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WorksheetsAssessment 3_Preliminary Engagement/Audit Planning
Total questions: 60
Worksheet time: 30mins
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:
Acceptable Audit Risk
Inherent Risk
Financial Risk
Statistical Risk
A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:
Audit Risk
Inherent Risk
Control Risk
Detection Risk
When inherent risk is high, there will need to be:
A lower assessment of audit risk: No
More evidence accumulated by the auditor: Yes
A lower assessment of audit risk: Yes
More evidence accumulated by the auditor: Yes
A lower assessment of audit risk: No
More evidence accumulated by the auditor: No
A lower assessment of audit risk: Yes
More evidence accumulated by the auditor: No
In what order should the following steps occur?
A. assess client business risk
B. understand the client's business and industry
C. perform preliminary analytical procedures
D. assess acceptable audit risk
B, A, D, C
A, B, C, D
C, B, A, D
B, D, A, C
The auditor uses knowledge gained from the understanding of the client's business and industry to assess:
client business risk
financial capacity
going concern
audit report to issue
One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for:
Good client relations: Yes
Facilitating high-quality work at a reasonable cost: Yes
Good client relations: Yes
Facilitating high-quality work at a reasonable cost: No
Good client relations: No
Facilitating high-quality work at a reasonable cost: Yes
Good client relations: No
Facilitating high-quality work at a reasonable cost: No
The auditor is likely to accumulate more evidence when the audit is for a company:
Which has large amounts of debt: Yes
Which is to be sold in the near future: Yes
Which has large amounts of debt: No
Which is to be sold in the near future: Yes
Which has large amounts of debt: Yes
Which is to be sold in the near future: No
Which has large amounts of debt: No
Which is to be sold in the near future: No
Initial audit planning involves four matters. Which of the following is not one of these?
Request that bank balances be confirmed.
Identify the client’s reason for the audit
Schedule engagement staff and audit specialists
Develop an overall audit strategy
Rodgers CPA has requested permission to communicate with predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow this communication to occur would impact Rodgers decision concerning:
Inventory turnover
Possible scope exception due to lack of access
Integrity of management concerning possible accounting misstatements
Document the terms of the engagement
A successor auditor may perform which of the following for a new audit client?
Speak to local attorneys, banks and other businesses regarding the company's reputation: Yes
Speak to the predecessor auditors about disagreements they had with management: Yes
Speak to local attorneys, banks and other businesses regarding the company's reputation: Yes
Speak to the predecessor auditors about disagreements they had with management: No
Speak to local attorneys, banks and other businesses regarding the company's reputation: No
Speak to the predecessor auditors about disagreements they had with management: Yes
Speak to local attorneys, banks and other businesses regarding the company's reputation: No
Speak to the predecessor auditors about disagreements they had with management: No
Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate?
Special care is required in assigning experienced staff
Less evidence is accumulated
Request that bank balances be confirmed
Inherent risk
A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:
Inherent Risk
Engagement Letter
Letter of Audit Inquiry
Representation Letter
If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?
the client’s management
the client’s chief executive officer
the client's audit committee
the client’s chief financial officer
The purpose of an engagement letter is to:
document the terms of the engagement
issue audit report
the client’s audit committee
document the CPA firm’s ability to external users of the audited financial statements
Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:
Inherent risk
Representation letter
Letter of audit inquiry
Engagement letter
Which of the following normally signs the engagement letter for an audit of a private company?
Management
Employees
Board of Directors
Auditor
Jennings and Company has repositioned the firm's business strategy from the basis of competing on costs to competing on product differentiation. All the following will increase, except:
Client business risk
Audit risk
Detection risk
Inherent risk
Early appointment of the independent auditor will enable:
a more thorough examination to be performed
inherent risk
a more efficient examination to be planned.
a proper study and evaluation of internal control to be performed
An official record of meetings of the board of directors and stockholders is included in the corporate:
minutes
nanometers
hours
license
Related party transactions may be indicated when another company:
Subsidizes certain operating expenses of the company
Loans to company at market rates
through the date of the audit report
Purchases its securities at their fair value
Which of the following is not one of the three main reasons why the auditor should properly plan engagements?
To help keep audit costs reasonable.
To enable the auditor to obtain sufficient competent evidence.
To avoid misunderstandings with the client.
To enable proper on-the-job training of employees.
Which of the following is not typically included in initial audit planning?
Client acceptance or continuation decisions.
Determination of the purpose of the audit.
Perform preliminary analytical procedures.
Schedule engagement staff and audit specialists.
Which of the following factors partially explains the increased importance of understanding the client's business?
Increased connectedness of clients with their suppliers and customers via information technology.
Increased importance of human capital and other intangible assets.
