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1 Exam 2 Review Sheet You need to know: 1.

The difference between audit risk, audit failure and business risk a. Audit risk -risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when they are materially misstated. b. Audit failure occurs when the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards (GAAS). c. Business risk: The possibility of business failure because of economic or business condition, such as recession or poor management decisions. 2. How to demonstrate the lack of duty to perform certain service a. CPA firm claims that there was no implied or expressed contract 3. prudent person concept a. standard of due care to which the auditor is expected to be held 4. who is a third party beneficiary a. third party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract. A common example is a bank that has a large loan outstanding at the balance sheet date and requires an audit as a part of its loan agreement. 5. What privity of contract is a. Parties who have a relationship that is established by a contract 6. The difference between separate and proportionate liability and joint and several liability a. Joint and several liability: The assessment against a defendant of the full loss suffered by a plaintiff, regardless of the extent to which other parties shared in the wro ngdoing. For example, if management intentionally misstates financial statements, an auditor can be assessed the entire loss to shareholders if the company is bankrupt and management is unable to pay. b. Separate and proportionate liability: The assessment against a defendant of that portion of the damage caused by the defendant's negligence. For example, if the courts determine that an auditor's negligence in conducting an audit was the cause of 30% of a loss to a defendant, only 30% of the aggregate damage would be assessed to the CPA firm. 7. The difference between negligence, gross negligence, constructive fraud, and fraud a. Ordinary negligence: Absence of reasonable care that can be expected of a person in a set of circumstances. For auditors, it is in terms of what other competent auditors would have done in the same situation. b. Gross negligence: Lack of even slight care that can be expected of a person. c. Constructive fraud: Existence of extreme or unusual negligence even though there was no intent to deceive or do harm. Constructive fraud is also termed recklessness. d. Fraud: Occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to deceive. 8. Defenses available for lawsuits from clients and third parties Defense from clients 1. Lack of duty to perform the service a. It means that the CPA firm claims that there was no implied or expressed contract. 2. Nonnegligent performance a. The CPA firm claims that the audit was performed in accordance with auditing standards. Even if there were undiscovered misstatements, the auditor is not responsible if the audit was conducted properly. 3. Contributory negligence a. A defense of contributory negligence exists when the client's own actions either resulted

2 in the loss that is the basis for damages or interfered with the con duct of the audit in such a way that prevented the auditor from discovering the cause of the loss. 4. Absence of causal connection. i. To succeed in an action against the auditor, the client must be able to show that there is a close causal connection between the auditor's breach of the standard of due care and the damages suffered by the client. Defense from 3rd party b. All above except contributory negligence c. The preferred defense in third-party suits is nonnegligent performance. If the auditor conducted the audit in accordance with GAAS, the other defenses are unnecessary. On the other hand, nonnegligent performance is difficult to demonstrate to a court, especially if it is a jury trial and the jury is made up of laypeople 9. The responsibilities of auditors under 1933 Act and 1934 Act 1933 -The auditor has the burden of demonstrating as a defense that (1) an adequate audit was conducted in the circumstances or (2) all or a portion of the plaintiff's loss was caused by factors other than the misleading financial statements. The 1933 act is the only common or statutory law where the burden of proof is on the defendant. a. Furthermore, the auditor has responsibility for making sure that the financial state ments were fairly stated beyond the date of issuance, up to the date the registration statement became effective, which could be several months later 1934- liability of auditors under the 1934 Act often centers on the audited financial statements issued to the public in annual reports or submitted to the SEC as a part of annual Form 10-K reports 10. The 1136 Tenants case and its results a. Engagement letters were required. b. The Accounting and Review Services Committee was formed to set forth guidelines for unaudited financial statements for nonpublic companies 11. Section 10-5b of 1934 Act (the antifraud provision) i. The principal focus on CPA liability litigation under the 1934 act has been Rule 10b-5, which prohibits any fraudulent activities. ii. Generally, accountants can be held liable under Section 10 and Rule 10b -5 if they intentionally or recklessly misrepresent information intended for third-party use. 12. The objective of financial statement audit a. expression of an opinion on the fairness with which they present fairly, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. [SAS 1 (AU 110)]. 13. The three major categories of assertions SAS 106 (AU 326) classifies assertions into three broad categories: a. Assertion about classes of transactions and events for the period under audit. b. Assertion about account balances at period end. c. Assertions about presentation and disclosures. 14. The difference between reasonable and absolute assurance a. Good vs perfect 15. The management responsibility and the auditor responsibility Mgmt Adopting sound accounting policies, maintaining adequate internal control, and making fair representations in the financial statements. Management's responsibility for the fairness of the representations (assertions) in the financial statements carries with it the privilege of determining which disclosures it considers necessary.

