Chapter 3 Class

Question 1

what are 3 risk management activities public firms do before beginning an audit engagement?

Answer 1

1. perform procedures regarding the acceptance or continuance of the audit client relationship
2. determine compliance with independence and ethics requirements
3. reach a contractual understanding

Question 2

from the auditing firm’s perspective, the acceptance/continuance of client relationships is focused on:

Answer 2

managing risks

Question 3

how do auditing standards require a new firm obtain basic information about their cilent?

Answer 3

a prospective auditor must reach out to the previous auditor to attempt to gain information and potential issues about their client

Question 4

what is required of all senior managers and members of the audit committee while obtaining engagement?

Answer 4

criminal background checks

Question 5

client must _______ _________ before a new auditing firm can reach out to their old auditing firm

Answer 5

grant approval

Question 6

what will a new firm ask the client’s old auditing firm about?

Answer 6

• management’s integrity
• disagreement with management about accounting principles, audit procedures, etc.
• reason for a change in auditors

Question 7

what form must a company file when it changes auditors?

Answer 7

Form 8-K with the SEC

Question 8

when must an auditing firm review their continuing relationship with a client?

Answer 8

annually or when a significant event occurs with the client (change in management directors, mergers, litigation, etc.)

Question 9

auditors must be independent in ______________ and __________

Answer 9

appearance and fact

Question 10

engagement letter

Answer 10

a written letter documenting the auditor’s understanding with each client
- acts as a contract, prepared for each individual audit

Question 11

5 elements of the engagement letter

Answer 11

1. the objective of the engagement (to express an opinion)
2. management’s responsibilities
3. auditor’s responsibilities
4. any limitations of the engagement
5. any other matters the auditor wishes to include (detailed is better)

Question 12

4 elements a termination letter addresses:

Answer 12

1. access to audit documentation by successor auditors
2. re-issuance of the report when required for comparative financial reporting
3. fee arrangements for future services
4. understanding the circumstances of termination

Question 13

5 steps of the audit plan

Answer 13

1. obtain engagement
2. engagement planning
3. risk assessment
4. audit evidence
5. reporting

Question 14

audit plan

Answer 14

a comprehensive list of procedures the audit team needs to gather sufficient and appropriate evidence on which to base their opinion of the financial statements

Question 15

2 steps the auditor is required to do in engagement planning:

Answer 15

1. develop and document a plan that describes the nature, timing, and extent of audit procedures
2. plan the nature, timing, and extent of control tests and substantive tests performed

Question 16

3 factors influencing the work completed during planning:

Answer 16

1. client’s size, industry, complexity
2. auditor’s prior experience with the client
3. client’s IT system

Question 17

3 main goals of audit planning:

Answer 17

1. make sure the audit will be properly staffed
2. determine materiality
3. outline the specific audit procedures

Question 18

the audit plan will identify:

Answer 18

• each of the relevant financial statement assertions for each significant account/disclosure
• the combination of control and substantive testing for each assertion

Question 19

what serves as audit documentation?

Answer 19

the auditor’s sign-off when each step in the audit plan is completed

Question 20

3 elements of a sign off

Answer 20

• date
• initials
• work paper reference

Question 21

which staff personnel is specifically required in public audits?

Answer 21

quality assurance (“concurring” partner

Question 22

who has final responsibility for the audit?

Answer 22

the audit partner

Question 23

who does the audit team typically consist of?

Answer 23

• partner
• manager
• IT auditor
• tax specialist
• concurring partner
• other audit staff

Question 24

internal auditors should be _______ but cannot be ________

Answer 24

objective; independent

Question 25

IT auditor

Answer 25

a member of the audit team with special training to evaluate computerized controls and processes

Question 26

planning meetings should include: and focus on:

Answer 26

all team members financial statement accounts with the highest risk of material misstatement

Question 27

external auditors assess internal auditors' _________ and ___________

Answer 27

objectivity and competence

Question 28

how is internal auditors' competence determined?

