Deck 6: Preliminary Audit Planning: Understanding the Auditee

Question 1

Materiality is primarily a quantitative calculation.

Answer 1

False

Question 2

Audit risk can be offset by:

A)General management.
B)Engagement management.
C)Audit management.
D)Quality management.

Answer 2

D

Question 3

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.

Answer 3

True

Question 4

The audit objective related to existence is to obtain evidence that the asset, liability or equity exists physically or legally.

Question 5

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 6

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 7

Generally accepted auditing standards require that analytical procedures:

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

Question 8

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.

Question 9

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

Question 10

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

Question 11

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

Question 12

In a typical audit, testing of internal controls occurs:

A)In the planning stage of the audit.
B)During the interim audit work.
C)During the yearend audit work.
D)As a separate engagement.

Question 13

Risk in an audit engagement is the probability that the financial statements are misstated.

Question 14

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

Question 15

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

Question 16

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 17

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

Question 18

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

Question 19

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 20

A completeness error occurs when an account balance is overstated.

Question 21

The valuation assertion includes:

A)The measurement assumption used.
B)Ensuring all inventory is counted.
C)Making sure that all receivables relate to sales during the year.
D)The method of presenting short term and long term liabilities.

Question 22

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 23

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 24

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 25

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 26

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 27

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 28

Analytical procedures consist of evaluating financial information by studying financial
and non -financial 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, 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 29

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 30

Analytical procedures are one type of evidence gathering procedure.According to auditing standards, there are five general forms of analytical procedures.Auditing standards also provide examples of five sources of information for analytical procedures.
Required:
Describe three of the five general forms of analytical procedures.For each form, describe a typical source of the information for the form.For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

Question 31

Three key management assertions about items on the balance sheet are:

A)Occurrence, completeness and accuracy.
B)Classification, existence and cut-off.
C)Confirmation, presentation and disclosure.
D)Existence, completeness and presentation.

Question 32

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

Question 33

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 34

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 35

What is meant by materiality?

Question 36

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 37

The compliance assertion is not normally listed as a separate assertion.It requires an auditor to assess:

A)How well company procedures control risk.
B)How well company employees comply with codes of conduct.
C)How well company personnel follow internal controls.
D)How well a company's strategy is being implemented.

Question 38

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s)?

A)Existence or occurrence
B)Rights and obligations
C)Completeness
D)Presentation and disclosure

Question 39

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 40

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.

Question 41

An auditor examines an organization's strategy to determine its objectives.After assessing whether the strategy is guiding the whole operation, what steps will the auditor take next? What key management assertion can be affected by any weakness in the strategy?

Question 42

Give some examples of cut off errors and explain what management assertions are affected by such errors.

Question 43

Decisions involving the proper application of GAAP primarily involve which management assertion? Give some examples.

Question 44

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