cpa audit review ch 3 review 5

Card Set Information

cpa audit review ch 3 review 5
2014-07-21 00:43:12
cpa audit review

cpa audit review ch 3 review 5
Show Answers:

  1. When performing analytical procedures as risk assessment procedures, the auditor most likely would develop expectations by reviewing which of the following sources of information?

    A.Comments in the prior year’s management letter.

    B.Unaudited information from internal quarterly reports.

    C.Various account assertions in the planning memorandum.

    D.The risk assessment relating to specific financial assertions.
    Unaudited information from internal quarterly reports. 

    Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client’s business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315). The unaudited information included in the quarterly reports will give the auditor a sufficient overview to identify areas that may represent specific audit risks.
  2. Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

    A.Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

    B.Facts known to the predecessor auditor that might bear on the integrity of management.

    C.The predecessor auditor’s understanding of the reasons for the change of auditors.

    D.Disagreements between the predecessor auditor and management about significant accounting policies and principles.
    Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

    An objective of an initial audit is to obtain sufficient appropriate evidence regarding opening balances. The auditor should determine whether they (1) contain misstatements materially affecting the current statements and (2) reflect appropriate accounting policies consistently applied in the current statements. Relevant audit evidence about these matters may include (1) the most recent audited statements, (2) the predecessor’s report on them, (3) the results of inquiry of the predecessor, and (4) a review of the predecessor’s audit documentation (AU-C 510).
  3. In every audit, what must be identified as a potential risk of material misstatement due to fraud?
    Management override of controls.

    The auditor should address the risk of management override of controls in all audits because of its unpredictability and ordinarily should assume the existence of a fraud risk relating to improper revenue recognition. In the second case, the contrary conclusion must be documented. Accordingly, even if specific fraud risks are not identified, the possibility of management override of controls is always deemed to exist. AU-C 240 states that the auditor’s procedures should address that risk apart from any conclusions regarding the existence of more specifically identifiable risks.
  4. In assessing whether to accept a client for an audit engagement, a CPA should consider the
    Client’s Business Risk

    CPA’s Business Risk

    Before accepting an engagement, the CPA should consider the risks of being associated with the client. Auditor business risk relates to potential loss or injury to the auditor’s professional practice from litigation and adverse publicity from the relationship with the client. The successful outcome of an audit and the ability to control auditor business risk often depends on the client’s business risk. The auditor’s understanding of the entity’s business risks increases the likelihood of identifying risks of material misstatement. Thus, QC 10 states that policies and procedures should be established regarding acceptance and continuance of clients and specific engagements. They should provide reasonable assurance that the firm will undertake or continue relationships only when it does not have information leading to the conclusion that the client lacks integrity.
  5. Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business?

    A.Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate.

    B.Verify commission expense by multiplying sales revenue by the company’s standard commission rate.

    C.Verify interest expense, which includes imputed interest, by multiplying noncurrent debt balances by the year-end prevailing interest rate.

    D.Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year.
    Verify commission expense by multiplying sales revenue by the company’s standard commission rate.

    If the wholesaler uses a standard commission rate, commission expense should be related to sales revenue. The auditor should also compare actual with budgeted and prior year amounts.