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Exam 6: Preliminary Audit Planning: Understanding the Auditee

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Question 1

Multiple Choice

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If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on

A) Absolute size.
B) Relative size.
C) Nature of the item.
D) Cumulative effects.

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B

Question 2

Multiple Choice

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In the planning stage, analytical procedures are used to

A) Assess overall reasonableness of the financial statements.
B) Identify potential problem areas.
C) Determine the mathematical correctness of the financial statements.
D) Provide direct evidence about the balances in accounts.

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Question 3

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The auditor's objective in obtaining an understanding of the client's business and risks is to design audit procedures that will serve as a basis for their report.

Materiality levels determined at the planning stage are used to decide how much work to do on each financial statement account.

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s) ?

During the preliminary analytical review, the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold.The auditors should consider performing a careful lower-of-cost-or-market valuation of the year-end inventory.

This question tests your ability to perceive the place(s) where potential problems may exist and the type of problem (overstatement or understatement) that may exist. Required: For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason; for example, "potential overstatement or understatement of ." A) Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same. B) Current year inventory is larger than last year but the current year gross margin (profit) is larger. C) Current year long-term liabilities are larger than last year but the interest expense is the same. D) Current year fixed assets total is larger than last year but current amortization expense is the same as last year.

A completeness error occurs when an account balance is overstated.

The detailed audit plan guides development of the overall audit strategy.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation, the auditor should

Generally accepted auditing standards require that analytical procedures:

Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.

The overall audit strategy typically includes:

An auditor should assess a client's business risks:

Which of the following is likely to be found in the minutes of the board of directors?

In a typical audit, testing of internal controls occurs:

Analytical procedures consist of evaluating financial information by studying financial and non -financial data and looking for plausible or implausible relationships.The procedures can range from making simple comparisons to using complex models involving many relationships and elements of data.They can involve time-series comparisons of recorded amounts, ratios developed from recorded amounts and they always include comparison to expectations developed by the auditors. Required: A) Describe the broad purposes of analytical procedures. B) Identify the sources of information from which an auditor develops expectations.

Auditors' analytical procedures can include review of prior year adjusting entries, conversations with client personnel, and study of the minutes of board of directors' meetings.

Give some examples of cut off errors and explain what management assertions are affected by such errors.