ACC653 Ch 6 - Arens

• When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether

• • the predecessor’s work should be used;

• • the company follows the policy of rotating its auditors;

• • in the predecessor’s opinion, internal control of the company has been satisfactory;

• • the engagement should be accepted.

2. A successor would most likely make specific inquiries of the predecessor auditor regarding

• • specialized accounting principles of the client’s industry;

• • the competency of the client’s internal audit staff;

• • the uncertainty inherent in applying sampling procedures;

• • disagreements with management as to auditing procedures.

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

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

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

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

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

• Analytical procedures used in planning an audit should focus on identifying the following:

• 1. Material weaknesses in internal control

• • The predictability of financial data from individual transactions

• • The various assertions that are embodied in the financial statements

• • Areas that may represent specific risks relevant to the audit

• A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

• 1. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

• • The financial statements do not conform to GAAP.

• • The financial statements contain unadjusted misstatements that should result in a qualified opinion.

• • The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.

When reading the corporate minutes, the auditor extracted the approved annual salary for the President, the Chief Executive Officer, and other senior executives. What audit step would the auditor likely conduct with this information?

• trace the payroll amount to each individual officer's payroll record

• check that the payroll has been recorded into the correct bank account

• verify that payroll cheques have two signatures for all large amounts

• ensure that all overtime is approved and adequately documented

Nancy Humphreys, CPA, is an auditor with Humphreys & Co. Public Accountants. Nancy needs to identify trends that reveal unusual transactions and potential misstatements, and decides to perform a ratio analysis on the draft financial statements. Which risk assessment procedure was Nancy performing?

• observation and inspection

• test of details

• analytical procedures

• inquiry

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

• significant.

• insignificant.

• material.

• relevant.