Financial Statement Audits 1

Question 1

How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements? Examination of evidence /Consistent application of accounting principles

Answer 1

Explicitly & Implicitly

Question 2

Prior GAAS Standards

Answer 2

General Standards, Standards of Field Work, and the Standards of Reporting.

Question 3

Requirement for audit evidence

Answer 3

sufficient appropriate audit evidence…

Question 4

What is due care?

Answer 4

Critical review of the judgment exercised at every level of supervision.

Question 5

In planning a new engagement, what are the factors that affects the auditor’s judgment as to the quantity, type, and content of audit documentation?

Answer 5

1. the nature of the engagement;
2. the type of report to be issued;
3. the nature of the financial statements, schedules, or other information on which the auditor is reporting;
4. the nature and condition of the client’s records;
   the assessed level of control risk (including the estimated occurrence rate of attributes);
5. and the needs in the particular circumstances for supervision and review of the work.

The auditor would NOT consider the content of the management representation letter obtained at the end of the engagement.

Question 6

The audit program usually cannot be finalized until this has occured

Answer 6

Consideration of the entity’s internal control structure has been completed.

Question 7

The successor auditor normally reviews the predecessor’s audit documentation relating to:

Answer 7

planning, internal control, audit results, balance sheet accounts, and contingencies.

Question 8

The engagement letter would typically refer to:

Answer 8

1. the objective of the audit;
2. management’s responsibilities for the financial statements, for internal control over financial reporting, and for compliance with laws and regulations;
3. availability of financial records;
4. representation letter;
5. auditor’s responsibilities;
6. components of an audit;
7. correction of misstatements.

Question 9

All three components of audit risk - control risk, detection risk, and inherent risk - as well as audit risk itself, may be assessed in

Answer 9

either quantitative or nonquantitative terms.

Question 10

The auditor is required to communicate with the audit committee regarding:

Answer 10

1) the auditor’s responsibility under GAAS;
2) significant accounting policies;
3) management judgments and accounting estimates;
4) audit adjustments;
5) auditor’s judgments about the quality of the entity’s accounting principles;
6) disagreements with management;
7) consultation with other accountants; and
8) difficulties encountered in performing the audit.

Question 11

Rules for using a specialist

Answer 11

1) Doesn’t need to be independent, but auditor should assess relationship with client
2) Specialist should understand how auditor is going to use findings
3) auditor is required to understand the methods and assumptions used by the specialist,
4) ensure that significant data provided to the specialist are tested
5) evaluate whether the specialist’s findings support the related financial statement assertions

Question 12

Control risk should be assessed in terms of

Answer 12

Financial statement assertions. The auditor assesses control risk for the assertions present in the financial statements. Such assertions may be found in the account balance, transaction class, or disclosure components. Based upon the understanding of internal control and the control risk assessments, the auditor determines the nature, timing, and extent of the auditing procedures to be performed.

Question 13

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

Answer 13

Reperformance and observation.

Tests of controls directed toward effectiveness or operation of a control would ordinarily include inquiries, inspections of documents, observation, and reperformance of the application of a control. Thus, both reperformance and observation are used by an auditor to assess control risk.

Question 14

In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor

Answer 14

modifies the report and believes that the reference will enable reader to better understand why the modification was made. A decision to include a going concern paragraph as a result of the specialist’s findings involves a modification of the report and, thus, it would be appropriate for the auditor to refer to the specialist in the report.

Question 15

Follow-up on errors reported by customers provides evidence that the customers exist and that the receivables are valid.

Answer 15

This validates Rights and Obligations