Question 1

Which of the following would most likely not be classified as a related-party transaction?

Accepted Answer

A)  an advance of one week's salary to an employee 
B)  sales of merchandise between affiliated companies 
C)  loans or credit sales to the principal owner of the client company 
D)  exchanges of equipment between two companies owned by the same person 
A)  an advance of one week's salary to an employee 
B)  sales of merchandise between affiliated companies 
C)  loans or credit sales to the principal owner of the client company 
D)  exchanges of equipment between two companies owned by the same person

Question 2

Related party

Accepted Answer

A)  transactions must be disclosed in the footnotes even if the amounts are immaterial. 
B)  disclosures include the nature of the related party relationship and a description of the transaction. 
C)  transactions are considered arm's-length transactions. 
D)  disclosures are required only for public companies. 
A)  transactions must be disclosed in the footnotes even if the amounts are immaterial. 
B)  disclosures include the nature of the related party relationship and a description of the transaction. 
C)  transactions are considered arm's-length transactions. 
D)  disclosures are required only for public companies.

Question 3

Which is a liquidity activity ratio?

Accepted Answer

A)  profit margin 
B)  inventory turnover 
C)  return on assets 
D)  times interest earned 
A)  profit margin 
B)  inventory turnover 
C)  return on assets 
D)  times interest earned

Question 4

Which of the following would not be classified as an analytical procedure?

Accepted Answer

A)  benchmarking the company's profitability ratios against others in the industry 
B)  preparing common size financial statements 
C)  calculating income statement account balances as a percent of sales when the level of sales has changed from the prior year 
D)  reconciling fixed asset dispositions with the fixed asset ledger 
A)  benchmarking the company's profitability ratios against others in the industry 
B)  preparing common size financial statements 
C)  calculating income statement account balances as a percent of sales when the level of sales has changed from the prior year 
D)  reconciling fixed asset dispositions with the fixed asset ledger

Question 5

Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.

Accepted Answer

Allocating the preliminary judgment abou

Question 6

A successor auditor may perform which of the following for a new audit client?

Accepted Answer

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

Question 7

When a successor auditor contacts a company's previous auditor, the predecessor auditor is required to respond fully and without limit to the request for information.

Accepted Answer

A) True 
 B)False

Question 8

Income before taxes is often used by the auditor as a benchmark for materiality. Once income before taxes is established as a benchmark for materiality for a particular audit client, the auditor still must decide whether any misstatements could affect other benchmarks such a current assets or current liabilities, for example.

Accepted Answer

A) True 
 B)False

Question 9

Which is usually included in the engagement letter?

Accepted Answer

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

Question 10

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor.

Accepted Answer

A) True 
 B)False

Question 11

When setting a preliminary judgment about materiality,

Accepted Answer

A)  more evidence is required for a low dollar amount than for a high dollar amount. 
B)  less evidence is required for a low dollar amount than for a high dollar amount. 
C)  the same amount of evidence is required for either low or high dollar amounts. 
D)  there is no relationship between materiality and the dollar amount of evidence needed. 
A)  more evidence is required for a low dollar amount than for a high dollar amount. 
B)  less evidence is required for a low dollar amount than for a high dollar amount. 
C)  the same amount of evidence is required for either low or high dollar amounts. 
D)  there is no relationship between materiality and the dollar amount of evidence needed.

Question 12

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for

Accepted Answer

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

Question 13

When evaluating the audit findings, the auditor should be satisfied that the

Accepted Answer

A)  amount of known misstatement is documented in the management representation letter. 
B)  estimate of the total known and likely misstatements is less than a material amount. 
C)  estimate of the total likely misstatement includes sample error. 
D)  amount of known misstatement is acknowledged and recorded by the client. 
A)  amount of known misstatement is documented in the management representation letter. 
B)  estimate of the total known and likely misstatements is less than a material amount. 
C)  estimate of the total likely misstatement includes sample error. 
D)  amount of known misstatement is acknowledged and recorded by the client.

Question 14

A related party transaction may be indicated when another company

Accepted Answer

A)  subsidizes certain operating expenses of the company. 
B)  purchases its securities at their fair value. 
C)  loans to the company at market rates. 
D)  has had a distributor relationship with the company for 10 years. 
A)  subsidizes certain operating expenses of the company. 
B)  purchases its securities at their fair value. 
C)  loans to the company at market rates. 
D)  has had a distributor relationship with the company for 10 years.

Question 15

If the total misstatement of an account is known, a sampling error still needs to be determined.

Accepted Answer

A) True 
 B)False

Question 16

Discuss four of the matters that should be specified in an engagement letter.

Accepted Answer

Matters that should be specified in the

Question 17

Management's philosophy and operating style influence the risk of material misstatements in the financial statements.

Accepted Answer

A) True 
 B)False

Question 18

Preliminary judgments about materiality are often changed during the course of the engagement.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is false?

Accepted Answer

A)  Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. 
B)  A misclassification in the balance sheet will have no effect on operating income. 
C)  Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
D)  Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
A)  Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. 
B)  A misclassification in the balance sheet will have no effect on operating income. 
C)  Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. 
D)  Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Question 20

A major consideration in audit staffing is the need for continuity from year to year.

Accepted Answer

A) True 
 B)False

Exam 8: Audit Planning and Materiality

Which of the following would most likely not be classified as a related-party transaction?

Related party

Which is a liquidity activity ratio?

Which of the following would not be classified as an analytical procedure?

Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts.

A successor auditor may perform which of the following for a new audit client?

When a successor auditor contacts a company's previous auditor, the predecessor auditor is required to respond fully and without limit to the request for information.

Which is usually included in the engagement letter?

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor.

When setting a preliminary judgment about materiality,

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for

When evaluating the audit findings, the auditor should be satisfied that the

A related party transaction may be indicated when another company

If the total misstatement of an account is known, a sampling error still needs to be determined.

Discuss four of the matters that should be specified in an engagement letter.

Management's philosophy and operating style influence the risk of material misstatements in the financial statements.

Preliminary judgments about materiality are often changed during the course of the engagement.

Which of the following statements is false?

A major consideration in audit staffing is the need for continuity from year to year.

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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