Time Value of Money: An
managers job - make
decisions on behalf of investors
should exceed costs
much more complex in reality
much will advertising impact sales?
1. An appropriate level of management, at least one level above those involved
Generally, any indication of fraud (even immaterial fraud) should be discussed with an appropriate level of
management at least one level above those involved.
2. Both senior m
1. GAAS and GAGAS Audit
An entity that receives in excess of $500,000 of federal financial assistance would likely be required to have
an audit in accordance with GAGAS. If the entity spent $500,000 in federal financial assistance, it would
qualify for a
Completeness (account balances)
Failure to record a loan means that payables are incomplete.
Understandability and classification
GAAP requires that the current portion of long-term debt be included in the current liabilities section of the balance
1. Control risk | Decrease risk
Requiring approval for large purchases is a good control that would reduce control risk.
2. Inherent risk | Increase risk
Assertions involving complex calculations (such as lease calculations) have relatively high inherent
Form of Engagement
1. Both sets of financial statements
Thayer & Cox may compile either set of financial statements.
2. Neither set of financial statements
A review of prospective financial statements is not allowed.
3. Both sets of financial statements
Tests of controls are procedures performed to evaluate the effectiveness of either the design or the operation of
Substantive tests are of tests of the details of transactions and balances, and analytical review procedures.
1. Substantive test
1. Choice 4 is correct Calculate accounts receivable turnover
With respect to the revenue cycle, Brown & Lawrence would most likely calculate accounts receivable
turnover. A review consists primarily of inquiry and analytical procedures, and ratio calcula
Fortier & Yarrow may not provide assurance with respect to compliance, since this was not the purpose of
the financial statement audit.
Fortier & Yarrow may provide negative assurance relative to loan covenants based on their audit of the
1. Decrease in RMM
Since DML returned to profitable operation, its healthier financial condition leads to a decrease in the risk of
2. Increase in RMM
The risk of material misstatement increases when the internal auditor reports to
1. The client's immediate short-term liquidity
(Cash equivalents + Marketable securities + Net receivables) / Current liabilities
This ratio provides an indication of Silvas immediate short-term liquidity. Inventory and prepaids are not
2. The c
Not an important consideration
The number of years of experience that Jacob had as Janis, Inc.'s auditor is not an important consideration for
Rae & Joseph, as it has no bearing on the Year 2 audit.
Consider after accepting the engagement, as part o
1. Qualified opinion or disclaimer of opinion
When the scope of the auditors examination is affected by conditions that preclude the application of a
necessary auditing procedure, a qualified opinion or disclaimer of opinion would be appropriate.
1. Charles is incorrect
Reference to the subsidiary that was not audited by the principal auditor and the magnitude of its financial
statements is included in the opening paragraph.
2. Charles is incorrect
The other auditors can only be named with their e
The auditor has an active responsibility to investigate certain subsequent events between the date of the
financial statements and the date of the auditors report (12/31/Y2 through 2/12/Y3, in this case). The auditor
would also be responsible for investig
Welcome to ACCT 405/5560!
First things first.
Rules of the Game
expected at all times! Respect,
honesty & integrity
NO cell phones or
(Fine print: Except for use as clicker)
Audit Planning, Types of Audit Tests, and Materiality
The Phases of an Audit That Relate
to Audit Planning
Client Acceptance: New Clients
Appointment & timing
Understand the prospective client
Do we want to work with the client?
1. Choice 4 is correct (the auditor should not rely on this control)
The two purchases that lack appropriate signatures should be considered deviations, despite the fact that
the purchases may have been appropriate. In addition, the allowance for sampling
Customer orders are compared with the approved customer list
Credit approval should be received before sales are made, to ensure that customers are on an approved list.
This should reduce the risk of sales to customers with unsatisfactory credit.
Introduction to Financial
Firms Disclosure of Financial
Financial Statements are accounting
statements issued periodically
present the past performance
a snapshot of the firms assets & financing of
1. easy c Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: a. finance. b. auditing. c. accounting. d.
Auditors must make decisions regarding what evidence to gather and how much to accumulate.
Which of the following is a decision that must be made by auditors related to evidence?
Which one of the following is not one of the three General Standards?
a. Proper planning and supervision.
b. Independence of mental attitude.
c. Adequate training and proficiency.
d. Due professional care.
Auditing standards require that the audit report must be titled and that the title must:
a. include the word independent.
b. indicate if the auditor is a CPA.
c. indicate if the auditor is a proprietorship, pa
Society has attached a special meaning to the term professional. A professional is:
a. someone who has passed a qualifying exam to enter the job market.
b. a person who is expected to conduct himself or hersel
1. easy a The objective of the ordinary audit of financial statements is the expression of an opinion on: a. the fairness of the financial statements. b. the accuracy of the financial statements. c. the accuracy of the
Which of the following is not one of the three main reasons why the auditor should properly
a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient
If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is, by
definition of FASB Statement No. 2:
Which of the following best defines fraud in a financial statement auditing context?
Fraud is an unintentional misstatement of the financial statements.
Fraud is an intentional misstatement of the finan
IT has several significant effects on an organization. Which of the following would not be
important from an auditing perspective?
a. Organizational changes.
b. The visibility of information.
c. The potential