An auditor's engagement letter most likely would include a statement that:
Answer(s): D
Choice "d" is correct. An auditor's engagement letter typically includes discussion of limitations of the engagement, such as the fact that the auditor will obtain only reasonable assurance, and therefore a material misstatement may remain undetected. Choice "a" is incorrect. An auditor's engagement letter typically covers the objectives of the engagement, management's responsibilities, the auditor's responsibilities, limitations of the engagement, and other matters involving the conduct of the audit. Potential significant deficiencies discovered during the prior year's audit would not typically be included in the engagement letter. Choice "b" is incorrect. While the auditor's engagement letter might include a discussion of the overall audit strategy, it typically would not include specific audit procedures. Choice "c" is incorrect. While the auditor's engagement letter might include a discussion of the auditor's responsibilities, this is usually discussed in fairly general terms. An engagement letter would not describe the auditor's responsibility with respect to specific issues (such as going concern issues).
Which of the following statements is correct concerning materiality in a financial statement audit?
Choice "d" is correct. Because the financial statements are interrelated, materiality levels are generally considered in terms of the smallest level of misstatement that could be material to any one of the financial statements.Choice "a" is incorrect. Analytical procedures are performed during an audit's review stage to evaluate the overall financial statement presentation and to assess the conclusions reacheD. They generally would not result in a change in materiality levels. Choice "b" is incorrect. If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should consider whether the audit plan needs to be modified. Typically, an increase in materiality levels would result in a decrease in audit risk, which would result in less substantive testing, not more.Choice "c" is incorrect. Qualitative considerations may lead to situations in which misstatements that do not exceed materiality limits are still likely to influence the economic decisions of users. In such cases, an otherwise immaterial misstatement is deemed to be material.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
Choice "d" is correct. During planning, analytical procedures consist of a review of data aggregated at a high level, with an objective of enhancing the auditor's understanding of the client. Comparing the current-year account balances for conformity with predictable patterns would fulfill this purpose. Choice "a" is incorrect. Confirmation of bank balances is a substantive audit procedure (not an analytical procedure) that would be performed during the fieldwork stage of the audit. Choice "b" is incorrect. Scanning accounts receivable for amounts over credit limits is a detailed procedure related to one specific account, and it would be performed during the fieldwork stage of the audit.Choice "c" is incorrect. Recalculating inventory extensions of physical inventory counts is a detailed procedure related to one specific account, and it would be performed during the fieldwork stage of the audit.
An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:
Answer(s): B
Choice "b" is correct. While a specialist who is unrelated to the client will provide the auditor with greater assurance of reliability, a specialist who is related to the client may be acceptable in certain circumstances. In such situations, the auditor would likely perform additional procedures to verify objectivity.Choice "a" is incorrect. If the auditor is expressing a standard unqualified opinion, no reference would be made to the specialist in the auditor's report. Choice "c" is incorrect. While a specialist who is unrelated to the client will provide the auditor with greater assurance of reliability, a specialist who is related to the client may be acceptable in certain circumstances.Choice "d" is incorrect. The fact that the actuary has a relationship with the client is not considered to be a significant deficiency in internal control.
Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:
Choice "d" is correct. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end.Choice "a" is incorrect. The risk of incorrect rejection relates to the efficiency of audit testing, since an item that is initially (and erroneously) rejected will be subject to additional audit testing that should correct the error. The likelihood of assessing this risk lower than it should be does not affect the auditor's decision regarding the appropriate timing of audit work. Choice "b" is incorrect. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved, but this risk would not necessarily be assessed at the maximum level.Choice "c" is incorrect. Interim testing may be performed on material accounts, as long as the auditor assesses the incremental risk involved and determines whether sufficient alternative procedures exist to extend the interim conclusions to year-end. Immaterial accounts would not need to be tested.
Post your Comments and Discuss AICPA CPA-Auditing exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the CPA-Auditing content, but please register or login to continue.