Which of the following would an auditor least likely perform as part of the auditors preliminary

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OT Quizzer 6 Planning Answer Key

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The audit plan usually cannot be finalized until the...

Consideration of the entity's internal control structure has been completed.

Engagement letter has been signed by the auditor and the client.

Significant deficiencies have been communicated to the audit committee of the board of directors.

Search for unrecorded liabilities has been performed and documented.

Consideration of the entity's internal control structure has been completed.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?

The industry and the business and regulatory environments in which the client operates.

The degree to which information technology is used in the accounting function.

The relationship between management, the board of directors, and external stakeholders.

The degree to which the auditor intends to use internal audit personnel to perform substantive tests.

The degree to which information technology is used in the accounting function.

Which of the following conditions most likely would 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 10 years.

There will be a client-imposed scope limitation.

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

Coordinating the assistance of entity personnel in data preparation.

Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.

Selecting a sample of vendors' invoices for comparison to receiving reports.

Reading the current year's interim financial statements.

Selecting a sample of vendors' invoices for comparison to receiving reports.

Which of the following statements is not correct about materiality?

The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

The results of the initial assessment of control risk.

The anticipated sample size for planned substantive tests.

The entity's financial statements of the prior year.

The assertions that are embodied in the financial statements.

The entity's financial statements of the prior year.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

The anticipated sample size of the planned substantive tests.

The entity's annualized interim financial statements.

The results of the internal control questionnaire.

The contents of the management representation letter.

The entity's annualized interim financial statements.

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should

Be related to the auditor's business risk.

Not be adjusted for qualitative factors.

Be related to preliminary judgments about materiality levels.

Not be changed during the audit process.

Be related to preliminary judgments about materiality levels.

Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?

The auditor is required to reperform audit procedures already completed on the audit using the revised materiality.

The auditor should consider disclaiming an opinion due to a scope limitation.

The revision of materiality at the financial statement levels will not affect the planned nature and timing of audit procedures, only the extent of those procedures.

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Inherent risk and control risk differ from detection risk in which of the following ways?

Inherent risk and control risk are calculated by the client.

Inherent risk and control risk exist independently of the audit.

Inherent risk and control risk are controlled by the auditor.

Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

Inherent risk and control risk exist independently of the audit.

Inherent risk and control risk comprise the risk of material misstatement, which the auditor is obligated to assess. The auditor is responsible for designing the audit procedures to be responsive to the assessed risk of material misstatement, which exists independently of the audit itself.

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive tests.

Risk of misapplying auditing procedures.

Preliminary judgment about materiality levels.

Risk of failing to discover material misstatements.

Assurance provided by substantive tests.

Detection risk is inversely related to the assurance provided by substantive tests. The lower the detection risk, the more assurance needed from substantive testing.

As the acceptable level of detection risk increases, an auditor may change the

Assessed level of control risk from below the maximum to the maximum level.

Assurance provided by tests of controls by using a larger sample size than planned.

Timing of substantive tests from year end to an interim date.

Nature of substantive tests from a less effective to a more effective procedure.

Timing of substantive tests from year end to an interim date.

Performing substantive tests at an interim date increases the risk that misstatements that exist at the balance sheet date will not be detected by the auditor. Evidence collected at an interim date is therefore less strong than evidence collected at year end. Increasing detection risk means that the auditor can obtain less or weaker evidence. As a result, the auditor may be able to push the timing of substantive tests from year end to an interim date.

When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Extent of tests of controls.

Level of detection risk.

Extent of tests of details.

Level of inherent risk.

Extent of tests of details.

An increase in the assessed level of control risk means that the risk of a material misstatement occurring and not being detected has increased. To offset that increased risk, the auditor should make decisions that decrease the level of detection risk. Increasing the emphasis on tests of details would decrease detection risk.

Inherent risk and control risk differ from detection risk in that they

Arise from the misapplication of auditing procedures.

May be assessed in either quantitative or nonquantitative terms.

Exist independently of the financial statement audit.

Can be changed at the auditor's discretion.

Exist independently of the financial statement audit.

Inherent risk and control risk are environmental risks pertaining to the client. They are assessed by the auditor and exist independently of the financial statement audit. Detection risk is the only risk controllable by the auditor. It relates to the auditor's procedures and can be changed by the auditor.

Holding other planning considerations equal, a decrease in the number of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Apply the planned substantive tests prior to the balance sheet date.

Perform the planned auditing procedures closer to the balance sheet date.

Increase the assessed level of control risk for relevant financial statement assertions.

Decrease the extent of auditing procedures to be applied to the class of transactions.

Perform the planned auditing procedures closer to the balance sheet date.

When the level of tolerable misstatements decreases, the auditor will have to increase substantive testing to ensure that all material misstatements are detected. Performing the planned auditing procedures closer to the balance sheet date increases the effectiveness of substantive procedures and thus increases substantive testing.

An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?

A decrease in costs of goods sold as a percentage of sales.

A decrease in accounts payable.

A decrease in retained earnings.

A decrease in notes payable.

A decrease in retained earnings.

- A significant increase in net income would result in an increase, not a decrease, in retained earnings.

The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider?

Interrelationships of financial information.

Nonfinancial information that may affect financial information.

The nature of the assertion tested.

Explanations provided by the client.

The nature of the assertion tested.

-AICPA Professional Standards (specifically, AU-C 520.A8) list 4 factors that determine the effectiveness and efficiency of analytical procedures used for substantive purposes: (1) the nature of the assertion, (2) the plausibility and predictability of the relationship, (3) the availability and reliability of the data used to develop the expectation, and (4) the precision of the expectation.

Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?

Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations

Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified

Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified

-AICPA Professional Standards indicate that the overall review might include reading the financial statements and considering whether the evidence gathered is adequate to address identified unusual or unexpected balances as well as unusual or unexpected balances or relationships that were not previously identified.

Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements?

Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters.

The chief financial officer will not sign the management representation letter until the last day of the auditor's fieldwork.

Audit trails of computer-generated transactions exist only for a short time.

The results of an analytical procedure disclose unexpected differences.

The results of an analytical procedure disclose unexpected differences.

-Analytical procedures are a category of "substantive" audit procedures, and unexpected differences relative to the auditor's expectations may direct the auditor's attention to the possibility of a material misstatement.

A primary objective of analytical procedures used in the final review stage of an audit is to

Identify account balances that represent specific risks relevant to the audit.

Gather evidence from tests of details to corroborate financial statement assertions.

Detect fraud that may cause the financial statements to be misstated.

Assist the auditor in evaluating the overall financial statement presentation.

Assist the auditor in evaluating the overall financial statement presentation.

-Analytical procedures used in the overall review stage of an audit are intended to assist the auditor in assessing the conclusions reached and in evaluating the overall financial statement presentation.

Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?

Reading the minutes of the board of directors' meetings for the year under audit

Obtaining a letter concerning potential liabilities from the client's attorney

Comparing the current year's financial statements with those of the prior year

Ensuring that a representation letter signed by management is in the file

Comparing the current year's financial statements with those of the prior year

-Comparing the current and prior year's financial statements is a legitimate analytical procedure performed both in planning and as a final review.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They often replace the tests of controls that are performed to assess control risk.

They usually use financial and nonfinancial data aggregated at a high level.

They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.

They are often used to develop an auditor's preliminary judgment about materiality.

They usually use financial and nonfinancial data aggregated at a high level.

-Analytical procedures used in planning often use data aggregated at a high level.

An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the

Availability of data aggregated at a high level.

Relative effectiveness and efficiency of the tests.

Timing of tests performed after the balance sheet date.

Auditor's familiarity with industry trends.

Relative effectiveness and efficiency of the tests.

-Evidence may be gathered by means of analytical tests (performed as substantive tests), tests of transactions, and tests of details of balances. The decision as to which means to employ is based on the auditor's judgment of the expected effectiveness and efficiency of the available procedures.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's accounts receivable with the prior year's accounts receivable

The current year's payroll expense with the prior year's payroll expense

The budgeted current year's sales with the prior year's sales

The budgeted current year's warranty expense with the current year's contingent liabilities

The current year's payroll expense with the prior year's payroll expense

-The auditor evaluates an entity's costs and expenses to try to detect any material misstatements present. The best comparison would be current-year and prior-year payroll expense as they are likely to be related to each other. Thus, prior-year expense can be used to predict likely current-year expense. If the numbers are materially different, it could indicate the existence of a material misstatement.

Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?

Current ratio of 2:1 as compared to 5:1 for the prior period.

Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

Accounts payable turnover of 5, compared to 10 for the prior period.

Accounts payable balance increase greater than 10% over the prior period.

Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

-This ratio is A/P divided by total current liabilities. A decrease in this ratio (from 6:1 to 4:1) could be caused by an omission of current liabilities (other than A/P) resulting in the appearance that A/P is a larger proportion of total current liabilities than it should be.

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the

Client receives financial assistance from a federal government agency.

Evidential matter that is necessary to prove that the illegal acts were committed does not exist.

Employees' actions affect the auditor's ability to rely on management's representations.

Notes to the financial statements fail to disclose the employees' actions.

Employees' actions affect the auditor's ability to rely on management's representations.

An auditor may withdraw from an engagement when he/she believes that there is such a significant risk of fraud that it is not practicable to modify the procedures that are planned for the audit sufficiently to address the risk. If management fails to respond appropriately to the auditor's discovery of the payment of bribes to public officials, it may indicate a more pervasive problem, even though the amounts involved were small. This failure may impact the auditor's ability to rely on management's representations and result in withdrawal from the engagement.

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified opinion, require disclosure.

Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.

Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

-The auditor may decide that withdrawal is necessary when the client fails to take the remedial action considered necessary. This failure may indicate a greater problem with the control environment and overall governance. As a result, it may affect the auditor's ability to rely on management representations as well as the relationship with the client going forward.

Which of the following statements concerning the auditor's use of the work of a specialist is correct?

If the auditor believes that the determinations made by the specialist are unreasonable, only a qualified opinion may be issued.

If the specialist is related to the client, the auditor is still permitted to use the specialist's findings as corroborative evidence.

The specialist need not have an understanding of the auditor's corroborative use of the specialist's findings.

The specialist may be identified in the auditor's report when the auditor issues an unmodified audit report.

If the specialist is related to the client, the auditor is still permitted to use the specialist's findings as corroborative evidence.

-The specialist is not required to be independent. The auditor, however, must evaluate the nature of the relationship of the specialist to the client and assess the specialist's ability to be objective.

When using the work of a specialist, an auditor may refer to and identify the specialist in the auditor's report if the

Auditor expresses a qualified opinion as a result of the specialist's findings.

Specialist is not independent of the client.

Auditor wishes to indicate a division of responsibility.

Specialist's work provides the auditor greater assurance of reliability.

Auditor expresses a qualified opinion as a result of the specialist's findings.

-The auditor may refer to (and, with the specialist's permission, identify) the specialist in the report, if the opinion is modified as a result of the specialist's findings, and the auditor believes that such a reference will be helpful to readers in understanding the reason(s) for the modification.

Which of the following is an auditor least likely to perform as part of the planning for a financial report audit?

Which of the following procedures would an auditor least likely perform while obtaining?

Which of the following is least likely when an auditor performs an integrated audit of a public company's financial statements?

What are preliminary audit procedures?