Auditing An International Approach 8Th Edition By Wally Smieliauskas - Test Bank

Auditing An International Approach 8Th Edition By Wally Smieliauskas – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05

Preliminary Audit Planning: Understanding the Auditee’s Business

 

 

Multiple Choice Questions

1. The overall audit process can be broken down into which of these three phases?
   A.Client acceptance, risk analysis, and audit performance.
   B. Analytical review, test of details of balances, and tests of controls
   C. Risk identification, risk assessment and risk response.
   D. Risk assessment, risk response, and reporting of results

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Summarize the financial statement audit process.
Topic: 05-08 Overview of the Financial Statement Audit Process

2. An “accountable party” can be all of the following at the same time except ________.
   A.an auditor
   B. an entity
   C. a client
   D. an auditee

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-02 Explain the main characteristics of an independent audit engagement.
Topic: 05-09 Independent Audit Engagement Characteristics

3. Audit risk can be offset by ________.
   A.general management
   B. engagement management
   C. audit management
   D. quality management

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-11 Pre-engagement Activities

4. CAS and CSQC standards require all of the following factors be addressed as part of the audit engagement acceptance and continuance decision, except for:
   A.An assessment of the auditor’s level of independence.
   B. An assessment of the client’s integrity
   C. An assessment of the auditor’s competence and capabilities to perform the audit.
   D. An assessment of what additional services can be provided to the current or potential client.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-12 Audit Engagement Acceptance and Continuance

5. Which of the following most indicates a situation where an organization would be deemed by the PA to be “not auditable”?
   A.As part of an aggressive growth strategy, the company’s operations will soon extend to multiple countries.
   B. Management’s intention is to take the company global within the next three years.
   C. Due to what it perceives as unacceptably high legal liability exposure, company management will not commit to providing the auditor with written representations.
   D. Because the company’s shares are traded on the New York Stock Exchange, its financial statements are prepared according to U.S. GAAP.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-13 Determining Auditability

6. All but which of the following statements concerning communication between predecessor and successor auditors is correct?
   A.The predecessor auditor must obtain the auditee’s permission before granting the successor auditor access to the prior year’s audit file.
   B. The predecessor auditor is required to initiate contact with the successor auditor.
   C. Information provided by the predecessor auditor may lead the successor to reject the new auditee as a client.
   D. The minimum information the predecessor is required to report to the successor is if there is any known reason why the successor should not accept the engagement.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-14 Communication between Predecessor and Successor Auditors

7. What is the best description of the engagement letter?
   A.The letter soliciting a potential client.
   B. A letter from a successor auditor to a predecessor auditor asking to review the working papers for the previous year.
   C. The audit contract, which may include special requests.
   D. The letter at the end of the audit engagement reviewing any concerns the auditors wish management to be aware of.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-16 Engagement Letters

8. The probability that something will adversely affect the entity’s ability to achieve its objectives and execute its strategies is called ________.
   A.Audit Risk
   B. Business Risk
   C. The Risk of Material Misstatement
   D. Information Risk

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-19 Understanding the Business and Its Environment and Risks

9. In researching a potential new audit client, you determine that the business operates in a highly competitive industry, with low barriers to entry and very short product life cycles. What audit planning factors will this information help you to assess?
   A.Audit risk
   B. Auditor’s risk from taking the engagement.
   C. Client business risk
   D. An acceptable level of Information risk.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-19 Understanding the Business and Its Environment and Risks

10. An auditor should assess a client’s business risks ________.
    A.during the planning stage of the engagement
    B. at the end of the engagement after all evidence has been assembled
    C. as part of the year-end evidence gathering
    D. only if the client requests the auditor to do so in the engagement letter

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-04 Explain why auditors need to understand the auditee organization’s business and environment and its risks and controls at the start of a financial statement audit.
Topic: 05-19 Understanding the Business and Its Environment and Risks

11. Generally accepted auditing standards require that analytical procedures ________.
    A.Be used in the planning and final review stages, as well as during the audit as a substantive test.
    B. Be used in the planning and final review stages of the audit and optionally they can be used as a substantive test during the audit.
    C. Be used in the planning stage only, with the option to use them as a substantive test and in the final review stage.
    D. Be used in the final review stage, and can optionally be applied as a substantive test in the planning stage