Expansion of operations to have a global reach.
All of the above.
An understanding of a client's external environment includes
Regulatory requirements.
General economic conditions.
The extent of competition within the industry.
All of the above.
A tour of the client's facilities is helpful in obtaining an understanding of the client's operations because
The auditor may be better able to assess certain inherent risks.
The auditor will be able to assess the physical safeguards over assets.
The auditor obtains a broader perspective about the company as a whole.
All of the above.
The corporate minutes are the official record of the meetings of the board of directors and stockholders. The minutes typically include authorizations related to which of the following?
Dividend payments.
Corporate officer compensation.
Significant acquisitions of property, plant and equipment.
All of the above.
The engagement letter
Affects the CA firm's responsibility to external users of audited financial statements.
Is useful only if it is an audit engagement, but has no effect for review or compilation services.
Can be used to alter the auditor's responsibilities under generally accepted auditing standards.
Can affect legal responsibilities to the client.
Which of the following would not usually be included in the minutes of the board of directors or shareholders?
Authorization of long-term loans.
Declaration of dividends.
Authorization of individuals to sign checks. .
The duties and powers of the corporate officers
_________ is the risk that an auditor expresses an inappropriate opinion on the financial statements.
Inherent risk
Audit risk
Control risk
Detection risk
Factor that in assessing inherent risk, exclude:
Nature of client
Client motivation
Integrity of management
Nature of audit test
The risk of material misstatement refers to:
control risk and acceptable audit risk
combination of control risk and inherent risk
inherent risk
none of the above
Auditors are responsible for determining whether financial statements are materially misstated. Upon discovering a material misstatement they must bring it to the attention of:
audit firm's managing partner
audit firm's manager
client's management
regulators
The auditor’s preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users.
True
False
If an auditor establishes a relatively high level for materiality, then the auditor will accumulate...
more evidence than if a lower level had been set.
lesser evidence than if a lower level had been set.
If planned detection risk is reduced, the amount of evidence the auditor accumulates will be...
increased
decreased
unchanged
Auditor will make use of analytical review to identify any strange movements in balances indicating risk areas and to identify anomalous figures indicating potential misstatements.
True
False
Which THREE of the following are objectives of audit planning?
To ensure appropriate attention is devoted to the important areas of the audit
To assign work to members of the audit team
To determine the scope of the engagement
To identify potential problems and resolve them on a timely basis
Which THREE of the following would normally be included in the overall audit strategy?
Details of economic factors and industry conditions
Confirmation of management's responsibility for the financial statements
Identification of specific audit risks
The results of initial analytical procedures
Type of risk?
The organisation has a high turnover of staff in the accounts department.
Inherent risk
Control risk
Detection risk
Type of risk?
The organisation has a number of estimates in its financial statements.
Inherent risk
Control risk
Detection risk
Type of risk?
The organization has few employees in its accounting department.
Inherent risk
Control risk
Detection risk
Type of risk?
The organisation operates in a fast-moving, high-tech environment.
Inherent risk
Control risk
Detection risk
Audit strategy?
The audit of a new client, recently started up, with few employees in its accounting department.
Tests of control only
Substantive procedures only
Tests of control and substantive procedures
Information / facts that are used as a basis for drawing conclusions are the meaning of...
Inspection
Confirmation
Audit evidence
Observation
Analytical procedures used in planning an audit should focus on identifying...
The various assertions that are embodied in the financial statement
Material weaknesses in internal control
The predictability of financial data from individual transaction
Areas that may represent specific risks relevant to the audit
In minimizing the risk of litigation, which precaution can help minimize the risk of misunderstanding about the contractual obligations?...
Use engagement letters
Comply with professional pronouncements
Thoroughly investigate clients
Emphasize quality rather than growth
WHICH IS NOT THE MEANING OF MATERIALITY?
TRANSACTIONS, ITEM S, EVENTS THAT MATERIAL IN FS IF THEIR OMISSION, MISSTATEMENT, MISCLASSIFICATION OR NON-DISCLOSURE WOULD DISTORT THE VIEW GIVEN BY THE FS
MISSTATEMENTS OR OMISSIO THAT COULD INFLUENCE THE ECONOMICSDECISIONS OF USERS TAKEN ON THE BASIS OF FS
EFFECT RISK EVALUATION.
An assurance engagement that provides a high level of assurance that the financial statements are free from of material misstatements is known as?
Review
Independent Financial Statements Audit
Information Reliability Services
Agreed-upon procedures
The concept of materiality as it applies to a financial statement audit:
Is determined, in part, based on how financial statement users may be influenced in making decisions.
Relates primarily to the audit fees involved.
Generally involves less professional judgment for public companies.
Relates primarily to the quantity of audit procedures performed.