3 In the event that management insists on financial statement disclosure that the auditor finds unacceptable, the auditor can either issue an adverse or qualified opinion or withdraw from the engagement. The SarbanesOxley Act increases management's responsibility for the financial statements by requiring the chief executive officer (CEO) and the chief financial officer (CFO) of public companies to certify the quarterly and annual financial statements submitted to the SEC. The SarbanesOxley Act provides for criminal penalties, including significant monetary fines or imprisonment up to 20 years, for anyone who knowingly falsely certifies those statements Auditor Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. o A material misstatement will affect the decisions of a reasonable person using the statements. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. o Sampling inevitably includes some risk of not uncovering a material misstatement. o Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. o Fraudulently prepared financial statements are often extremely difficult, if not impossible, detect, especially when there is collusion among management. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by error or fraud, that are not material are detected. o Error is an unintentional misstatement. o Fraud is intentional, Misappropriation of assets, often called defalcation or employee fraud. Fraudulent financial reporting, often called management fraud. o The audit must be planned and performed with an attitude of professional skepticism in all aspects of the engagement. o Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Materiality also applies for the internal control evaluation. 16. The various management assertions such as completeness assertion, existence assertion, cutoff assertion, classification and understandability assertion, etc. a. Completeness- All transactions and accounts that should be presented in the financial statements are included. (understatement) b. Existence- Amounts included in the balance sheet actually exist (inventory existed and was available for sales). (overstatement) c. Cutoff- Transactions are recorded on the correct accounting period. d. Classification and understandability- Amounts appropriately classified in the financial statements and footnotes and whether the balance descriptions and related disclosures are understandable e. Occurrence: Rerecorded transactions included in the financial statements actually occurred during the accounting period (overstatement) f. Accuracy: Recorded transactions are stated at the correct amounts g. Classification: Transactions are recorded in the appropriate accounts h. Valuation and allocation: financial statements show appropriate amounts i. Rights and obligations: Assets must be owned, and liabilities must represent obligations of the entity at a given date 17. The relation between management assertions and audit objectives

4 a. transaction-related audit objectives are intended to provide a framework to help the auditor accumulate sufficient competent evidence required by the third standard of field work and decide the proper evidence to accumulate for classes of transactions given the circumstances of the engagement b. balance-related audit objectives follow from management assertions and they provide a framework to help the auditor accumulate sufficient competent evidence. i. There are two differences between balance-related and transaction-related audit objectives: First, as the terms imply, balance-related audit objectives are applied to account balances, rather than classes of transactions such as sales. Second, there are more audit objectives for account balances than for classes of transactions. There are eight balance-related audit objectives compared to six transaction- related audit objectives. 18. The difference between direct legal act and indirect legal acts and the auditors responsibility toward them a. Direct-Effect Illegal Acts: Certain violations of laws and regulations have a direct financial effect on specific account balances in the financial statements. For example, a violation of federal tax laws directly affects income tax expense and income taxes payable. The auditor's responsibilities under SAS 54 for these direct-effect illegal acts is the same as for errors and fraud. On each audit, therefore, the auditor will normally evaluate whether or not there is evidence available to indicate material violations of federal or state tax laws. b. Indirect-Effect Illegal Acts: Most illegal acts affect the financial statements only indirectly. Potential material fines and sanctions indirectly affect financial statements by creating the need to disclose a contingent liability for the potential amount that might ultimately be paid. Auditing standards clearly state that the auditor provides no assurance that indirect-effect illegal acts will be detected 19. What professional skepticism is a. attitude that includes a questioning mind and a critical assessment of audit evidence 20. The difference between occurrence and completeness assertions The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included, whereas the occurrence assertion is concerned with inclusion of amounts that should not have been included. a. Thus, violations of the occurrence assertion relate to account overstatements, whereas violations of the completeness assertion relate to account understatements 21. The difference between existence and completeness assertions a. Violation of existence assertion relates to account overstatements, while the violation of completeness assertion relates to account understatements 22. Types of audit evidence (8 of them), which is more reliable than the others a. Physical examination-most reliable b. Confirmation - To be considered reliable evidence, confirmations must be controlled by the auditor from the time they are prepared until they are returned c. Documentation- External docs are considered more reliable evidence than internal ones d. Analytical procedures e. Inquiries of the client f. Recalculation g. Reperformance h. Observation 23. What analytical procedures are and when are they used (important)

5 a. use comparisons and relationships to assess whether account balances or other data appear reasonable b. required during the planning and completion phases on all audits o Understand the Industry and Business: o Assess the Entity's Ability to Continue as a Going Concern: o Indicate the Presence of Possible Misstatements in the financial Statements: c. Reduce Detailed Audit Tests 24. To be persuasive, the evidence should be _______, and ------a. appropriateness and sufficiency 25. The use of specific evidence, e.g., when should we use physical examination or when should we use confirmation, etc. a. Phys exam/documentation- inspection or count by the auditor of a tangible asset b. Confirmation- required for a/r us gaas c. Documentation-verify individual sales 26. Types of confirmation, positive, negative, blank a. A positive confirmation asks the recipient to respond in all circumstances. In contrast, with a negative confirmation recipient is asked to respond only when the information is incorrect b. request the recipient to provide the info (called a blank form), or the confirmation may include the information and request the respondent to indicate whether they agree w/ info 27. What audit procedure and audit program are a. Auditing standards require a written audit program for every audit, list of audit procedures for an audit area or an entire audit is called an audit program b. audit procedure is the detailed instruction for the collection of a type of audit evidence that is to be obtained at some time during the audit 28. Reasons for audit planning a. To enable the auditor to obtain sufficient competent evidence for the circumstances, to minimize legal liability and maintain a good reputation in the business community. b. To help keep audit costs reasonable, helps the firm remain competitive and thereby retain or expand its client base and to c. Avoid misunderstandings with the client, to have good client relations and for facilitating highquality work at reasonable cost. 29. Definitions of inherent risk and acceptable audit risk a. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. b. Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of inter nal control. 30. The major steps in audit planning a. *ACCEPT CLIENT AND PERFORM INITIAL AUDIT PLANNING b. *UNDERSTAND THE CLIENT'S BUSINESS AND INDUSTRY c. *ASSESS CLIENT BUSINESS RISK d. *PERFORM PRELIMINARY ANALYTICAL PROCEDURES 31. The communication between successor and predecessor CPA and who is responsible for initiating it (SAS No. 84) a. the new (successor) auditor is required by SAS 84 (AU 315) to communicate with the predecessor auditor b. burden of initiating the communication rests with the successor auditor 32. The purpose of an engagement letter clear understanding of the terms of the engagement should exist between the client and the CPA firm. SAS 108 (AU 310) requires that auditors must document their understanding with the client

