cpa audit review ch 3 review 3

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Joens1313
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cpa audit review ch 3 review 3
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2014-07-21 00:33:07
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cpa audit review ch 3 review 3
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  1. An auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s
    Audit Documentation

    The predecessor’s engagement letter is not useful for the auditor in evaluating whether to accept a new client. However, the audit documentation provides useful information for an auditor. Thus, the client should comply with the auditor’s request to authorize the predecessor to make available his/her audit documentation.
  2. Which of the following factors most likely would cause an auditor to question the integrity of management?

    A.Management has an aggressive attitude toward financial reporting and meeting profit goals.

    B.Managerial decisions are dominated by one person who is also a stockholder.

    C.Weaknesses in internal control reported to the audit committee are not corrected by management.

    D.Audit tests detect material fraud that was known to management, but not disclosed to the auditor.
    D.Audit tests detect material fraud that was known to management, but not disclosed to the auditor.Answer (D) is correct. The auditors request written representations from management. These include disclosures of fraud or suspected fraud affecting the entity involving (1) management, (2) employees who participate significantly in internal control, and (3) others if the fraud is material. If management fails to provide written representations about such matters, the auditor should (1) reevaluate management’s integrity, (2) determine the possible effect on the opinion, and (3) withdraw from the engagement in appropriate circumstances (AU-C 580).
  3. Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed
    After the auditor has obtained an understanding of existing internal control.

    The effectiveness of a client’s internal control has an inverse relationship with the evidence that must be gathered to support an opinion. Only after the understanding of the entity and its environment, including its internal control, is obtained and the risks of material misstatement have been assessed can the auditor determine the nature, timing, and extent of further audit procedures (AU-C 315).
  4. The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor’s attention is that
    Noncompliance by clients often relates to operating aspects rather than accounting aspects.

    Some noncompliance, such as violations of tax law, has a direct effect on the financial statements. Other noncompliance, such as violations of environmental protection laws, relates more to an entity’s operating aspects than to its financial and accounting aspects, and their financial statement effect is indirect. An audit in accordance with GAAS usually does not include audit procedures specifically designed to detect noncompliance that has such indirect effects. Thus, no assurance is provided that such noncompliance will be detected or that resulting contingent liabilities will be disclosed. However, an audit should be designed to provide reasonable assurance that noncompliance having a direct and material effect on the financial statements will be detected.
  5. Which of the following analytical procedures most likely would be used during the planning stage of an audit?

    A.Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio.

    B.Comparing current-year to prior-year sales volumes.

    C.Reading the financial statements and notes and considering the adequacy of evidence.

    D.Reading the letter from the client’s attorney and considering the threat of litigation.
    B.Comparing current-year to prior-year sales volumes.

    Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. The basic premise is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations (AU-C 315). Thus, the sources of information for the expectations generally are not developed by the auditor. For example, they include information for comparable prior periods and ratios typical for the client’s industry.

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