Auditing Ch4 - MC

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Seifer
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Auditing Ch4 - MC
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2012-03-23 15:55:34
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Auditing Assurance Louwers Engagement Planning
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Chapter 4 Engagement Planning
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  1. Analytical procedures are generally used to produce evidence from

    a. Confirmations mailed directly to the auditors by client customers

    b. Physical observation of inventories

    c. Relationships amount current financial balances and prior balances, forecasts, and nonfinancial data

    d. Detailed examination of external, external-internal, and internal documents
    C. Correct - Analytical procedures incorporate informtaiton from a variety of sources
  2. Auditors perform analytical procedures in the planning state of an audit for the purpose of

    a. deciding the matters to cover in an engagement letter

    b. Identifying unusual conditions that deserve more auditing effort

    c. Determining which of the financial statement assertions are the most important for the client's financial statements

    d. Determining the nature, timing, and esxtent of audit procedures for auditing the inventory
    B. Correct - This is the "attention-directing" purpose

    a. Incorrect - Analytical procedures are performed after the engagement letter is obtained

    c. Incorrect - All the assertions are always important

    d. Incorrect - This answer could be good even though it evokes the control risk assessment standard, but restriction to inventory makes it a poor choice
  3. 4.29 Analytical procedures can be used in which of the following ways?

    a. As a means of overall review at the end of an audit

    b. as "attention-directing" methods when planning an audit at the beginning

    c. As substantive audit procedures to obtain evidence during an audit

    d. all of the above
    D. Correct - All of the above. Analytical procedures can be used when planning the audit, when performing substantive procedures during an audi, and as a method of overall review at the end of an audit
  4. Analytical procedures used when planning an audit should concentrate on

    a. Weaknesses in the company's internal control activities

    b. Predictability of account balances based on individual transactions

    c. Management assertions in financial statements

    d. Accounts and relationships that can represent specific potential problems and risks in the financial statements
    D. Correct - WIth preliminary analytical procedures, the auditors are looking for signs of accounts and relationships that may represent specific potential problems and risks in the financial statements

    a. Incorrect - Weaknesses in the company's internal control are not subject for preliminary analytical procedures because auditors can't examine the internal controls at this particular time with these kinds of analyses.

    b. Incorrect - Individual transactions are not used in preliminary analytical procedures

    c. Incorrect - Management assertions in financial statements are not the direct object of preliminary attention-directing analytical procedures
  5. When inititiating communications with predecessor auditors, prospective auditors shoudl expect

    a. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits

    b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement

    c. To obtain copies of some or all of the predeceesor auditors' audit documentation

    d. All of the above
    D. - All of the above

    a. the successor must take responsibility for obtaining the client's consent for the predecessor to give information about prior audits

    b. Cooperation from the predeceesor is expected

    c. Cooperation includes obtaining copies of some or all of the predecessor auditors' documentaiton
  6. Generally accepted auditing standards require that auditors always prepare and use

    a. A written planning memorandum explaining the auditors' understanding of the client's business

    b. Written client consent to discuss audit matter with prospective auditors

    c. A written audit plan

    d. Written time budgets and schedules for performing each audit
    C. Correct - A written audit plan is required (SAS 22, AU 311)

    a. Incorrect - Although strongly encouraged, U.S. GAAS do not require written engagement letter for audits

    b. Incorrect - Client consents do not have to be in writing

    d. Incorrect - Written time budgets and schedules may be good idea but they are not required
  7. When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

    a. The auditors' need to document compliance with generally accepted auditing standards

    b. the existence of new sales contracts important for the clients's business

    c. The auditors' judgement about their independence with regard to the client

    d. The auditors' judgements about materiliaty
    C. Correct - Independence is not really a working paper matter

    a. Incorrect - Audit documentaiton is necessary to document compliance with GAAS

    b. Incorrect - Extracts of contracts should go in the permanent file

    d. Incorrect - Materiality judgements will affect the amount of evidence shown in audit documentation
  8. Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

    a. current file evidence audit documentation

    b. Permanent file audit documentation

    c. Administrative audit documentation in the current file

    d. Planning memorandum in the current file
    A. Correct - Evidence bears on the year under audit

    b. Incorrect - Current-year evidence is usually not in the permanent file

    c. Incorrect -The administrative and docomentaiton do not contain current-year evidence about particular balances

    d. Incorrect - the planning memo does not contain evidence
  9. An auditor's permanent file audit documentation most like will contain

    a. Internal control analysis for the current year

    b. The most recent engagement letter

    c. Memoranda of conference with management

    d. Excerpts of the corporate charter and bylaws.
    D. Correct - Excerpts of the corporate charter and by-laws would not change often and would be in the permanent file

    a. Incorrect - Internal control analysis for the current year would be in the administrative or current file

    b. The latest engagement letter would be in teh administrative current file

    c. Incorrect - Memoranda of conference with management would be int he administrative or current file
  10. Which of the following is not a benefit claimed for the practice of determining materiality in the initital planning stage of an audit?

    a. Being able to fine-tune the audit work for effectiveness and efficiency

    b. Avoiding the problem of doing more work than necessary (overauditing)

    c. Being able to decide early what type of audit opinion to issue

    d. Avoiding the problem of doing too little work (underauditing)
    C. Correct - The kind of opinion cannot be determined until the evidence is obtained and evaluated

    a. Incorrect - materiality determination helps concentrate the audit work where it is most needed

    b. Incorrect - Materiality determination helps auditors to do the "sufficient" amount of work

    d. Incorrect - Materiality determination helps auditors to do the "sufficient" amount of work
  11. Spreadsheet software would be most useful for which of the following audit activities?

