Question 1

When an auditor sets a low acceptable audit risk, it means that he or she wants to be more certain that the financial statements are not materially misstated.

Accepted Answer

A) True 
 B)False

Question 2

Many risks are common to all clients in certain industries.

Accepted Answer

A) True 
 B)False

Question 3

Discuss the essential activities involved in the initial planning of an audit.

Accepted Answer

There are four essential activities invo

Question 4

Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment. List and discuss the three main factors that affect an auditor's preliminary judgment about materiality.

Accepted Answer

The three main factors that affect an au

Question 5

A tour of the client's facilities provides the auditor an opportunity to

Accepted Answer

A)  meet key personnel. 
B)  observe operations. 
C)  assess physical safeguards over assets. 
D)  all of the above. 
A)  meet key personnel. 
B)  observe operations. 
C)  assess physical safeguards over assets. 
D)  all of the above.

Question 6

List the five steps in applying materiality in an audit.

Accepted Answer

Step 1. Set materiality for the financia

Question 7

Which of the following is a correct statement regarding analytical procedures?

Accepted Answer

A)  A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B)  Common-size financial statements display all items as a percentage change from a base year. 
C)  In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios. 
D)  In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances. 
A)  A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B)  Common-size financial statements display all items as a percentage change from a base year. 
C)  In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios. 
D)  In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

Question 8

The auditor should read the corporate minutes to obtain authorizations and other information that is relevant to performing the audit.

Accepted Answer

A) True 
 B)False

Question 9

Before accepting a new client, most CPA firms investigate the company to determine its acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties-namely the company's attorneys and bankers-during this investigation.

Accepted Answer

A) True 
 B)False

Question 10

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as

Accepted Answer

A)  the materiality range. 
B)  the error range. 
C)  tolerable materiality. 
D)  performance materiality. 
A)  the materiality range. 
B)  the error range. 
C)  tolerable materiality. 
D)  performance materiality.

Question 11

The auditor is likely to accumulate more evidence when the audit is for a company

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 12

There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment. What are these reasons?

Accepted Answer

The three reasons are:
• Risks associate

Question 13

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

Accepted Answer

A) True 
 B)False

Question 14

The auditor's preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users.

Accepted Answer

A) True 
 B)False

Question 15

When determining materiality,

Accepted Answer

A)  the preliminary judgment about materiality can be increased, but not decreased during the audit. 
B)  auditing standards provide specific materiality guidelines to practitioners. 
C)  only one benchmark can be used. 
D)  the application of guidelines requires considerable professional judgment. 
A)  the preliminary judgment about materiality can be increased, but not decreased during the audit. 
B)  auditing standards provide specific materiality guidelines to practitioners. 
C)  only one benchmark can be used. 
D)  the application of guidelines requires considerable professional judgment.

Question 16

Determining materiality requires professional judgment.

Accepted Answer

A) True 
 B)False

Question 17

Specialists may be employed by the client, employed by the audit firm, or affiliated with the client and the audit firm.

Accepted Answer

A) True 
 B)False

Question 18

The burden of initiating communication with the successor audit rests with the predecessor auditor, especially in the event of legal problems or disputes between the client and the predecessor auditor.

Accepted Answer

A) True 
 B)False

Question 19

The two major factors affecting acceptable audit risk are

Accepted Answer

A)  inherent risk and the intended uses of the financial statements. 
B)  control risk and the intended uses of the financial statements. 
C)  the likely statement users and their intended uses of the statements. 
D)  the audit firm and the intended uses of the statements. 
A)  inherent risk and the intended uses of the financial statements. 
B)  control risk and the intended uses of the financial statements. 
C)  the likely statement users and their intended uses of the statements. 
D)  the audit firm and the intended uses of the statements.

Question 20

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the

Accepted Answer

A)  inherent risk. 
B)  acceptable audit risk. 
C)  statistical risk. 
D)  financial risk. 
A)  inherent risk. 
B)  acceptable audit risk. 
C)  statistical risk. 
D)  financial risk.

Exam 8: Audit Planning and Materiality

When an auditor sets a low acceptable audit risk, it means that he or she wants to be more certain that the financial statements are not materially misstated.

Many risks are common to all clients in certain industries.

Discuss the essential activities involved in the initial planning of an audit.

Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment. List and discuss the three main factors that affect an auditor's preliminary judgment about materiality.

A tour of the client's facilities provides the auditor an opportunity to

List the five steps in applying materiality in an audit.

Which of the following is a correct statement regarding analytical procedures?

The auditor should read the corporate minutes to obtain authorizations and other information that is relevant to performing the audit.

Before accepting a new client, most CPA firms investigate the company to determine its acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties-namely the company's attorneys and bankers-during this investigation.

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as

The auditor is likely to accumulate more evidence when the audit is for a company

There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment. What are these reasons?

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

The auditor's preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users.

When determining materiality,

Determining materiality requires professional judgment.

Specialists may be employed by the client, employed by the audit firm, or affiliated with the client and the audit firm.

The burden of initiating communication with the successor audit rests with the predecessor auditor, especially in the event of legal problems or disputes between the client and the predecessor auditor.

The two major factors affecting acceptable audit risk are

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the

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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