Chapter 3: Engagement Planning and Audit Evidence

Question 1

Procedures performed several weeks or months before the date of the financial statements

Answer 1

interim audit work

Acc bal audited during intermin are later rolled forward at year end

Question 2

Procedures performed shortly after before and after the date of the finanical statments

Answer 2

year-end audit work

Question 3

What members does a typical audit engagment team consist of? (6)

Answer 3

• audit engagement partner (final responsibility & usually industry specialist)
• audit manager
• IT auditor
• tax specialist
• quality assurance partner (reviews audit work in critical areas)
• audit staff

Question 4

Audit Plan

Answer 4

comprehensive list of specific procedures needed to gather sufficient appropriate evidence

Question 5

To plan the nature, timing, and extent of further audit procedures to be performed, an auditor should establish an ____ level for the financial statemetns as a whole that is appropriate in light of the company’s earning and other relevant factors

Answer 5

materiality

Question 6

Several activities public accounting firms undertake before beginning any audit engagement

What is the benefit?

Answer 6

Risk Management Activities

Benefit: to reduce their own business risks

Question 7

What is risk?

Answer 7

probability that firm could issue clean audit opinion, when actually a material misstatement does exist and the opinion should have been modified

Question 8

What are the 3 things the professional standards state an auditor should do before beginning audit engagement?

Answer 8

1. Client acceptance or continuance
2. Determine compliance w/ independence and ethics requirement
3. Reach contractual understanding w/client for audit

Question 9

Independence in fact vs independence in appearance

Answer 9

lack of independence can result in disciplinary action and litigation

Question 10

What should be included in an engagement letter?

Answer 10

1. objectives of engagement
2. management’s responsibilities
3. auditors’ responsibilities
4. any limitations of the engagement

Question 11

Who is required to lead the planing processed?

Answer 11

the assigned engagement partner

Question 12

What is performance materiality?

What is the benefit?

Answer 12

an amount less than materiality for the financial statements as a whole

Benefit: to make sure uncorrected and undeteced immaterial misstatements don’t exceed materiality for financial statements as a whole

Question 13

When auditors use sampling, performance materiality is referred to as _______ .

Answer 13

tolerable misstatement

Question 14

The planning process begins with a calculation of a preliminary materiality amount that is based on a relevant ____ and a rule of thumb percentage applied to it.

Answer 14

benchmark

Question 15

Verifying if all transactions were recorded in the proper period address the ASB assertion of_______.

Answer 15

cutoff

Question 16

A list of audit procedures for gathering evidence related to the relevant assertions identified for an audit client’s financial statement accounts and disclosures is a(n)… _____ _____ plan.

Answer 16

substantive audit

Question 17

The auditor begins the search for evidence by focusing on transactions that have already been recorded in the financial statements and following them back to the source when engaged in _______.

Answer 17

vouching

Question 18

Testing the completeness assertion by following a sample of shipping documents forward to sales invoices, the sales journal and revenue earned is called _______.

Answer 18

tracing

Question 19

Auditors use audit procedures for _____
assessment, tests of ____
, and to produce evidence about management’s assertions.

Answer 19

risk; controls

Question 20

Physical inspection of tangible assets provides strong evidence regarding the assertion of ____ and may provide some evidence related to the assertion of _____.

Answer 20

existence; valuation

Question 21

Reperformance is a representative audit procedure used to test the PCAOB and ASB assertion of ______.

Answer 21

valuation and allocation

Question 22

The substantive audit plan depends almost exclusively upon the:

Answer 22

risk assessment of the client

Question 23

Observation is commonly used as a test of ______.

Answer 23

controls

Question 24

Selecting an item in the financial records and following its path back to the source document is referred to as _______.

Answer 24

vouching

Question 25

The collection of verbal evidence from independent parties and management is the audit procedure known as ______.

Answer 25

inquiry

Question 26

Confirmation can provide evidence regarding ______. (4)

Answer 26

- rights and obligations - cutoff - valuation - existence

Question 27

Inspection of tangible assets does not necessarily provide any evidence of ______. | Explain why

Answer 27

rights (assets may be held on lease or consignment)

Question 28

The physical presence of assets is an example of evidence available to test the ASB assertion of________.

Answer 28

existence

Question 29

An audit procedure that is similar to recalculation but much broader in approach is called ________.

Answer 29

reperformance

Question 30

Viewing a client's physical facilities and participating in a surprise payroll distributions are examples of the audit procedure known as _____.

Answer 30

observation

Question 31

What are analytical procedures? ## Footnote When are they required to be used?

Answer 31

when an auditor compares the expectation to a recorded balance ## Footnote Required when planning audit and when performing review of financial statements near end of audit

Question 32

Audit documentation _____. (3)

Answer 32

1. should contain support for the audit decision 2. provides the auditors' records of compliance with standards 3. may be in either electronic or hard copy form

Question 33

A widely used auditing procedure is _________ by direct correspondence with independent parties.

Answer 33

confirmation

Question 34

What files contain information of continuing audit significance over many years' audits of the same client? | Provide both names

Answer 34

Continuing audit files AKA permanent files

Question 35

When the audit team recomputes computations previously performed by client personnel, the audit procedure is called _____.

Answer 35

recalculation

Question 36

According to the professional standards, if there is a chance an account could contain a material misstatement, it should be identified as ____.

Answer 36

significant

Question 37

Information to familiarize new audit team members with a client, company history, continuing schedules and prior years financial statements and audit reports may all be found in the ______ files.

Answer 37

permanent

Question 38

According to the professional standards, if an assertion has "a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated," it must be categorized as ____ .

Answer 38

relevant