Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
Answer(s): D
Choice "d" is correct. The planning process should include application of analytical procedures, such as comparison of the financial statements with budgeted or anticipated results. Choice "a" is incorrect. Management representations are typically obtained at the end of the audit, not during the planning stage.Choice "b" is incorrect. Assuming all of those charged with governance are not also involved with managing the entity, the auditor is required to communicate with those charged with governance concerning adjustments arising from the current year's audit, not adjustments from the previous year.Choice "c" is incorrect. Inquiries are typically made of the client's attorney during the fieldwork stage of the audit, not during the planning stage.
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
Answer(s): C
Choice "c" is correct. An understanding between the auditor and the client generally includes the auditor's responsibilities. One of the auditor's responsibilities is to ensure that those charged with governance (e.g., the audit committee) are aware of any significant deficiencies in internal control that come to the auditor's attention.Choice "a" is incorrect. An understanding between the auditor and the client generally would not include the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors, as an understanding generally is not obtained with respect to audit procedures or specific audit assessments.Choice "b" is incorrect. Management is not responsible for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. The auditor, however, would look for and evaluate mitigating factors to determine if such factors alleviate doubt about the entity's ability to continue as a going concern.Choice "d" is incorrect. Management is not responsible for providing the auditor with an assessment of the risk of material misstatement due to fraud. The auditor, however, is responsible for making such an assessment.Fraud and Illegal Acts
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?
Choice "d" is correct. Audit documentation is required to include a description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud. Choice "a" is incorrect. Discussion among engagement personnel regarding the risk of material misstatement due to fraud is required.Choice "b" is incorrect. The discussion should include all key members of the audit team, but if an audit involves more than one location, there could be multiple discussions with team members in different locations.Choice "c" is incorrect. Communication among audit team members about the risks of material misstatement due to fraud should continue throughout the audit.
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?
Answer(s): B
Choice "b" is correct. During planning, the audit team is required to discuss the potential for material misstatement due to fraud, and the fraud risk factors should be included in that discussion. Choice "a" is incorrect. The auditor should determine whether and to what extent fraud risk factors are present during the planning stage of the audit, not during the final overall review stage. Choice "c" is incorrect. The existence of all three fraud risk factors does not necessarily imply that fraud has occurred, although it is indicative of a greater risk of fraud. Choice "d" is incorrect. Lack of observation of all three fraud risk factors does not necessarily imply that fraud has not occurred, as one factor may be significant enough on its own to result in fraud.
Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud?
Choice "b" is correct. The auditor should inquire whether management (not operating personnel) has communicated to those charged with governance (not management) regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud. Choice "a" is incorrect. The auditor should inquire how management communicates to employees its views on acceptable business practices.Choice "c" is incorrect. The auditor should inquire whether there are any particular business segments for which a risk of fraud may be more likely to exist. Choice "d" is incorrect. The auditor should inquire whether management is aware of any allegations of fraud.
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