Which of the following risks may be assessed in nonquantitative terms?
Answer(s): C
Choice "c" is correct. Both the risk of material misstatement (including control risk and inherent risk) and detection risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that range, for example, from a minimum to a maximum. Choices "a", "b", and "d" are incorrect, based on the above explanation.
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
Answer(s): B
Choice "b" is correct. The auditor's preliminary judgment about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "a" is incorrect. The anticipated sample size for substantive tests is irrelevant in making a preliminary judgment about materiality.Choice "c" is incorrect. The results of the internal control questionnaire would be relevant for making a preliminary assessment of control risk; however, these results are irrelevant for determining a preliminary level of materiality.Choice "d" is incorrect. The management representation letter is obtained at the end of the audit and would not be available when preliminary assessments of materiality are made during planning.
An auditor should design the written audit plan so that:
Choice "c" is correct. An audit plan aids in instructing assistants in the work to be done. It should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit.Choice "a" is incorrect. Auditors make extensive use of sampling to perform audit tests. Tests of all material transactions would not be economically feasible. Choice "b" is incorrect. Assuming that incremental risk can be controlled, substantive tests can be performed prior to year-end.Choice "d" is incorrect. An account balance does not necessarily have to have tests of controls or tests of transactions applied to it.
In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions.Under these circumstances, Land should:
Answer(s): D
Choice "d" is correct. If, during the audit, the successor auditor becomes aware of information indicating that the financial statements reported on by the predecessor auditor may require revision, he or she should request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.Choice "a" is incorrect. It is not the successor auditor's responsibility to inform readers that the financial statements, which were audited by another firm, cannot be relied upon. Choice "b" is incorrect. The prior year's financial statements should not be reissued until the two auditing firms and the client have an opportunity to discuss the matter. There is a reasonable likelihood that the successor firm is unaware of other information that supports the current condition of the prior year financial statements.Choice "c" is incorrect. The successor firm should not notify the predecessor directly but should request that the client do so.
An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:
Choice "c" is correct. In making judgments about the extent of the effect of the internal auditor's work on the auditor's procedures, the auditor considers the materiality of financial statement amounts, the risk of material misstatement of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases.Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor's testing in this area.Choice "a" is incorrect. Testing the existence of contingencies involves much subjectivity, and should, therefore, be performed by the auditor.Choice "b" is incorrect. Testing the valuation of intangible assets involves much subjectivity, and should, therefore, be performed by the auditor.Choice "d" is incorrect. Testing the valuation of related party transactions involves much subjectivity, and should, therefore, be performed by the auditor.
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