Question 1

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

Accepted Answer

A) True 
 B)False  False

Question 2

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Accepted Answer

A) True 
 B)False  True

Question 3

Because auditors are responsible for having appropriate competence and capabilities to perform an audit, auditors are not normally permitted to consult with outside specialists during an audit engagement.

Accepted Answer

A) True 
 B)False  False

Question 4

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

Accepted Answer

Three reasons why an auditor should prop

Question 5

A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the

Accepted Answer

A)  management letter requested by the auditor. 
B)  engagement letter. 
C)  audit plan. 
D)  audit strategy for the client. 
A)  management letter requested by the auditor. 
B)  engagement letter. 
C)  audit plan. 
D)  audit strategy for the client.

Question 6

Smith, CPA, has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Smith's decision concerning

Accepted Answer

A)  the auditor's ability to design audit tests. 
B)  possible scope exception due to lack of access. 
C)  the desirability of accepting the prospective engagement. 
D)  violation of the GAAP rules concerning consistency and comparability of financial information. 
A)  the auditor's ability to design audit tests. 
B)  possible scope exception due to lack of access. 
C)  the desirability of accepting the prospective engagement. 
D)  violation of the GAAP rules concerning consistency and comparability of financial information.

Question 7

Preliminary analytical procedures can help the auditor assess client business risk.

Accepted Answer

A) True 
 B)False

Question 8

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

Accepted Answer

A)  Potential 
B)  Likely 
C)  Known 
D)  Projected 
A)  Potential 
B)  Likely 
C)  Known 
D)  Projected

Question 9

The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate.

Accepted Answer

A) True 
 B)False

Question 10

Auditors allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole. What is the term for the auditor's allocation of preliminary misstatement to account balances?
 What are three difficulties auditors face when allocating materiality to balance sheet accounts?

Accepted Answer

Performance materiality is the term for

Question 11

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality is (are) true?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 12

Sampling risk results if the sample accurately represents the population.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is a reason that the auditors may change the preliminary judgment about materiality?

Accepted Answer

A)  The auditors decide that the preliminary judgment was too large. 
B)  The auditors decide that the preliminary judgment was too small. 
C)  Client circumstance may have changed due to qualitative events. 
D)  All of the above. 
A)  The auditors decide that the preliminary judgment was too large. 
B)  The auditors decide that the preliminary judgment was too small. 
C)  Client circumstance may have changed due to qualitative events. 
D)  All of the above.

Question 14

Which of the following best describes the corporate minutes of an entity?

Accepted Answer

A)  official record of the meetings of the board of directors and the stockholders 
B)  unofficial record of the meeting of the board of directors 
C)  official record of management meeting with investors and creditors of the company 
D)  unofficial record of the board of directors' meetings 
A)  official record of the meetings of the board of directors and the stockholders 
B)  unofficial record of the meeting of the board of directors 
C)  official record of management meeting with investors and creditors of the company 
D)  unofficial record of the board of directors' meetings

Question 15

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

Accepted Answer

A)  Management asserts there are no errors, material or immaterial, in the general ledger. 
B)  Auditors assert that the primary audit goal is audit efficiency. 
C)  Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. 
D)  Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements. 
A)  Management asserts there are no errors, material or immaterial, in the general ledger. 
B)  Auditors assert that the primary audit goal is audit efficiency. 
C)  Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. 
D)  Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

Question 16

Performance materiality is commonly set at 50-75 percent of overall materiality.

Accepted Answer

A) True 
 B)False

Question 17

Discuss the required communications between predecessor and successor auditors.

Accepted Answer

Auditing standards require a successor a

Question 18

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should

Accepted Answer

A)  investigate the possibility the client may have made an error in their cost of goods sold computation. 
B)  assist management in developing greater cost efficiencies in their product line. 
C)  prepare a going concern opinion for the client. 
D)  advise the client to have extensive disclosure to alleviate investor concerns. 
A)  investigate the possibility the client may have made an error in their cost of goods sold computation. 
B)  assist management in developing greater cost efficiencies in their product line. 
C)  prepare a going concern opinion for the client. 
D)  advise the client to have extensive disclosure to alleviate investor concerns.

Question 19

Zero risk is certainty, and a 100% audit risk is complete uncertainty.

Accepted Answer

A) True 
 B)False

Question 20

Lewis Corporation has a few large accounts receivable that total one million dollars, whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of

Accepted Answer

A)  materiality. 
B)  audit risk. 
C)  reasonable assurance. 
D)  comparative analysis. 
A)  materiality. 
B)  audit risk. 
C)  reasonable assurance. 
D)  comparative analysis.

Exam 8: Audit Planning and Materiality

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Because auditors are responsible for having appropriate competence and capabilities to perform an audit, auditors are not normally permitted to consult with outside specialists during an audit engagement.

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the

Smith, CPA, has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Smith's decision concerning

Preliminary analytical procedures can help the auditor assess client business risk.

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate.

Sampling risk results if the sample accurately represents the population.

Which of the following is a reason that the auditors may change the preliminary judgment about materiality?

Which of the following best describes the corporate minutes of an entity?

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

Performance materiality is commonly set at 50-75 percent of overall materiality.

Discuss the required communications between predecessor and successor auditors.

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should

Zero risk is certainty, and a 100% audit risk is complete uncertainty.

Lewis Corporation has a few large accounts receivable that total one million dollars, whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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