Question 1

With respect to the auditor's planning of a year-end audit,which of the following statements is always true?
A)An engagement should not be accepted after the fiscal year-end.
B)An inventory count must be observed at the balance sheet date.
C)The client's audit committee should not be told of any specific audit procedures which will be performed.
D)It is an acceptable practice to carry out parts of the examination at interim dates.

Accepted Answer

It is acceptable for auditors to carry out parts of the examination at interim dates, especially for larger clients with complex financial statements. This helps to spread out the work and reduce the workload during the year-end period. However, the timing and extent of these interim procedures must be carefully planned and documented.

A) is not always true as there may be legitimate reasons for accepting an engagement after the fiscal year-end, such as a new client or a change in the client's financial year-end.

B) is not always true as there may be circumstances where it is not possible or practical to observe an inventory count on the balance sheet date, such as when the inventory is located in multiple locations or is continuously being sold or replenished.

C) is not true as the audit committee has the right to be informed of the nature and scope of the audit, including specific audit procedures, as part of their oversight responsibilities. However, auditors may need to exercise professional judgment in determining the appropriate level of detail and communication with the audit committee.

Question 2

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of:
A)Tests of transactions and balances.
B)An assessment of internal control.
C)Specialized audit programs.
D)Analytical procedures.

Accepted Answer

Analytical procedures are used in the risk assessment phase of an audit to identify any abnormal fluctuations or patterns in financial statement data. By comparing current year data with prior year data and industry benchmarks, auditors can identify any areas of potential risk and decide whether extended audit procedures are necessary. Tests of transactions and balances, an assessment of internal control, and specialized audit programs would not provide the same level of insight into abnormal fluctuations in gross profit.

Question 3

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?
A)A material amount would significantly alter the "total mix" of information made available to an investor.
B)Materiality cannot be used as a basis for interpreting federal securities laws.
C)A material amount is that at which an individual's decision would be changed.
D)Materiality is composed of quantitative and not qualitative aspects.

Accepted Answer

PCAOB standards suggest that a material amount would significantly alter the "total mix" of information made available to an investor. This means that the information is significant enough that it would impact the investor's decision-making process if they were aware of it. Therefore, it is important for auditors to consider materiality when interpreting the federal securities laws.

Question 4

Auditors perform various tasks in planning an audit engagement.Provide an overall description of how each task is performed and its purpose.
a.Obtain an understanding of the client's business.
b.Assess audit risk and materiality for the engagement.
c.Assess fraud risk.
d.Assess the risk of material misstatement of assertions about financial statement accounts and classes of transactions.

Accepted Answer

The answer of Auditors perform various tasks in planning an...

Question 5

Which of the following is correct concerning the PCAOB's concept of a significant account?
A)It is the same as a relevant assertion.
B)The auditor need only consider significant accounts when controls do not operate effectively.
C)In deciding whether an account is a significant account one does not consider the effect of internal control.
D)It is an account for which qualitative materiality considerations are particularly important.

Accepted Answer

The answer of Which of the following is correct concerning...

Question 6

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity,should:
A)Engage financial experts familiar with the nature of the business entity.
B)Obtain a knowledge of matters that relate to the nature of the entity's business.
C)Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D)First inform management that an unqualified opinion cannot be issued.

Accepted Answer

The auditor should obtain a knowledge of matters that relate to the nature of the entity's business to perform the audit effectively. Engaging financial experts or referring the audit to another CPA may not be necessary if the auditor can obtain the necessary knowledge through other means. Informing management that an unqualified opinion cannot be issued without performing the audit is premature and may not be necessary if the auditor can obtain the necessary knowledge.

Question 7

The auditor faces a risk that the audit will not detect material misstatements in the financial statements.In regard to minimizing this risk,the auditor primarily relies on:
A)Substantive procedures.
B)Tests of controls.
C)Internal control.
D)Statistical analysis.

Accepted Answer

Substantive procedures are designed to detect material misstatements in the financial statements. These procedures involve testing account balances, transactions, and disclosures to ensure their accuracy, completeness, and validity. By performing substantive procedures, the auditor can minimize the risk of not detecting material misstatements in the financial statements. While internal control and tests of controls can also help to mitigate this risk, they are not the primary ways in which auditors address the risk of material misstatements. Statistical analysis may aid in identifying unusual accounting transactions and balances, but it is not a primary means of detecting material misstatements in the financial statements.

Question 8

Many auditors take an approach to assessing the risk of material misstatement by beginning with an assessment of business risks.
a.Define business risks.
b.Why have auditors found it effective to take the approach of assessing business risks?
c.Identify a business risk and explain how it might affect the auditor's audit procedures.

