3.7 Flashcards
Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?
Audit plan.
An audit plan is developed and documented based on the overall audit strategy. It is more detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed. The plan includes (1) risk assessment procedures, (2) further audit procedures at the assertion level, and (3) other procedures to comply with GAAS. Audit planning has many benefits, such as helping to organize and manage the audit so it is performed effectively and efficiently (AU-C 300).
A CPA auditing CBX Co.’s 12/31/2017 financials determined performance materiality for current liabilities should be calculated at 1/4 of total materiality (3% of total current liabilities) and noncurrent liabilities should be calculated at 1/3 of total materiality (7% of total noncurrent liabilities). Calculate performance materiality for current liabilities based on the following:
Accounts payable: $900,000 Loan payable (due 3/17/2019): 400,000 Interest payable (due 3/31/2018): 20,000 Reserve for returns: 50,000 Note payable (due 1/1/2019): 150,000
$7,275.
Materiality is a matter of professional judgment about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs. Performance materiality is the amount(s) set by the auditor at less than the materiality for (1) the statements as a whole or (2) particular classes of transactions, balances, or disclosures. Performance materiality is an adjustment to reduce to an appropriately low level the probability that the sum of (1) uncorrected and (2) undetected misstatements (whether or not individually material) exceeds the applicable materiality.
$7,275 = [$900,000 +$20,000 + $50,000] × [3% (total materiality %) × 1/4 (performance materiality)].
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that
Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
Unrealized gains from increases in the value of available-for-sale securities should be recorded directly in other comprehensive income (a component of equity). Unrealized gains from increases in the value of trading securities should be included in income. Thus, a more-than-10% increase in income could have been caused by improper accounting for available-for-sale securities.
Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer?
It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.
Intent is often difficult to determine, particularly in matters involving accounting estimates and the application of accounting principles. For example, unreasonable accounting estimates may be unintentional or may be the result of an intentional attempt to misstate the financial statements. Although an audit is not designed to determine intent, the auditor’s objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
A primary objective of analytical procedures used to form an overall conclusion is to
Determine whether the financial statements are consistent with the auditor’s understanding.
Analytical procedures should be applied to form an overall conclusion near the end of the audit. They may include reading the statements and considering (1) the adequacy of evidence regarding previously identified unusual or unexpected balances and (2) unusual or unexpected balances or relationships not previously noted.
Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement?
I. Financial statement accounts likely to contain a misstatement.
II. Conditions that require extension of audit tests.
Both I & II.
When planning an audit, the auditor should consider, among other things, the financial statement accounts likely to require adjustment and the conditions that require extension or modification of audit procedures (e.g., risk of material misstatement).
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
Supporting accounting records and files that should be readily available are not produced promptly when requested.
An auditor should assess fraud risk throughout the audit. Conditions observed during the audit that may change or support the assessment include difficult or unusual relationship with management, for example, denial of access to records, unusual delays in providing requested information, and unwillingness to facilitate access to computer files (AU-C 240).
An auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s
Engagement letter:
Audit documentation:
No
Yes
The predecessor’s engagement letter is not useful for the auditor in evaluating whether to accept a new client. However, the audit documentation provides useful information for an auditor. Thus, the client should comply with the auditor’s request to authorize the predecessor to make available his or her audit documentation.
The acceptable level of detection risk is inversely related to the
Assurance provided by substantive procedures.
For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS 2301).
Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into derivative transactions as hedges.
Inherent risk is the susceptibility of a financial statement assertion to a material misstatement before consideration of related controls. It tends to be higher for amounts derived from accounting estimates subject to significant estimation uncertainty, for example, the amounts recorded for hedges using derivative transactions.
Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?
An illegal payment to a foreign official that was not recorded.
The auditor’s response to detected illegal acts is to consider the effects on the financial statements and the implications for other aspects of the audit. The reliability of management’s representations is particularly important. Failure to record an illegal payment creates doubt regarding management’s integrity and therefore its other representations and assertions in the financial statements.
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
Ratio Analysis.
Using analytical procedures, the auditor develops expectations about (predictions of) recorded balances or ratios. In analyzing relationships among balance sheet accounts, comparisons of one balance sheet account with another, or ratio analysis, would be particularly appropriate.
Analytical procedures used as risk assessment procedures should focus on
Enhancing the auditor’s understanding of the transactions and events that have occurred since the last audit.
Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client’s business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315).
The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
Timing of inventory observation procedures to be performed.
The client is responsible for taking the physical inventory. The auditor is responsible for observing this process and performing test counts. The audit procedures are dependent upon management’s plans. Thus, the auditor must coordinate the collection of this evidence with management.
An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the
Illegal act affects the auditor’s ability to rely on management representations.
The auditor should consider the implications of an illegal act in relation to the other representations of management. If the disposition of the illegal act is questionable (whether or not the act is material), the auditor may have to withdraw, owing to a lack of confidence in client management. If management cannot be trusted in this matter, serious doubts arise about their other representations. The auditor must also consider the possible effects of continuing the association with the client.
