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Chapter 05 - Audit Planning and Types of Audit Tests

Chapter 05 Audit Planning and Types of Audit Tests True / False Questions 1. The first phase of audit planning is risk assessment. True False 2. When the prospe ti!e lient has pre!iously "een audited# auditing standards re$uire that the su essor auditor make ertain in$uires of the prede essor auditor "efore a epting the engagement. True False %. The Code of Professional Condu t does not allo& an auditor to dis lose onfidential lient information &ithout the lient's onsent. True False (. )f the prospe ti!e lient refuses to allo& the prede essor auditor to ommuni ate &ith the su essor auditor# the su essor auditor should ha!e reser!ations a"out a epting the lient. True False 5. *enerally# the auditor may rely on the &ork of an internal auditor if the internal auditor is ompetent and o"+e ti!e. True False ,. All ompanies must ha!e an audit ommittee. True False

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Chapter 05 - Audit Planning and Types of Audit Tests

-. The audit ommittee is dire tly responsi"le for the appointment# ompensation# and o!ersight of the &ork of any a ounting firm employed "y a pu"li ompany. True False .. The e/ternal auditor is re$uired to make a num"er of important ommuni ations to the audit ommittee during or at the end of the audit engagement. True False 0. )n order to properly preplan the audit# the auditor must determine the engagement team re$uirements and ensure the independen e of the audit team and audit firm. True False 10. There are fi!e general types of audit tests. True False

Multiple Choice Questions 11. 1a&kins re$uested permission to ommuni ate &ith the prede essor auditor and re!ie& ertain portions of the prede essor auditor's &orking papers. The prospe ti!e lient's refusal to permit this &ill "ear dire tly on 1a&kins' de ision on erning the A. Ade$ua y of the preplanned audit program 2. A"ility to esta"lish onsisten y in appli ation of a ounting prin iples "et&een years C. Apparent s ope limitation 3. )ntegrity of management 12. )n assessing &hether to a ept a lient for an audit engagement# a CPA should onsider the A. The entity's "usiness risk 2. The CPA's engagement risk C. The entity's "usiness risk and the CPA's engagement risk 3. 4either the entity's "usiness risk nor the CPA's engagement risk

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Chapter 05 - Audit Planning and Types of Audit Tests

1%. 5!aluating a prospe ti!e lient re$uires the follo&ing step6s78 A. Communi ate &ith the prede essor auditor 2. Preplan the audit C. 5sta"lish the terms of the engagement 3. 4one of the a"o!e 1(. A &ritten understanding "et&een the auditor and the lient on erning the auditor's responsi"ility for the dis o!ery of illegal a ts is usually set forth in a6n7 A. Client representation letter 2. 9etter of audit in$uiry C. :anagement letter 3. 5ngagement letter 15. 5ngagement letters in lude all of the follo&ing e/ ept A. A list of additional ser!i es that &ill "e pro!ided 2. A list of ad+usting +ournal entries C. )nformation a"out the audit fee 3. Arrangements in!ol!ing the use of spe ialists 1,. To pro!ide for the greatest degree of independen e in performing internal audit fun tions# an internal auditor most likely should report to the A. Finan ial !i e-president 2. Corporate ontroller C. 2oard of dire tors 3. Corporate sto kholders 1-. All of the follo&ing refer to an internal auditor's ompeten e e/ ept A. The party in the entity to &hi h the internal auditor reports 2. The $uality of internal audit do uments and reports C. Professional ertifi ation 3. ;uper!ision and re!ie& of internal audit a ti!ities

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Chapter 05 - Audit Planning and Types of Audit Tests

1.. An independent auditor might onsider the pro edures performed "y the internal auditors "e ause A. They are employees &hose &ork must "e re!ie&ed during su"stanti!e testing 2. They are employees &hose &ork might "e relied upon C. Their &ork impa ts upon the ost<"enefit tradeoff in e!aluating inherent limitations 3. Their degree of independen e may "e inferred "y the nature of their &ork 10. As generally on ei!ed# the audit ommittee of a pu"li ly held ompany should "e made up of A. =epresentati!es of the ma+or e$uity interests 6preferred sto k# ommon sto k7 2. The audit partner# the hief finan ial offi er# the legal ounsel# and at least one outsider C. =epresentati!es from the lient's management# in!estors# suppliers# and ustomers 3. :em"ers of the "oard of dire tors &ho are not offi ers or employees 20. To emphasi>e auditor independen e from management# pu"li ly traded orporations are re$uired to A. Appoint a partner of the CPA firm ondu ting the e/amination to the orporation's audit ommittee 2. 5sta"lish a poli y of dis ouraging so ial onta t "et&een employees of the orporation and the independent auditors C. =e$uest that a representati!e of the independent auditor "e on hand at the annual sto kholders' meeting 3. 1a!e the independent auditor report to an audit ommittee of independent mem"ers of the "oard of dire tors 21. Whi h of the follo&ing situations &ould most likely re$uire spe ial audit planning? A. ;ome items of fa tory and offi e e$uipment do not "ear identifi ation num"ers 2. 3epre iation methods used on the lient's ta/ return differ from those used on the "ooks C. Assets osting less than @500 are e/pensed e!en though the e/pe ted life e/ eeds one year 3. )n!entory is omprised of pre ious stones

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Chapter 05 - Audit Planning and Types of Audit Tests

22. An auditor o"tains kno&ledge a"out a ne& lient's "usiness and its industry in order to A. :ake onstru ti!e suggestions on erning impro!ements to the lient's internal ontrol stru ture 2. 3e!elop an attitude of professional skepti ism on erning management's finan ial statement assertions C. 5!aluate &hether the aggregation of kno&n misstatements auses the finan ial statements taken as a &hole to "e materially misstated 3. Anderstand the e!ents and transa tions that may ha!e an effe t on the lient's finan ial statements 2%. Whi h of the follo&ing is an e/ample of a related party transa tion? A. An a tion is taken "y the dire tors of Company A to pro!ide additional ompensation for !i e presidents in harge of the prin ipal "usiness fun tions of Company A 2. A long term agreement is made "y Company A to pro!ide mer handise or ser!i es to Company 2# a long-time# friendly ompetitor C. A short-term loan is granted to Company A "y a "ank that has a depositor &ho is a mem"er of the "oard of dire tors of Company A 3. A nonmonetary e/ hange o urs &here"y Company A e/ hanges property for similar property o&ned "y Company 2# an un onsolidated su"sidiary of Company A 2(. An independent auditor finds that 1olda&ay Corporation o upies offi e spa e# at no harge# in an offi e "uilding o&ned "y a shareholder. This finding likely indi ates the e/isten e of A. :anagement fraud 2. =elated party transa tions C. Windo& dressing 3. Weak internal ontrol 25. Whi h of the follo&ing &ould not ne essarily "e a related party transa tion? A. ;ales to another orporation &ith a similar name 2. Pur hases from another orporation that is ontrolled "y the orporation's hief sto kholder C. 9oan from the orporation to a ma+or sto kholder 3. ;ale of land to the orporation "y the spouse of a dire tor

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Chapter 05 - Audit Planning and Types of Audit Tests

2,. The e/isten e of a related party transa tion may "e indi ated &hen another entity A. ;ells real estate to the orporation at a pri e that is ompara"le to its appraised !alue 2. A"sor"s e/penses of the orporation C. 2orro&s from the orporation at a rate of interest &hi h e$uals the urrent market rate 3. 9ends to the orporation at a rate of interest &hi h e$uals the urrent market rate 2-. )n the onte/t of an audit of finan ial statements# su"stanti!e pro edures are audit pro edures that A. :ay "e eliminated under ertain onditions 2. Are primarily designed to dis o!er signifi ant su"se$uent e!ents C. :ay "e either tests of details of transa tions# tests of details of a ount "alan es# or analyti al pro edures 3. Will in rease proportionately &ith an in rease in the auditor's relian e on internal ontrol 2.. Whi h of the follo&ing is not an audit pro edure that is ommonly used in performing tests of ontrols? A. )n$uiring 2. B"ser!ing C. Confirming 3. )nspe ting 20. Whi h of the follo&ing is not a typi al analyti al pro edure? A. ;tudy of relationships of the finan ial information &ith rele!ant nonfinan ial information 2. Comparison of the finan ial information &ith similar information regarding the industry in &hi h the entity operates C. Comparison of re orded amounts of ma+or dis"ursements &ith appropriate in!oi es 3. Comparison of the finan ial information &ith "udgeted amounts %0. Analyti al pro edures may "e lassified as "eing primarily &hi h of the follo&ing? A. Tests of ontrols 2. ;u"stanti!e pro edures C. Tests of ratios 3. 3etailed tests of "alan es

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Chapter 05 - Audit Planning and Types of Audit Tests