Accepted Answer

The answer of Many auditors take an approach to assessing...

Question 9

As a part of the planning process,the auditors often prepare an audit plan,an audit program,and a time budget.
a.Describe an audit plan and explain its purpose.
b.Describe an audit program and explain its purpose.
c.Describe a time budget and explain its purpose.

Accepted Answer

The answer of As a part of the planning process,the...

Question 10

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.This test is performed to satisfy the audit objective of:
A)Accuracy.
B)Completeness.
C)Control.
D)Existence.

Accepted Answer

The answer of An auditor selects a sample from the...

Question 11

Engagement letters are used by most auditors in performing professional services.
a.Describe the purpose of an engagement letter.
b.List four items that are normally included in an engagement letter.

Accepted Answer

The answer of Engagement letters are used by most auditors...

Question 12

Before accepting an audit engagement,a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
A)Awareness of the consistency in the application of generally accepted accounting principles between accounting periods.
B)Evaluation of all matters of continuing accounting significance.
C)Opinion of any subsequent events occurring since the predecessor's audit report was issued.
D)Understanding as to the reasons for the change of auditors.

Accepted Answer

The answer of Before accepting an audit engagement,a successor auditor...

Question 13

Which of the following situations would most likely require special audit planning by the auditors?
A)Some items of factory and office equipment do not bear identification numbers.
B)Depreciation methods used on the client's tax return differ from those used on the books.
C)Assets costing less than $500 are expensed even though the expected life exceeds one year.
D)Inventory is comprised of precious stones.

Accepted Answer

Inventory comprised of precious stones would require special audit planning due to their unique characteristics and valuation methods. The auditors may need to engage a specialist or use specialized valuation techniques to verify the existence and value of the inventory. The other situations listed may require some additional audit procedures, but they would not necessarily require special audit planning.

Question 14

Note:
 Although not entirely necessary,the following question is best used if the examination also includes Chapter 7.Also,an instructor might consider using only portions of this question.
On September 3,20X1,Larkin,CPA,was engaged to audit the financial statements of Precious Metals Co.(PM),for the year ended October 31,20X1.PM purchases precious metals at wholesale prices and resells them to craft clubs at retail.PM is a new client whose common stock was first offered to the public five years ago.PM received an unqualified opinion on its financial statements in each of the prior three years,but changes auditors after each engagement.In accepting the engagement,Larkin completed all of the appropriate client acceptance procedures.
Larkin instructed Johnson,an assistant on the engagement,to draft a planning checklist that would assist Larkin in preparing the audit staff for the fieldwork that is scheduled to begin on October 17,20X1.On October 5,20X1,Johnson prepared the planning checklist below (engagement letter points have been omitted).Indicate the inappropriate points that are included on Johnson's planning checklist.
I.Understanding the assignment
In planning the audit,have the engagement personnel considered:
1.PM's accounting policies and procedures?
2.Financial statement items likely to require adjustment?
3.The nature of the reports expected to be rendered?
4.The effects of accounting and auditing pronouncements,particularly new ones?
5.Methods of audit sampling to be used?
6.Whether the method of sampling is likely to be approved by PM?
7.The extent of involvement of other independent auditors or internal auditors?
8.Procedures to evaluate competence and objectivity of PM's internal auditors?
In planning the audit,have engaged personnel discussed:
9.The general scope and timing of the audit work with PM's management,board of directors,or audit committee?
10.The risk of misstatement due to fraud for each assertion for each account with PM's management,board of directors,and the audit committee?
II.Assigning personnel to the engagement
Has a time budget for the engagement been prepared to determine the staffing requirements and to schedule the fieldwork,and has it been approved by:
11.The engagement partner?
12.PM's controller and audit committee?
13.Has the engagement staffing schedule been approved by the engagement partner?
Have the following factors been considered:
14.Engagement size and complexity?
15.Personnel available?
16.Timing of the work to be performed?
17.Continuity and periodic rotation of personnel?
18.Need to restrict engagement to CPAs?
III.Knowledge of the entity's business
Has an overall understanding of PM's operations been obtained by reviewing:
19.Successor auditor's working papers?
20.Financial statements and interim financial statements?
21.Minutes of stockholders' and board of directors' meetings?
22.Filings with regulatory agencies?
23.Recent management letters?
24.The Codification of Statements on Auditing Standards?
25.Economic conditions,government regulations,and specialist accounting practices?
26.Have engagement personnel obtained knowledge of PM's organization and operating characteristics?
Have engagement personnel considered
27.Factors affecting the risk of misstatements due to error or fraud?
28.Materiality?
29.Degree of understanding of internal control to plan the audit?
30.Methods that PM uses to process accounting information?
31.Whether their investments in PM stock are material?
IV.Assessing auditability
Has the adequacy of the accounting records been assessed for proper:
32.Descriptions of transactions to permit the appropriate financial statement classification?
33.Information about transactions to permit the recording of appropriate monetary amounts?
34.Recording of transactions in the appropriate accounting period?
Have the following factors regarding the integrity of management been considered in planning the audit:
35.Responses to previous inquiries of local attorneys,bankers,and other business leaders regarding PM's standing in the community?
36.PM's credit rating?
37.Have inquiries of a sample of PM's customers regarding PM's credit-granting policies been made?
V.Assessing risk
38.Has detection risk been appropriately restricted to determine how much inherent risk can be accepted?
39.Has consideration been given to permitting PM's internal auditors to make the assessment of inherent risk and evaluations of significant accounting estimates?
If control risk is assessed at below the maximum level
40.Is the audit fee high enough to handle any likely litigation?
41.Have specific internal control activities that are likely to prevent or detect material misstatements in those assertions been identified?
If control risk is assessed at the maximum level for some or all assertions
42.Is the scope of substantive testing appropriately decreased?
43.Have tests of controls to evaluate the design and operation of such activities been performed?
VI.Illegal acts
Have the following matters been considered in assessing the risk that PM has not complied with laws and regulations that have a direct and material effect on the financial statements:
44.PM's policy relative to the prevention of illegal acts?
45.PM's understanding of the requirements of law and regulations pertinent to its business?
46.Obtaining management's written assurance that no employees have committed any illegal acts of any type?
VII.Analytical procedures
In planning the audit,have analytical procedures been used that focus on:
47.Enhancing an understanding of PM's business and the transactions and events of the year under audit?
48.Identifying areas that may represent specific risks relevant to the audit?
49.Evaluating the overall financial statement presentation?
VIII.Audit strategies and the audit program
50.Has the program been developed for the engagement and approved by the engagement partner?

