Understanding the Firm Environment

1. One of the considerations in audit planning is obtaining a knowledge of the client’s business. An auditor obtains knowledge about a new client’s business and its industry to

• 1. Make constructive suggestions concerning improvements to the client’s internal control.

• Develop an attitude of professional skepticism concerning management’s financial statement assertions.

• 1. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.

• 1. Understand the events and transactions that may have an effect on the client’s financial statements.

1. Which of the following statements is not a reason for utilizing analytical review procedures?

• 1. To assess the entity’s ability to continue is a going concern.

• 1. To identify areas with no unusual fluctuations so that fewer detailed tests may be performed on those accounts.

• 1. To highlight changes from the prior year to the current year so that trends can be identified which will influence audit planning.

• 1. To determine the magnitude of errors in the financial statements.

1. When the continuing auditor intends to use information about the entity and its environment obtained in prior periods, the auditor should

• 1. Seek permission with the client in using the prior period information obtained by the auditor.

• 1. Determine whether to equitably reduce the audit fee due to lower audit effort expended during the engagement.

• 1. Determine whether changes have occurred that may affect the relevance of such information in the current audit.

• 1. Assess control risk as “high” for the assertions affected by the prior-period information.

1. Relevant industry conditions include the following, except:

• 1. The market and competition, including demand, capacity and price competition.

• 1. Cyclical or seasonal activity.

• 1. Product technology relating to the entity’s products.

• 1. Regulatory framework for a regulated industry.

  
  

1. Which of the following mattes is not included under “regulatory environment”?

• 1. Accounting principles and industry specific practices.

• 1. Legislation and regulation that significantly affect the entity’s operations.

• 1. Government policies currently affecting the conduct of the entity’s business.

• 1. General level of economic activity (for example, recession, growth)

1. The nature of the entity refers to the following, except,

• 1. The entity’s operations, its ownership, and governance

• 1. The types of investments that it is making and plans to make.

• 1. The way that the entity is structured and how it is financed.

• 1. Other external factors, such as general economic conditions.

1. These result from significant conditions, events, circumstances, actions or inactions that could adversely affect the entity’s ability to achieve its objectives and execute its strategies.

• Business failure

• Information risk

• 1.  Business obstacles

• 1. Business Risk

  
  

1. In obtaining an understanding of a client’s objectives, strategies and related business risks, the auditor would most likely consider the following as business risks.

• 1. The entity does not have the personnel or expertise to deal with the changes in the industry.

• 1. There is increased product liability.

• 1. Demand has not been accurately estimated.

• 1. The entity relies more on debt financing rather than equity financing.

• 1. All of the above are considered.

1. Examples of matters an auditor may consider under measurement and review of the entity’s financial performance include the following (select the exception)

• 1. Key ratios and operating statistics

• 1. Use of information technology

• 1. Competitor analysis

• 1. Employee performance measures and incentive compensation policies

1. According to PSA 315, the auditor should document:

• 1. The discussion among the engagement team

• 1. Key elements of the understanding obtained regarding each of the aspects of the entity and its environment, including each of the internal control components.

• 1. The identified and assessed risks of material misstatement at the financial statement level and at the assertion level, the risks identified and related controls evaluated.

• 1. All of the choices.