Which of the following statements would least likely appear in an auditor's engagement letter?
Answer(s): D
Choice "d" is correct. The auditor does not consult with the client about audit procedures that will be performed.Choice "a" is incorrect. Since the engagement letter serves as a contract between the auditor and client, fee arrangements are typically disclosed in the letter. Choice "b" is incorrect. A discussion regarding possible auditor suggestions is appropriate for inclusion in an engagement letter.Choice "c" is incorrect. The fact that audit risk exists and that an audit only provides reasonable assurance of the detection of errors and fraud is typically disclosed in an engagement letter.
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
Answer(s): B
Choice "b" is correct. A requirement during planning is to perform analytical procedures, which involve comparisons of recorded amounts to expectations.Choice "a" is incorrect. Inquiry of the client's legal counsel is typically performed near the end of fieldwork.Choice "c" is incorrect. Tests of controls are performed after audit planning is complete. Choice "d" is incorrect. The search for unrecorded liabilities is generally performed at or after year- end.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:
Choice "b" is correct. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Part of the assistant's responsibility is to properly evaluate audit results, and the in-charge auditor would likely discuss this with them. Choice "a" is incorrect. Fraud that causes a material misstatement or involves senior management should be reported to those charged with governance.Choice "c" is incorrect. Preparation and maintenance of the time budget is related to planning rather than supervision.Choice "d" is incorrect. The reasons for transferring documents from the permanent file to the current file need not be explained to the staff assistants.
Analytical procedures used in planning an audit should focus on:
Answer(s): C
Choice "c" is correct. Analytical procedures used in planning the audit should focus on enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date.Choice "a" is incorrect. Analytical procedures used in planning do not reduce tests of controls or substantive tests.Choice "b" is incorrect. Analytical procedures used in planning are not designed to identify material misstatements.Choice "d" is incorrect. Audit evidence has not yet been gathered during the planning process, so its adequacy cannot be assessed.
Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?
Answer(s): A
Choice "a" is correct. An illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue.Choice "b" is incorrect. Failure to retire a piece of obsolete office equipment is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "c" is incorrect. Failure to properly authorize a petty cash fund disbursement is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "d" is incorrect. Failure to write off a relatively small uncollectible account receivable is not likely to have ramifications beyond the immaterial misstatement that would result directly from it.
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