Deck 5: Preliminary Audit Planning: Understanding the Auditees Business

Question 1

Which of the following statements concerning materiality is incorrect?

A)Overall materiality represents the maximum amount of accumulated misstatements in the financial statements before the auditor can conclude they are materially misstated.
B)Performance materiality is an amount that is applied uniformly to all accounts.
C)Two auditors,auditing the same company at the exact same time,can both come up with completely different materiality figures.
D)Materiality affects the risk assessment,risk response,and concluding ad reporting phases of the audit.

Answer 1

C

Question 2

The probability that something will adversely affect the entity's ability to achieve its objectives and execute its strategies is called ________.

A)Audit Risk
B)Business Risk
C)The Risk of Material Misstatement
D)Information Risk

Answer 2

B

Question 3

Audit risk can be offset by ________.

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

Answer 3

D

Question 4

All but which of the following statements concerning communication between predecessor and successor auditors is correct?

A)The predecessor auditor must obtain the auditee's permission before granting the successor auditor access to the prior year's audit file.
B)The predecessor auditor is required to initiate contact with the successor auditor.
C)Information provided by the predecessor auditor may lead the successor to reject the new auditee as a client.
D)The minimum information the predecessor is required to report to the successor is if there is any known reason why the successor should not accept the engagement.

Question 5

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 6

Generally accepted auditing standards require that analytical procedures ________.

A)Be used in the planning and final review stages,as well as during the audit as a substantive test.
B)Be used in the planning and final review stages of the audit and optionally they can be used as a substantive test during the audit.
C)Be used in the planning stage only,with the option to use them as a substantive test and in the final review stage.
D)Be used in the final review stage,and can optionally be applied as a substantive test in the planning stage

Question 7

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 affect the decisions of a financial statement user.
D)an amount of risk in an organization sufficient to offset the expected returns of any investment in the company

Question 8

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

Question 9

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 10

Which of the following most indicates a situation where an organization would be deemed by the PA to be "not auditable"?

A)As part of an aggressive growth strategy,the company's operations will soon extend to multiple countries.
B)Management's intention is to take the company global within the next three years.
C)Due to what it perceives as unacceptably high legal liability exposure,company management will not commit to providing the auditor with written representations.
D)Because the company's shares are traded on the New York Stock Exchange,its financial statements are prepared according to U.S.GAAP.

Question 11

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

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.

Question 12

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

A)during the planning stage of the engagement
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 13

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 14

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 15

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 16

CAS and CSQC standards require all of the following factors be addressed as part of the audit engagement acceptance and continuance decision,except for:

A)An assessment of the auditor's level of independence.
B)An assessment of the client's integrity
C)An assessment of the auditor's competence and capabilities to perform the audit.
D)An assessment of what additional services can be provided to the current or potential client.

Question 17

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 18

The overall audit process can be broken down into which of these three phases?

A)Client acceptance,risk analysis,and audit performance.
B)Analytical review,test of details of balances,and tests of controls
C)Risk identification,risk assessment and risk response.
D)Risk assessment,risk response,and reporting of results

Question 19

In researching a potential new audit client,you determine that the business operates in a highly competitive industry,with low barriers to entry and very short product life cycles.What audit planning factors will this information help you to assess?

A)Audit risk
B)Auditor's risk from taking the engagement.
C)Client business risk
D)An acceptable level of Information risk.

Question 20

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 21

The auditor's objective in obtaining an understanding of the client's business and risks is to assess the overall risk of material misstatement in the financial statements.

Question 22

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

Question 23

What are the benefits of scheduling interim audit work as part of your audit time budget?

Question 24

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

Question 25

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-net realizable value analysis of the year-end inventory.

Question 26

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

Question 27

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 28

Analytical procedures are required at the beginning,during the testing phase and the end of an audit.

Question 29

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

Question 30

Overall materiality is used to identify and assess risks,to design audit procedures to be done in response to the assessed risks,and to evaluate the results of sampling procedure

Question 31

List and briefly explain four factors that increase the auditor's risk from accepting an audit engagement.

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

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

Question 34

Overall materiality is determined by the auditor at the planning stage of the audit and remains fixed throughout the audit process.

Question 35

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 36

An intentional misstatement for an amount lower than both overall and performance materiality is still likely to be considered material.

Question 37

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

Question 38

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 39

Preliminary analytical procedures revealed that the gross profit margin increased unexpectedly from last year.As a result,the auditor should consider an increased risk of material misstatement in both sales and inventory.

Question 40

Materiality is primarily a quantitative calculation.

Question 41

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 42

What is meant by materiality in the context of the audit plan?

Question 43

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 44

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

Question 45

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