Auditing Chapter 3 and 4
with financial statements audited. True False
A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring segregation of duties are subject to management override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
D. Management has a reputation for consulting with several accounting firms about significant accounting issues
predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’
decision concerning the
A. Adequacy of the preplanned audit program.
B. Ability to establish consistency in application of accounting principles between years.
C. Apparent scope limitation.
D. Integrity of management.
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on management integrity.
A. Arises from the misapplication of auditing procedures.
B. May be assessed in either quantitative or qualitative terms.
C. Exists independently of the actions of the auditor.
D. Can be changed at the auditor’s discretion.
most likely should report to the
A. Vice-President – Finance
B. Corporate controller.
C. Audit committee of the board of directors.
D. Corporate stockholders.
A. May be eliminated under certain conditions.
B. Are primarily designed to discover significant subsequent events.
C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures.
D. Will increase proportionately with an increase in the auditor’s reliance on internal control.
A. Appoint a partner of the CPA firm conducting the examination to the corporation’s audit committee.
B. Establish a policy of discouraging social contact between employees of the corporation and the independent
C. Request that a representative of the independent auditor be on hand at the annual stockholders’ meeting.
D. Have the independent auditor report to an audit committee of independent members of the board of directors
A. Substantive procedures should increase.
B. Substantive procedures should decrease.
C. Tests of controls should increase.
D. Tests of controls should decrease.
A. Substantive procedures, tests of controls, and risk assessment procedures.
B. Substantive procedures, risk assessment procedures, and tests of controls.
C. Risk assessment procedures, tests of controls, and substantive procedures.
D. Risk assessment procedures, substantive procedures, and tests of controls.
materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence
A. Securities and Exchange Commission.
B. Client’s legal counsel.
C. Stock exchanges where the company’s stock is traded.
D. Audit committee of the board of directors.
A. Detection risk.
B. Audit risk.
C. Inherent risk.
D. Nonsampling risk.
A. Client risk.
B. Acceptable audit risk.
C. Risk of material misstatement.
D. Entity business risk.
account balance when, in fact, such an error does exist is referred to as
A. Sampling risk.
B. Detection risk.
C. Nonsampling risk.
D. Inherent risk.
A. Potential for fraud.
B. The company is close to violating loan covenants.
C. Firm policy sets materiality at 4% of pretax income.
D. A small misstatement would interrupt an earnings trend.
A. Materiality allocated to an assertion.
B. Materiality for the balance sheet as a whole.
C. Materiality for the income statement as a whole.
D. Materiality allocated to a specific account
A. Risk of material misstatement.
B. Detection risk.
C. Neither risk of material misstatement nor detection risk.
D. Both risk of material misstatement and detection risk.
statements that are materially misstated. It can be directly controlled by the scope of the auditor’s test
procedures. Engagement risk, on the other hand, is the auditor’s exposure to loss or injury to professional
practice from litigation, adverse publicity, or other events arising in connection with financial statements audited
and reported on. It cannot be directly controlled by the auditor, but some control can be exercised through the
careful acceptance and continuance of clients.
for conducting the audit. The objective of the audit plan is to conduct an effective and efficient audit. This
means that the audit is to be conducted in accordance with auditing standards and that the risk of material
misstatements is reduced to an acceptably low level. The audit plan should also consider how to conduct the
engagement in a cost-effective manner. When preparing the audit plan, the auditor should be guided by the
results of the risk assessment and procedures performed to gain and support the understanding of the entity.
Additional steps that should be performed include:
1. Assess a preliminary level for control risk by account and assertion.
2. Assess the possibility of illegal acts.
3. Identify related parties.
4. Conduct preliminary analytical procedures.
5. Develop an overall audit strategy and prepare audit programs.
6. Consider additional value-added services
1. Each member of the audit committee must be a member of the board of directors and must be independent.
2. The audit committee is directly responsible for the appointment, compensation, and oversight of the work of
any registered public accounting firm employed by the company.
3. The audit committee must preapprove all audit and nonaudit services provided by its auditor.
4. The audit committee must establish procedures for the receipt, retention, and treatment of complaints
received by the company regarding accounting, internal control, and auditing.
5. Each audit committee member must have the authority to engage independent counsel, or other advisors, as
he or she deems necessary to carry out his or her duties.
from misappropriation of assets
or disclosures in financial statements intended to deceive financial statement users.
Misstatements arising from misappropriation of assets involve the theft of an entity’s assets where the theft
causes the financial statements to be misstated.
phase, analytical procedures help the auditor to understand the client’s business and transactions. Analytical
procedures also guide the auditor towards financial statement accounts that are likely to contain errors. With
this information, the auditor is able to plan the nature, timing, and extent of audit procedures.
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