The areas where management is more likely to misstate transactions are riskier for the auditor because
the auditor will be the subject of legal action.
the auditor probably will not have enough time to identify these areas.
failing to correct the misstatements may lead to issuing a clean opinion on materially misstated financial statements.
failing to correct the misstatements may lead to issuing a qualified opinion on materially misstated financial statements.
To obtain reasonable assurance, which is a high, but not absolute level of assurance, the auditor:
Performs the work and properly supervises the client.
Assumes appropriate materiality level or levels.
Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control.
Obtains sufficient appropriate management representations about whether material misstatements exist
The Auditing Standards Board
Each year issues a new “Codification of Statements of Auditing Standards”.
Issues new financial accounting standards
Evaluates complaints about violations of the standards.
Issues new auditing standards as “Statements on Auditing Standards.”
The PCAOB is required to
Conduct continuing inspections of public accounting firms registered with the SEC.
Inspect firms with more than 100 public clients on an annual basis.
Inspect firms with fewer than 100 clients at least every four years
Post the inspection reports on the SEC website and are available to the public
In the gathering of evidence, several concepts are important. At the beginning of the audit, the auditor presents his credentials to the client as
An individual with training and knowledge in accounting and auditing.
An individual who will be sensitive to good client relations.
Someone with the knowledge to make good business decisions.
Someone who will exercise good judgment.
The auditor must gather evidence guided by the standard of due professional care. Due professional care requires
The auditor to perform audit duties with skill comparable to that of any other client.
To gather statements and interpret statements in a manner that any other professional would have done.
The auditor to know accounting and auditing requirements.
The auditor to be knowledgeable about the client.
When management presents the financial statements to the auditor, management makes several assertions about the financial statements. Which of the following is not one of these assertions?
Existence or occurrence.
Which of the following statements is correct about the objective of the audit process?
Generally accepted auditing standards require the auditor to obtain assurance about whether the financial statements are free from all misstatements.
Assurance is obtained by the auditor when he has obtained evidence to reduce audit risk to a low level.
A material misstatement is an error or fraud in the financial statements that might cause a user of the financial statements to change his decision about the company.
Sufficient appropriate audit evidence refers to the persuasiveness of the evidence gathered.
How does the auditor gain an understanding of the entity and its environment? The auditing standards require the auditor to understand
Industry, regulatory and other external factors relevant to the entity
The nature of management of the entity, including its operations, ownership and governance structures, the types of investments management makes, and the way the entity is structured and financed.
Management’s selection and use of accounting policies, including any changes in these policies.
Management’s objectives and strategies and the related business risks that may lead to the risk of material misstatement.
Audit risk is defined as
The risk that the auditor issues an opinion saying that the financial statements are not materially misstated when they are.
The risk that the auditor fails to issue an opinion using random sampling.
The risk that the auditor does not detect a material misstatement in the financial statements.
The risk that the auditor does detect a material misstatement in the financial statements but fails to report the material misstatement.
When an auditor agrees to perform an audit because the preconditions for an audit have been met and the auditor believes that he can gather sufficient appropriate audit evidence to reduce audit risk to an acceptably low level, an engagement letter is prepared. This engagement letter includes:
The objective and scope of the audit (to express an opinion on particular financial statements).
Management’s assistance (to prepare the financial statements, select accounting policies, establish effective internal controls, design programs to prevent and detect fraud, provide written representation, inform the auditor of subsequent events that may affect the financial statements, and make all financial records and information available to the auditor).
The auditor’s performance (to conduct the audit in accordance with generally accepted auditing standards and obtain an understanding of the client’s internal control).
The internal control limitations of an audit engagement (material misstatements may not be detected).
In the planning process, the auditor assesses the risk that misstatements have occurred in the financial statements. The source of misstatements includes
The use of auditing standards that the auditor may consider unreasonable or inappropriate.
Inaccuracies in gathering or processing data used to prepare the financial statements.
Differences between the amount or classification of a financial statement item and what should have been reported under generally accepted auditing standards.
Omissions of financial statement explanations.
The auditor has to develop an audit plan that responds to the risks of material misstatement identified in the prior steps of the audit process. The auditing standards require the auditor to develop an audit plan that includes which of the following elements?
The nature, timing, and extent of planned risk assessment procedures to allow the auditor to estimate the risk of material misstatement at the financial statement and assertion level.
The nature, timing, and extent of audit procedures to respond to the assessed risks of material misstatement at the relevant assertion level.
The nature, timing, and extent of audit procedures to test the effectiveness of internal controls.
Other audit procedures that need to be done to allow the auditor to comply with generally accepted accounting principles.
The auditor should document the audit strategy in the audit report containing the key decisions about the scope, timing, and conduct of the audit.
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