Question 1

The process of working from financial statement figures back to detailed documents most directly addresses the financial statement assertion of
A)Completeness.
B)Existence.
C)Disclosure.
D)Correctness.

Accepted Answer

When working back from financial statement figures to detailed documents, auditors are focusing on the existence assertion, which confirms that the assets, liabilities, and equity interests exist and are legally valid. This process involves verifying that the transactions supporting the financial statement figures actually occurred and providing sufficient audit evidence to support the amounts reported. Therefore, choice B is the correct answer. Completeness assertion would involve working forward from detailed documents to financial statements to ensure that all transactions have been included, while disclosure assertion would focus on ensuring that all necessary information is presented in the financial statements. Correctness assertion would involve ensuring that financial statement figures are accurate and recorded in accordance with GAAP.

Question 2

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 provide information that would help identify the risks of material misstatement due to fraud. The other options (B, C, and D) relate directly to fraud risks and are therefore more likely to be included in an auditor's inquiries of management.

Question 3

Which of the following is least likely to be considered a risk assessment procedure? A)Observation of the physical count of inventory. B)Analytical procedures. C)Application of data analytical procedures. D)Inspection of receiving reports.

Accepted Answer

Observation of physical count of inventory is not a risk assessment procedure as it is a procedure used to obtain evidence about the existence and completeness of inventory, rather than assessing the risk of material misstatement in the financial statements. Analytical procedures, application of data analytical procedures, and inspection of receiving reports are commonly used risk assessment procedures.

Question 4

Which of the following statements is always true when an auditor is planning a year-end audit? 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)An audit plan should be developed that includes a time budget.

Accepted Answer

Developing an audit plan that includes a time budget is a fundamental step in planning a year-end audit. It helps the auditor allocate time and resources effectively and efficiently. While statement A is generally true, there may be exceptional circumstances where an engagement may be accepted after the fiscal year-end. Statement B is not always true as there may be alternative audit procedures that can be performed instead of observing an inventory count at the balance sheet date. Statement C is also not always true as the audit committee may need to be informed of important audit procedures or findings for effective oversight.

Question 5

When an auditor accepts an audit engagement but does not possess the industry expertise of the business entity involved,the auditor 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

Obtaining a knowledge of matters that relate to the nature of the entity's business is essential for an auditor who lacks industry expertise. This step is crucial for understanding the business and its environment, which impacts the audit approach and procedures. Engaging experts, referring the audit, or preemptively discussing opinion limitations are not initial or necessary steps solely due to a lack of industry expertise.

Question 6

According to the professional standards,auditors may document the understanding established with an audit client through a(n)  
$\begin{array}{lll}&\text { Written communication with the client }&\text { Oral Communication with the client }\
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

Professional standards, such as those set by the AICPA, typically require that the understanding between the auditor and the client regarding the audit engagement be documented in writing. This is to ensure that both parties have a clear, formalized agreement of the scope and nature of the audit, reducing the risk of misunderstandings. Oral communications, while they may occur during the engagement, are not considered sufficient on their own to establish this understanding.

Question 7

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.

Accepted Answer

The answer of On September 3,20X1,Larkin,CPA,was engaged to audit the...

Question 8

In the United States,the hiring of a company's external auditors of a public company is most likely the responsibility of the
A)Audit committee.
B)Board of directors.
C)Management.
D)Public Company Accounting Oversight Board.

Accepted Answer

The audit committee of a public company's board of directors is responsible for hiring and overseeing the external auditors. This is to ensure the independence and objectivity of the audit process. The audit committee also reviews the audit plan, evaluates the performance of the auditors, and approves their fees. Ultimately, the audit committee is responsible for ensuring the accuracy and integrity of the company's financial statements.

Question 9

Which situation 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)The investment portfolio has several complex financial instruments,such as derivatives.

Accepted Answer

The investment portfolio with complex financial instruments, such as derivatives, would require special audit planning due to their complexity and the potential for valuation and disclosure issues. The other situations can be addressed through routine audit procedures and do not require special planning.

Question 10

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 where a "total mix" of information available to an investor would be significantly altered. This aligns with the legal definition of materiality as set forth in court cases such as TSC Industries, Inc. v. Northway, Inc. (1976). Choice B is incorrect as materiality is a key concept in interpreting federal securities laws. Choice C is also incorrect as materiality is not defined solely by an individual's decision, but by whether the information would influence a reasonable investor's decision. Choice D is incorrect as materiality considers both quantitative and qualitative aspects.

