Question 1

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.

Accepted Answer

The board of directors typically authorizes executive salaries, as these are significant decisions that impact the company's leadership and financial strategy.

Question 2

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.

Accepted Answer

The auditor's understanding of the client's business and risks serves as a basis for designing audit procedures and determining the nature, timing, and extent of further audit procedures required to obtain sufficient evidence to support their report. The objective is to provide reasonable assurance that the financial statements are free from material misstatement.

Question 3

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

Accepted Answer

Using a percentage of income before taxes as a basis for materiality is an example of judgment based on relative size, as it considers the proportion of a specific item's amount to the overall financial statement amounts. This is in contrast to absolute size, which considers the dollar amount alone, nature of the item, which considers the impact of the item on the financial statements, and cumulative effects, which considers the total impact of multiple items on the financial statements.

Question 4

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

Accepted Answer

The answer of The overall audit strategy typically includes ________.
A)...

Question 5

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.

Accepted Answer

This is true as per the Rules of Professional Conduct, which emphasize the confidentiality and independence of the auditor-client relationship. The predecessor auditor can only provide information to the successor auditor with the explicit consent of the client.

Question 6

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

Accepted Answer

Materiality refers to an amount of misstatement that could influence someone's decision-making and potentially cause a loss. It is a key concept in auditing and financial reporting, as material misstatements must be disclosed in financial statements.

Question 7

Audit risk can be offset by ________.
A) general management
B) engagement management
C) audit management
D) quality management

Accepted Answer

The answer of Audit risk can be offset by ________.
A)...

Question 8

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

Accepted Answer

Analytical procedures are required at the beginning of an audit to identify areas of potential risk and at the end of an audit to confirm the accuracy and completeness of the financial statements. Therefore, the statement is true.

Question 9

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

Accepted Answer

An auditor should assess a client's business risks early in the engagement before planning the audit procedures. This allows the auditor to better understand the client's operations and identify any potential risks that may impact the financial statements.

Question 10

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

Accepted Answer

Auditors are not obligated to continue auditing a client once they start. They may terminate the engagement if there is a conflict of interest, if the client fails to provide necessary information, or if the client lacks integrity. Additionally, auditors may choose not to renew an audit engagement for reasons such as changes in the client's financial circumstances or the auditor's own capacity constraints.

Question 11

Generally accepted auditing standards require that analytical procedures should be applied ________.
A) in the planning and final review stages of the audit and as a substantive test during the audit
B) in the planning and final review stages of the audit, and can be used as a substantive test during the audit
C) in the planning stage, and can be applied as a substantive test and in the final review stage
D) in the final review stage, and can be applied as a substantive test in the planning stage

Accepted Answer

Generally accepted auditing standards require that analytical procedures should be applied in the planning and final review stages, and can also be used as a substantive test during the audit. This helps auditors to understand the nature of the entity's business and identify areas where there may be a higher risk of material misstatement. Analytical procedures can also be useful in gathering evidence about account balances or transactions. Therefore, the best choice is B.

Question 12

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

Accepted Answer

Analytical procedures in the planning stage are primarily used to identify potential problem areas by highlighting unusual changes or trends in the financial data, which can then be investigated further during the audit.

Question 13

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.

Accepted Answer

Auditors should use the concept of materiality as a guide in planning the audit program. Materiality is the amount of misstatement in financial statements that could potentially influence the decisions of a reasonable user. By setting a materiality threshold, auditors can direct their attention to areas of the financial statements that have a higher risk of material misstatement, thereby planning their audit procedures accordingly. Materiality is not used to assess inherent risk, control risk, or in deciding to report a deficiency to the audit committee.

Question 14

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.

Accepted Answer

The engagement letter is the audit contract which outlines the terms of the audit engagement, including the scope, timing, and fees, and may also include any specific requests or expectations from the client.

Answer: D 
 While an engagement letter may include special requests or expectations, the letter at the end of the audit engagement that reviews any concerns or findings is typically the management letter, not the engagement letter. Therefore, choice D is not the best answer for describing the engagement letter.

Answer: A and B 
 Neither choice A (soliciting a potential client) nor choice B (requesting to review previous year's working papers) accurately describes the engagement letter, so neither of these choices is the best answer.

Question 15

The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.

Accepted Answer

The CASs (Canadian Auditing Standards) provide the overall objective of a financial statement auditor and set out the requirements that must be met to achieve that objective. This includes the general principles of auditing, as well as specific requirements related to planning, conducting, and reporting on audits.

Question 16

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

Accepted Answer

If significant unexplained differences are identified, the auditor should investigate the matter further by performing additional audit procedures to obtain sufficient appropriate evidence. This is necessary to determine the cause of the differences and assess whether they represent material misstatements in the financial statements. Withdrawal from the engagement or intensifying the audit to detect fraud are not appropriate responses without further investigation and evaluation. Considering the matter a scope limitation may be appropriate if the inability to obtain sufficient appropriate evidence results in a limitation on the scope of the audit.

Question 17

An "accountable party" can be all of the following at the same time except ________.
A) an auditor
B) an entity
C) a client
D) an auditee

Accepted Answer

An accountable party refers to an entity, client, or auditee that is responsible for providing an accurate and trustworthy account of their financial or performance-related information. An auditor, on the other hand, is responsible for providing an independent and objective opinion on the accuracy and reliability of the accountable party's information. Therefore, an auditor cannot be considered an accountable party themselves.

Question 18

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

Accepted Answer

The answer of If fictitious sales were recorded and the...

Question 19

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

Accepted Answer

The answer of A bank with a large loan would...

Question 20

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

Accepted Answer

Analytical procedures are required as a substantive test and in the final review stage because they can help to identify potential misstatements in the financial statements and to assess the reasonableness of the financial statements as a whole.

Quiz 5: Preliminary Audit Planning: Understanding the Auditees Business

Which of the following is likely to be found in the minutes of the board of directors?

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.

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 ________.

The overall audit strategy typically includes ________.

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.

The concept of materiality refers to ________.

Audit risk can be offset by ________.

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

An auditor should assess a client's business risks ________.

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

Generally accepted auditing standards require that analytical procedures should be applied ________.

In the planning stage, analytical procedures are used to ________.

How should auditors use the concept of materiality?

What is the best description of the engagement letter?

The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.

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 ________.

An "accountable party" can be all of the following at the same time except ________.

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense, ________.

A bank with a large loan would most likely be interested in materiality based on ________.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent ________.