Question 1

When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.

Accepted Answer

When the auditor determines that there is a higher inherent risk for an account, it means that there is a greater likelihood of a material misstatement. To mitigate this risk, the auditor may need to gather more audit evidence to ensure that the financial statements are free from material misstatements.

Question 2

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.

Accepted Answer

Acceptable audit risk measures the level of risk that the auditor is willing to accept that the financial statements may be materially misstated after completion of the audit and issuing an unqualified opinion. Inherent risk refers to the risk of material misstatement before considering internal controls, statistical risk is not a term commonly used in auditing, and financial risk is not directly related to the auditor's willingness to accept the risk of material misstatement.

Question 3

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:
A) management letter requested by the auditor.
B) engagement letter.
C) Audit Plan.
D) Audit Strategy for the client.

Accepted Answer

The written understanding detailing the scope of work and expectations of both the auditor and the client is typically included in the engagement letter. The management letter requested by the auditor generally contains recommendations or suggestions for improving the company's controls or operations, but does not detail the audit procedures or expectations. The Audit Plan and Audit Strategy are internal documents used by the audit team to plan and execute the audit, but are not typically shared with the client.

Question 4

Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate?
A) More evidence is accumulated.
B) Less evidence is accumulated.
C) Special care is required in assigning experienced staff.
D) Review of audit documentation is performed by personnel not assigned to the engagement.

Accepted Answer

If an auditor decides that a lower acceptable audit risk is appropriate, more evidence should be accumulated to reduce the audit risk to an acceptable level. Less evidence would increase the audit risk, which is not appropriate. Special care is required in assigning experienced staff to ensure that all audit procedures are performed effectively and efficiently. A review of audit documentation by personnel not assigned to the engagement is performed to ensure that the audit was performed in compliance with professional standards and firm policies.

Question 5

Rodgers CPA has requested permission to communicate with predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow this communication to occur would impact Rodgers decision concerning:
A) the auditor's ability to design audit tests.
B) possible scope exception due to lack of access.
C) integrity of management concerning possible accounting misstatements.
D) violation of the GAAP rules concerning consistency and comparability of financial information.

Accepted Answer

Refusal to allow communication with the predecessor auditor may indicate issues with management's integrity, as it raises concerns about potential accounting misstatements or undisclosed issues.

Question 6

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

Accepted Answer

The answer of There are three main reasons why an...

Question 7

A successor auditor may perform which of the following for a new audit client?
A) 
B) 
C) 
D)

Accepted Answer

The answer of A successor auditor may perform which of...

Question 8

The purpose of an engagement letter is to:
A) document the CPA firm's responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
D) emphasize management's responsibility for approving the audit program.

Accepted Answer

The purpose of an engagement letter is to document the terms and responsibilities of the engagement, including the nature and scope of the services to be performed, the expected timeline and fees, and the respective responsibilities of the client and CPA firm. While external users of the audited financial statements may be mentioned within the engagement letter, this is not the primary purpose of the letter. The engagement letter also does not directly impact personnel scheduling or management's approval of the audit program.

Question 9

The auditor is likely to accumulate more evidence when the audit is for a company:
A) 
B) 
C) 
D)

Accepted Answer

The answer of The auditor is likely to accumulate more...

Question 10

Acceptable audit risk is a measure of the auditor's willingness to accept that the financial statements do not contain material misstatements after the audit is completed and a qualified audit report has been issued.

Accepted Answer

Acceptable audit risk is the auditor's willingness to accept that the financial statements may contain material misstatements after the audit is completed and an unqualified (clean) audit report has been issued.

Question 11

Two major factors that affect acceptable audit risk are the likely users of the financial statements and the likelihood of issuing an unqualified audit opinion.

Accepted Answer

The two major factors that affect acceptable audit risk are the degree to which external users rely on the financial statements and the likelihood of financial difficulties after the audit report is issued.

Question 12

When inherent risk is high, there will need to be:
A) 
B) 
C) 
D)

Accepted Answer

The answer of When inherent risk is high, there will...

Question 13

The auditor uses knowledge gained from the understanding of the client's business and industry to assess:
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.

Accepted Answer

The answer of The auditor uses knowledge gained from the...

Question 14

Which of the following statements is true regarding communications between predecessor and successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) There must be communication between the predecessor and successor if the successor is to accept the engagement.

Accepted Answer

The answer of Which of the following statements is true...

Question 15

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

Accepted Answer

When the acceptable audit risk is decreased, the auditor requires more assurance and evidence, which leads to a more extensive and detailed audit process. This increased level of assurance and evidence gathering leads to an increase in audit cost.

Question 16

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:
A) control risk.
B) acceptable audit risk.
C) statistical risk.
D) inherent risk.

Accepted Answer

The measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called inherent risk. Control risk refers to the risk that a misstatement will not be prevented or detected by the client's internal control. Acceptable audit risk refers to the level of risk that the auditor is willing to accept that the financial statements may be materially misstated after the audit is completed. Statistical risk is not a commonly used term in auditing.

Question 17

If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?
A) the client's management
B) the client's chief executive officer
C) the client's chief financial officer
D) the client's audit committee

Accepted Answer

According to the SEC rules, the client's audit committee is responsible for overseeing the engagement of the audit firm for both audit and nonaudit services. Therefore, it is the responsibility of the client's audit committee to agree and approve the engagement of the auditor for nonaudit services.

Question 18

In what order should the following steps occur?
A. assess client business risk
B. understand the client's business and industry
C. perform preliminary analytical procedures
D. assess acceptable audit risk
A) D, B, C, A
B) B, A, D, C
C) B, D, A, C
D) D, C, B, A

Accepted Answer

Understanding the client's business and industry should occur before assessing client business risk and assessing acceptable audit risk, as knowledge of the client's business and industry is necessary to properly assess these risks. Performing preliminary analytical procedures can occur after understanding the client's business and industry but before assessing client business risk. Therefore, the correct order is B, A, D, C.

Question 19

Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client's reason for the audit.

Accepted Answer

Requesting bank balances be confirmed is part of substantive testing and not part of initial audit planning. The other three options are part of initial audit planning. Developing an overall audit strategy helps in understanding the scope of the audit and the objectives to be accomplished. Scheduling engagement staff and audit specialists needs to be done in advance to ensure timely completion of the audit. Identifying the client's reason for the audit helps the auditor to understand why the audit is being conducted and what areas need to be focused on.

Question 20

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for:
A) 
B) 
C) 
D)

Accepted Answer

The answer of One of the purposes of an engagement...

Quiz 8: Audit Planning and Analytical Procedures

When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:

Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate?

Rodgers CPA has requested permission to communicate with predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow this communication to occur would impact Rodgers decision concerning:

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

A successor auditor may perform which of the following for a new audit client?

The purpose of an engagement letter is to:

The auditor is likely to accumulate more evidence when the audit is for a company:

Acceptable audit risk is a measure of the auditor's willingness to accept that the financial statements do not contain material misstatements after the audit is completed and a qualified audit report has been issued.

Two major factors that affect acceptable audit risk are the likely users of the financial statements and the likelihood of issuing an unqualified audit opinion.

When inherent risk is high, there will need to be:

The auditor uses knowledge gained from the understanding of the client's business and industry to assess:

Which of the following statements is true regarding communications between predecessor and successor auditors?

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?

In what order should the following steps occur? A. assess client business risk B. understand the client's business and industry C. perform preliminary analytical procedures D. assess acceptable audit risk

Initial audit planning involves four matters. Which of the following is not one of these?

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for: