A) Define or describe the independent auditor's concept of "planning materiality."
B) Name (but do not describe or explain) three common relationships or considerations used by the auditor quantifying materiality.

Question 23

Auditors' analytical procedures can include review of prior year adjusting entries, conversations with client personnel, and study of the minutes of board of directors' meetings.

Question 24

The enquiries of the client that result from preliminary analytical review provide direct evidence about the amounts in the financial statements.

Question 25

Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.

Question 26

The detailed audit plan guides development of the overall audit strategy.

Question 27

This question tests your ability to perceive the place(s) where potential problems may exist and the type of problem (overstatement or understatement) that may exist.
Required:
For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason; for example, "potential overstatement or understatement of _______."

A) Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same.
B) Current year inventory is larger than last year but the current year gross margin (profit) is larger.
C) Current year long-term liabilities are larger than last year but the interest expense is the same.
D) Current-year fixed assets total is larger than last year but current amortization expense is the same as last year.

Question 28

Materiality is primarily a quantitative calculation.

Question 29

Relationships on the financial statements that do not make sense may indicate problem areas in the accounts.

Question 30

During the preliminary analytical review, the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold. The auditors should consider performing a careful lower-of-cost-or-market valuation of the year-end inventory.

Question 31

Contrast horizontal and vertical analysis. Give an example of each.

Question 32

Analytical procedures consist of evaluating financial information by studying financial and nonfinancial data and looking for plausible or implausible relationships. The procedures can range from making simple comparisons to using complex models involving many relationships and elements of data. They can involve time-series comparisons of recorded amounts and ratios developed from recorded amounts, and they always include comparison to expectations developed by the auditors.
Required:

A) Describe the broad purposes of analytical procedures.
B) Identify the sources of information from which an auditor develops expectations.

Question 33

What are auditors referring to when they talk about the nature, timing, and extent of audit procedures?

Question 34

Materiality levels determined at the planning stage are used to decide how much work to do on each financial statement account.