Quiz 3

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

• a.     Staff will need to be rescheduled to cover this new client.

• b.     There will be a client-imposed scope limitation.

• c.     The firm will have to hire a specialist in one audit area.

• The client’s financial reporting system has been in place for 10 years.

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to

• Refer the disagreement to the AICPA’s Peer Review Board. 

• Document the details of the disagreement with the conclusion reached. 

• Discuss the disagreement with the entity’s management or its audit committee. 

• Report the disagreement to an impartial peer review monitoring team.

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

• Reduce audit risk by lowering initial levels of materiality. 

• Design special substantive procedures to compensate for the lack of industry expertise. 

• Engage financial experts familiar with the nature of the industry.

• Perform risk assessment procedures.

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered?

• a.     Textbooks and periodicals related to the industry

• b.     AICPA Audit and Accounting Guides

• c.     Financial statements of other entities in the industry

• d.     Results of performing substantive procedures

Which of the following statements about the auditor’s response to assessed risks of material misstatement in a financial statement audit is true?

• Risk assessment procedures performed to obtain an understanding of an entity’s internal control also may serve as tests of controls. 

• When the risks of material misstatement are high, an auditor should reduce the amount of substantive testing. 

• Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes. 

• When assessing the risks of material misstatement, an auditor should not consider evidence obtained in prior audits about the operation of controls.

An auditor wishes to evaluate the design and perform tests of controls over a client’s cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

• Confirmation and observation.

• Observation and inquiry.

• Analytical procedures and confirmation.

• Inquiry and analytical procedures.

 

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

• Timing of the audit.

• Costs and benefits of gathering evidence.

• Financial statements as a whole.

• Financial statement assertions.

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

• Obtain audit evidence about the operating effectiveness of controls.

• Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.

• Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

• Obtain written representations from management that all financial records and related data will be made available.

Which of the following documentation is not required for an audit in accordance with auditing standards?

• A written audit plan setting forth the procedures necessary to accomplish the audit’s objectives.

•    An indication that the accounting records agree or reconcile with the financial statements.

• A client letter that details the auditor’s planned field work.

• The basis for the auditor’s conclusions about the assessed risks of material misstatement.

Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use

• a.     The positive form to confirm all balances regardless of size

• The negative form for small balances

• A combination of the two forms, with the positive form used for trade balances and the negative form used for other balances

• The positive form when the assessed risk of material misstatement is acceptably low and the negative form when it is unacceptably high