    a. Testing internal controls over computerized accounting applications

    b. Preparing an audit plan

    c. Preparing a comparison of current-year expenses with those from the previous year.

    d. Drafing a planning memorandum
    C. Correct - Spreadsheet software is ideal for preparing comparison of current year expenses with those from the previous year

    a. Incorrect - Spreadsheet software would not be appropriate for testing internal controls over computerized accounting applications

    b. Incorrect - Word processing software would be best to prepare an audit plan

    d. Incorrect - Word processing software would be best for drafting a planning memo
  12. Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

    a. The CAATs programs are all written in one computer language

    b. The software can be used for audits of clients that use different computer equipment and file formats

    c. CAATs have reduced the need for the auditor to study input controls for computer-related procedures

    d. The use of CAATs can be substituted for a relatively large part of the required testing
    B. Correct - CAATs can be transported to various cliens having various systems

    a. Incorrect - All CAATs are not in the same language

    c. Incorrect - Input controls are important in their own right

    d. Incorrect - The use is the means to accomplish testing, but the complete set of audit procedures can rarely be done entirely on the computer
  13. A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to

    a. Substantiate the accuracy of the data through self-checking digits and hash totals

    b. Utilize the speed and accuracy of the computer

    c. Verify the performance of machine operations that leave visable evidence of occurrence

    d. Gather and store large quantities of supportive audit evidence in machine-readable form
    B. Correct - Auditors can use the computer with ease

    a. Incorrect - These are functions of a client's computer system

    c. Incorrect - Machine operations do not leave "visable" evidence

    d. Computer auditing is meant to gather good evidence with the least quantity of storage
  14. When a company that sells its products for a (gross) profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will

    a. Increase

    b. Decrease

    c. remain unchanged

    d. Not be able to be determined with the information provided
    B. Correct - The numerator (cost of goods sold) increases relatively less than the denominator (sales) increases

    a. Incorrect - the ratio of cost/sales does not increase

    c. Incorrect - the ratio of cost/sales does not remain unchanged
  15. An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

    a. Schedules and analyses to be prepared by the client's employees

    b. Methods of statistical sampling the auditor will use

    c. Specification of litigation in progress against the client

    d. Client represenations about availability of all minutes of meetings of the board of directors
    A. correct - Client cooperation should be specified

    b. Incorrect - Technical details are not in the engagement letter

    c. Incorrect - Litigation matters are covered with respect to the request for an attorney's letter

    d. Incorrect - Client represenations about board minutes should be in the client's written represenation letter
  16. When auditing Vandalay Jewelry, Costanza, CPA was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist in the inventory valuation. Should Costanza refer to Benes's work in the audit report?

    a. Yes, the auditors's report should mention the fact that specialist was used

    b. The auditors' report should mention th use of the specialist only when the specialist's findings affect the auditor's conclusions

    c. The use of a specialist need not be mentioned if the auditors decide not to take responsibility for the specialist's findings

    d. The auditors' report should mention the specialist only if Vandalay agrees with the specialist's findings
    B. Correct - The auditors' report should only mention the use of the specialist when the specialist's findings affect the auditor's conclustions
  17. Whih of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-shee date?

    a. Interviewing internal auditors about their reporting responsibilities

    b. Reviewing accounting records for recurring transactions occurring near year-end

    c. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities

    d. Scanning the minutes for significant transactions with members of the board of directors
    D. Correct - Scanning the minutes for significant transactions with members of the Board of Directors would be helpful in identifying transactions with parties relaed to the client

    a. Incorrect - Interviewing internal auditors about the reporting responsibilities would assist the audit team in determining whether the internal auditors were objective, but would provide little evidence of related-party transactions

    b. Incorrect - reviewing accounting records for nonrecurring transactions occurring throughout the year would raise suspicions of fraud, but not necessarily related-party transactions

    c. Incorrect - Inspecting communications with the client's legal counsel regarding recorded contingent liabilities would be helpful in determining contingent liabilities
  18. Which of the following communications is most likely to be written before the balance-sheet date?

    a. A report to the audit committee on the results of testing of internal control over cash receipts

    b. Confirmation letters to vendors confirming the amounts they owe to the client

    c. An attorney's letter regarding contingent liabilities

    d. An engagement letter
    D. Correct - An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date

    a. Incorrect - A report to the audit committe on the results of testing internal control over cash receipts would typically occur after the entire period could be tested, and therefore woul be written after the balance sheet date

    b. Incorrect - Confirmation letters to vendors confirming the amounts they owe to the client are part of substantive procedures performed on balance sheet account amounts

    c. Incorrect - An attorney's letter regarding contingent liabilities would be written as close to the end of the fieldword as practicable
  19. Which of the following procedures would most likely be performed during planning?

    a. Surprise counts of the client's petty cash fund

    b. Reporting internal control deficiencies to the audit committee

    c. Performing a search for unrecorded liabilities

    d. Identifying related parties
    D. Correct - Identifying related parties is an important part of planning

    a. Incorrect - Surprise counts of the client's petty cash fund may occur during planning, but are more typically performed close to the balance sheet date

    b. Reporting internal control deficiencies to the audit committee would typically occurr after internal control testing was complete

    c. Incorrect - Performing a search for unrecorded liabilities would be performed as a substantive procedure after planning.
  20. Prior to accepting a new audit engagement, a public accounting firm should

    a. attempt to contact the predecessor auditors

    b. evaluate the integrity of mangament

    c. Assess the firm's resources to ensure that they are sufficient to permit them to accept the engagement

    d. All of the above
    D. Correct - Prior to accepting a new audit engagement, an audit firm shoudl (a) attempt to contact the predecessor auditor, (b) evaluate the integrity of management, and (c) assess the firm's resources

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