Question 11

When an auditor is planning an audit,the 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, the auditor should make preliminary judgments about materiality levels for audit purposes. This helps the auditor determine the scope of testing and the level of verification necessary for financial information. While the auditor may consider the results of the internal control questionnaire, this does not necessarily impact the extent of substantive procedures. The auditor also does not conclude whether changes in compliance with prescribed control procedures justify reliance on them during the planning phase. Additionally, preparing a preliminary draft of the management representation letter typically occurs later in the audit process.

Question 12

Which of the following is least likely to be considered a "further audit procedure"? A)Tests of approval of sales transactions. B)An engagement letter. C)Analytical procedures performed as substantive procedures relating to inventory. D)Accounts receivable confirmation.

Accepted Answer

An engagement letter is not a further audit procedure but rather is a letter of agreement between the auditor and the client outlining the scope and terms of the audit engagement. The other choices listed are all examples of further audit procedures.

Question 13

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 14

A successor auditor should always make inquiries of the predecessor auditor before accepting an audit engagement.The successor should specifically inquire about 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 new audit engagement.

Question 15

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.

Question 16

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?
A)Turnover of personnel in the factory.
B)Objectivity of audit committee members.
C)Square footage of selling space.
D)Management's plans to repurchase stock.

Accepted Answer

Square footage of selling space is a nonfinancial metric that can be used to assess sales performance and efficiency, making it relevant for analytical procedures during risk assessment.

Question 17

An abnormal fluctuation in gross profit suggests the need for extended audit procedures for sales and inventories.This would most likely be identified in the audit risk assessment phase by utilizing:
A)Tests of transactions and balances.
B)An assessment of internal control.
C)An audit time budget.
D)Analytical procedures.

Accepted Answer

Analytical procedures involve evaluating financial information through the comparison of current financial statements with prior periods or industry standards. Abnormal fluctuations in gross profit can be detected through analytical procedures, which can then prompt extended audit procedures for sales and inventories. Tests of transactions and balances, an assessment of internal control, and audit time budgets may also be useful in the audit risk assessment phase, but they are not specifically related to identifying abnormal fluctuations in gross profit.

Question 18

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

Accepted Answer

By selecting a sample from the shipping documents file to check if invoices were prepared, the auditor is addressing the audit objective of completeness. This objective concerns ensuring that all transactions that should have been recorded have been recorded.

Question 19

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

Accepted Answer

Fraud typically involves three elements: pressure (or incentive), opportunity, and rationalization. Individuals who commit fraud usually have an incentive or pressure that drives them to commit the act, the opportunity to do so, and a way to rationalize their actions.

Question 20

To minimize the risk that the audit will not detect material misstatements in the financial statements,the auditor primarily relies on: A)Substantive procedures. B)Tests of controls. C)Internal control. D)Statistical analysis.

Accepted Answer

Substantive procedures are audit procedures designed to detect material misstatements in the financial statements. They include analytical procedures, tests of details of transactions, and tests of details of balances. By performing substantive procedures, the auditor is able to obtain sufficient appropriate audit evidence to reduce the risk of material misstatements in the financial statements to an acceptably low level.

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

The process of working from financial statement figures back to detailed documents most directly addresses the financial statement assertion of

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?

Which of the following is least likely to be considered a risk assessment procedure?

Which of the following statements is always true when an auditor is planning a year-end audit?

When an auditor accepts an audit engagement but does not possess the industry expertise of the business entity involved,the auditor should:

In the United States,the hiring of a company's external auditors of a public company is most likely the responsibility of the

Which situation would most likely require special audit planning by the auditors?

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

When an auditor is planning an audit,the auditor should:

Which of the following is least likely to be considered a "further audit procedure"?

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

A successor auditor should always make inquiries of the predecessor auditor before accepting an audit engagement.The successor should specifically inquire about the predecessor's:

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 nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?

An abnormal fluctuation in gross profit suggests the need for extended audit procedures for sales and inventories.This would most likely be identified in the audit risk assessment phase by utilizing:

An auditor who selects a sample from the shipping documents file to determine whether invoices were prepared is satisfying the audit objective of:

To minimize the risk that the audit will not detect material misstatements in the financial statements,the auditor primarily relies on: