ACCT 4301 Exam 1 Review Questions and Correct Answers

What is the process of the Prospective Client Evaluation? 1. Obtain and review FINANCIAL INFORMATION 2. Inquire 3rd parties of CLIENT INTEGRITY 3. Communicate w/ PREDECESSOR AUDITOR 4. Consider UNUSUAL business or audit RISKS 5. Determine if firm is INDEPENDENT 6. Determine if firm has necessary SKILLS AND KNOWLEDGE 7. Determine if ACCEPTANCE violates any REGULATIONS OR REQUIREMENTS Who prepares and signs the engagement letter? The AUDITOR PREPARES it and MANAGEMENT SIGNS it When should you evaluate client retention? Periodically near AUDIT COMPLETION or after a SIGNIFICANT EVENT What are the requirements of audit committee members? 1. INDEPENDENT and members of BOARD OF DIRECTORS 2. OVERSEE WORK of any public accounting firm employed by the company 3. Must PREAPPROVE audit and nonaudit SERVICES provided 4. Establish procedures for COMPLAINTS 5. Have authority to ENGAGE INDEPENDENT COUNSEL Who should internal auditors report to? The audit committee What guides the audit plan? 1. Client ACCEPTANCE/CONTINUANCE process 2. Procedures formed to GAIN AN UNDERSTANDING of the entity 3. PRELIMINARY ENGAGEMENT activities What steps do auditors take in planning an audit? 1. ASSESS business RISK 2. Establish MATERIALITY 3. Consider MULTI-LOCATIONS 4. Assess the need for SPECIALISTS 5. Identify RELATED PARTIES 6. Consider ILLEGAL ACTS 7. Consider VALUE-ADDED services How is materiality established? 1. First PLANNED MATERIALITY is established 2. Then TOLERABLE MISSTATEMENT is established 3. Then the AUDIT FINDINGS of combined materiality is evaluated What are some different ways that related parties can be identified? 1. BOARD MINUTES 2. CONFLIC-OF-INTEREST statements 3. Review transactions with MAJOR customers, suppliers, borrowers, and lenders 4. Review LARGE OR UNUSUAL transactions 5. Review LOAN AGREEMENTS What are some permissible value-added services? Tax planning Risk assessment Non-financial system design and integration Internal reporting Benchmarking Electronic commerce What nonaudit services are prohibited? Bookeeping Actuarial services Broker or dealer Financial system design and implementation Internal auditing outsourcing services Legal services Appraisal or valuation services Mgt functions or HR