A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?
Answer(s): A
Choice "a" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports. Choice "b" is incorrect. FASB Technical Bulletins are considered to be a source of established accounting principles that expand upon or further clarify GAAP. They do not provide information regarding how various companies comply with GAAP.Choice "c" is incorrect. AICPA Audit and Accounting Guides are interpretive publications that provide additional guidance regarding the application of auditing standards. They do not provide information regarding how various companies comply with GAAP.Choice "d" is incorrect. FASB Statements of Financial Accounting Concepts establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. They do not provide information regarding how various companies comply with GAAP.
An auditor's engagement letter most likely would include a statement regarding:
Choice "a" is correct. The auditor is required to establish an understanding with the client, and this understanding should be documented in the form of an engagement letter. The understanding (and therefore the letter) should encompass management's responsibilities, which include providing the auditor with a representation letter at the conclusion of the engagement. Choices "b", "c", and "d" are incorrect. An understanding generally is not obtained with respect to specific audit procedures, and therefore these items would not be included in an engagement letter.
A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's:
Choice "a" is correct. The successor auditor is required to make inquiries of the predecessor auditor before accepting an engagement. These inquiries should include the predecessor's understanding as to the reasons for the change in auditors.Choice "b" is incorrect. The successor auditor would not typically inquire regarding audit methodology used during the prior audit.Choices "c" and "d" are incorrect. The successor auditor is responsible for making his or her own judgments regarding the audit, and would not typically inquire regarding the predecessor auditor's judgments with respect to subsequent events or the internal audit function.
An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters?
Answer(s): D
Choice "d" is correct. An auditor would review the client's accounting policies and procedures as part of obtaining an understanding of the client's operations and business. This understanding is important because it affects the design of internal control, which in turn impacts planned auditing procedures.Choice "a" is incorrect. Although the auditor might consider the client's accounting policies and procedures when designing a sampling plan, this is not the primary reason for the auditor's review of the client's policies and procedures.Choice "b" is incorrect. The client's accounting policies and procedures would not affect preliminary judgments about materiality, which are generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "c" is incorrect. The client's accounting policies and procedures would not affect the nature of reports to be rendered. The nature of reports to be rendered would be based on the type of engagement and the specific results of that engagement.
An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
Answer(s): B
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies in internal control. Also, such deficiencies are typically identified during the fieldwork stage of the audit, while obtaining an understanding of the entity's business typically occurs during planning.Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc.Choice "d" is incorrect. Analytical procedures are always required in an audit, during the planning and overall review stages.
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