University of Michigan ACCOUNTING

ACC 575

CHAPTER 7

1)This involves developing an overall strategy for the expected conduct and scope of the examination; the nature, extent, and timing of which vary with the size and complexity, and experience with and knowledge of the entity.

1. 1. Audit planning
   2. Audit procedure
   3. Audit program
   4. Audit working papers

2. Initial planning involves four matters. Which of the following is not one of these?

1. 1. Develop an overall audit strategy
   2. Request that bank balances be confirmed
   3. Schedule engagement staff and audit specialists
   4. Identify the client’s reason for the audit

3. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor’s working papers. This procedure is
   1. Acceptable if the client and the predecessor auditor agree to it.
   2. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor’s work.
   3. Required if the CPA is to render an unmodified opinion.
   4. Unacceptable because the CPA should bring an independent viewpoint to a new engagement.

4. The preliminary judgment about materiality and the amount of audit evidence accumulated are

                               related.

1. 1. directly
   2. indirectly
   3. not
   4. inversely

5. According to PSA 320, materiality should be considered by the auditor when:

Determining the nature, timing                 Evaluating the effects and extent of audit procedures.                                       of misstatements

1. 1. YES                                                                                         YES
   2. YES                                                                                         NO
   3. NO                                                                                         NO
   4. NO                                                                                         YES

6. Which of the following statements is not correct about materiality?
   1. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with the applicable financial reporting framework, while other matters are not important.
   2. An auditor considers materiality for planning purposes in terms of the largest aggregate

level of misstatements that could be material to any one of the financial statements.

1. 3. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
   4. An auditor’s consideration of materiality is influenced by the auditor’s perception of the

needs of a reasonable person who will rely on the financial statements.

7. “Performance materiality” is the term used to indicate materiality at the:
   1. balance sheet level
   2. account balance level
   3. income statement level
   4. company-wide level

8. When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect
   1. The level of materiality to be always similar.
   2. The level of materiality for planning purposes to be similar.
   3. The level of materiality for planning purposes to be higher.
   4. The level of materiality for planning purposes to be based on total assets while the level of materiality for evaluating purposes to be based on net income.

9. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following qualitative factors could influence the assessment of materiality?

1. Misstatements that are otherwise immaterial may be material if affect earnings trends.
2. Minor misstatements resulting from the consequences of contractual obligations.
   1. I only
   2. II only
   3. I and II
   4. neither I or II

10. Auditors frequently refer to the terms audit assurance, overall assurance, ad level of assurance to refer to .
    1. detection risk
    2. audit report risk
    3. acceptable audit risk
    4. inherent risk

11. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is the;
    1. Inherent risk
    2. Audit risk
    3. Client risk
    4. Control risk

12. When planning a financial statement audit, the auditor should assess inherent risk at the

Financial statement level              Account balance or transaction class level

1. 1. YES                                                                         YES
   2. YES                                                                         NO
   3. NO                                                                         NO
   4. NO                                                                         YES

13. Which of the following is an incorrect statement?
    1. Detection risk cannot be changed at the auditor’s discretion.
    2. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risk.
    3. The greater the inherent and control risk the auditor believes exist, the less detection

risk that can be accepted.

1. 4. The auditor might make separate or combines assessments of inherent risk and control risk.

14. Relationship between control risk and detection risk is ordinarily
    1. Parallel
    2. Direct
    3. Inverse
    4. Equal

15. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit risk is appropriate?
    1. More evidence is accumulated
    2. Less evidence is accumulated
    3. Special care is required in assigning experienced staff
    4. Review of audit documentation is performed by personnel not assigned to the engagement

16. These consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationship that are inconsistent with other relevant information or deviate from predictable amount.
    1. Financial statement analysis
    2. Variance analysis
    3. Analytical procedures
    4. Regression analysis

17. Which of the following statements about analytical procedures is incorrect?
    1. Analytical procedures are required to be performed in the planning phase of the audit.
    2. Analytical procedures are required to be done during the testing phase of the audit.
    3. Analytical procedures are required to be done during the completion phase of the audit.
    4. Analytical procedures may be performed in the planning, testing and completion phases of the audit.

18. In developing the overall audit plan and audit program, the auditor should assess inherent risk at the:

Audit plan                                           Audit program

1. 1. Financial statement level              Accounting balance level
   2. Account balance level                    Financial statement level
   3. Account balance level                    Account balance level
   4. Financial statement level              Financial statement level

19. An auditor should design the written audit program so that
    1. All material transactions will be selected for substantive testing
    2. Substantive tests prior to the balance sheet date will be minimized.
    3. The audit procedures selected will achieve specific audit objectives.