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Flashcards in Auditing Process Deck (10)
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Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Prior to accepting an initial engagement pursuant to the standards of the PCAOB, a registered public accounting firm must:

describe, in writing, to the audit committee of the issuer, all relationships between the registered public accounting firm or any affiliates of the firm and the potential audit client or persons in financial reporting oversight roles at the potential audit client that, as of the date of the communication, may reasonably be thought to bear on independence;
discuss with the audit committee of the issuer the potential effects of the relationships described above in (1) on the independence of the registered public accounting firm, should it be appointed the issuer's auditor; and
document the substance of its discussion with the audit committee of the issuer.


Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

understanding of the reasons for the change of auditors.


Exp + Allowance for Sampling Risk = Tolerable Rate

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations when the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?


An auditor may report on condensed financial statements that are derived from complete financial statements if the:

auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.


Reasonableness Test

A reasonableness test compares a known, recorded amount (number of overtime hours in a week) with an estimated, or expected, amount (the average of weekly overtime during a similar period in a prior year). The auditor looks to see if the actual number is reasonable based on prior historical data. This test is a type of analytical procedure.


Documenting Uncorrected Misstatements

The auditor should include in the audit documentation:

the amount below which misstatements would be regarded as clearly trivial;
all misstatements accumulated during the audit and whether they have been corrected; and
the auditor's conclusion about whether uncorrected misstatements are material, individually or in aggregate.


What should an accountant consider in determining needs for retention of engagement documents?

The nature of the engagement and the firm's circumstances


The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered:

a limitation on the scope of the audit.

sufficient to PRECLUDE an unmodified opinion.


An auditor usually determines whether dividend income from publicly held investments is reasonable by computing the amounts that should have been received by referring to:

records produced by investment services.

If the entity has multiple investments in publicly held companies, they have usually invested through a broker or other investment service. The investment service could easily confirm dividends paid to the entity. Using the SEC records would be more difficult, as would reviewing the minutes of the board of directors for each investment held (if the auditor could actually obtain them).

Stock ledgers maintained by independent registrars would not have dividend information on file; only the record of stockholders' names and outstanding and issued shares of stock.


Definition of "Misstatement"

AU-C 450.04 defines misstatement as “a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.”

An unrecorded liability resulting from a specific activity or invoice would be considered a (known) misstatement. The other two answer choices are examples of (likely) misstatements (error extrapolation, dif. management and auditor calcs of appropriate warranty accrual.).