Question 1

If an auditor establishes a relatively high level for materiality, then the auditor will

Accepted Answer

A)  accumulate more evidence than if a lower level had been set. 
B)  accumulate less evidence than if a lower level had been set. 
C)  accumulate approximately the same evidence as would be the case were materiality lower. 
D)  accumulate an undetermined amount of evidence. 
A)  accumulate more evidence than if a lower level had been set. 
B)  accumulate less evidence than if a lower level had been set. 
C)  accumulate approximately the same evidence as would be the case were materiality lower. 
D)  accumulate an undetermined amount of evidence.

Question 2

When selecting staff for the audit engagement,

Accepted Answer

A)  only staff members who are CPAs should be assigned to the audit. 
B)  only managers and above need to have appropriate competence and capabilities to perform the audit. 
C)  continuity of staff members from year to year should not be a factor. 
D)  staff assigned to the audit must be knowledgeable about the client's industry. 
A)  only staff members who are CPAs should be assigned to the audit. 
B)  only managers and above need to have appropriate competence and capabilities to perform the audit. 
C)  continuity of staff members from year to year should not be a factor. 
D)  staff assigned to the audit must be knowledgeable about the client's industry.

Question 3

Operations are approaches followed by the entity to achieve organizational objectives.

Accepted Answer

A) True 
 B)False

Question 4

Assessing acceptable audit risk, client business risk, and risk of material misstatement helps determine the audit procedures that will be needed.

Accepted Answer

A) True 
 B)False

Question 5

If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned.

Accepted Answer

A) True 
 B)False

Question 6

The risk of material misstatement is a function of the susceptibility of the financial statements to misstatement; the effectiveness of the client's controls in preventing or detecting these misstatements has no impact on the risk of material misstatement.

Accepted Answer

A) True 
 B)False

Question 7

A public company must disclose if the company has not adopted a code of ethics that applies to senior management, but not the reason why it has not done so.

Accepted Answer

A) True 
 B)False

Question 8

Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because

Accepted Answer

A)  of the unique classification of related-party transactions required on the balance sheet. 
B)  of the lack of independence between the parties. 
C)  of the unique classification of related-party transactions required on the income statement. 
D)  it is required by generally accepted accounting principles. 
A)  of the unique classification of related-party transactions required on the balance sheet. 
B)  of the lack of independence between the parties. 
C)  of the unique classification of related-party transactions required on the income statement. 
D)  it is required by generally accepted accounting principles.

Question 9

The lower the dollar amount of the preliminary judgment, the more audit evidence is required.

Accepted Answer

A) True 
 B)False

Question 10

The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is

Accepted Answer

A)  they got lucky the landlord hasn't noticed the lack of payments. 
B)  the landlord has weak internal controls over billings. 
C)  a related party transaction in which a major shareholder owns the office tower. 
D)  Matthews Company is engaging in fraudulent activities. 
A)  they got lucky the landlord hasn't noticed the lack of payments. 
B)  the landlord has weak internal controls over billings. 
C)  a related party transaction in which a major shareholder owns the office tower. 
D)  Matthews Company is engaging in fraudulent activities.

Question 11

Net income before taxes is the normal base used to determine materiality for a not-for-profit organization.

Accepted Answer

A) True 
 B)False

Question 12

For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act.

Accepted Answer

A)  client's management 
B)  client's chief executive officer 
C)  client's chief financial officer 
D)  client's audit committee 
A)  client's management 
B)  client's chief executive officer 
C)  client's chief financial officer 
D)  client's audit committee

Question 13

Client business risk is the risk that the entity fails to achieve its objectives or execute its strategies.

Accepted Answer

A) True 
 B)False

Question 14

An official record of meetings of the board of directors and stockholders is included in the corporate

Accepted Answer

A)  bylaws. 
B)  charter. 
C)  minutes. 
D)  license. 
A)  bylaws. 
B)  charter. 
C)  minutes. 
D)  license.

Question 15

When dealing with audit risk,

Accepted Answer

A)  audit risk should not be a factor when determining if a new client should be accepted. 
B)  audits with a low acceptable audit risk generally result in lower audit fees. 
C)  if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client. 
D)  if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client. 
A)  audit risk should not be a factor when determining if a new client should be accepted. 
B)  audits with a low acceptable audit risk generally result in lower audit fees. 
C)  if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client. 
D)  if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.

Question 16

A CPA firm may decide not to continue doing audits for an existing audit client simply due to what the CPA firm deems to be excessive risk, alone, even if the audit engagement is very profitable to the CPA firm.

Accepted Answer

A) True 
 B)False

Question 17

A successor auditor must seek the written permission of a prospective audit client before making other investigations regarding the prospective audit client, including gathering information from local attorneys, other CPAs, banks, and other businesses.

Accepted Answer

A) True 
 B)False

Question 18

Due to qualitative factors, certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same. Identify two qualitative factors that might significantly affect an auditor's materiality judgment, and give an example of each.

Accepted Answer

Qualitative factors that affect an audit

Question 19

The purpose of an engagement letter is to

Accepted Answer

A)  document the CPA firm's responsibility to external users of the audited financial statements. 
B)  document the terms of the engagement. 
C)  notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. 
D)  emphasize management's responsibility for approving the audit program. 
A)  document the CPA firm's responsibility to external users of the audited financial statements. 
B)  document the terms of the engagement. 
C)  notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. 
D)  emphasize management's responsibility for approving the audit program.

Question 20

The term "tolerable misstatement," used by the Public Company Accounting Oversight Board auditing standards, has the same meaning as "performance materiality," described by AICPA and International Auditing and Assurance Standards Board standards.

Accepted Answer

A) True 
 B)False

Exam 8: Audit Planning and Materiality

If an auditor establishes a relatively high level for materiality, then the auditor will

When selecting staff for the audit engagement,

Operations are approaches followed by the entity to achieve organizational objectives.

Assessing acceptable audit risk, client business risk, and risk of material misstatement helps determine the audit procedures that will be needed.

If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned.

The risk of material misstatement is a function of the susceptibility of the financial statements to misstatement; the effectiveness of the client's controls in preventing or detecting these misstatements has no impact on the risk of material misstatement.

A public company must disclose if the company has not adopted a code of ethics that applies to senior management, but not the reason why it has not done so.

Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because

The lower the dollar amount of the preliminary judgment, the more audit evidence is required.

The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is

Net income before taxes is the normal base used to determine materiality for a not-for-profit organization.

For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act.

Client business risk is the risk that the entity fails to achieve its objectives or execute its strategies.

An official record of meetings of the board of directors and stockholders is included in the corporate

When dealing with audit risk,

A CPA firm may decide not to continue doing audits for an existing audit client simply due to what the CPA firm deems to be excessive risk, alone, even if the audit engagement is very profitable to the CPA firm.

A successor auditor must seek the written permission of a prospective audit client before making other investigations regarding the prospective audit client, including gathering information from local attorneys, other CPAs, banks, and other businesses.

Due to qualitative factors, certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same. Identify two qualitative factors that might significantly affect an auditor's materiality judgment, and give an example of each.

The purpose of an engagement letter is to

The term "tolerable misstatement," used by the Public Company Accounting Oversight Board auditing standards, has the same meaning as "performance materiality," described by AICPA and International Auditing and Assurance Standards Board standards.

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

Filters