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aud ch 3
| Question | Answer |
|---|---|
| List the three required pre-engagement activities auditors must undertake before beginning an audit. | Client acceptance or continuance, compliance with independence and ethical requirements, and engagement letters. |
| Whose responsibility is it to initiate communication between the predecessor and prospective auditor? | The prospective (successor) auditor. |
| Before a prospective auditor can communicate with a predecessor auditor, they must first secure approval from the _____. | Audit client |
| What information regarding management integrity should be included in the communication between predecessor and prospective auditors? | Basic information regarding issues that reflect directly on the integrity of management. |
| Successor auditors should ask predecessors about disagreements regarding accounting principles or _____. | Audit procedures |
| What is the primary purpose of the predecessor auditor sharing communications about fraud or internal control recommendations with the successor? | To inform the successor about risks and issues identified in prior audits. |
| Auditors must maintain independence in _____ (mental attitude) and independence in _____ (perceptions of others). | Fact; Appearance |
| What can be the result of a lack of auditor independence? | Disciplinary action by regulators, professional organizations, and/or litigation. |
| The _____ acts as a contract between the auditor and the client to reduce the risk of misunderstandings. | Engagement letter |
| Identify two specific management responsibilities that must be included in an engagement letter. | Preparing financial reports and designing/maintaining effective internal control. |
| According to the engagement letter, the auditor's primary responsibility is to express an opinion on the _____. | Financial reports (and often the effectiveness of internal control). |
| What level of assurance does an audit provide regarding the financial statements? | Reasonable assurance |
| What are the three main goals of a comprehensive audit plan? | List specific audit procedures, assess risk of material misstatement, and ensure requisite staffing. |
| Which member of the audit team performs a quality review but does not directly participate in the detailed audit work? | Quality assurance partner (or Engagement Quality Reviewer). |
| Before relying on the work of internal auditors, external auditors must evaluate their _____ and _____. | Objectivity; Competence |
| What is the restriction on delegating tasks to internal auditors by external auditors? | External auditors cannot delegate key audit decisions or professional judgment. |
| Audit specialists are persons skilled in fields other than accounting, such as _____ or _____. | Actuaries; Geologists (or attorneys, appraisers, environmental engineers). |
| When are specialists referred to in the audit report? | Only if the specialist's findings cause the auditors' report to be qualified. |
| Define 'interim audit work.' | Procedures performed several weeks or months before the balance sheet date. |
| Define 'year-end audit work.' | Procedures performed shortly after the balance sheet date. |
| What are the three main purposes of using time reports in an audit engagement? | Evaluating team efficiency, billing the client, and planning the next audit. |
| Define 'materiality' from an auditing perspective. | An amount or transaction sufficiently important to influence the decisions of reasonable users of financial statements. |
| Quantitative materiality involves absolute size (dollar amount) and _____ size (percentage of assets or income). | Relative |
| Why are misstatements involving illegal activities or fraud considered material regardless of the dollar amount? | Because the nature of the item (qualitative criteria) makes it always material. |
| In qualitative materiality, _____ misstatements are generally more material than _____ misstatements when holding the dollar amount constant. | Income-increasing; Income-decreasing |
| What is the rule of thumb for overall materiality based on net income before taxes? | 3% - 5% |
| What is the rule of thumb for overall materiality based on total assets or total revenue? | 0.5% - 1% |
| Term: Performance Materiality | Definition: The amount of materiality allocated to individual accounts or classes of transactions. |
| How does an increase in materiality affect the audit scope? | An increase in materiality leads to a decrease in audit scope. |
| A decrease in materiality leads to a _____ precise audit. | More |
| What are the three purposes for which auditors use audit procedures? | Risk assessment, tests of controls, and substantive procedures. |
| The _____ audit plan consists of procedures designed to test management assertions for financial statement accounts and disclosures. | Substantive |
| Substantive analytical procedures are more _____ but less _____ than tests of details. | Efficient; Effective |
| What is the directional process of 'vouching' in document inspection? | From the summary listing (e.g., Sales Journal) back to the source documents. |
