Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
Answer(s): A
Choice "a" is correct. The initiative to communicate with the predecessor auditor rests with the successor auditor. Note, however, that the successor auditor must first receive permission from the client.Choice "b" is incorrect. The predecessor auditor should respond promptly and fully to reasonable inquiries. However, the predecessor is not responsible for initiating communications. Choice "c" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications. Choice "d" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications.
The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:
Choice "a" is correct. Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform.Choice "b" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not typically the primary reason for the meeting.Choice "c" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but this is not the primary reason for the meeting.Choice "d" is incorrect. Disagreements about technical issues arise and are resolved after testing begins, not during the pre-audit conference.
To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:
Answer(s): B
Choice "b" is correct. Knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity. Audit documentation from prior years may contain useful information about the nature of the business, its organizational structure, its operating characteristics, and transactions that may require special consideration. Choice "a" is incorrect. Tests of details of transactions and balances are not performed during the planning stage of an audit.Choice "c" is incorrect. Reading industry journals would provide information about the industry in which the entity operates, but reviewing prior-year audit documentation and the permanent file would provide a more thorough understanding of the specific client's business. Choice "d" is incorrect. The client's internal control is not reevaluated during the planning stage of an audit.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:
Choice "a" is correct. The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures. Choice "b" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perceptions of the needs of a reasonable person. It would not be affected by the methods used to process accounting information.Choice "c" is incorrect. The auditor develops specific audit objectives based on financial statement assertions. The methods used to process accounting information would not be relevant to the development of objectives.Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. The acceptable level of audit risk is a matter of auditor judgment, but it would not be affected by the methods used to process accounting information.
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
Answer(s): D
Choice "d" is correct. The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Choice "a" is incorrect. This statement defines the distinction between the responsibility of the auditor and that of management.Choice "b" is incorrect. The purpose of this section is to note that fair presentation is not necessarily impacted by immaterial errors.Choice "c" is incorrect. This statement explains the nature of an audit.
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