6 in an engagement letter, including the engagement's objectives, the responsibilities of the auditor and management, and the engagement's limitations. The engagement letter should specify whether the auditor will perform an audit, a review, or a compilation, plus any other services such as tax returns or management consulting. a. It should also state any restrictions to be imposed on the auditor's work, deadlines for completing the audit, assistance to be provided by the client's personnel in obtaining records and documents, and schedules to be prepared for the auditor. It often includes an agreement on fees. The engagement letter is also a means of informing the client that the auditor cannot guarantee that all acts of fraud will be discovered Questions and exercises 1. A group not typically included as third parties in common law is: a. actual and potential stockholders. b. bankers and other creditors of client. c. employees of client. d. none of the above; that is, all would be included. 2. Which of the auditors defenses is ordinarily not available when lawsuits are filed by a third party? a. Absence of causal connections. b. Contributory negligence. c. Non-negligent performance. d. Lack of duty. 3. The leading precedent-setting auditing case in third-party liability is: a. Escott et al. v. Bar Chris Construction Corp. b. Hochfelder v. Ernst & Ernst. c. Ultramares Corporation v. Touche. d. United States v. Simon. 4. Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditors involvement with the: a. 8-K form. b. 10-K form. c. 10-Q form. d. S-1 form. 5. Distinguish between ordinary negligence and gross negligence. Answer: Ordinary negligence is the absence of reasonable care, whereas gross negligence is the absence of even slight care that can be expected of a person in a set of circumstances.

7 6. Distinguish between constructive fraud and fraud. Answer: Constructive fraud is the existence of extreme or unusual negligence with no intent to deceive or do harm. In contrast, fraud involves both knowledge and intent to deceive. 7. Explain what each of the following terms means: (1) Business failure. (2) Audit failure. (3) Audit risk. Answer: (1) Business failure occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions. The extreme case of business failure is filing for bankruptcy. (2) Audit failure occurs when the auditor issues an erroneous audit opinion as the result of a failure to comply with the requirements of generally accepted auditing standards. (3) Audit risk is the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. 8.
Match eight of the following terms (a-n) with the definitions provided below (1-8): a. b. c. d. e. f. g. h. i. j. k. l. m. n. g Foreign Corrupt Practices Act Securities Exchange Act of 1934 Securities Litigation Uniform Standards Act of 1998 Securities Act of 1933 Ultramares doctrine Audit risk Audit failure Standards failure Business failure Absence of causal connection Contributory negligence Lack of duty to perform Private Securities Litigation Reform Act Nonnegligent performance 1. A situation in which the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards. A federal statute dealing with companies that trade securities on national and over-the-counter exchanges. Auditors are involved because the annual reporting requirements include audited financial statements. An auditors legal defense under which the auditor claims that the client failed to perform certain obligations and that it is the clients failure to perform those obligations that brought about the claimed damages. A federal statute that makes it illegal to offer a bribe to an official of a foreign country. A common-law approach to third-party liability in which ordinary negligence is insufficient for liability to third parties, because of the lack of privity of contract between the third party and the auditor unless the third party is a primary beneficiary. A federal statute designed to cause class-action securities lawsuits to be addressed in federal district courts. An auditors legal defense under which the auditor claims that the audit was performed in accordance with generally accepted auditing standards. An auditors legal defense under which the auditor contends that the damages claimed by the client were not brought about by any act of the auditor.

2.

3.

a e

4. 5.

c n

6. 7.

8.

9. Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units. a. True b. False 10. Audit risk is the risk there will be an audit failure for a given audit engagement. a. True b. False 11. Which of the following is not one of the three categories of assertions? a. Assertions about classes of transactions and events for the period under audit b. Assertions about financial statements and correspondence to GAAP c. Assertions about account balances at period end d. Assertions about presentation and disclosure 12. Auditing standards make _____ distinction(s) between the auditors responsibilities for searching for errors and fraud. a. little b. a significant c. no d. various 13. Illegal acts are defined in SAS 54 (AU217) as: a. violations of laws or government regulations. b. violations of laws or government regulations other than errors. c. violations of laws or government regulations other than fraud. d. violations of law which would result in the arrest of the perpetrator. 14. Briefly explain each management assertion related to presentation and disclosure. Answer: Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity. Completeness. All disclosures that should have been included in the financial statements have been included. Accuracy and valuation. Financial and other information are disclosed appropriately and at appropriate amounts. Classification and understandability. Financial and other information is appropriately presented and described and disclosures are clearly expressed.
15. Distinguish between managements responsibility and the auditors responsibility for the financial statements under audit. Answer: Management is responsible for adopting appropriate accounting policies, maintaining adequate internal control, and making fair representations in the financial statements. The auditors responsibility is to perform an audit designed to provide reasonable assurance of detecting any material misstatements in the financial statements and to express an opinion on those financial statements at the conclusion of the audit. 16. In the context of the audit of sales, distinguish between the existence and completeness transaction-related audit objectives. State the effect on the sales account (overstatement or understatement) of a violation of each objective. Answer: When testing the existence objective for sales, the auditors focus is on whether the sales that have been recorded in the sales journal actually occurred. In contrast, tests of the completeness objective are concerned with determining whether all sales that actually occurred have been recorded in the sales journal. Violations of the existence objective result in overstatements of sales; violations of the completeness objective result in understatements of sales.