%1. Whi h of the follo&ing are ordinarily designed to dete t possi"le material monetary errors in the finan ial statements? A. Tests of ontrols 2. Analyti al pro edures C. Computer ontrols 3. Post-audit re!ie& of audit do uments %2. An a"normal flu tuation in gross profit that might suggest the need for e/tended audit pro edures for sales and in!entories &ould most likely "e identified in the planning phase of the audit "y the use of A. Tests of transa tions and "alan es 2. A preliminary re!ie& of internal ontrols C. ;pe iali>ed audit programs 3. Analyti al pro edures %%. An e/ample of an analyti al pro edure is the omparison of A. Finan ial information &ith similar information regarding the industry in &hi h the entity operates 2. =e orded amounts of ma+or dis"ursements &ith appropriate in!oi es C. =esults of a statisti al sample &ith the e/pe ted hara teristi s of the a tual population 3. 53P generated data &ith similar data generated "y a manual a ounting system %(. Analyti al pro edures used in planning an audit should fo us on identifying A. :aterial &eaknesses in internal ontrol 2. The predi ta"ility of finan ial data from indi!idual transa tions C. The !arious assertions that are em"odied in the finan ial statements 3. Areas that may represent spe ifi risks rele!ant to the audit %5. Analyti al pro edures are A. 4e!er re$uired 2. =e$uired for planning# su"stanti!e testing# and o!erall re!ie& of the finan ial statements C. =e$uired for planning and o!erall re!ie& of the finan ial statements 3. =e$uired during planning only

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Chapter 05 - Audit Planning and Types of Audit Tests

%,. As a result of analyti al pro edures ondu ted during the planning phase# the independent auditor determines that the gross profit per entage has de lined from %0C in the pre eding year to 20C in the urrent year. The auditor should A. 5/press an opinion &hi h is $ualified due to the ina"ility of the lient ompany to ontinue as a going on ern 2. 5!aluate management's performan e in ausing this de line C. =e$uire footnote dis losure 3. Consider the possi"ility of an error in the finan ial statements %-. An auditor has &ithdra&n from an audit engagement of a pu"li ly held ompany after finding fraud that may materially affe t the finan ial statements. The auditor should set forth the reasons and findings in orresponden e to the A. ;e urities and 5/ hange Commission 2. Client's legal ounsel C. ;to k e/ hanges &here the ompany's sto k is traded 3. The audit ommittee of the "oard of dire tors %.. When a CPA is approa hed to perform an audit for the first time# the CPA should make in$uiries of the prede essor auditor. This is a ne essary pro edure "e ause the prede essor may "e a"le to pro!ide the su essor &ith information that &ill assist the su essor in determining A. Whether the prede essor's &ork should "e utili>ed 2. Whether the ompany follo&s the poli y of rotating its auditors C. Whether# in the prede essor's opinion# the ompany's internal ontrols ha!e "een satisfa tory 3. Whether the engagement should "e a epted %0. Whi h of the follo&ing should an auditor o"tain from the prede essor auditor prior to a epting an audit engagement? A. Analysis of "alan e sheet a ounts 2. Analysis of in ome statement a ounts C. All matters of ontinuing a ounting signifi an e 3. Fa ts that might "ear on management integrity

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Chapter 05 - Audit Planning and Types of Audit Tests

(0. Whi h of the follo&ing fa tors most likely &ould ause a CPA not to a ept a ne& audit engagement? A. The prospe ti!e lient's un&illingness to permit in$uiry of its legal ounsel 2. The ina"ility to re!ie& the prede essor auditor's do umentation C. The CPA's la k of understanding of the prospe ti!e lient's operations and industry 3. )ndi ations that management has not in!estigated employees in key positions "efore hiring them (1. An auditor &ho dis o!ers that a lient's employees paid small "ri"es to muni ipal offi ials most likely &ould &ithdra& from the engagement if A. The payments !iolated the lient's poli ies regarding the pre!ention of illegal a ts 2. The lient re ei!es finan ial assistan e from a federal go!ernment agen y C. 3o umentation that is ne essary to pro!e that the "ri"es &ere paid does not e/ist 3. :anagement fails to take the appropriate remedial a tion (2. A su essor auditor should re$uest the ne& lient to authori>e the prede essor auditor to allo& a re!ie& of the prede essor's A. 5ngagement letter 2. Audit &orking papers C. 5ngagement letter and audit &orking papers 3. )t &ould not "e typi al to allo& a re!ie& of either the engagement letter or the audit &orking papers (%. An auditor is re$uired to esta"lish an understanding &ith a lient regarding the responsi"ilities for ea h engagement. This understanding generally in ludes A. :anagement's responsi"ility to guarantee that there are no material misstatements due to fraud 2. The auditor's responsi"ility to plan and perform the audit to pro!ide reasona"le# "ut not a"solute# assuran e of dete ting material errors or fraud C. :anagement's responsi"ility for pro!iding the auditor &ith an assessment of the risk of material misstatement due to fraud 3. The auditor's responsi"ility for the fairness of the finan ial statements

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Chapter 05 - Audit Planning and Types of Audit Tests

((. Whi h of the follo&ing matters generally is in luded in an auditor's engagement letter? A. :anagement's responsi"ility for the entity's omplian e &ith la&s and regulations 2. The fa tors to "e onsidered in setting preliminary +udgments a"out materiality C. :anagement's lia"ility for illegal a ts ommitted "y its employees 3. The auditor's responsi"ility to guarantee a ura y of the finan ial statements (5. )n assessing the ompeten e of an internal auditor# an independent CPA most likely &ould o"tain information a"out the A. Duality of the internal auditor's &ork 2. Brgani>ation's ommitment to integrity and ethi al !alues C. )nfluen e of management on the s ope of the internal auditor's duties 3. Brgani>ational le!els to &hi h the internal auditor reports (,. Whi h of the follo&ing pro edures &ould an auditor most likely in lude in the initial planning of a finan ial statement audit? A. B"taining a &ritten representation letter from the lient's management 2. 5/amining do uments to dete t illegal a ts ha!ing a material effe t on the finan ial statements C. Considering &hether the lient's a ounting estimates are reasona"le in the ir umstan es 3. 3etermining the e/tent of in!ol!ement of the lient's internal auditors (-. 5!aluating a prospe ti!e lient re$uires the follo&ing steps6s78 A. Communi ate &ith the ;5C. 2. Preplan the audit. C. 3etermine if the firm is independent of the lient. 3. Communi ate &ith the A)CPA.

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Chapter 05 - Audit Planning and Types of Audit Tests

(.. The in- harge auditor most likely &ould ha!e a super!isory responsi"ility to e/plain to the staff assistants A. That immaterial fraud is not to "e reported to the lient's audit ommittee 2. 1o& the results of !arious auditing pro edures performed "y the assistants should "e e!aluated C. 1o& the o!erall audit strategy &ill allo& the firm to rea h a suffi iently lo& le!el of audit risk 3. 1o& o!erall materiality &as sele ted (0. Whi h of the follo&ing audit pro edures &ould "e least likely to dis lose the e/isten e of related party transa tions of a lient during the period under audit? A. =eading E onfli t-of-interestE statements o"tained "y the lient from its management 2. ; anning a ounting re ords for large transa tions at or +ust prior to the end of the period under audit C. =eading minutes of the 2oard of 3ire tors meetings for authori>ation or dis ussion of material transa tions 3. Confirming pur hase and sale transa tions &ith the !endors and<or ustomers in!ol!ed 50. A dual-purpose test A. ;imultaneously tests de"its and redits 2. )s a pro edure ompleted "y "oth the internal and e/ternal auditors C. )s useful to "oth the entity and the auditor 3. )s "oth a su"stanti!e test of transa tions and a test of ontrols 51. The auditor generally gi!es most emphasis to ratio and trend analysis in the e/amination of the A. ;tatement of Changes in ;to kholders' 5$uity and =etained earnings 2. )n ome ;tatement C. 2alan e ;heet 3. ;tatement of Cash Flo&s

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Chapter 05 - Audit Planning and Types of Audit Tests

52. The auditor noti es signifi ant flu tuations in key elements of the ompany's finan ial statements. )f management is una"le to pro!ide an a epta"le e/planation# the auditor should A. Consider the matter a s ope limitation 2. Perform additional audit pro edures to in!estigate the matter further C. )ntensify the e/amination &ith the e/pe tation of dete ting management fraud 3. Withdra& from the engagement 5%. Whi h of the follo&ing tends to "e most predi ta"le for purposes of analyti al pro edures applied as su"stanti!e pro edures? A. =elationships in!ol!ing "alan e sheet a ounts 2. Transa tions su"+e t to management dis retion C. =elationships in!ol!ing in ome statement a ounts 3. 3ata su"+e t to audit testing in the prior year 5(. An auditor's de ision either to apply analyti al pro edures as su"stanti!e pro edures or to perform tests of transa tions and a ount "alan es usually is determined "y A. A!aila"ility of data aggregated at a high le!el 2. =elati!e effe ti!eness and effi ien y of the tests C. Timing of tests performed after the "alan e sheet date 3. Auditor's familiarity &ith industry trends 55. Analyti al pro edures ena"le the auditor to predi t the "alan e or $uantity of an item under audit. )nformation to de!elop this estimate an "e o"tained from all of the follo&ing e/ ept A. Tra ing transa tions through the system to determine &hether pro edures are "eing applied as pres ri"ed 2. Comparison of finan ial data &ith data for ompara"le prior periods# anti ipated results 6e.g.# "udgets and fore asts7 and similar data for the industry in &hi h the entity operates C. ;tudy of the relationships of elements of finan ial data that &ould "e e/pe ted to onform to a predi ta"le pattern "ased upon the entity's e/perien e 3. ;tudy of the relationships of finan ial data &ith rele!ant nonfinan ial data

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Chapter 05 - Audit Planning and Types of Audit Tests

5,. A ompany sells a parti ular produ t only in the last month of its fis al year. The ompany uses ommission agents for su h sales and pays them ,C of their net sales %0 days after the sales are made. The agents' sales &ere @10 million. 5/perien e indi ates that 10C of the sales are usually not olle ted and 2C are returned in the first month of the ne& year. The auditor &ould e/pe t the year-end "alan e in the a rued ommissions paya"le a ount to "e A. @52.#000 2. @5(0#000 C. @5..#000 3. @,00#000 5-. Whi h of the follo&ing nonfinan ial information &ould an auditor most likely onsider in performing analyti al pro edures during the planning phase of an audit? A. Turno!er of personnel in the a ounting department 2. B"+e ti!ity of audit ommittee mem"ers C. ;$uare footage of selling spa e 3. :anagement's plans to repur hase sto k

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Chapter 05 - Audit Planning and Types of Audit Tests

5.. A not-for-profit organi>ation pu"lished a monthly maga>ine that had 15#000 su"s ri"ers on Fanuary 1# 2000. The num"er of su"s ri"ers in reased steadily throughout the year and at 3e em"er %1# 2000# there &ere 1,#200 su"s ri"ers. The annual maga>ine su"s ription ost &as @10 on Fanuary 1# 2000 and &as in reased to @12 for ne& mem"ers on April 1# 2000. ;u"s riptions are paid in full at the "eginning of the mem"er term. An auditor should e/pe t that the re eipts from su"s riptions for the year ended 3e em"er %1# 2000# &ould "e appro/imately

A. @1-0#(00 2. @1-1#,00 C. @1,(#(00 3. @1,%#.00 50. Analyti al pro edures performed in the o!erall re!ie& stage of an audit suggest that se!eral a ounts ha!e une/pe ted relationships. The results of these pro edures most likely &ould indi ate that A. Fraud e/ists &ithin the rele!ant a ounts 2. )nternal ontrol a ti!ities are not operating effe ti!ely C. Additional tests of details are re$uired 3. The ommuni ation &ith the audit ommittee should "e re!ised

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Chapter 05 - Audit Planning and Types of Audit Tests

,0. Whi h of the follo&ing &ould "e least likely to "e ompara"le "et&een similar orporations in the same industry or line of "usiness? A. 5arnings per share 2. =eturn on total assets "efore interest and ta/es C. A ounts re ei!a"le turno!er 3. Bperating y le ,1. Whi h of the follo&ing ratios &ould an engagement partner most likely al ulate &hen re!ie&ing the "alan e sheet in the o!erall re!ie& stage of an audit? A. Dui k assets di!ided "y a ounts paya"le 2. A ounts re ei!a"le di!ided "y in!entory C. )nterest paya"le di!ided "y interest re ei!a"le 3. Total de"t di!ided "y total assets ,2. Whi h of the follo&ing fa tors most likely &ould lead a CPA to on lude that a potential audit engagement should "e re+e ted? A. The details of most re orded transa tions are not a!aila"le after a spe ified period of time 2. )nternal ontrol a ti!ities re$uiring segregation of duties are su"+e t to management o!erride C. )t is unlikely that suffi ient appropriate e!iden e is a!aila"le to support an opinion on the finan ial statements 3. :anagement has a reputation for onsulting &ith se!eral a ounting firms a"out signifi ant a ounting issues ,%. Whi h of the follo&ing fa tors most likely &ould ause a CPA to de ide not to a ept a ne& audit engagement? A. The CPA's la k of understanding of the prospe ti!e lient's internal auditor's omputerassisted audit te hni$ues 2. :anagement's disregard of its responsi"ility to maintain an ade$uate ontrol en!ironment C. The CPA's ina"ility to determine &hether related party transa tions &ere onsummated on terms e$ui!alent to arm's-length transa tions 3. :anagement's refusal to permit the CPA to perform su"stanti!e pro edures "efore the year-end

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Chapter 05 - Audit Planning and Types of Audit Tests

,(. 2efore a epting an engagement to audit a ne& lient# a CPA is re$uired to o"tain A. An understanding of the prospe ti!e lient's industry and "usiness 2. The prospe ti!e lient's signature on the engagement letter C. A preliminary understanding of the prospe ti!e lient's ontrol en!ironment 3. The prospe ti!e lient's onsent to make in$uiries of the prede essor auditor# if any ,5. The element of the audit planning pro ess most likely to "e agreed upon &ith the lient "efore implementation of the audit strategy is the determination of the A. :ethods of statisti al sampling to "e used in onfirming a ounts re ei!a"le 2. Pending legal matters to "e in luded in the in$uiry of the lient's attorney C. 5!iden e to "e gathered to pro!ide a suffi ient "asis for the auditor's opinion 3. Timing of the audit ,,. The audit lient's "oard of dire tors and audit ommittee refused to take any a tion &ith respe t to an immaterial illegal a t &hi h &as "rought to their attention "y the auditor. 2e ause of their failure to a t# the auditor &ithdre& from the engagement. The auditor's de ision to &ithdra& &as primarily due to dou"ts on erning A. Ade$uate finan ial statement dis losures 2. Complian e &ith the statutory la&s and regulations C. ; ope limitations resulting from their ina tion 3. The integrity of management ,-. 3uring the initial planning phase of an audit# a CPA most likely &ould A. )dentify spe ifi internal ontrol a ti!ities that are likely to pre!ent fraud 2. 5!aluate the reasona"leness of the lient's a ounting estimates C. 3is uss the timing of the audit pro edures &ith the lient's management 3. )n$uire of the lient's attorney as to any unre orded laims

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Chapter 05 - Audit Planning and Types of Audit Tests

,.. Whi h of the follo&ing pro edures &ould an auditor most likely in lude in the initial planning of an e/amination of finan ial statements? A. Assess the need for the use of spe ialists in the audit 2. )n$uiring of the lient's attorney as to any laims that are likely to "e asserted C. B"taining a &ritten representation letter from the lient's management 3. 3etermining &hether ne essary internal ontrols pro edures are "eing applied as pres ri"ed ,0. An entity's finan ial statements &ere misstated o!er a period of years due to large amounts of re!enue "eing re orded in +ournal entries that in!ol!ed de"its and redits to an illogi al om"ination of a ounts. The auditor ould most likely ha!e "een alerted to this fraud "y A. ; anning the general +ournal for unusual entries 2. Performing a re!enue utoff test at year-end C. Tra ing a sample of +ournal entries to the general ledger 3. 5/amining do umentary e!iden e of sales returns and allo&an es re orded after year-end -0. Ander the ;ar"anes-B/ley A t# the audit ommittee of a pu"li ompany has the follo&ing re$uirement6s78 A. 5a h mem"er of the ommittee must "e a "oard mem"er and shall "e independent. 2. The audit ommittee must pre-appro!e all audit and non-audit ser!i es. C. The audit ommittee must esta"lish and maintain pro edures to handle all issues &hi h relate to a ounting# internal ontrol# and auditing. 3. All of the a"o!e.

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Chapter 05 - Audit Planning and Types of Audit Tests

-1. An auditor's analyti al pro edures performed during the o!erall re!ie& stage indi ated that the lient's a ounts re ei!a"le "alan e had dou"led sin e the end of the prior year. 1o&e!er# the allo&an e for dou"tful a ounts as a per entage of a ounts re ei!a"le remained a"out the same. Whi h of the follo&ing lient e/planations most likely &ould satisfy the auditor? A. The lient li"erali>ed its redit standards in the urrent year and sold mu h more mer handise to ustomers &ith poor redit ratings 2. T&i e as many a ounts re ei!a"le &ere &ritten off in the prior year than in the urrent year C. A greater per entage of a ounts re ei!a"le &ere urrently listed in the Emore than 00 days o!erdueE ategory than in the prior year 3. The lient opened a se ond retail outlet in the urrent year and its redit sales appro/imately e$ualed the older# esta"lished outlet -2. Whi h of the follo&ing is a general audit test8 A. Fee assessment pro edures. 2. Tests of ontrols. C. Preparation of orporate ta/ returns. 3. A ti!e testing pro edures. -%. )n orre t order# general types of audit tests in lude8 A. ;u"stanti!e pro edures# tests of ontrols# and risk assessment pro edures. 2. ;u"stanti!e pro edures# risk assessment pro edures# and tests of ontrols. C. =isk assessment pro edures# tests of ontrols# and su"stanti!e pro edures. 3. =isk assessment pro edures# su"stanti!e pro edures# and tests of ontrols.

Short Answer Questions

5-1.

Chapter 05 - Audit Planning and Types of Audit Tests

-(. Cart and 2lan he# a regional a ounting firm is determining &hether it &ants to a ept a ne& lient# )!y Photos. )!y Photos is urrently a pri!ately held photography studio operating 2( studios in se!eral states# "ut the ompany's management is planning an )nitial Pu"li Bffering in the near future. This is the ompany's first audit. What steps should Cart and 2lan he take in e!aluating this ne& lient?

-5. 3efine the engagement letter and dis uss its importan e.

-,. 23G A ounting is auditing a ne& lient# A 9a Carte Catering. 23G ould sa!e audit time "y using &ork from A 9a Carte's internal audit staff. The staff onsists of three a ountants &ith pu"li a ounting e/perien e and ertifi ation. A 9a Carte re$uires e!ery mem"er of its a ounting department to spend t&o out of e!ery fi!e years on the internal audit staff. Then# the employee is rotated "a k into the a ounting department for a ouple of years. What fa tors should 23G onsider &hen determining &hether or not it an use &ork of the internal audit staff? )n this ase# &hat should 23G de ide?

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Chapter 05 - Audit Planning and Types of Audit Tests

--. 4ame three ;ar"anes-B/ley A t re$uirements of the mem"ers and duties of the audit ommittee of a pu"li ompany.

-.. 1o& &ould an auditor identify related parties and &hat is the importan e of doing so?

-0. )n the planning stages of an audit# &hat information does an auditor gain through analyti al pro edures?

.0. 3is uss the purposes for planning the audit and identify the steps that are performed during this phase of the engagement.

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Chapter 05 - Audit Planning and Types of Audit Tests

.1. For ea h of the follo&ing ategories of analyti al pro edures# indi ate 6a7 &hether an auditor is re$uired to use the pro edure and 6"7 the purpose6s7 of the pro edure. Preliminary analyti al pro edures ;u"stanti!e analyti al pro edures Final analyti al pro edures

.2. 4ame the three types of analyti al pro edures and pro!ide a definition and e/ample for ea h.

.%. When using analyti al pro edures# the auditor first needs to de!elop an e/pe tation &ith &hi h to ompare re orded results. What is meant "y Epre ision of the e/pe tation#E and &hat fa tors affe t the pre ision of analyti al pro edures?

5-21

Chapter 05 - Audit Planning and Types of Audit Tests

.(. )n de iding to implement analyti al pro edures# &hat are some fa tors the auditor &ill onsider in determining a tolera"le differen e "et&een the e/pe tation and the re orded amount?

.5. ;tan is auditing First Finan ial ;er!i es and &ould like to use finan ial ratios to test the a"ility of First Finan ial ;er!i es to meet its urrent o"ligations. 4ame t&o ratios that &ould help ;tan in this task. )ndi ate ho& ea h ratio is al ulated and &hat a high ratio &ould signify to ;tan.

5-22

Chapter 05 - Audit Planning and Types of Audit Tests

Chapter 05 Audit Planning and Types of Audit Tests Ans&er Gey

True / False Questions 1. The first phase of audit planning is risk assessment. FALS AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ' 2. When the prospe ti!e lient has pre!iously "een audited# auditing standards re$uire that the su essor auditor make ertain in$uires of the prede essor auditor "efore a epting the engagement. T!" AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ' %. The Code of Professional Condu t does not allo& an auditor to dis lose onfidential lient information &ithout the lient's onsent. T!" AACSB: !t(ics AICPA BB: Industry AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: '

5-2%

Chapter 05 - Audit Planning and Types of Audit Tests

(. )f the prospe ti!e lient refuses to allo& the prede essor auditor to ommuni ate &ith the su essor auditor# the su essor auditor should ha!e reser!ations a"out a epting the lient. T!" AACSB: !t(ics AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ' 5. *enerally# the auditor may rely on the &ork of an internal auditor if the internal auditor is ompetent and o"+e ti!e. T!" AACSB: !t(ics AICPA BB: Resource *anagement AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: + ,. All ompanies must ha!e an audit ommittee. FALS AACSB: Analytic AICPA BB: "egal AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ,

5-2(

Chapter 05 - Audit Planning and Types of Audit Tests

-. The audit ommittee is dire tly responsi"le for the appointment# ompensation# and o!ersight of the &ork of any a ounting firm employed "y a pu"li ompany. T!" AACSB: Analytic AICPA BB: Industry AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ,

5-25

Chapter 05 - Audit Planning and Types of Audit Tests

.. The e/ternal auditor is re$uired to make a num"er of important ommuni ations to the audit ommittee during or at the end of the audit engagement. T!" AACSB: Communications AICPA BB: Industry AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: , 0. )n order to properly preplan the audit# the auditor must determine the engagement team re$uirements and ensure the independen e of the audit team and audit firm. T!" AACSB: Analytic AICPA BB: Resource *anagement AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: 10. There are fi!e general types of audit tests. FALS AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: .

Multiple Choice Questions

5-2,

Chapter 05 - Audit Planning and Types of Audit Tests

11. 1a&kins re$uested permission to ommuni ate &ith the prede essor auditor and re!ie& ertain portions of the prede essor auditor's &orking papers. The prospe ti!e lient's refusal to permit this &ill "ear dire tly on 1a&kins' de ision on erning the A. Ade$ua y of the preplanned audit program 2. A"ility to esta"lish onsisten y in appli ation of a ounting prin iples "et&een years C. Apparent s ope limitation #$ )ntegrity of management AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: ' 12. )n assessing &hether to a ept a lient for an audit engagement# a CPA should onsider the A. The entity's "usiness risk 2. The CPA's engagement risk C$ The entity's "usiness risk and the CPA's engagement risk 3. 4either the entity's "usiness risk nor the CPA's engagement risk AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ' 1%. 5!aluating a prospe ti!e lient re$uires the follo&ing step6s78 A$ Communi ate &ith the prede essor auditor 2. Preplan the audit C. 5sta"lish the terms of the engagement 3. 4one of the a"o!e AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: '

5-2-

Chapter 05 - Audit Planning and Types of Audit Tests

1(. A &ritten understanding "et&een the auditor and the lient on erning the auditor's responsi"ility for the dis o!ery of illegal a ts is usually set forth in a6n7 A. Client representation letter 2. 9etter of audit in$uiry C. :anagement letter #$ 5ngagement letter AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: / 15. 5ngagement letters in lude all of the follo&ing e/ ept A. A list of additional ser!i es that &ill "e pro!ided %$ A list of ad+usting +ournal entries C. )nformation a"out the audit fee 3. Arrangements in!ol!ing the use of spe ialists AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: / 1,. To pro!ide for the greatest degree of independen e in performing internal audit fun tions# an internal auditor most likely should report to the A. Finan ial !i e-president 2. Corporate ontroller C$ 2oard of dire tors 3. Corporate sto kholders AACSB: !t(ics AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ,

5-2.

Chapter 05 - Audit Planning and Types of Audit Tests

1-. All of the follo&ing refer to an internal auditor's ompeten e e/ ept A$ The party in the entity to &hi h the internal auditor reports 2. The $uality of internal audit do uments and reports C. Professional ertifi ation 3. ;uper!ision and re!ie& of internal audit a ti!ities AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: + 1.. An independent auditor might onsider the pro edures performed "y the internal auditors "e ause A. They are employees &hose &ork must "e re!ie&ed during su"stanti!e testing %$ They are employees &hose &ork might "e relied upon C. Their &ork impa ts upon the ost<"enefit tradeoff in e!aluating inherent limitations 3. Their degree of independen e may "e inferred "y the nature of their &ork AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: + "earning #$%ecti&e: . 10. As generally on ei!ed# the audit ommittee of a pu"li ly held ompany should "e made up of A. =epresentati!es of the ma+or e$uity interests 6preferred sto k# ommon sto k7 2. The audit partner# the hief finan ial offi er# the legal ounsel# and at least one outsider C. =epresentati!es from the lient's management# in!estors# suppliers# and ustomers #$ :em"ers of the "oard of dire tors &ho are not offi ers or employees AACSB: Communications AICPA BB: "egal AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: ,

5-20

Chapter 05 - Audit Planning and Types of Audit Tests

20. To emphasi>e auditor independen e from management# pu"li ly traded orporations are re$uired to A. Appoint a partner of the CPA firm ondu ting the e/amination to the orporation's audit ommittee 2. 5sta"lish a poli y of dis ouraging so ial onta t "et&een employees of the orporation and the independent auditors C. =e$uest that a representati!e of the independent auditor "e on hand at the annual sto kholders' meeting #$ 1a!e the independent auditor report to an audit ommittee of independent mem"ers of the "oard of dire tors AACSB: Communications AICPA BB: "egal AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: , "earning #$%ecti&e: 21. Whi h of the follo&ing situations &ould most likely re$uire spe ial audit planning? A. ;ome items of fa tory and offi e e$uipment do not "ear identifi ation num"ers 2. 3epre iation methods used on the lient's ta/ return differ from those used on the "ooks C. Assets osting less than @500 are e/pensed e!en though the e/pe ted life e/ eeds one year #$ )n!entory is omprised of pre ious stones AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: -

5-%0

Chapter 05 - Audit Planning and Types of Audit Tests

22. An auditor o"tains kno&ledge a"out a ne& lient's "usiness and its industry in order to A. :ake onstru ti!e suggestions on erning impro!ements to the lient's internal ontrol stru ture 2. 3e!elop an attitude of professional skepti ism on erning management's finan ial statement assertions C. 5!aluate &hether the aggregation of kno&n misstatements auses the finan ial statements taken as a &hole to "e materially misstated #$ Anderstand the e!ents and transa tions that may ha!e an effe t on the lient's finan ial statements AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: 0 2%. Whi h of the follo&ing is an e/ample of a related party transa tion? A. An a tion is taken "y the dire tors of Company A to pro!ide additional ompensation for !i e presidents in harge of the prin ipal "usiness fun tions of Company A 2. A long term agreement is made "y Company A to pro!ide mer handise or ser!i es to Company 2# a long-time# friendly ompetitor C. A short-term loan is granted to Company A "y a "ank that has a depositor &ho is a mem"er of the "oard of dire tors of Company A #$ A nonmonetary e/ hange o urs &here"y Company A e/ hanges property for similar property o&ned "y Company 2# an un onsolidated su"sidiary of Company A AACSB: Communications AICPA BB: Industry AICPA FN: Re)orting Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: 0

5-%1

Chapter 05 - Audit Planning and Types of Audit Tests

2(. An independent auditor finds that 1olda&ay Corporation o upies offi e spa e# at no harge# in an offi e "uilding o&ned "y a shareholder. This finding likely indi ates the e/isten e of A. :anagement fraud %$ =elated party transa tions C. Windo& dressing 3. Weak internal ontrol AACSB: Communications AICPA BB: Industry AICPA FN: Re)orting Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: 0 25. Whi h of the follo&ing &ould not ne essarily "e a related party transa tion? A$ ;ales to another orporation &ith a similar name 2. Pur hases from another orporation that is ontrolled "y the orporation's hief sto kholder C. 9oan from the orporation to a ma+or sto kholder 3. ;ale of land to the orporation "y the spouse of a dire tor AACSB: Communications AICPA BB: Industry AICPA FN: Re)orting Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: 0 2,. The e/isten e of a related party transa tion may "e indi ated &hen another entity A. ;ells real estate to the orporation at a pri e that is ompara"le to its appraised !alue %$ A"sor"s e/penses of the orporation C. 2orro&s from the orporation at a rate of interest &hi h e$uals the urrent market rate 3. 9ends to the orporation at a rate of interest &hi h e$uals the urrent market rate AACSB: Communications AICPA BB: Industry AICPA FN: Re)orting Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: 0

5-%2

Chapter 05 - Audit Planning and Types of Audit Tests

2-. )n the onte/t of an audit of finan ial statements# su"stanti!e pro edures are audit pro edures that A. :ay "e eliminated under ertain onditions 2. Are primarily designed to dis o!er signifi ant su"se$uent e!ents C$ :ay "e either tests of details of transa tions# tests of details of a ount "alan es# or analyti al pro edures 3. Will in rease proportionately &ith an in rease in the auditor's relian e on internal ontrol AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: . 2.. Whi h of the follo&ing is not an audit pro edure that is ommonly used in performing tests of ontrols? A. )n$uiring 2. B"ser!ing C$ Confirming 3. )nspe ting AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: .

5-%%

Chapter 05 - Audit Planning and Types of Audit Tests

20. Whi h of the follo&ing is not a typi al analyti al pro edure? A. ;tudy of relationships of the finan ial information &ith rele!ant nonfinan ial information 2. Comparison of the finan ial information &ith similar information regarding the industry in &hi h the entity operates C$ Comparison of re orded amounts of ma+or dis"ursements &ith appropriate in!oi es 3. Comparison of the finan ial information &ith "udgeted amounts AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-%(

Chapter 05 - Audit Planning and Types of Audit Tests

%0. Analyti al pro edures may "e lassified as "eing primarily &hi h of the follo&ing? A. Tests of ontrols %$ ;u"stanti!e pro edures C. Tests of ratios 3. 3etailed tests of "alan es AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: *oderate "earning #$%ecti&e: . "earning #$%ecti&e: 2 %1. Whi h of the follo&ing are ordinarily designed to dete t possi"le material monetary errors in the finan ial statements? A. Tests of ontrols %$ Analyti al pro edures C. Computer ontrols 3. Post-audit re!ie& of audit do uments AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-%5

Chapter 05 - Audit Planning and Types of Audit Tests

%2. An a"normal flu tuation in gross profit that might suggest the need for e/tended audit pro edures for sales and in!entories &ould most likely "e identified in the planning phase of the audit "y the use of A. Tests of transa tions and "alan es 2. A preliminary re!ie& of internal ontrols C. ;pe iali>ed audit programs #$ Analyti al pro edures AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: '' "earning #$%ecti&e: . "earning #$%ecti&e: 2 %%. An e/ample of an analyti al pro edure is the omparison of A$ Finan ial information &ith similar information regarding the industry in &hi h the entity operates 2. =e orded amounts of ma+or dis"ursements &ith appropriate in!oi es C. =esults of a statisti al sample &ith the e/pe ted hara teristi s of the a tual population 3. 53P generated data &ith similar data generated "y a manual a ounting system AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-%,

Chapter 05 - Audit Planning and Types of Audit Tests

%(. Analyti al pro edures used in planning an audit should fo us on identifying A. :aterial &eaknesses in internal ontrol 2. The predi ta"ility of finan ial data from indi!idual transa tions C. The !arious assertions that are em"odied in the finan ial statements #$ Areas that may represent spe ifi risks rele!ant to the audit AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: . "earning #$%ecti&e: 2 %5. Analyti al pro edures are A. 4e!er re$uired 2. =e$uired for planning# su"stanti!e testing# and o!erall re!ie& of the finan ial statements C$ =e$uired for planning and o!erall re!ie& of the finan ial statements 3. =e$uired during planning only AACSB: Analytic AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-%-

Chapter 05 - Audit Planning and Types of Audit Tests

%,. As a result of analyti al pro edures ondu ted during the planning phase# the independent auditor determines that the gross profit per entage has de lined from %0C in the pre eding year to 20C in the urrent year. The auditor should A. 5/press an opinion &hi h is $ualified due to the ina"ility of the lient ompany to ontinue as a going on ern 2. 5!aluate management's performan e in ausing this de line C. =e$uire footnote dis losure #$ Consider the possi"ility of an error in the finan ial statements AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: '' "earning #$%ecti&e: 2

5-%.

Chapter 05 - Audit Planning and Types of Audit Tests

%-. An auditor has &ithdra&n from an audit engagement of a pu"li ly held ompany after finding fraud that may materially affe t the finan ial statements. The auditor should set forth the reasons and findings in orresponden e to the A. ;e urities and 5/ hange Commission 2. Client's legal ounsel C. ;to k e/ hanges &here the ompany's sto k is traded #$ The audit ommittee of the "oard of dire tors AACSB: Communications AICPA BB: "egal AICPA FN: Re)orting Bloom's: Knowledge Di iculty: *oderate "earning #$%ecti&e: ' %.. When a CPA is approa hed to perform an audit for the first time# the CPA should make in$uiries of the prede essor auditor. This is a ne essary pro edure "e ause the prede essor may "e a"le to pro!ide the su essor &ith information that &ill assist the su essor in determining A. Whether the prede essor's &ork should "e utili>ed 2. Whether the ompany follo&s the poli y of rotating its auditors C. Whether# in the prede essor's opinion# the ompany's internal ontrols ha!e "een satisfa tory #$ Whether the engagement should "e a epted AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: *oderate "earning #$%ecti&e: '

5-%0

Chapter 05 - Audit Planning and Types of Audit Tests

%0. Whi h of the follo&ing should an auditor o"tain from the prede essor auditor prior to a epting an audit engagement? A. Analysis of "alan e sheet a ounts 2. Analysis of in ome statement a ounts C. All matters of ontinuing a ounting signifi an e #$ Fa ts that might "ear on management integrity AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: ' (0. Whi h of the follo&ing fa tors most likely &ould ause a CPA not to a ept a ne& audit engagement? A$ The prospe ti!e lient's un&illingness to permit in$uiry of its legal ounsel 2. The ina"ility to re!ie& the prede essor auditor's do umentation C. The CPA's la k of understanding of the prospe ti!e lient's operations and industry 3. )ndi ations that management has not in!estigated employees in key positions "efore hiring them AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: 3ard "earning #$%ecti&e: ' (1. An auditor &ho dis o!ers that a lient's employees paid small "ri"es to muni ipal offi ials most likely &ould &ithdra& from the engagement if A. The payments !iolated the lient's poli ies regarding the pre!ention of illegal a ts 2. The lient re ei!es finan ial assistan e from a federal go!ernment agen y C. 3o umentation that is ne essary to pro!e that the "ri"es &ere paid does not e/ist #$ :anagement fails to take the appropriate remedial a tion AACSB: Communications AICPA BB: "egal AICPA FN: Re)orting Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: '

5-(0

Chapter 05 - Audit Planning and Types of Audit Tests

(2. A su essor auditor should re$uest the ne& lient to authori>e the prede essor auditor to allo& a re!ie& of the prede essor's A. 5ngagement letter %$ Audit &orking papers C. 5ngagement letter and audit &orking papers 3. )t &ould not "e typi al to allo& a re!ie& of either the engagement letter or the audit &orking papers AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: ' (%. An auditor is re$uired to esta"lish an understanding &ith a lient regarding the responsi"ilities for ea h engagement. This understanding generally in ludes A. :anagement's responsi"ility to guarantee that there are no material misstatements due to fraud %$ The auditor's responsi"ility to plan and perform the audit to pro!ide reasona"le# "ut not a"solute# assuran e of dete ting material errors or fraud C. :anagement's responsi"ility for pro!iding the auditor &ith an assessment of the risk of material misstatement due to fraud 3. The auditor's responsi"ility for the fairness of the finan ial statements AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: *oderate "earning #$%ecti&e: 4

5-(1

Chapter 05 - Audit Planning and Types of Audit Tests

((. Whi h of the follo&ing matters generally is in luded in an auditor's engagement letter? A$ :anagement's responsi"ility for the entity's omplian e &ith la&s and regulations 2. The fa tors to "e onsidered in setting preliminary +udgments a"out materiality C. :anagement's lia"ility for illegal a ts ommitted "y its employees 3. The auditor's responsi"ility to guarantee a ura y of the finan ial statements AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: 3ard "earning #$%ecti&e: / (5. )n assessing the ompeten e of an internal auditor# an independent CPA most likely &ould o"tain information a"out the A$ Duality of the internal auditor's &ork 2. Brgani>ation's ommitment to integrity and ethi al !alues C. )nfluen e of management on the s ope of the internal auditor's duties 3. Brgani>ational le!els to &hi h the internal auditor reports AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: *oderate "earning #$%ecti&e: + (,. Whi h of the follo&ing pro edures &ould an auditor most likely in lude in the initial planning of a finan ial statement audit? A. B"taining a &ritten representation letter from the lient's management 2. 5/amining do uments to dete t illegal a ts ha!ing a material effe t on the finan ial statements C. Considering &hether the lient's a ounting estimates are reasona"le in the ir umstan es #$ 3etermining the e/tent of in!ol!ement of the lient's internal auditors AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: + "earning #$%ecti&e: 0

5-(2

Chapter 05 - Audit Planning and Types of Audit Tests

(-. 5!aluating a prospe ti!e lient re$uires the follo&ing steps6s78 A. Communi ate &ith the ;5C. 2. Preplan the audit. C$ 3etermine if the firm is independent of the lient. 3. Communi ate &ith the A)CPA. AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: ' (.. The in- harge auditor most likely &ould ha!e a super!isory responsi"ility to e/plain to the staff assistants A. That immaterial fraud is not to "e reported to the lient's audit ommittee %$ 1o& the results of !arious auditing pro edures performed "y the assistants should "e e!aluated C. 1o& the o!erall audit strategy &ill allo& the firm to rea h a suffi iently lo& le!el of audit risk 3. 1o& o!erall materiality &as sele ted AACSB: Communications AICPA BB: Resource *anagement AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: 0

5-(%

Chapter 05 - Audit Planning and Types of Audit Tests

(0. Whi h of the follo&ing audit pro edures &ould "e least likely to dis lose the e/isten e of related party transa tions of a lient during the period under audit? A. =eading E onfli t-of-interestE statements o"tained "y the lient from its management 2. ; anning a ounting re ords for large transa tions at or +ust prior to the end of the period under audit C. =eading minutes of the 2oard of 3ire tors meetings for authori>ation or dis ussion of material transa tions #$ Confirming pur hase and sale transa tions &ith the !endors and<or ustomers in!ol!ed AACSB: Communications AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: *oderate "earning #$%ecti&e: 0 50. A dual-purpose test A. ;imultaneously tests de"its and redits 2. )s a pro edure ompleted "y "oth the internal and e/ternal auditors C. )s useful to "oth the entity and the auditor #$ )s "oth a su"stanti!e test of transa tions and a test of ontrols AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: .

5-((

Chapter 05 - Audit Planning and Types of Audit Tests

51. The auditor generally gi!es most emphasis to ratio and trend analysis in the e/amination of the A. ;tatement of Changes in ;to kholders' 5$uity and =etained earnings %$ )n ome ;tatement C. 2alan e ;heet 3. ;tatement of Cash Flo&s AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-(5

Chapter 05 - Audit Planning and Types of Audit Tests

52. The auditor noti es signifi ant flu tuations in key elements of the ompany's finan ial statements. )f management is una"le to pro!ide an a epta"le e/planation# the auditor should A. Consider the matter a s ope limitation %$ Perform additional audit pro edures to in!estigate the matter further C. )ntensify the e/amination &ith the e/pe tation of dete ting management fraud 3. Withdra& from the engagement AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: . "earning #$%ecti&e: 2 5%. Whi h of the follo&ing tends to "e most predi ta"le for purposes of analyti al pro edures applied as su"stanti!e pro edures? A. =elationships in!ol!ing "alan e sheet a ounts 2. Transa tions su"+e t to management dis retion C$ =elationships in!ol!ing in ome statement a ounts 3. 3ata su"+e t to audit testing in the prior year AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: *oderate "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-(,

Chapter 05 - Audit Planning and Types of Audit Tests

5(. An auditor's de ision either to apply analyti al pro edures as su"stanti!e pro edures or to perform tests of transa tions and a ount "alan es usually is determined "y A. A!aila"ility of data aggregated at a high le!el %$ =elati!e effe ti!eness and effi ien y of the tests C. Timing of tests performed after the "alan e sheet date 3. Auditor's familiarity &ith industry trends AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-(-

Chapter 05 - Audit Planning and Types of Audit Tests

55. Analyti al pro edures ena"le the auditor to predi t the "alan e or $uantity of an item under audit. )nformation to de!elop this estimate an "e o"tained from all of the follo&ing e/ ept A$ Tra ing transa tions through the system to determine &hether pro edures are "eing applied as pres ri"ed 2. Comparison of finan ial data &ith data for ompara"le prior periods# anti ipated results 6e.g.# "udgets and fore asts7 and similar data for the industry in &hi h the entity operates C. ;tudy of the relationships of elements of finan ial data that &ould "e e/pe ted to onform to a predi ta"le pattern "ased upon the entity's e/perien e 3. ;tudy of the relationships of finan ial data &ith rele!ant nonfinan ial data AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: !asy "earning #$%ecti&e: . "earning #$%ecti&e: 2 5,. A ompany sells a parti ular produ t only in the last month of its fis al year. The ompany uses ommission agents for su h sales and pays them ,C of their net sales %0 days after the sales are made. The agents' sales &ere @10 million. 5/perien e indi ates that 10C of the sales are usually not olle ted and 2C are returned in the first month of the ne& year. The auditor &ould e/pe t the year-end "alan e in the a rued ommissions paya"le a ount to "e A. @52.#000 2. @5(0#000 C$ @5..#000 3. @,00#000 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: 2

5-(.

Chapter 05 - Audit Planning and Types of Audit Tests

5-. Whi h of the follo&ing nonfinan ial information &ould an auditor most likely onsider in performing analyti al pro edures during the planning phase of an audit? A. Turno!er of personnel in the a ounting department 2. B"+e ti!ity of audit ommittee mem"ers C$ ;$uare footage of selling spa e 3. :anagement's plans to repur hase sto k AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: 2

5-(0

Chapter 05 - Audit Planning and Types of Audit Tests

5.. A not-for-profit organi>ation pu"lished a monthly maga>ine that had 15#000 su"s ri"ers on Fanuary 1# 2000. The num"er of su"s ri"ers in reased steadily throughout the year and at 3e em"er %1# 2000# there &ere 1,#200 su"s ri"ers. The annual maga>ine su"s ription ost &as @10 on Fanuary 1# 2000 and &as in reased to @12 for ne& mem"ers on April 1# 2000. ;u"s riptions are paid in full at the "eginning of the mem"er term. An auditor should e/pe t that the re eipts from su"s riptions for the year ended 3e em"er %1# 2000# &ould "e appro/imately

A. @1-0#(00 2. @1-1#,00 C. @1,(#(00 #$ @1,%#.00 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: 2

5-50

Chapter 05 - Audit Planning and Types of Audit Tests

50. Analyti al pro edures performed in the o!erall re!ie& stage of an audit suggest that se!eral a ounts ha!e une/pe ted relationships. The results of these pro edures most likely &ould indi ate that A. Fraud e/ists &ithin the rele!ant a ounts 2. )nternal ontrol a ti!ities are not operating effe ti!ely C$ Additional tests of details are re$uired 3. The ommuni ation &ith the audit ommittee should "e re!ised AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: 2 ,0. Whi h of the follo&ing &ould "e least likely to "e ompara"le "et&een similar orporations in the same industry or line of "usiness? A$ 5arnings per share 2. =eturn on total assets "efore interest and ta/es C. A ounts re ei!a"le turno!er 3. Bperating y le AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: '' ,1. Whi h of the follo&ing ratios &ould an engagement partner most likely al ulate &hen re!ie&ing the "alan e sheet in the o!erall re!ie& stage of an audit? A. Dui k assets di!ided "y a ounts paya"le 2. A ounts re ei!a"le di!ided "y in!entory C. )nterest paya"le di!ided "y interest re ei!a"le #$ Total de"t di!ided "y total assets AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: ''

5-51

Chapter 05 - Audit Planning and Types of Audit Tests

,2. Whi h of the follo&ing fa tors most likely &ould lead a CPA to on lude that a potential audit engagement should "e re+e ted? A. The details of most re orded transa tions are not a!aila"le after a spe ified period of time 2. )nternal ontrol a ti!ities re$uiring segregation of duties are su"+e t to management o!erride C$ )t is unlikely that suffi ient appropriate e!iden e is a!aila"le to support an opinion on the finan ial statements 3. :anagement has a reputation for onsulting &ith se!eral a ounting firms a"out signifi ant a ounting issues AACSB: Communications AICPA BB: Critical 1(inking AICPA FN: Risk Analysis Bloom's: A))lication Di iculty: 3ard "earning #$%ecti&e: ' ,%. Whi h of the follo&ing fa tors most likely &ould ause a CPA to de ide not to a ept a ne& audit engagement? A. The CPA's la k of understanding of the prospe ti!e lient's internal auditor's omputerassisted audit te hni$ues %$ :anagement's disregard of its responsi"ility to maintain an ade$uate ontrol en!ironment C. The CPA's ina"ility to determine &hether related party transa tions &ere onsummated on terms e$ui!alent to arm's-length transa tions 3. :anagement's refusal to permit the CPA to perform su"stanti!e pro edures "efore the year-end AACSB: Communications AICPA BB: Critical 1(inking AICPA FN: Risk Analysis Bloom's: A))lication Di iculty: 3ard "earning #$%ecti&e: '

5-52

Chapter 05 - Audit Planning and Types of Audit Tests

,(. 2efore a epting an engagement to audit a ne& lient# a CPA is re$uired to o"tain A. An understanding of the prospe ti!e lient's industry and "usiness 2. The prospe ti!e lient's signature on the engagement letter C. A preliminary understanding of the prospe ti!e lient's ontrol en!ironment #$ The prospe ti!e lient's onsent to make in$uiries of the prede essor auditor# if any AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: ' ,5. The element of the audit planning pro ess most likely to "e agreed upon &ith the lient "efore implementation of the audit strategy is the determination of the A. :ethods of statisti al sampling to "e used in onfirming a ounts re ei!a"le 2. Pending legal matters to "e in luded in the in$uiry of the lient's attorney C. 5!iden e to "e gathered to pro!ide a suffi ient "asis for the auditor's opinion #$ Timing of the audit AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: 4 "earning #$%ecti&e: / "earning #$%ecti&e: 0

5-5%

Chapter 05 - Audit Planning and Types of Audit Tests

,,. The audit lient's "oard of dire tors and audit ommittee refused to take any a tion &ith respe t to an immaterial illegal a t &hi h &as "rought to their attention "y the auditor. 2e ause of their failure to a t# the auditor &ithdre& from the engagement. The auditor's de ision to &ithdra& &as primarily due to dou"ts on erning A. Ade$uate finan ial statement dis losures 2. Complian e &ith the statutory la&s and regulations C. ; ope limitations resulting from their ina tion #$ The integrity of management AACSB: !t(ics AICPA BB: "egal AICPA FN: Risk Analysis Bloom's: Com)re(ension Di iculty: 3ard "earning #$%ecti&e: ,

5-5(

Chapter 05 - Audit Planning and Types of Audit Tests

,-. 3uring the initial planning phase of an audit# a CPA most likely &ould A. )dentify spe ifi internal ontrol a ti!ities that are likely to pre!ent fraud 2. 5!aluate the reasona"leness of the lient's a ounting estimates C$ 3is uss the timing of the audit pro edures &ith the lient's management 3. )n$uire of the lient's attorney as to any unre orded laims AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: ,.. Whi h of the follo&ing pro edures &ould an auditor most likely in lude in the initial planning of an e/amination of finan ial statements? A$ Assess the need for the use of spe ialists in the audit 2. )n$uiring of the lient's attorney as to any laims that are likely to "e asserted C. B"taining a &ritten representation letter from the lient's management 3. 3etermining &hether ne essary internal ontrols pro edures are "eing applied as pres ri"ed AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Synt(esis Di iculty: 3ard "earning #$%ecti&e: 0

5-55

Chapter 05 - Audit Planning and Types of Audit Tests

,0. An entity's finan ial statements &ere misstated o!er a period of years due to large amounts of re!enue "eing re orded in +ournal entries that in!ol!ed de"its and redits to an illogi al om"ination of a ounts. The auditor ould most likely ha!e "een alerted to this fraud "y A$ ; anning the general +ournal for unusual entries 2. Performing a re!enue utoff test at year-end C. Tra ing a sample of +ournal entries to the general ledger 3. 5/amining do umentary e!iden e of sales returns and allo&an es re orded after year-end AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: A))lication Di iculty: 3ard "earning #$%ecti&e: .

5-5,

Chapter 05 - Audit Planning and Types of Audit Tests

-0. Ander the ;ar"anes-B/ley A t# the audit ommittee of a pu"li ompany has the follo&ing re$uirement6s78 A. 5a h mem"er of the ommittee must "e a "oard mem"er and shall "e independent. 2. The audit ommittee must pre-appro!e all audit and non-audit ser!i es. C. The audit ommittee must esta"lish and maintain pro edures to handle all issues &hi h relate to a ounting# internal ontrol# and auditing. #$ All of the a"o!e. AACSB: !t(ics AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: *oderate "earning #$%ecti&e: , -1. An auditor's analyti al pro edures performed during the o!erall re!ie& stage indi ated that the lient's a ounts re ei!a"le "alan e had dou"led sin e the end of the prior year. 1o&e!er# the allo&an e for dou"tful a ounts as a per entage of a ounts re ei!a"le remained a"out the same. Whi h of the follo&ing lient e/planations most likely &ould satisfy the auditor? A. The lient li"erali>ed its redit standards in the urrent year and sold mu h more mer handise to ustomers &ith poor redit ratings 2. T&i e as many a ounts re ei!a"le &ere &ritten off in the prior year than in the urrent year C. A greater per entage of a ounts re ei!a"le &ere urrently listed in the Emore than 00 days o!erdueE ategory than in the prior year #$ The lient opened a se ond retail outlet in the urrent year and its redit sales appro/imately e$ualed the older# esta"lished outlet AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: 3ard "earning #$%ecti&e: . "earning #$%ecti&e: 2

5-5-

Chapter 05 - Audit Planning and Types of Audit Tests

-2. Whi h of the follo&ing is a general audit test8 A. Fee assessment pro edures. %$ Tests of ontrols. C. Preparation of orporate ta/ returns. 3. A ti!e testing pro edures. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: . -%. )n orre t order# general types of audit tests in lude8 A. ;u"stanti!e pro edures# tests of ontrols# and risk assessment pro edures. 2. ;u"stanti!e pro edures# risk assessment pro edures# and tests of ontrols. C$ =isk assessment pro edures# tests of ontrols# and su"stanti!e pro edures. 3. =isk assessment pro edures# su"stanti!e pro edures# and tests of ontrols. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: .

Short Answer Questions

5-5.

Chapter 05 - Audit Planning and Types of Audit Tests

-(. Cart and 2lan he# a regional a ounting firm is determining &hether it &ants to a ept a ne& lient# )!y Photos. )!y Photos is urrently a pri!ately held photography studio operating 2( studios in se!eral states# "ut the ompany's management is planning an )nitial Pu"li Bffering in the near future. This is the ompany's first audit. What steps should Cart and 2lan he take in e!aluating this ne& lient? To e!aluate the lient# the auditors should o"tain and re!ie& a!aila"le finan ial information and should in$uire of third parties a"out any information on erning the integrity of the prospe ti!e lient and its management. These in$uiries should "e dire ted to the prospe ti!e lient's "ankers and attorneys# redit agen ies# and other mem"ers of the "usiness ommunity &ho may ha!e su h kno&ledge. The auditor should also onsider &hether the prospe ti!e lient has any ir umstan es that &ill re$uire spe ial attention or that may represent unusual "usiness or audit risks# su h as litigation or going- on ern pro"lems. The auditor should also determine if Cart and 2lan he is independent of )!y Photos and has the ne essary te hni al skills and kno&ledge of the industry to omplete the engagement. Finally# Cart and 2lan he needs to determine if a eptan e of the lient &ould !iolate any appli a"le regulatory agen y re$uirements or the Code of Professional Condu t. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: A))lication Di iculty: 3ard "earning #$%ecti&e: ' -5. 3efine the engagement letter and dis uss its importan e. An engagement letter formali>es the arrangement rea hed "et&een the auditor and the lient. This letter ser!es as a ontra t# outlining the responsi"ilities of "oth parties and pre!enting misunderstandings "et&een the t&o parties. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: /