Accepted Answer

The answer of Note:
 Although not entirely necessary,the following question...

Question 15

When planning an audit,an auditor should:
A)Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.
B)Make preliminary judgments about materiality levels for audit purposes.
C)Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.
D)Prepare a preliminary draft of the management representation letter.

Accepted Answer

The answer of When planning an audit,an auditor should:
A)Consider whether...

Question 16

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: $$\begin{array} { c } 
&\text { Incentive}&\text{ Opportunity }\
\text { A) } & \text { Yes } & \text { Yes } \
\text { B) } & \text { Yes } & \text { No } \
\text { C) } & \text { No } & \text { Yes } \
\text { D) } & \text { No } & \text { No }
\end{array}$$
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

Individuals who commit fraud are often incentivized by personal gain and have the opportunity to carry out the fraudulent act. Therefore, option A is the best choice as it includes both incentives and opportunities. Options B, C, and D either lack incentives or opportunities, which are two common factors that motivate fraudulent behavior.

Question 17

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers.The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:
A)Adequacy of the preplanned audit program.
B)Ability to establish consistency in application of accounting principles between years.
C)Apparent scope limitation.
D)Integrity of management.

Accepted Answer

Refusal to allow communication with the predecessor auditor may indicate management's lack of transparency or integrity, which is crucial for the auditor's decision to accept the engagement.

Question 18

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
A)Are all financial reporting operations at one location?
B)Does it have knowledge of fraud or suspect fraud?
C)Does it have programs to mitigate fraud risks?
D)Has it reported to the audit committee the nature of the company's internal control?

Accepted Answer

Inquiring about the location of financial reporting operations is not relevant to identifying the risks of material misstatement due to fraud. The other choices are more directly related to identifying and mitigating fraud risks.

Quiz 6: Audit Planning, understanding the Client, assessing Risks, and Responding

With respect to the auditor's planning of a year-end audit,which of the following statements is always true?

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of:

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

Which of the following is correct concerning the PCAOB's concept of a significant account?

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity,should:

The auditor faces a risk that the audit will not detect material misstatements in the financial statements.In regard to minimizing this risk,the auditor primarily relies on:

As a part of the planning process,the auditors often prepare an audit plan,an audit program,and a time budget. a.Describe an audit plan and explain its purpose. b.Describe an audit program and explain its purpose. c.Describe a time budget and explain its purpose.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.This test is performed to satisfy the audit objective of:

Engagement letters are used by most auditors in performing professional services. a.Describe the purpose of an engagement letter. b.List four items that are normally included in an engagement letter.

Before accepting an audit engagement,a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

Which of the following situations would most likely require special audit planning by the auditors?

When planning an audit,an auditor should:

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers.The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?