Questions and Answers of Auditing International Approach

The term testing alludes to the concept ofa. A guarantee.b. A certificate.c. Accuracy.d. Sampling.
Which of the following is an incorrect statement?a. Financial statements are materially misstated when they contain misstatements whose effect, individually or in the aggregate, is impor tant enough
Which of the following is an incorrect statement?a. Detection risk is a function of the effectiveness of an auditing procedure and its application.b. Detection risk arises partly from uncertainties
Which of the following is an incorrect statement?a. Detection risk cannot be changed at the auditor's discretion.b. If individual audit risk remains the same, detection risk bears an inverse
The existence of audit risk is recognized by the statement in the independent auditor's standard report that the auditora. Obtains reasonable assurance about whether the financial statements are
The risk that an auditor will conclude, based on audit tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to asa.
Inherent risk and control risk differ from detection risk in that inherent risk and control risk area. Elements of audit risk while detection risk is not.b. Changed at the auditor's discretion while
Inherent risk and control risk differ from detection risk in that theya. Arise from the misapplication of auditing procedures.b. May be assessed in either quantitative or nonquantitative terms.c.
Which of the following statements is not correct about materiality?a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity
The acceptable level of detection risk is inversely related to thea. Assurance provided by substantive tests.b. Risk of misapplying auditing procedures.c. Preliminary judgment about materiality
For each description, list the letter or letters of the term or terms that are identified with the description. Each term may be used once, more than once, or not at all. Description 1. This term is
This question consists of 15 items pertaining to an auditor's risk analysis of an entity. Select the best answer for each item.Bond, CPA, is considering audit risk at the financial statement level in
Evaluate the following statement:There is a 10 percent or less risk that the financial statements are misstated by more than $\$ 3,000$.Required:a. Give the definition of materiality and audit
Audit risk and materiality should be considered when planning and performing an audit of financial statements in accordance with generally accepted auditing standards. Audit risk and materiality
Begin Company was organized in January of 19X7. The company is in the business of taking computer chips from discarded personal computers and making vases and other items that are used to decorate
Using the audit risk model, calculate detection risk if the other risks are set at these levels.a. Individual audit risk of 5 percent.Inherent risk of 50 percent.Control risk of 40 percent.b.
For the following sets of circumstances, indicate whether the auditor would have a high or low risk of failing to detect these circumstances with appropriate audit procedures. Give reasons for your
The auditor decided to examine 100 percent of the invoices supporting additions to property and equipment. Several months after the audit was completed and the audit report was issued, significant
Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 19X0. Audit
Assume that the audit risk model used to set detection risk contains the following percentages (from the prior-year audit) relating to the valuation assertion for net accounts receivable.Required:a.
The noise of the huge folder dropping on his desk startled Alan Weisner, a new staff member of Kosner \& Kosner. He had recently returned from the firm's staff training school."What's this?" inquired
Custom Furniture Company was ready for an audit by a new CPA firm after replacing the previous auditor who had performed the audit for several years. The lawsuit filed by Custom's creditors against
What is meant by opinion shopping?
Describe four potential duties of audit committees.
Who has the responsibility to initiate communications when a change of auditors occurs? What specific inquiries should be made?
List the matters normally included in an audit engagement letter.
Describe an auditor's attitude toward planning and performing an audit.
What matters should an auditor consider when planning an audit?
What are three global economic risks that an auditor should consider when planning an audit?
What are three U.S. economic risks that an auditor should consider when planning an audit?
What are two important industry risks that an auditor should consider when planning an audit?
What are three entity risks not controlled directly by management that an auditor should consider when planning an audit?
What are some potential problem areas that an auditor should consider when planning an audit?
When would an auditor consider the use of a specialist during the planning phase?
What are some general sources of planning information?
Why does an auditor perform analytical procedures in the planning phase of an audit?
Describe the composition of the audit team and the responsibilities of its members.
Why is an audit program considered tentative? What could cause it to be changed?
How does the auditor use the audit risk model to help plan the audit?
Why do-auditors attempt to perform as much work as possible at an interim date?
Four audit segments or phases are identified in the chapter. When is each performed?
How does planning for a first-time audit differ from planning a continuing audit?
If a CPA receives a request from an entity that is not a client to evaluate the use of an accounting principle, the CPA shoulda. Consult with the entity's auditor as required by the Code of
As generally conceived, the "audit committee" of a publicly held company should be made up ofa. Representatives of the major equity interests (bonds, preferred stock, common stock).b. The audit
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor'sa. Opinion of any subsequent events occurring since the
A successor auditor most likely would make specific inquiries of the predecessor auditor regardinga. Specialized accounting principles of the client's industry.b. The competency of the client's
Which of the following statements would least likely appear in an auditor's engagement letter?a. Fees for our services are based on our regular per diem rates, plus travel and other out of-pocket
Because an audit in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements, the auditor should plan the audit with an attitude ofa.
A CPA is planning an audit of a client, a substantial portion of whose business consists of exports of microchips for sale in England. The CPA knows from reading the financial news that the U.S.
A CPA is planning the audit of a hospital and is aware that the U.S. Congress recently passed a law limiting the amounts that can legally be charged for certain hospital services. Because of this
To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely woulda. Perform tests of details of transactions and balances.b. Review prior-year working
Prior to beginning interim work on a recurring audit, an auditor makes a preliminary judgment about materiality. Which of the following would not be an appropriate base for this decision?a.