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

12. Which of the following is likely to be found in the minutes of the board of directors’ meetings?
    A.Approval of customer credit limits.
    B. Approval of a new computer for the controller.
    C. Authorization of employee salaries.
    D. Authorization of executive salaries.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

13. In the planning stage, analytical procedures are used to ________.
    A.assess overall reasonableness of the financial statements
    B. identify potential problem areas
    C. determine the mathematical correctness of the financial statements
    D. provide direct evidence about the balances in accounts

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

14. Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor’s expectations. If management is unable to provide an acceptable explanation, the auditor should ________.
    A.consider the matter a scope limitation
    B. perform additional audit procedures to investigate the matter further
    C. intensify the audit with the expectation of detecting management fraud
    D. withdraw from the engagement

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

15. If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense, ________.
    A.income would be overstated
    B. income would be understated
    C. income would not be misstated
    D. accounts receivable would be understated

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-16 Engagement Letters
Topic: 05-17 Staff Assignment and Time Budgets
Topic: 05-24 Preliminary Analytical Procedures

16. The concept of materiality refers to ________.
    A.any misstatement in the financial statements
    B. the overall degree of risk in an organization
    C. an amount of misstatement that could affect the decisions of a financial statement user.
    D. an amount of risk in an organization sufficient to offset the expected returns of any investment in the company

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process

17. Which of the following statements concerning materiality is incorrect?
    A.Overall materiality represents the maximum amount of accumulated misstatements in the financial statements before the auditor can conclude they are materially misstated.
    B. Performance materiality is an amount that is applied uniformly to all accounts.
    C. Two auditors, auditing the same company at the exact same time, can both come up with completely different materiality figures.
    D. Materiality affects the risk assessment, risk response, and concluding ad reporting phases of the audit.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-31 Materiality Levels for Audit Planning
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process

18. A bank with a large loan would most likely be interested in materiality based on ________.
    A.operating cash flows
    B. normalized net income
    C. sales revenue
    D. net assets

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-33 Financial Statement Materiality
Topic: 05-37 Materiality Judgment Criteria
Topic: 05-40 Summary of Materiality Levels in the Auditing Standards

19. If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on ________.
    A.absolute size
    B. relative size
    C. nature of the item
    D. cumulative effects

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-37 Materiality Judgment Criteria
Topic: 05-38 Materiality Judgment Criteria-Quantitative

20. How should auditors use the concept of materiality?
    A.As a guide to assessing inherent risk
    B. As a guide in assessing control risk.
    C. As a guide in deciding to report a deficiency to the audit committee.
    D. As a guide in planning the audit program.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process
Topic: 05-33 Financial Statement Materiality

21. The overall audit strategy typically includes ________.
    A.the detailed audit plan
    B. specific procedures for determining inherent and control risk
    C. decisions about unusual client accounting principles
    D. audit evidence gathering procedures

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-07 List the preliminary planning decisions set out in the overall audit strategy.
Topic: 05-42 Overall Audit Strategy

 

True / False Questions

22. The CASs provide the overall objective of a financial statement auditor and set out the requirements that must be met to meet that objective.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-08 Overview of the Financial Statement Audit Process

23. Since auditing is a public profession, auditors are obligated to continue auditing a client once they start.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-12 Audit Engagement Acceptance and Continuance

24. When there is a change in auditors, the Rules of Professional Conduct do not permit the predecessor auditor to give information to the successor auditor without explicit approval by the client.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 05-14 Communication between Predecessor and Successor Auditors

25. The auditor’s objective in obtaining an understanding of the client’s business and risks is to assess the overall risk of material misstatement in the financial statements.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-19 Understanding the Business and Its Environment and Risks

26. Analytical procedures are required at the beginning, during the testing phase and the end of an audit.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

27. During the preliminary analytical review, the auditor discovered that the auditee forecast sales of 10,000 units but only 5,000 were sold. The auditors should consider performing a careful lower-of-cost-or-net realizable value analysis of the year-end inventory.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

28. Preliminary analytical procedures revealed that the gross profit margin increased unexpectedly from last year. As a result, the auditor should consider an increased risk of material misstatement in both sales and inventory.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements

29. The enquiries of the client that result from preliminary analytical review provide direct evidence about the amounts in the financial statements.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

30. Relationships on the financial statements that do not make sense may indicate problem areas in the accounts.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

31. Materiality is primarily a quantitative calculation.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Topic: 05-37 Materiality Judgment Criteria