Answer 28

education, experience, certifications

Question 29

what can internal auditors help with?

Answer 29

SOME substantive testing. they cannot make any decisions or judgements

Question 30

interim audit work

Answer 30

procedures performed several weeks or months before the financial statement date

Question 31

year-end audit work

Answer 31

procedures performed shortly before and after the financial statement date

Question 32

time budgets include:

Answer 32

- areas of the engagement - expected number of hours to be spent on each area

Question 33

materiality must be expressed as a:

Answer 33

specified amount

Question 34

materiality is a matter of:

Answer 34

professional judgement

Question 35

performance materiality

Answer 35

- an amount less than materiality for the financial statements as a whole - used to make sure the aggregate of uncorrected misstatements does not exceed materiality as a whole

Question 36

performance materiality is often referred to as

Answer 36

tolerable misstatement

Question 37

typical materiality percentages are:

Answer 37

- 3-5% of profit before tax - 1-2% of revenue or total assets

Question 38

Materiality Qualitative Factor: Nature of item or issue

Answer 38

consider illegal acts; errors in the more liquid assets are considered more important

Question 39

Materiality Qualitative Factor: Engagement circumstances

Answer 39

consider legal liability; items that turn a net loss into a net income; items surrounded by uncertainty

Question 40

Materiality Qualitative Factor: Possible cumulative effects

Answer 40

auditors must evaluate the aggregate sum of known or potential misstatements

Question 41

3 purposes of audit procedures

Answer 41

1. to gain an understanding of the client and its risks 2. to test the operating effectiveness of internal controls 3. to produce evidence about management's assertions

Question 42

2 ways to conduct substantive tests

Answer 42

1. analytical procedures 2. test of details

Question 43

analytical procedures are more __________, while tests of details are more __________

Answer 43

efficient, effective

Question 44

8 general audit procedures to gather evidence:

Answer 44

1. inspection of records and documents 2. inspection of tangible assets 3. observation 4. inquiry 5. confirmation 6. recalculation 7. re-performance 8. analytical procedures

Question 45

internal evidence

Answer 45

documents prepared by the client

Question 46

inspection of records and documents

Answer 46

examine authoritative documents prepared by independent parties and by the client

Question 47

reliability of documents depends on their ______ and _______

Answer 47

nature and source

Question 48

vouching

Answer 48

an auditor selects an item from the financial records and follows it back through the processing steps to its origin

Question 49

tracing

Answer 49

an auditor selects a source document and follows its processing patch forward to the financial statements

Question 50

assertion related to vouching

Answer 50

existence/occurrence

Question 51

assertion related to tracing

Answer 51

completeness

Question 52

scanning

Answer 52

scanning financial records to find unusual items or events

Question 53

inspection of tangible assets

Answer 53

examining PPE, inventory, securities certificates

Question 54

assertions related to inspection of tangible assets

Answer 54

existence, valuation

Question 55

observation

Answer 55

observing client personnel performing their procedures and control activities

Question 56

inquiry

Answer 56

collection of verbal evidence from independent parties and management

Question 57

confirmation

Answer 57

letters printed on the client's letterhead and signed by the client. seeks out info the client can supply

Question 58

2 main types of confirmations

Answer 58

1. banks (cash and loan balance) 2. customers (receivables)

Question 59

assertions related to recalculations

Answer 59

existence, valuation

Question 60

analytical procedures are required during _____ and __________

Answer 60

planning and final review

Question 61

audit documentation

Answer 61

the written record for the basis for the auditors' conclusions that provides the support for the auditors' representations

Question 62

Lead Schedule

Answer 62

a summary of the accounts or components in an account group

Question 63

audit standards require that documentation show:

Answer 63

1. the client's accounting records agree or reconcile with the financial statements 2. the work was adequately planned and supervised 3. a sufficient understanding of the client's internal control was obtained 4. sufficient appropriate audit evidence was obtained as a reasonable basis for an audit opinion