5-50

Chapter 05 - Audit Planning and Types of Audit Tests

-,. 23G A ounting is auditing a ne& lient# A 9a Carte Catering. 23G ould sa!e audit time "y using &ork from A 9a Carte's internal audit staff. The staff onsists of three a ountants &ith pu"li a ounting e/perien e and ertifi ation. A 9a Carte re$uires e!ery mem"er of its a ounting department to spend t&o out of e!ery fi!e years on the internal audit staff. Then# the employee is rotated "a k into the a ounting department for a ouple of years. What fa tors should 23G onsider &hen determining &hether or not it an use &ork of the internal audit staff? )n this ase# &hat should 23G de ide? The ma+or issue for 23G is the ompeten e and o"+e ti!ity of the internal auditors and the effe t of their &ork on the audit. A 9a Carte's internal audit staff seems ompetent# as all of its auditors are ertified. 1o&e!er# 23G should seriously $uestion ho& o"+e ti!e the audit staff is. All of the internal auditors are also asso iated &ith other positions &ithin the ompany. Further# all of the auditors are from the a ounting department# so none of them ould o"+e ti!ely audit the a ounting area they &orked in. To maintain independen e# 23G &ould not "e a"le to use the &ork of the internal audit staff in pla e of 23G's &ork. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: +

5-,0

Chapter 05 - Audit Planning and Types of Audit Tests

--. 4ame three ;ar"anes-B/ley A t re$uirements of the mem"ers and duties of the audit ommittee of a pu"li ompany. Students &ust pro'ide three of the following( 1. 5a h mem"er of the audit ommittee must "e a mem"er of the "oard of dire tors and must "e independent. 2. The audit ommittee is dire tly responsi"le for the appointment# ompensation# and o!ersight of the &ork of any registered pu"li a ounting firm employed "y the ompany. %. The audit ommittee must preappro!e all audit and nonaudit ser!i es pro!ided "y its auditor. (. The audit ommittee must esta"lish pro edures for the re eipt# retention# and treatment of omplaints re ei!ed "y the ompany regarding a ounting# internal ontrol# and auditing. 5. 5a h audit ommittee mem"er must ha!e the authority to engage independent ounsel or other ad!isors as he or she deems ne essary to arry out his or her duties. AACSB: Communications AICPA BB: "egal AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: *oderate "earning #$%ecti&e: , -.. 1o& &ould an auditor identify related parties and &hat is the importan e of doing so? Transa tions "et&een an entity and any related parties may not "e made at Earms length.E A ordingly# the auditor must s rutini>e arefully su h transa tions and ensure proper dis losures regarding related parties are made in a ordan e &ith *AAP. The auditor an identify related parties "y e!aluating the lient's pro edures for identifying related parties# re$uesting a list of related parties from management and for pu"li ly traded lients# re!ie&ing filings &ith the ;e urities and 5/ hange Commission and other regulatory agen ies. )t is important that the auditor attempts to identify all related parties during the planning phase of the audit so that the auditor an properly plan for e!aluating transa tions that may ha!e o urred "et&een entity and related parties. AACSB: Communications AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: *oderate "earning #$%ecti&e: 0

5-,1

Chapter 05 - Audit Planning and Types of Audit Tests

-0. )n the planning stages of an audit# &hat information does an auditor gain through analyti al pro edures? An auditor is re$uired to apply analyti al pro edures at the planning phase for all audits. )n the planning phase# analyti al pro edures help the auditor to understand the lient's "usiness and transa tions. Analyti al pro edures also guide the auditor to&ards finan ial statement a ounts that are likely to ontain errors. With this information# the auditor is a"le to plan the nature# timing# and e/tent of audit pro edures. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: 0 .0. 3is uss the purposes for planning the audit and identify the steps that are performed during this phase of the engagement. 5ngagement planning in!ol!es all the issues the auditor should onsider in de!eloping an o!erall strategy for ondu ting the audit. The o"+e ti!e of the audit plan is to ondu t an effe ti!e and effi ient audit. This means that the audit is to "e ondu ted in a ordan e &ith auditing standards and that the risk of material misstatements is redu ed to an a epta"ly lo& le!el. The audit plan should also onsider ho& to ondu t the engagement in a ost-effe ti!e manner. When preparing the audit plan# the auditor should "e guided "y the results of the risk assessment and pro edures performed to gain and support the understanding of the entity. Additional steps that should "e performed in lude8 1. Assess a preliminary le!el for ontrol risk "y a ount and assertion. 2. Assess the possi"ility of illegal a ts. %. )dentify related parties. (. Condu t preliminary analyti al pro edures. 5. 3e!elop an o!erall audit strategy and prepare audit programs. ,. Consider additional !alue-added ser!i es. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Knowledge Di iculty: !asy "earning #$%ecti&e: 0

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Chapter 05 - Audit Planning and Types of Audit Tests

.1. For ea h of the follo&ing ategories of analyti al pro edures# indi ate 6a7 &hether an auditor is re$uired to use the pro edure and 6"7 the purpose6s7 of the pro edure. Preliminary analyti al pro edures ;u"stanti!e analyti al pro edures Final analyti al pro edures The auditor is re$uired to use preliminary analyti al pro edures to "etter understand the "usiness and to help in planning the nature# timing# and e/tent of audit pro edures. ;u"stanti!e analyti al pro edures are not re$uired "ut are ommonly used to o"tain e!idential matter a"out parti ular assertions related to a ount "alan es or lasses of transa tions. Final analyti al pro edures are re$uired as an o!erall re!ie& of the finan ial information in the final re!ie& stage of the audit. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: 0 "earning #$%ecti&e: 2

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Chapter 05 - Audit Planning and Types of Audit Tests

.2. 4ame the three types of analyti al pro edures and pro!ide a definition and e/ample for ea h. The three types of analyti al pro edures are trend analysis# ratio analysis# and reasona"leness analysis. ;tudent's e/amples may !ary8 Trend analysis in!ol!es the e/amination of hanges in an a ount o!er time. For instan e# an auditor might e/amine the lient's re!enue o!er a period of ten years to see if the trend is onsistent &ith the auditor's e/pe tation. =atio analysis is the omparison# a ross time or to a "en hmark# of relationships "et&een finan ial statement a ounts or "et&een an a ount and nonfinan ial data. As an e/ample# an auditor ould ompare the lient's in!entory turno!er for the urrent and prior year to industry results to test for o"soles en e. =easona"leness analysis is the de!elopment of a model to form an e/pe tation using finan ial data# nonfinan ial data or "oth# to test a ount "alan es or hanges in a ount "alan es "et&een a ounting periods. For e/ample# an auditor might test re!enue against an e/pe tation formed using standard pri es and the num"er of re orded sales. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: A))lication Di iculty: *oderate "earning #$%ecti&e: . .%. When using analyti al pro edures# the auditor first needs to de!elop an e/pe tation &ith &hi h to ompare re orded results. What is meant "y Epre ision of the e/pe tation#E and &hat fa tors affe t the pre ision of analyti al pro edures? The $uality of an e/pe tation is referred to as the pre ision of the e/pe tation. Pre ision is a measure of the potential effe ti!eness of an analyti al pro edureH it represents the degree of relian e that an "e pla ed on the pro edure. Pre ision is affe ted "y disaggregation# the plausi"ility and predi ta"ility of the relationship "eing studied# data relia"ility and the type of analyti al pro edure used to form an e/pe tation. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: 2

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Chapter 05 - Audit Planning and Types of Audit Tests

.(. )n de iding to implement analyti al pro edures# &hat are some fa tors the auditor &ill onsider in determining a tolera"le differen e "et&een the e/pe tation and the re orded amount? The si>e of the tolera"le differen e depends on the signifi an e of the a ount# the desired degree of relian e on the su"stanti!e analyti al pro edure# the le!el of disaggregation in the amount "eing tested# and the pre ision of the e/pe tation. AACSB: Analytic AICPA BB: Critical 1(inking AICPA FN: Decision *aking Bloom's: Com)re(ension Di iculty: !asy "earning #$%ecti&e: 2 .5. ;tan is auditing First Finan ial ;er!i es and &ould like to use finan ial ratios to test the a"ility of First Finan ial ;er!i es to meet its urrent o"ligations. 4ame t&o ratios that &ould help ;tan in this task. )ndi ate ho& ea h ratio is al ulated and &hat a high ratio &ould signify to ;tan. Answer should include two of the following( The urrent ratio is al ulated as urrent assets di!ided "y urrent lia"ilities. A high ratio indi ates an entity's a"ility to pay urrent o"ligations. The $ui k ratio is al ulated as li$uid assets di!ided "y urrent lia"ilities. )t does not in lude in!entory and prepaid items. A ratio greater than 1 generally indi ates that the entity's li$uid assets are suffi ient to meet the ash re$uirements for paying urrent lia"ilities. The operating ash flo& ratio is al ulated as ash flo& from operations di!ided "y urrent lia"ilities. The operating ash flo& ratio pro!ides a longer-term measure of the entity's a"ility to meet its urrent lia"ilities and a high ratio indi ates a "etter a"ility to meet urrent lia"ilities &ith operating ash flo&. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision *aking Bloom's: Analysis Di iculty: *oderate "earning #$%ecti&e: ''

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