17.
Below are five audit procedures, all of which are tests of balances associated with the audit of accounts receivable. Also below are the eight general balance-related audit objectives and the four management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested. Objectives Assertions Existence V. Existence Completeness W. Completeness Accuracy X. Valuation and allocation Classification Y. Rights and obligations Cutoff Detail tie-in Realizable value Rights and obligations

A. B. C. D. E. F. G. H.

F X

1. Obtain an aged listing of accounts receivable. For a sample of individual customers on the listing, agree the customers name, amount, and other information with the corresponding information in the accounts receivable master file. (1) . (2) . 2. Examine details of sales for five days before and five days after year-end to determine whether sales have been recorded in the proper period. (1) . (2) . 3. Assess the reasonableness of the balance in the allowance for doubtful accounts. (1) . (2) . Inquire as to whether any accounts receivable have been factored or sold during the period. (1) . (2) . Inquire as to whether there are any receivables from related parties. (1) . (2) .

E X

G X 4. H Y 5. D X

18. Auditors have a higher degree of responsibility for detecting direct-effect illegal acts than indirect-effect illegal acts. a. True b. False 19. Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts. a. True b. False 20. The effect of a violation of the existence transaction-related audit objective for the sales account would be an overstatement of that account. a. True b. False

10 21. Which of the following statements is not correct? a. Persuasiveness of evidence is partially determined by the reliability of evidence. b. The quantity of evidence obtained determines its sufficiency. c. The auditor need not consider the independence of an information source when obtaining evidence. d. Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources. 22. Which of the following is an example of objective evidence? a. A letter written by clients attorney discussing the likely outcome of outstanding lawsuits. b. The physical count of securities and cash. c. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable. d. Observation of cobwebs on some inventory bins. 23. When making decisions about evidence for a given audit, the auditors goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so: a. no matter the cost involved in obtaining such evidence. b. at any cost because the costs are billed to the client. c. at the lowest possible total cost. d. None of the above. 24. One purpose of performing analytical procedures in the planning phase of an audit is to assess the clients financial condition. Explain how the assessment of a clients financial condition can affect the auditors decisions concerning evidence accumulation in later phases of the audit. Answer: All things being equal, the weaker the clients financial condition, the more assurance the auditor will require that the financial statements are free of material misstatements. As the auditor requires greater assurance, he or she can (1) perform detailed testing closer to the balance sheet date, (2) increase the extent of detailed testing, or (3) perform more reliable procedures. In extreme cases, however, if the auditor believes the entity is not a going concern, he or she may withdraw from the engagement and perform no additional tests. 25. Identify the three common types of confirmations used by auditors. Indicate which type is most reliable and explain your answer. In addition, indicate which type is least reliable and explain your answer. Answer: In order of reliability, the three common types of confirmations used by auditors are: positive confirmation with a request for information to be supplied by the recipient. positive confirmation with the information to be confirmed included on the form. negative confirmation. The positive confirmation with a request for information to be supplied by the recipient is the most reliable because the recipient must supply the information from his or her records. If this information agrees with the information in the clients records, the likelihood that the information is correct is high. The positive confirmation with the information to be confirmed included on the form is not as reliable as the first type because the recipient may sign and return the confirmation without carefully examining the information. The negative confirmation is the least reliable because a nonresponse could be due to either the recipient agreeing with the information or the recipient ignoring the confirmation request.

