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Exam 8: Audit Planning and Materiality

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Question 1

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When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should

A) investigate the possibility the client may have made an error in their cost of goods sold computation.
B) assist management in developing greater cost efficiencies in their product line.
C) prepare a going concern opinion for the client.
D) advise the client to have extensive disclosure to alleviate investor concerns.

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Question 2

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The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate.

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Question 3

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A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Performance materiality is commonly set at 50-75 percent of overall materiality.

Auditors allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole. What is the term for the auditor's allocation of preliminary misstatement to account balances? What are three difficulties auditors face when allocating materiality to balance sheet accounts?

Because auditors are responsible for having appropriate competence and capabilities to perform an audit, auditors are not normally permitted to consult with outside specialists during an audit engagement.

Sampling risk results if the sample accurately represents the population.

Zero risk is certainty, and a 100% audit risk is complete uncertainty.

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

Which of the following is a reason that the auditors may change the preliminary judgment about materiality?

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

Lewis Corporation has a few large accounts receivable that total one million dollars, whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of

Which of the following best describes the corporate minutes of an entity?

A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the

Preliminary analytical procedures can help the auditor assess client business risk.

Discuss the required communications between predecessor and successor auditors.

Smith, CPA, has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Smith's decision concerning

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality is (are) true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.