cpa audit review ch3 review 4

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Joens1313
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279366
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cpa audit review ch3 review 4
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2014-07-21 00:38:11
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cpa audit review ch3 review 4
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  1. When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the
    Extent of tests of details.

    For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS No. 13).
  2. Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company?

    A.Net income to sales.

    B.Net income to total assets.

    C.Net income to working capital.

    D.Net income to net worth.
    C.Net income to working capital.

    The ratio of net income to working capital is not typically considered in evaluating overall profitability. It does not give a broad measure of how effectively the firm is managed because it does not consider noncurrent assets and liabilities.
  3. Which of the following is an analytical procedure that an auditor most likely uses to form an overall conclusion?

    A.Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations.

    B.Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.

    C.Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements.

    D.Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages.
    B.Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified. 

    Analytical procedures used to form an overall conclusion should ordinarily include reading the financial statements and considering (1) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit, and (2) unusual or unexpected balances or relationships not previously detected.
  4. Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?

    A. An expectation of the effectiveness of internal control.

    B.Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

    C.Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of the acceptance of the engagement.

    D.Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.
    B.Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

    The auditor may accept the engagement if (s)he can obtain sufficient appropriate evidence by performing alternative procedures, e.g., tests of prior transactions affecting inventory or reviews of the records of prior counts.
  5. The audit plan usually cannot be finalized until the
    Understanding of the entity and its environment has been completed.

    The auditor must obtain an understanding of the entity and its environment, including internal control, to assess the risks of material misstatement of the financial statements, whether due to fraud or error.

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