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26.
Match five of the terms (a-h) with the definitions provided below (1-5): a. b. c. d. e. f. g. h. d Audit documentation Audit procedures Audit objectives Analytical procedures Budgets Reliability of evidence Sufficiency of evidence Persuasiveness of evidence 1. Use of comparisons and relationships to assess the reasonableness of account balances. Detailed instructions for the collection of a type of audit evidence. The degree to which evidence can be considered believable or trustworthy. Contains all the information that the auditor considers necessary to conduct an adequate audit and to provide support for the audit report. This is determined by the amount of evidence obtained.

b f a

2. 3. 4.

5.

27. Cost should never be a consideration when making decisions about evidence for a given audit. a. True b. False 28. Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective. a. True b. False 29. When analytical procedures reveal unusual fluctuations in an account balance, the auditor will probably perform fewer tests of details for that account and increase the tests of controls related to the account. a. True b. False 30. Analytical procedures must be used in the planning and completion phases of the audit. a. True b. False 31. When inherent risk is high, there will need to be: a. more evidence accumulated. b. more experienced staff assigned to the work. c. either a or b, but not both. d. both a and b. 32. Initial audit planning involves four matters. Which of the following is not one of these? a. Develop an overall audit strategy. b. Request that bank balances be confirmed. c. Schedule engagement staff and audit specialists. d. Identify the clients reason for the audit.

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33. A CPA firm may choose to not continue working with an audit client for which of the following reasons? a. Conflicts over past audits. b. Disagreements regarding the type of opinion to issue. c. Disagreements regarding audit fees. d. All of the above.

34. Which of the following statements is true regarding communications between predecessor and successor auditors? a. The burden of initiating the communication rests with the predecessor. b. The predecessor should attempt to respond fully and truthfully to the successors inquiries. c. The predecessor should communicate with the successor only if the client is public. d. There is no requirement that the predecessor and successor communicate. 35. An engagement letter sent to an audit client usually would not include a(n): a. reference to the auditors responsibility for the detection of errors or irregularities. b. estimation of the time to be spent on the audit work by audit staff and management. c. statement that management advisory services would be made available upon request. d. reference to managements responsibility for the financial statements. 36. Discuss the factors an auditor should consider before accepting a company as an audit client. Answer: The auditor should investigate and consider the prospective clients standing in the business community, financial stability, managements integrity, and relations with its bankers, attorneys, and previous CPA firm. The auditor should also determine whether he or she possesses the required competence and independence to do the audit. 37. Define the term related party and discuss why an auditor should identify the clients related parties early in the audit. Answer: A related party is an affiliated company, principal owner of the client company, or any other party with which the client deals where one of the parties can influence the management or operating policies of the other. Auditors need to be aware of who the clients related parties are early in the audit to enable the auditor to identify related-party transactions, especially those that have not been disclosed. 38. There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons. Answer: Three reasons why an auditor should properly plan audit engagements are: To enable the auditor to obtain sufficient competent evidence for the circumstances. This is essential for minimizing legal liability and maintaining a good profession reputation. To help keep audit costs reasonable. Given the competitive auditing environment, keeping costs reasonable helps the firm obtain and retain clients. To avoid misunderstandings with the client. This is important for good client relations.

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39. Discuss the required communications between predecessor and successor auditors as outlined by SAS No. 84. Answer: Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the burden of initiating the communication rests on the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements related to confidentiality, the predecessor must obtain the former clients permission prior to providing information to the successor. 40. Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit. Answer: The four primary purposes of preliminary analytical procedures are: to help the auditor understand the clients industry and business, to help the auditor assess the going concern assumption, to indicate areas of possible misstatements, and to reduce the extent of detailed tests.

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