Which of the following events most likely indicates the existence of related parties?a. Borrowing a large sum of money at a variable rate of interest.b. Making a loan without scheduled terms for
An auditor obtains knowledge about a new client's business and its industry toa. Make constructive suggestions concerning improvements to the client's internal control.b. Develop an attitude of
Which of the following situations would most likely require special audit planning by the auditor?a. Some items of factory equipment do not bear identification numbers.b. Depreciation methods used on
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?a. Inquiring of the client's legal counsel concerning pending litigation.b. Comparing
The objective of performing analytical procedures in planning an audit is to identify the existence ofa. Unusual transactions and events.b. Illegal acts that went undetected because of internal
In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to thea. Timing of audit procedures.b. Cost-benefit of gathering evidence.c. Selected
When planning an audit, the auditor needs to evaluate audit risk where the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assessa. Control risk at below the maximum level.b. Inherent risk at the maximum level.c. The
Which of the following procedures would an auditor normally plan only for a first-time audit?a. Review litigation against the company that was settled in prior years.b. Review capital stock
Match the term or terms that relate to each description. Each term may be used once, more than once, or not at all. Description 1. The confirmation of a CPA's responsibility for an audit. 2. In all
The use of audit committees has become widespread. Independent auditors have become increasingly involved with audit committees and consequently have become familiar with their nature and
Joe Melton, CPA, has been contacted by the president of Mudalum Company (a company developing a process to turn mud into aluminum) and asked to perform the company's audit for the current year.
Management of Consolidated Systems Company (CSC), a publicly held company, has asked three accounting firms, including yours, to bid on its annual audit. It has given permission to you and the
The following audit engagement letter was drafted by D. Minus, a new staff assistant.This will confirm our arrangements with you to express an unqualified opinion on the financial statements of Lurch
Your knowledge of general economic conditions during the year ended December 31, 19X9, included the facts that inflation had been recorded at a high 12 percent rate, which caused a serious slowdown
Your client, Kelting \& Company, established a manufacturing facility in a Central American country several years ago because of the availability of cheap labor. Goods manufactured at this plant are
You are in the process of planning the audit of Computer Logic, a supplier of integrated circuits (chips) and associated software for complex peripheral control functions, including mass storage,
Temple, CPA, is auditing the financial statements of Ford Lumber Yards, Inc., a privately held corporation with 300 employees and five stockholders, three of whom are active in management. Ford has
Parker is the in-charge auditor with administrative responsibilities for the upcoming annual audit of FGH Company, a continuing audit client. Parker will supervise two staff assistants on the
You have been assigned to the audit of Hogeye Ranch Company. In assessing audit risk for various accounts, you have gathered the following information.Accounts receivable Accounts receivable consists
You have been assigned to the planning phase of the audit of ABC Company. One of the procedures that you have been assigned to perform is to compare a set of projected ratios and balances for \(19
Late in the calendar year, Shallow and Shallow, a regional CPA firm, was approached by Undermyne Computers, Inc., a developer of innovative computer software, about changing auditors. Crest and
Cook, CPA, has been engaged to audit the financial statements of General Department Stores, Inc., a continuing audit client, which is a chain of medium-sized retail stores. General's fiscal year will
Name the five components of internal control.
Why is the control environment the foundation of internal control?
Describe the seven factors that influence the control environment.
Name eight examples of risk that management should identify and control.
Discuss four categories of control activities.
The information and communication component of internal control includes the accounting system. What other forms of communication are included?
What is the purpose of the monitoring component of internal control?
Describe the inherent limitations of internal control.
The understanding of internal control that relates to an assertion should be used to take three actions. Name these three actions.
Name the three procedures the auditor uses to obtain an understanding of relevant internal control policies and procedures.
What is the difference between a flowchart and an internal control questionnaire?
Why would studying and evaluating each of the client's controls not necessarily be the most efficient way of determining the scope of related substantive tests?
What is an audit strategy?
Describe two alternative audit strategies.
Give three reasons for using the primarily substantive approach.
Describe the steps in Figure 9.6. FIGURE 9.6 Flowchart of the Primarily Substantive Approach Obtain an understanding of relevant internal control policies and procedures-document the understanding
Describe the steps in Figure 9.7. FIGURE 9.7 Flowchart of the Lower Control Risk Approach Obtain an understanding of relevant internal control policies and procedures-document this understanding.
Give a four-part comparison of the two audit strategies.
In Figure 9.9, why are there fewer substantive tests for the existence assertion than for the valuation assertion? FIGURE 9.9 Illustration of Accounts Receivable Assertions Assertion: Valuation-Net
Which of the following is not a characteristic of the primarily substantive approach?a. The auditor usually gathers all or most of the evidence with substantive tests.b. Usually little or no reliance
Which of the following is not a characteristic of the lower control risk approach?a. Control risk is usually assessed at maximum level.b. Substantive tests are usually restricted.c. The auditor
Which of the following is not part of the control environment?a. Management philosophy and operating style.b. Organizational structure.c. Information and communication systems.d. Assignment of
If the auditor uses the primarily substantive approach instead of the lower control risk approacha. A higher level of understanding of internal control is required.b. The auditor plans to assess
The understanding of internal control that relates to a financial statement assertion should be used to do all of the following excepta. Determine inherent risk for that assertion.b. Identify types
To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the following excepta. Make inquiries.b. Inspect documents and records.c. Make

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