AUDITING PLANNING AND MATERIALITY

Question 1

ACCEPTABLE AUDIT RISK

Answer 1

A MEASURE OF HOW WILLING THE AUDITOR IS TO ACCEPT THAT THE FINANCIAL STATEMENTS MAY BE MATERIALLY MISSTATED AFTER THE AUDIT IS COMPLETED AND AN UNMODIFIED AUDIT OPINION HAS BEEN ISSUED.

Question 2

ALLOCATION OF THE PRELIMINARY JUDGEMENT ABOUT MATERIALITY

Answer 2

THE PROCESS OF ASSIGNING TO EACH BALANCE SHEET ACCOUNT THE MISSTATEMENT AMOUNT CONSIDERED TO BE MATERIAL FOR THAT ACCOUNT BASED ON THE AUDITOR’S PRELIMINARY JUDGEMENT

Question 3

AUDIT STRATEGY

Answer 3

OVERALL APPROACH TO THE AUDIT THAT CONSIDERS THE NATURE OF THE CLIENT, RISK OF SIGNIFICANT MISSTATEMENTS, AND OTHER FACTORS SUCH AS THE NUMBER OF CLIENT LOCATIONS AND PAST EFFECTIVENESS OF CLIENT CONTROLS

Question 4

CLIENT BUSINESS RISK

Answer 4

THE RISK THAT THE CLIENT WILL FAIL TO ACHIEVE ITS OBJECTIVES RELATED TO [1] RELIABILITY OF FINANCIAL REPORTING, [2] EFFECTIVENESS AND EFFICIENCY OF OPERATIONS, AND [3] COMPLIANCE WITH LAWS AND REGULATIONS

Question 5

CORPORATE MINUTES

Answer 5

THE OFFICIAL RECORD OF THE MEETINGS OF A CORPORATION’S BOARD OF DIRECTORS AND STOCKHOLDERS, IN WHICH CORPORATE ISSUES SUCH THE DECLARATION OF DIVIDENDS AND THE APPROVAL OF CONTRACTS ARE DOCUMENTED

Question 6

ENGAGEMENT LETTER

Answer 6

AN AGREEMENT BETWEEN THE CPA FIRM AND THE CLIENT AS TO THE TERMS OF THE ENGAGEMENT FOR THE CONDUCT OF THE AUDIT AND RELATED SERVICES.

Question 7

INITIAL AUDIT PLANNING

Answer 7

INVOLVES DECIDING WHETHER TO ACCEPT OR CONTINUE DOING THE AUDIT FOR THE CLIENT, IDENTIFYING THE CLIENT’S REASONS FOR THE AUDIT, OBTAINING AN ENGAGEMENT LETTER, AND DEVELOPING AN AUDIT STRATEGY.

Question 8

KEY PERFORMANCE INDICATOR

Answer 8

A QUANTIFIABLE VALUE USED TO MEASURE HOW EFFECTIVELY A COMPANY IS MEETING ITS STRATEGIC OBJECTIVES

Question 9

KNOWN MISSTATEMENTS

Answer 9

SPECIFIC MISSTATEMENTS IN A CLASS OF TRANSACTIONS OR ACCOUNT BALANCE IDENTIFIED DURING THE AUDIT.

Question 10

LIKELY MISSTATEMENTS

Answer 10

MISSTATEMENTS THAT ARISE EITHER FROM DIFFERENCES BETWEEN MANAGEMENT’S AND THE AUDITOR’S JUDGMENT ABOUT ESTIMATES OF ACCOUNT BALANCES OR FROM PROJECTIONS OF MISSTATEMENTS BASED ON THE AUDITOR’S TEST OF A SAMPLE FROM A POPULATION

Question 11

MATERIALITY

Answer 11

THE MAGNITUDE OF AN OMISSION OR MISSTATEMENT OF ACCOUNTING INFORMATION THAT, IN THE LIGHT OF SURROUNDING CIRCUMSTANCES, MAKES IT PROBABLE THAT THE JUDGEMENT OF A REASONABLE PERSON RELYING ON THE INFORMATION WOULD HAVE BEEN CHANGED OR INFLUENCED BY THE OMISSION OR MISSTATEMENT.

Question 12

PERFORMANCE MATERIALITY

Answer 12

THE MATERIALITY AMOUNT[S] FOR SEGMENTS OF THE AUDIT, SET BY THE AUDITOR AT LESS THAN MATERIALITY FOR THE FINANCIAL STATEMENTS AS A WHOLE.

Question 13

PRELIMINARY JUDGEMENT ABOUT MATERIALITY

Answer 13

THE MAXIMUM AMOUNT BY WHICH THE AUDITOR BELIEVES THAT THE STATEMENTS COULD BE MISSTATED AND STILL NOT AFFECT THE DECISIONS OF REASONABLE USERS; USED IN AUDIT PLANNING.

Question 14

RELATED PARTY

Answer 14

AFFILIATED COMPANY, PRINCIPAL OWNERS OF THE CLIENT COMPANY, OR ANY OTHER PARTY WITH WHICH THE CLIENT DEALS, WHERE ONE OF THE PARTIES CAN INFLUENCE THE MANAGEMENT OR OPERATING POLICIES OF THE OTHER.

Question 15

RELATED PARTY TRANSACTION

Answer 15

ANY TRANSACTION BETWEEN THE CLIENT AND A RELATED PARTY

Question 16

REVISED JUDGEMENT ABOUT MATERIALITY

Answer 16

A CHANGE IN THE AUDITOR’S PRELIMINARY JUDGEMENT MADE WHEN THE AUDITOR DETERMINES THAT THE PRELIMINARY JUDGMENT WAS TOO LARGE OR TO SMALL

Question 17

RISK ASSESSMENT PROCEDURES

Answer 17

AUDIT PROCEDURES PERFORMED TO OBTAIN AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT, INCLUDING THE ENTITY’S INTERNAL CONTROL, TO IDENTIFY AND ASSESS THE RISKS OF MATERIAL MISSTATEMENT

Question 18

RISK OF MATERIAL MISSTATEMENT

Answer 18

THE RISK THAT THE FINANCIAL STATEMENTS ARE MATERIALLY MISSTATED PRIOR TO THE AUDIT

Question 19

SAMPLING RISK

Answer 19

RESULTS BECAUSE THE AUDITOR HAS SAMPLED ONLY A PORTION OF THE POPULATION

Question 20

TOLERABLE MISSTATEMENT

Answer 20

THE APPLICATION OF PERFORMANCE MATERIALITY TO A SAMPLING PROCEDURE (AICPA STANDARDS) OR THE MATERIALITY ALLOCATED TO ANY GIVEN ACCOUNT BALANCE PCAOB STANDARDS).

Question 21

WHAT ARE THE BENEFITS DERIVED FROM PLANNING AUDITS?

Question 22

WHAT ARE THE RESPONSIBILITIES OF THE SUCCESSOR AND PREDECESSOR AUDITORS WHEN A COMPANY IS CHANGING AUDITORS?

Question 23

WHAT IS THE PURPOSE OF AN ENGAGEMENT LETTER?

Question 24

WHAT SUBJECTS SHOULD BE COVERED IN AN ENGAGEMENT LETTER

Question 25

WHO IS CONSIDERED THE CLIENT WHEN AUDITING PUBLIC COMPANIES?

Question 26

EXPLAIN WHY AUDITORS NEED AN UNDERSTANDING OF THE CLIENT’S INDUSTRY.

Question 27

WHAT INFORMATION SOURCES ARE COMMONLY USED BY AUDITORS TO LEARN ABOUT THE CLIENT’S INDUSTRY?

Question 28

WHY MIGHT IT BE IMPORTANT FOR YOU TO CONSIDER CURRENT ECONOMIC AND OTHER EVENTS AS PART OF PLANNING AN AUDIT?

Question 29

HOW WILL THE CPA’S OBSERVATIONS MADE DURING A MANUFACTURING PLANT TOUR BE OF HELP IN PLANNING AND CONDUCTING THE AUDIT?

Question 30

DEFINE WHAT IS MEANT BY A RELATED PARTY.

Question 31

WHAT ARE THE AUDITOR’S RESPONSIBILITIES FOR RELATED PARTIES AND RELATED PARTY TRANSACTIONS?

Question 32

LIST THE INFORMATION IN A MORTGAGE THAT WILL BE RELEVANT TO AN AUDITOR

Question 33

IDENTIFY TWO TYPES OF INFORMATION IN THE CLIENT’S MINUTES OF THE BOARD OF DIRECTORS MEETINGS THAT ARE LIKELY TO BE RELEVANT TO AN AUDITOR.

Question 34

WHY IS IT IMPORTANT TO READ MINUTES EARLY?

Question 35

IDENTIFY THE THREE CATEGORIES OF CLIENT OBJECTIVES

Question 36

WHAT IS THE PURPOSE OF THE CLIENT’S PERFORMANCE MEASUREMENT SYSTEM?

Question 37

HOW WOULD A CLIENT’S PERFORMANCE MEASUREMENT SYSTEM BE OF USE TO AN AUDITOR?

Question 38

WHAT IS THE RELATIONSHIP BETWEEN MATERIALITY AND THE PHRASE OBTAIN REASONABLE ASSURANCE USED IN THE AUDITOR’S REPORT?

Question 39

WHY IS MATERIALITY IMPORTANT BUT DIFFICULT TO APPLY IN PRACTICE?

Question 40

WHAT IS MEANT BY USING BENCHMARKS FOR SETTING A PRELIMINARY JUDGEMENT ABOUT MATERIALITY?

Question 41

HOW WILL THE CONDUCT OF AN AUDIT BE DIFFERENT WHEN AUDITING A MEDIUM COMPANY THAT IS PART OF A LARGER BUSINESS VS THE MEDIUM COMPANY BEING IT’S OWN ENTITY?

Question 42

WHY MIGHT AN AUDITOR SET A LOWER LEVEL OF PERFORMANCE MATERALITY?