32. Materiality levels determined at the planning stage are used to decide how much work to do on each financial statement account.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process
Topic: 05-33 Financial Statement Materiality

33. Overall materiality is determined by the auditor at the planning stage of the audit and remains fixed throughout the audit process.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 05-31 Materiality Levels for Audit Planning
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process

34. Overall materiality is used to identify and assess risks, to design audit procedures to be done in response to the assessed risks, and to evaluate the results of sampling procedure
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-36 Performance Materiality

35. An intentional misstatement for an amount lower than both overall and performance materiality is still likely to be considered material.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 05-37 Materiality Judgment Criteria

36. Audit planning is an ongoing process where information gained as the audit is performed may result in changes to the plan.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-42 Overall Audit Strategy

37. The detailed audit plan guides development of the overall audit strategy.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-25 What ‘s in the Minutes of Meetings?

 

Short Answer Questions

38. List and briefly explain four factors that increase the auditor’s risk from accepting an audit engagement.

Factors that make an audit engagement riskier for the auditor include:

i. Wide distribution of the financial statements. The audit of a publicly listed company is riskier than that of a private company.

ii. The auditee is in weak financial condition. A greater possibility of financial failure leads to greater chance of legal lawsuits from investors who suffered losses. It also increases the risk of non-payment of audit fees.

iii. Poor management integrity/trustworthiness. A greater risk for financial misstatement (fraudulent financial reporting).

iv. The level of knowledge of the financial statement users. A higher degree of reliance/dependence on the statements by the users, to make investment decisions, increases the auditor’s legal liability risk.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-15 Auditor’s Risk from Accepting an Audit Engagement

39. What are the benefits of scheduling interim audit work as part of your audit time budget?

Performing interim audit work provides two key benefits. Firstly, it allows the auditor to spread the workload out over the year. This helps to avoid the available personnel constraints that occur at year-end, due to many clients having a common year-end (December 31, for example). Secondly, performing interim work helps for better planning of the audit. Conducting internal control risk assessment and tests of controls at interim alerts the auditor to possible higher risk assessments, thus allowing the auditor to plan for more/less audit testing of balances at or shortly after the year-end date.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-03 Describe the activities auditors undertake the decide whether to accept a financial statement audit engagement, and the first tasks performed once an audit engagement is accepted.
Topic: 05-17 Staff Assignment and Time Budgets

40. Analytical procedures consist of evaluating financial information by studying financial and nonfinancial data and looking for plausible or implausible relationships. The procedures can range from making simple comparisons to using complex models involving many relationships and elements of data. They can involve time-series comparisons of recorded amounts and ratios developed from recorded amounts, and they always include comparison to expectations developed by the auditors.

    Required: A) Describe the broad purposes of analytical procedures.

    B) Identify the sources of information from which an auditor develops expectations.

41. A) Analytical procedures are used for these broad purposes:

    To assist the auditor in planning the nature, timing, and extent of other auditing procedures.

    ii. As a substantive test to obtain evidence about particular assertions related to account balances or classes of transactions.

    iii. As an overall review of the financial information in the final review stage of the audit.

    B) An auditor’s expectations are developed from the following sources of information:

    i. Financial information for comparable prior periods giving consideration to known changes.

    ii. Anticipated results-for example, budgets, forecasts, and extrapolations.

    iii. Relationships among elements of financial information within the period.

    iv. Information regarding the industry in which the client operates.

    v. Relationships of financial information with relevant nonfinancial information.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-23 Preliminary Analytical Procedures for Audit Planning
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

41. Analytical procedures are one type of evidence-gathering procedure. According to auditing standards, there are five general forms of analytical procedures. Auditing standards also provide examples of five sources of information for analytical procedures.

Required: Describe three of the five general forms of analytical procedures. For each form, describe a typical source of the information for the form. For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

 

1. A) The five general forms of analytical procedures are:

   Comparison of current-year account balances to one or more prior periods.

   ii. Comparison of the current-year account balances to budgets and forecasts prepared by the company.

   iii. Evaluation of the relationships of current-year account balances to other current-year balances to determine if they conform to expectations based on the company’s historical experience.

   iv. Comparison of current-year account balances and financial ratios with similar information for the industry in which the company operates.

   v. Study of the relationships of current-year account balances with relevant non-financial information (e.g., physical production statistics).

