Question 1

Discuss the essential activities involved in the initial planning of an audit.

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Question 2

Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?

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Question 3

The auditor's report should not refer to the specialist unless the specialist's report results in a modification of the audit opinion.

Accepted Answer

The auditor's report should not refer to the specialist unless the specialist's report results in a modification of the audit opinion. This is because the specialist's report does not affect the audit opinion unless it results in a modification. Therefore, it is only necessary to refer to the specialist's report if it has an impact on the audit opinion.

Question 4

An official record of meetings of the board of directors and stockholders is included in the corporate
A) bylaws.
B) charter.
C) minutes.
D) license.

Accepted Answer

Minutes are the official record of meetings of the board of directors and stockholders, documenting the decisions and actions taken during the meeting. Bylaws describe the internal workings of the corporation, the charter outlines the business purpose and structure of the corporation, and a license is a permission granted by a government authority to conduct business.

Question 5

Specialists may be employed by the client, employed by the audit firm, or affiliated with the client and the audit firm.

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Question 6

Which of the following best describes the corporate minutes of an entity?
A) official record of the meetings of the board of directors and the stockholders
B) unofficial record of the meeting of the board of directors
C) official record of management meeting with investors and creditors of the company
D) unofficial record of the board of directors' meetings

Accepted Answer

Corporate minutes are the official record documenting the discussions, decisions, and actions taken during the meetings of the board of directors and stockholders of a company. They serve as a legal record and are required to be kept by law.

Question 7

The engagement letter may include an agreement to provide other services to the audit client such as tax returns and management consulting services allowed under the Code of Professional Conduct and regulatory requirements.

Accepted Answer

It is true that the engagement letter may include an agreement to provide other services to the audit client, as long as they are allowed under the Code of Professional Conduct and regulatory requirements.

Question 8

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

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Question 9

The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is
A) they got lucky the landlord hasn't noticed the lack of payments.
B) the landlord has weak internal controls over billings.
C) a related party transaction in which a major shareholder owns the office tower.
D) Matthews Company is engaging in fraudulent activities.

Accepted Answer

A related party transaction in which a major shareholder owns the office tower is the most likely explanation for Matthews Company occupying the 3rd floor of an office tower without paying rent.

Question 10

Discuss the factors an auditor should consider before accepting a company as an audit client.

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Question 11

In order to obtain an understanding of the client's business, the audit firm will consider
A) inherent and control risk of the client.
B) audit risk to the CPA firm.
C) the client's business risk and the risk of material misstatements in the financial statements.
D) the CPA firm's potential ongoing revenue from the audit client.

Accepted Answer

In order to obtain an understanding of the client's business, the audit firm will consider the client's business risk and the risk of material misstatements in the financial statements. This is because understanding the client's business is important in identifying areas where there may be a risk of material misstatements in the financial statements. This, in turn, helps the audit firm to develop effective audit procedures and to allocate appropriate resources to the audit. Inherent risk and control risk are also important considerations, but they are only part of the overall risk assessment process. Similarly, audit risk to the CPA firm and potential ongoing revenue from the audit client are not relevant considerations when obtaining an understanding of the client's business.

Question 12

A related party transaction may be indicated when another company
A) subsidizes certain operating expenses of the company.
B) purchases its securities at their fair value.
C) loans to the company at market rates.
D) has had a distributor relationship with the company for 10 years.

Accepted Answer

Subsidizing certain operating expenses of the company suggests that the company may have a close relationship with another entity, which is a characteristic of a related party transaction. The other options do not necessarily indicate a related party transaction. Purchasing securities at fair value, loaning at market rates, and having a distributor relationship for 10 years are all common and legitimate business practices.

Question 13

Which of the following would most likely not be classified as a related-party transaction?
A) an advance of one week's salary to an employee
B) sales of merchandise between affiliated companies
C) loans or credit sales to the principal owner of the client company
D) exchanges of equipment between two companies owned by the same person

Accepted Answer

An advance of one week's salary to an employee is not usually considered a related-party transaction as it is a normal course of business and does not involve any other party. The other options involve transactions between affiliated companies, principal owners, or companies owned by the same person, which are considered related-party transactions.

Question 14

Which of the following is an accurate statement regarding a public company's code of ethics?
A) A code of ethics is required under The Foreign Corrupt Practices Act.
B) A code of ethics is required only for mid-level managers and below.
C) The SEC requires companies to disclose amendments and waivers to the code of ethics for the CEO, CFO and principal accounting officer.
D) The PCAOB requires companies to review their code of ethics every five years.

Accepted Answer

The SEC requires companies to disclose any amendments and waivers to the code of ethics for the CEO, CFO, and principal accounting officers. Option A is not entirely accurate as The Foreign Corrupt Practices Act only requires companies to maintain accurate books and records and implement internal controls. Option B and D are incorrect as a code of ethics is required for all employees and the PCAOB does not have specific requirements for the review of a code of ethics.

Question 15

An auditor should examine minutes of the board of directors' meetings
A) through the date of the financial statements.
B) through the date of the audit report.
C) only at the beginning of the audit.
D) on a test basis.

Accepted Answer

The auditor should examine minutes of the board of directors' meetings through the date of the audit report to obtain information about important financial transactions and events that occurred after the financial statement date but before the issuance of the audit report. This information may affect the financial statements, disclosures, or the auditor's opinion. The examination of minutes should not be limited to the beginning of the audit or on a test basis, but rather be performed throughout the audit period to ensure completeness and accuracy of information.

Question 16

A tour of the client's facilities provides the auditor an opportunity to
A) meet key personnel.
B) observe operations.
C) assess physical safeguards over assets.
D) all of the above.

Accepted Answer

A tour of the client's facilities provides the auditor the opportunity to meet key personnel, observe operations, and assess physical safeguards over assets. This information is important to the auditor in order to gain an understanding of the client's business and to identify any potential risks that may impact the financial statements. Therefore, all of the above options are correct.

Question 17

Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because
A) of the unique classification of related-party transactions required on the balance sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement.
D) it is required by generally accepted accounting principles.

Accepted Answer

Auditors consider related parties and related-party transactions to be at high risk of material misstatement because of the lack of independence between the parties involved. Related-party transactions may not reflect arm's length transactions, and there may be incentives for the parties to manipulate transactions to their advantage. As a result, auditors need to perform additional procedures to ensure that related-party transactions are properly accounted for and disclosed in the financial statements. The unique classification of related-party transactions on the balance sheet or income statement is not the primary reason for assessing the risk of material misstatement as high.

Question 18

Discuss the required communications between predecessor and successor auditors.

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Question 19

Discuss four of the matters that should be specified in an engagement letter.

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Question 20

Related party
A) transactions must be disclosed in the footnotes even if the amounts are immaterial.
B) disclosures include the nature of the related party relationship and a description of the transaction.
C) transactions are considered arm's-length transactions.
D) disclosures are required only for public companies.

Accepted Answer

Related party transactions must be disclosed in the footnotes of the financial statements, and the disclosures should include the nature of the related party relationship and a description of the transaction. This is to provide transparency to stakeholders about any potential conflicts of interest or special treatment given to related parties. The materiality of the transaction does not affect the requirement for disclosure. While related party transactions are not necessarily prohibited, they must be carefully scrutinized to ensure they are arm's-length transactions. These disclosure requirements apply to both public and private companies.

Quiz 8: Audit Planning and Materiality

Discuss the essential activities involved in the initial planning of an audit.

Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?

The auditor's report should not refer to the specialist unless the specialist's report results in a modification of the audit opinion.

An official record of meetings of the board of directors and stockholders is included in the corporate

Specialists may be employed by the client, employed by the audit firm, or affiliated with the client and the audit firm.

Which of the following best describes the corporate minutes of an entity?

The engagement letter may include an agreement to provide other services to the audit client such as tax returns and management consulting services allowed under the Code of Professional Conduct and regulatory requirements.

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is

Discuss the factors an auditor should consider before accepting a company as an audit client.

In order to obtain an understanding of the client's business, the audit firm will consider

A related party transaction may be indicated when another company

Which of the following would most likely not be classified as a related-party transaction?

Which of the following is an accurate statement regarding a public company's code of ethics?

An auditor should examine minutes of the board of directors' meetings

A tour of the client's facilities provides the auditor an opportunity to

Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because

Discuss the required communications between predecessor and successor auditors.

Discuss four of the matters that should be specified in an engagement letter.

Related party