Question 1

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.

Accepted Answer

Since the auditee forecasted sales of 10,000 units but only sold 5,000 units, there is a risk that there may be excess inventory on hand that cannot be sold at the originally anticipated selling price. As a result, the auditors should consider performing a lower-of-cost-or-market valuation of the year-end inventory to ensure that it is properly valued on the balance sheet.

Question 2

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

Accepted Answer

Materiality levels are used to determine the significance of each financial statement account and guide auditors in determining how much testing and analysis should be done on each account.

Question 3

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

Accepted Answer

Analytical procedures are required at the beginning to obtain a better understanding of the client's business and at the end to assess the overall reasonableness of the financial statements.

Question 4

Analytical procedures consist of evaluating financial information by studying financial and nonfinancial 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 and 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.

Accepted Answer

The answer of Analytical procedures consist of evaluating financial information...

Question 5

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

This statement is correct. The auditor's understanding of the client's business and risks is necessary to determine the scope and nature of audit procedures to be performed. This helps the auditor to identify areas of potential material misstatement and design appropriate audit procedures to address these risks, which serves as a basis for their report.

Question 6

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.

Accepted Answer

The answer of This question is about the auditor's concept...

Question 7

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. In fact, if they become aware of any conflicts of interest, lack of independence, or any other ethical issues, they are required to withdraw from the engagement.

Question 8

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.

Accepted Answer

The answer of This question tests your ability to perceive...

Question 9

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

Accepted Answer

Audit planning is not a one-time activity, but a continuous process. As information is gathered during the audit, the auditor may need to adjust the audit plan to ensure that it remains relevant and effective.

Question 10

What is meant by materiality?

Accepted Answer

The answer of What is meant by materiality?...

Question 11

A completeness error occurs when an account balance is overstated.

Accepted Answer

A completeness error occurs when an account balance is understated, not overstated. It means that something has been left out of a financial statement, making it incomplete.

Question 12

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

Accepted Answer

Relationships on the financial statements that do not make sense may indicate errors, discrepancies, or fraudulent activities in the accounts. Therefore, it is important to identify and investigate such anomalies to ensure the accuracy and integrity of the financial information.

Question 13

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

Accepted Answer

Preliminary analytical review helps in identifying areas of potential risk or concern by comparing financial information over time or against industry norms, but it does not provide direct evidence about specific amounts in the financial statements. Direct evidence would come from detailed testing of transactions and balances.

Question 14

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

Accepted Answer

The answer of Give some examples of cut off errors...

Question 15

Materiality is primarily a quantitative calculation.

Accepted Answer

Materiality involves both quantitative and qualitative factors, such as the nature of the item and its impact on financial statements, and cannot be solely determined by quantitative calculations.

Question 16

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

Accepted Answer

The overall audit strategy guides the development of the detailed audit plan, not the other way around.

Question 17

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. The predecessor auditor cannot disclose any confidential information without the explicit approval of the client. This is to maintain the confidentiality of the client's financial information and avoid any potential conflicts of interest.

Question 18

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

Accepted Answer

The audit objective related to existence is to obtain evidence that the asset, liability, or equity exists physically or legally. This means that the auditor wants to ensure that the item in question is not fictitious or non-existent.

Question 19

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

Accepted Answer

The answer of Contrast horizontal and vertical analysis.Give an example...

Question 20

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.

Accepted Answer

Auditors often use analytical procedures such as reviewing prior year adjusting entries, talking to client personnel, and examining board of directors' meeting minutes to gain insight into the client's financial information and to identify any potential errors or irregularities.

Quiz 5: Preliminary Audit Planning: Understanding the Auditees Business