   B) The five sources of information for analytical procedures are:

   i. Financial account information for prior period(s). Company budgets and forecasts.

   ii. Financial relationships among accounts in the current period.

   iii. Industry statistics.

   iv. Nonfinancial information, such as physical production statistics.

   C) Concerns about relevance and reliability of the sources of information are:

   i. Has the financial information from prior period(s) been audited?

   ii. Are company budgets or forecasts generally accurate? What processes does the client go through to develop these?

   iii. Are the industry statistics from a reliable source? Are the industry statistics specific enough to the client or the particular segment or division of the client being examined?

   iv. Has the nonfinancial information been audited? Have the controls over the production of the nonfinancial information been tested?

 

 

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

42. Contrast horizontal and vertical analysis. Give an example of each.

Horizontal analysis refers to changes in financial statement amounts and ratios across two or more years. An example would be the increase in revenues from one year to the next. Vertical analysis refers to the relationship among financial statement amounts in the same year. An example would be the ratio of cost of goods sold to product sales revenue.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-25 What ‘s in the Minutes of Meetings?
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

43. This question tests your ability to perceive the place(s) where potential problems may exist and the type of problem (overstatement or understatement) that may exist.

    Required: For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason; for example, “potential overstatement or understatement of _______.”

    A) Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same.

    B) Current year inventory is larger than last year but the current year gross margin (profit) is larger.

    C) Current year long-term liabilities are larger than last year but the interest expense is the same.

    D) Current-year fixed assets total is larger than last year but current amortization expense is the same as last year.

44. A) The collectability of accounts receivable is of concern. The allowance for doubtful accounts may be understated. The bad debt expense may be understated. Accounts receivable may be overstated.

    B) The existence assertion related to the inventory account is of concern. Inventory may be overstated. Cost of goods sold may be understated.

    C) The amount of accrued interest and interest expense is of concern. Interest expense may be understated. It is less likely, but long-term liabilities could be overstated.

    D) Amortization expense and accumulated amortization may be understated. It is also possible that fixed assets are overstated.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Use preliminary analytical procedures on management’s draft financial statements to identify areas where misstatements are most likely.
Topic: 05-24 Preliminary Analytical Procedures
Topic: 05-26 Applying Analytical Procedures to Management’s Draft Financial Statements
Topic: 05-27 Analysis Procedures for Attention Directing

44. What is meant by materiality in the context of the audit plan?

In general, materiality refers to the level of misstatement that would affect the decisions of a user of the financial statements. An amount of materiality is determined at the planning stage of the audit to help determine the nature, timing, and extent of audit procedures needed by the auditor. The auditor evaluates the aggregate amount of errors, omissions or other misstatements uncovered during the audit against the overall performance materiality to decide whether the financial statements can still be considered fairly presented. In order to assess materiality, the auditor must understand who the users of the financial statements are and for what purpose the financial statements will be used.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process
Topic: 05-33 Financial Statement Materiality

45. This question is about the auditor’s concept of materiality considered in the planning stage of the audit.

    Required: A) Define or describe the independent auditor’s concept of “planning materiality.”

    B) Name (but do not describe or explain) three common relationships or considerations used by the auditor quantifying materiality.

46. A) Planning materiality is the largest amount of uncorrected dollar misstatements the auditor believes could exist in audited financial statements without causing them to be considered misleading.

    B) Absolute size, relative size, nature of the item or issue, circumstances, uncertainty, cumulative effects.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-06 Explain the materiality levels used for planning the audit and how these amounts are determined.
Topic: 05-32 Materiality Decisions in the Context of the Whole Audit Process
Topic: 05-33 Financial Statement Materiality

46. What are auditors referring to when they talk about the nature, timing, and extent of audit procedures?

The nature of audit procedures refers to evidence techniques they will use, such as examination or recalculation. Timing refers to when t these procedures will be performed, whether before (interim date), at, or after the auditee’s year end. Timing may have other aspects such as surprise procedures (unannounced to auditee personnel) or the need to observe periodic auditee procedures, such as rotating inventory counts during the year. The extent usually refers to the sample sizes of data examined, such as the number of customer accounts receivable to confirm, or the number of inventory categories, products, or locations to count.

The nature, timing, and extent of the audit procedures for each component of the audit are documented in the detailed audit plan.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-07 List the preliminary planning decisions set out in the overall audit strategy.
Topic: 05-42 Overall Audit Strategy