| What is the directional process of 'tracing' in document inspection? | From the source documents forward to the summary listing. |
| Vouching is primarily used to test the _____ assertion. | Existence or Occurrence |
| Tracing is primarily used to test the _____ assertion. | Completeness |
| The inspection of _____ assets provides the best evidence for the existence assertion. | Tangible |
| Term: Confirmation | Definition: Audit evidence obtained by direct correspondence with independent third parties. |
| Checking the mathematical accuracy of client-provided documents is known as _____. | Recalculation |
| Term: Reperformance | Definition: The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control. |
| In an analytical procedure, the auditor compares a recorded balance with their own _____. | Independent expectation |
| In which two phases of the audit are analytical procedures required by auditing standards? | The planning phase and the final review phase. |
| Comparing the current-year COGS to last year's balance is an example of a(n) _____. | Analytical procedure |
| What defines a 'significant account' in audit documentation? | An account that has a reasonable chance of containing a material misstatement. |
| The _____ file contains information of continuing audit significance, such as bylaws or long-term contracts. | Permanent |
| The _____ file includes all documentation sufficient to support conclusions for the specific year under audit. | Current |
| All audit documentation must be finalized within _____ days of the audit report's release date. | 45 |
| Audit documentation must be retained for _____ years from the report release date. | 7 |
| Who owns the audit documentation created during an engagement? | The auditor. |
| Auditor selecting items from an inventory listing and finding them in the warehouse tests the _____ assertion. | Existence |
| An auditor counting inventory and then checking if those items are in the inventory listing tests the _____ assertion. | Completeness |
| Scanning minutes of the board of directors is a planning procedure most likely used to identify _____. | Related-party transactions |
| The revenue cycle typically includes the accounts: Cash, Accounts Receivable, and _____. | Sales |
| What is 'due care' in the context of the responsibilities principle? | The level of diligence expected of a prudent auditor in similar circumstances. |
| Section 302 of the Sarbanes-Oxley Act requires the _____ and _____ to sign financial statements. | CEO; CFO |
| What is the primary difference between a 'Qualified' and an 'Unqualified' audit opinion? | Unqualified means the statements are in compliance; Qualified means they are in compliance 'except for' specific items. |
| Testing whether a purchase order has a required signature is a _____, whereas confirming a bank balance is a _____. | Test of control; Substantive test |
| An auditor uses a _____ to plan and control audit hours across different areas and team levels. | Time budget |
| Why does the auditor perform risk assessment procedures? | To gain an understanding of the client and the associated risks. |
| Analyzing the valuation of receivables by re-aging them by due date is an example of _____. | Reperformance |
| In the materiality concept, the emphasis is on the _____, rather than management or the audit team. | Users of the financial statements |
| What is 'professional skepticism'? | Maintaining a questioning mind and a critical assessment of audit evidence. |
| What assertion is tested when an auditor reviews the footnotes for pending litigation disclosures? | Presentation and Disclosure |
| A(n) _____ procedure is used when an auditor compares the relationship between notes payable and interest expense. | Analytical |
| If an auditor is unable to express an opinion due to a lack of complete audit work, they issue a _____. | Disclaimer |
| What is the main objective of the performance principle in GAAS? | To provide reasonable assurance that financial statements contain no material misstatements. |
| According to SOX Section 206, an auditor must wait _____ year(s) before joining a client they previously audited. | One |
| Which regulatory body was created by SOX to oversee CPAs auditing public companies? | PCAOB (Public Company Accounting Oversight Board). |
| What are the three main sources of revenue for public accounting firms? | Auditing/Assurance, Tax, and Advisory services. |
| Comparing sales growth with growth in retail square footage is a study of financial information related to _____ information. | Nonfinancial |
| What term describes the risk that a company will fail to meet its business objectives? | Business risk |
| What term describes the risk that information published by a company will be false or misleading? | Information risk |
| Vouching from the sales journal to shipping documents tests for _____ sales. | Overstated (or fictitious) |
| Tracing from shipping documents to the sales journal tests for _____ sales. | Understated (or unrecorded) |
Created by:
444ali