Question 1

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 test is performed to ensure that all shipping documents have corresponding invoices, which addresses the completeness of the invoicing process.

Question 2

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 an acceptable practice to carry out parts of the examination at interim dates. This is known as an interim audit and can be useful in identifying any potential issues early on in the audit process. Options A, B, and C are not always true and depend on the specific circumstances of the audit engagement.

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 materiality should be interpreted as the point at which a reasonable investor would consider the information important in making an investment decision, and that a material amount would significantly alter the "total mix" of information made available to an investor. Option B is incorrect, as materiality is often used as a basis for interpreting federal securities laws. Option C is not entirely accurate as materiality is not based solely on an individual's decision, but rather on a reasonable investor's decision. Option D is incorrect, as materiality has both quantitative and qualitative aspects.

Question 4

As a part of the planning process, auditors develop an audit strategy, an audit plan, and a time budget.
a. Describe an audit strategy and explain its purpose.
b. Describe an audit plan 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,...

Question 5

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 6

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

The location of financial reporting operations is unlikely to have a direct impact on the risk of material misstatement due to fraud. The other options (B, C, and D) are more relevant to identifying and mitigating fraud risks.

Question 7

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 be able to carry out the audit effectively. While engaging financial experts or referring a substantial portion of the audit to another CPA are options, they may not always be practical and could result in additional costs to the client. Informing management that an unqualified opinion cannot be issued should only be done as a last resort after all other options have been exhausted.

Question 8

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) An audit time budget.
D) Analytical procedures.

Accepted Answer

Abnormal fluctuations in gross profit would be identified using analytical procedures in the risk assessment phase of the audit. Analytical procedures involve comparing financial information with expectations developed by the auditor, and identifying significant fluctuations or relationships that need further investigation. Tests of transactions and balances, assessment of internal controls, and audit time budgets may be used in other phases of the audit, but would not specifically identify abnormal fluctuations in gross profit as a risk.

Question 9

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 successor auditor should inquire about the reasons for the change of auditors to understand any issues or disagreements that might have led to the change, which could impact the audit engagement.

Question 10

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

When planning an audit, auditors make preliminary judgments about materiality levels to determine the nature, timing, and extent of audit procedures.

Question 11

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 12

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 engagement
In planning the audit, have the engagement personnel considered:
1. PM's accounting policies and procedures?
2. Financial statement items likeby 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 corrmittee?
The risk of misstatement due to fraud tor each ass ertion for each account with PM's management, board of
10. directors, and the audit cormittee? II. Assigning personnel to the engagement
Has a time budget tor the engagement been prepared to determine the stafing requirements and to schedule the fieldwork, and has it been approw ed by:
11. The engagement partner?
12. PM's controller and audit committee?
13. Has the engagement stafting 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 ently'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. Rec ent 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 aucitablity
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. Res ponses to previous inquiries of local attomeys, bankers, and other business leaders regarding PM's standing in the community?
36. PM's credit rating?
37. Hav'e inquiries of a sample of PM's customers regarding PM's credit-granting polic ies been made? V. Assessing risk
38. Has detection risk been appropriately restricted to determine how much inherent risk can be accepted?
Has consideration been given to permitting FM's internal auditors to make the assessment of inherent risk and
39. 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?
Hawe s pecific 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 Ph has not complied with laws and regulations that have a direct and material effect on the financial statements:
44. Phis policy relatioe to the prevention of illegal acts?
45. Pl's understanding of the requirements of laws and regulations pertinent to its business?
46. Obtaining management's written ass urance that no employ ees have committed any illegal acts of ary' type? VII. Analytic al 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 audih plan
50. Has the program been dev eloped for the engagement and approved by the engagement partner?

Accepted Answer

The answer of On September 3, 20X1, Larkin, CPA, was...

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 is a unique and high-risk asset that requires special audit planning to ensure proper valuation and existence.

Question 14

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 15

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 involve direct testing of account balances, transactions and disclosures in the financial statements. This approach helps to mitigate the risk of material misstatements in the financial statements by verifying the accuracy and completeness of the data underlying the financial statements. Tests of controls, on the other hand, help the auditor to gain an understanding of the internal control environment, but do not provide direct evidence about the accuracy of the financial statements. Internal controls and statistical analysis can also help to minimize audit risk, but they are not the primary means of detection of material misstatements.

Question 16

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

Accepted Answer

Individuals who commit fraud are ordinarily able to rationalize the act and also have an incentive and opportunity to do so.

Question 17

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 18

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 plan.
B) Ability to establish consistency in application of accounting principles between years.
C) Apparent scope limitation.
D) Integrity of management.

Accepted Answer

The refusal to allow communication with the predecessor auditor or to review their working papers raises questions about the integrity of management, as it suggests they may be hiding information or not being fully transparent. This is a red flag for auditors assessing whether to take on a new client.

Quiz 6: Planning the Audit; Linking Audit Procedures to Risk

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:

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

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

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

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?

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

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:

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

When planning an audit, an auditor should:

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

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

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.

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:

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: