Question 1

________ is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit.

Accepted Answer

A)  Inherent risk 
B)  Client business risk 
C)  Acceptable audit risk 
D)  Risk of material misstatement 
A)  Inherent risk 
B)  Client business risk 
C)  Acceptable audit risk 
D)  Risk of material misstatement

Question 2

What documents do auditors routinely obtain to aid in their understanding of a client's governance system?
 Briefly discuss each of these documents.

Accepted Answer

Auditors commonly obtain the company's o

Question 3

Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts.

Accepted Answer

A)  less 
B)  no less 
C)  no more 
D)  more 
A)  less 
B)  no less 
C)  no more 
D)  more

Question 4

What are three factors that have increased the importance of obtaining an understanding of a client's business and industry?
 How can an auditor obtain this understanding?

Accepted Answer

Factors that have increased the importan

Question 5

Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?

Accepted Answer

A)  Auditors expect certain accounts to have more misstatements than others. 
B)  The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. 
C)  Auditors expect to identify overstatements as well as understatements in the accounts. 
D)  Relative audit costs affect the allocation. 
A)  Auditors expect certain accounts to have more misstatements than others. 
B)  The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. 
C)  Auditors expect to identify overstatements as well as understatements in the accounts. 
D)  Relative audit costs affect the allocation.

Question 6

If the auditor approaches the audit of the accounts in a sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

Accepted Answer

A) True 
 B)False

Question 7

In order to obtain an understanding of the client's business, the audit firm will consider

Accepted Answer

A)  inherent and control risk of the client. 
B)  audit risk to the CPA firm. 
C)  the client's business risk and the risk of material misstatements in the financial statements. 
D)  the CPA firm's potential ongoing revenue from the audit client. 
A)  inherent and control risk of the client. 
B)  audit risk to the CPA firm. 
C)  the client's business risk and the risk of material misstatements in the financial statements. 
D)  the CPA firm's potential ongoing revenue from the audit client.

Question 8

For prospective clients that have previously been audited by another CPA firm, the predecessor auditor must initiate the communication with the successor auditor.

Accepted Answer

A) True 
 B)False

Question 9

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when

Accepted Answer

A)  the predecessor auditor has poor relations with the successor auditor. 
B)  the client is dissatisfied with the predecessor's work. 
C)  there are actual or potential legal problems between the client and the predecessor. 
D)  the predecessor believes that the client lacks integrity. 
A)  the predecessor auditor has poor relations with the successor auditor. 
B)  the client is dissatisfied with the predecessor's work. 
C)  there are actual or potential legal problems between the client and the predecessor. 
D)  the predecessor believes that the client lacks integrity.

Question 10

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

Accepted Answer

A) True 
 B)False

Question 11

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Accepted Answer

A) True 
 B)False

Question 12

Material transactions between the client and the client's related parties must be disclosed in the auditor's report.

Accepted Answer

A) True 
 B)False

Question 13

Preliminary analytical procedures for an audit client focusing on liquidity activity ratios find that the client's accounts receivable turnover ratio is significantly better than in previous years. The ratio is also significantly better compared to similar firms in the same industry. The results of this ratio indicate, preliminarily, that the accounts receivable area has been identified as having increased risk to the auditor.

Accepted Answer

A) True 
 B)False

Question 14

AICPA auditing standards require the auditor to determine whether the financial statement framework to be used by management to prepare the financial statements is appropriate under the circumstances.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true concerning the allocation of preliminary materiality?

Accepted Answer

A)  It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. 
B)  Preliminary materiality should be allocated to income statement accounts only. 
C)  Preliminary materiality is required by the SEC. 
D)  The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement. 
A)  It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. 
B)  Preliminary materiality should be allocated to income statement accounts only. 
C)  Preliminary materiality is required by the SEC. 
D)  The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

Question 16

All known related parties must be identified and included in the auditor's permanent files related to the client.

Accepted Answer

A) True 
 B)False

Question 17

Why do auditors establish a preliminary judgment about materiality?

Accepted Answer

A)  to determine the appropriate level of staff to assign to the audit 
B)  so the client can know what records to make available to the auditor 
C)  to help plan the appropriate evidence to accumulate 
D)  to finalize the control risk assessment 
A)  to determine the appropriate level of staff to assign to the audit 
B)  so the client can know what records to make available to the auditor 
C)  to help plan the appropriate evidence to accumulate 
D)  to finalize the control risk assessment

Question 18

The auditor's report should not refer to the specialist unless the specialist's report results in a modification of the audit opinion.

Accepted Answer

A) True 
 B)False

Question 19

Which is usually included in the engagement letter?

Accepted Answer

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

Question 20

Which of the following statements is true regarding communications between predecessor and successor auditors?

Accepted Answer

A)  The burden of initiating the communication rests with the predecessor. 
B)  The predecessor's response can be limited to stating that no information will be provided. 
C)  The predecessor should communicate with the successor only if the client is public. 
D)  The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor. 
A)  The burden of initiating the communication rests with the predecessor. 
B)  The predecessor's response can be limited to stating that no information will be provided. 
C)  The predecessor should communicate with the successor only if the client is public. 
D)  The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.

Exam 8: Audit Planning and Materiality

________ is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit.

What documents do auditors routinely obtain to aid in their understanding of a client's governance system? Briefly discuss each of these documents.

Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts.

What are three factors that have increased the importance of obtaining an understanding of a client's business and industry? How can an auditor obtain this understanding?

Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?

If the auditor approaches the audit of the accounts in a sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

In order to obtain an understanding of the client's business, the audit firm will consider

For prospective clients that have previously been audited by another CPA firm, the predecessor auditor must initiate the communication with the successor auditor.

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Material transactions between the client and the client's related parties must be disclosed in the auditor's report.

AICPA auditing standards require the auditor to determine whether the financial statement framework to be used by management to prepare the financial statements is appropriate under the circumstances.

Which of the following statements is true concerning the allocation of preliminary materiality?

All known related parties must be identified and included in the auditor's permanent files related to the client.

Why do auditors establish a preliminary judgment about materiality?

The auditor's report should not refer to the specialist unless the specialist's report results in a modification of the audit opinion.

Which is usually included in the engagement letter?

Which of the following statements is true regarding communications between predecessor and successor auditors?

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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