Exam 5: Overview of the Audit Process

Substantive tests provide evidence as to the fairness of management's financial statement assertions.

The auditor might approach unaudited information showing decreased profit margins with a higher level of professional skepticism when industry factors point to an increased level of competitiveness and declining industry margins.

When sampling is used, the auditors must project unknown misstatements on the population as a whole.

Many elements of financial statements involve accounting estimates that are unrelated to business performance.

Which of the following would not be an important factor in understanding an entity's industry, regulatory environment and other external factors?

Which of the following statements about understanding internal control is not true:

Determining whether amounts are in conformity with GAAP addresses the proper measurement of assets, liabilities, revenues, and expenses which includes all of the following except:

For a particular assertion, control risk is the risk that:

An understanding of the business and industry assists the auditor in understanding important information system issues for a client.

The audit has value because an audit provides reasonable assurance to financial statement users that the financial statements are free of material misstatements.

The existence or occurrence assertion, by its nature, extends only to physical assets such as cash and inventory.

Financial statements include explicit and implicit management assertions.

The performance of tests of controls is required in a financial statement audit.

The process of making judgments about the accounts likely to contain material misstatement and obtaining reasonable assurance about fair presentation in the financial statements involves six distinct phases.

The professional standards identify five categories of assertions made by management that are contained in the financial statements. If any of these assertions is a misrepresentation, the statements could be materially misstated. The categories of assertions identified by the profession are: A.Existence or occurrence B.Completeness C.Rights and obligations D.Valuation or allocation E.Presentation and disclosure Following is a list of errors encountered during the conduct of an audit. REQUIRED: Using the letters given above, indicate the assertion that is being misrepresented by each listed error. 1.A short-term loan obtained from the bank was not recorded. 2.The current portion of long-term debt was excluded from the current liabilities section of the balance sheet. 3.The fact that certain inventories were pledged as collateral on a bank loan was not mentioned in the statements. 4.Reported sales include transactions from the subsequent period. 5.A number of shipments were made that were never billed. 6.Clerical errors were made in the compilation of the physical inventory count. 7.Several fictitious sales were booked during the period. 8.Legal title has not been obtained to a truck purchased from a private party. 9.Some of the inventory is obsolete, with no current market. 10.Accrued liabilities include the utility bills of the owner. 11.The allowance for doubtful accounts was understated because of the failure to properly age the receivables at year-end. 12.The disposal of several pieces of machinery was never recorded. 13.Utility bills for the current period were recorded and paid in the following period. 14.A piece of land, carried as an investment, has been written up to reflect current appraisals of the property. 15.The subsidiary accounts receivable ledger is out of balance with the control account.

The completeness assertion would be violated if:

Business risks are the operational approaches by which management intends to achieve its objectives.

CPAs normally use engagement letters to describe the scope of services and fee arrangements.