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Auditors of U.S. public companies should follow the PCAOB’s auditing standards.
There is not much commonality among the auditing stan- dards set by the PCAOB, AICPA, and IAASB.
The ten standards underlying the PCAOB’s auditing stan- dards fall within four different categories.
The purpose of an audit is to enhance the degree of confi- dence that users can place on the financial statements.
As a precondition to applying the audit opinion formulation process, the auditor needs to understand the client’s responsibilities for internal control over financial reporting and the financial statements.
The audit opinion formulation is described as consisting of five phases.
The cycle approach to auditing provides a way for breaking the audit up into manageable components.
Within a particular cycle, the auditor focuses on the flow of transactions within that cycle, including how transactions are initi- ated, authorized, recorded, and reported.
The completeness assertion is typically the more relevant assertion for assets.
Within each cycle, the audit is designed to test management assertions.
Risk assessment procedures alone provide sufficient appro- priate audit evidence on which to base an audit opinion.
The auditor’s selection of audit procedures depends on the accounts and assertions being tested.
Auditors are encouraged, but not required, to prepare audit documentation.
Audit checklists and audit programs are examples of audit documentation.
U.S. auditing standards require that an auditor communicate with a predecessor auditor for an initial audit engagement.
The agreed-upon terms of an audit engagement should be documented in an audit program.
During risk assessment, the auditor is focused on under- standing the risks of all misstatements in the financial statements and related disclosures.T/F
The auditor assesses the risk of material misstatement at only the assertion level.
The auditor is expected to obtain evidence about the oper- ating effectiveness of internal control on all audits.
When testing controls, the auditor tests only transaction controls.
The auditor is expected to perform substantive procedures for each relevant assertion of each significant account and disclosure.
Substantive procedures include substantive analytical pro- cedures and tests of details.
Once the auditor completes the substantive procedures in Phase IV, the auditor is in a position to issue the audit opinion.
In an integrated audit, the auditor reviews management’s documentation of internal control and management’s evaluation and findings related to internal control effectiveness.
The results of the auditor’s tests of controls will likely have implications for the substantive procedures the auditor will perform.
Which of the following statements is correct regarding the setting of auditing standards in the U.S.?
Both (a) and (b) are correct.
The AICPA is responsible for the setting auditing standards for
audits of nonpublic entities.
The PCAOB is responsible for setting auditing standards for
audits of public companies.
The following describes a situation in which an auditor has to determine the most appropriate standards to follow. The audited company is headquartered in Paris but has substantial operations within the United States (60% of all operations) and has securities registered with the SEC and is traded on the NYSE. The company uses International Financial Reporting Standards (IFRS) for its accounting framework. What would be the most appropriate set of auditing standards to follow?
Which of the following is not required as part of the field- work standards?
All of the above are required by the fieldwork standards.
a. An audit should be properly planned and supervised.
b. Auditors should develop an understanding of the client’s controls
as an important prerequisite to developing specific audit tests.
c. Auditors should obtain sufficient appropriate audit evidence by
performing audit procedures to provide a reasonable basis for
the audit opinion being provided.
Which of the following is included as part of the AICPA’s principles governing an audit?
An audit has inherent limitations such that auditor cannot pro-
vide absolute assurance about whether the financial statements
are free of misstatement.
Which of the following statements is true about the audit opinion formulation process presented in this chapter?
The audit opinion formulation process is based on the premise
that management has responsibility to prepare the financial state-
ments and maintain internal control over financial reporting.
Which of the following activities is not part of the activities
within the audit opinion formulation process?
The auditor determines the appropriate nonaudit consulting
services to provide to the client.
Which of the following is a reason that the auditor uses an accounting cycle approach when performing an audit?
The accounting cycles provide a convenient way to break the
audit up into manageable pieces.
Which of the following accounts would not be included in
the Acquisition and Payment for Long-Lived Assets Cycle?
Which of the following is not one of the management assertions?
Which management assertion addresses whether the compo- nents of the financial statements are properly classified, described, and disclosed?
Assume that an auditor is physically examining a client’s
equipment. What type of audit procedure is the auditor performing?
Which of the following is a true statement regarding audit evidence and audit procedures?
The auditor has a responsibility to design and perform audit
procedures to obtain sufficient appropriate audit evidence.
Which of the following items should be included in audit documentation?
Which of the following statements is a false statement regarding audit documentation?
The only purpose of audit documentation is to provide evidence
that the audit was planned and performed in accordance with
Which of the following statements is a true statement regarding client acceptance?
Auditors in the U.S. are required to communicate with the pre-
decessor auditor before accepting a new client
Which of the following documents contains the agreed-upon
terms of the audit engagement?
Which of the following statements is correct regarding the
design of controls related to credit limits?
The effectiveness of the control design is contingent on the
credit manager’s process for establishing and reviewing credit
Which of the following tests of controls would not typically be used in assessing control design effectiveness?
The auditor is testing the operating effectiveness of controls in the revenue cycle and notes the following: (a) the organization does not regularly follow its credit policies; rather it often overrides the credit policy when divisional management needs to meet its performance goals; and (b) the sales manager has the ability to override the credit policy for important customers. Which of the following statements would be correct regarding an integrated audit of sales and receivables?
Based on the test of controls, the auditor would likely assess
control risk as high.
Assume the auditor concludes the controls related to accounts receivable are operating effectively based on inquiry and other appropriate tests. Which of the following is a correct infer- ence regarding the auditor’s conclusion?
The auditor could not have concluded that the internal controls
over credit were effective unless the auditor determined that the
credit limits are updated for changed conditions.
In performing substantive procedures, which of the follow- ing statements provides appropriate guidance to the auditor?
The auditor can perform both substantive analytical procedures
and substantive tests of details.
In which of the following scenarios is the auditor likely to obtain more (or more rigorous) substantive evidence?
When the design of controls is determined to be ineffective.
Which of the following procedures is least likely to be per- formed during Phase V of the audit opinion formulation process?
Performance of preliminary analytical review procedures.
Which of the following statements is correct regarding the auditor’s report on a public company’s internal control over financial reporting?
The auditor must explicitly reference the criteria for evaluating
internal control, using the COSO framework, for example.
The auditor discovers that there is a key control deficiency over sales contracts and that some contracts near the end of the year are not properly reviewed by management. Which of the fol- lowing would be the best way for the auditor to respond to the control deficiency identified?
Expand the sample size for substantive testing and review of contracts during the latter part of the year to determine if reve- nue is appropriately identified.
Assume the auditor has assessed the design of controls and determines that the company has an ineffective control design related to pricing and dating of sales. This assessment is due to an inadequate segregation of duties. Based on this information, which of the following actions should the auditor take?
Answers (b) and (c) above.
b. Do not test controls over sales pricing and dating of sales
c. Expand the direct tests of related account balances by selecting
recorded sales and tracing back to shipping documents and
authorized price lists.
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