Essay on Cost Structure Break Even Target Profile

9726 Words Jul 19th, 2014 39 Pages
CHAPTER 6

Audit Planning, Understanding the Client,
Assessing Risks, and Responding

Review Questions

6–1 In their investigation of a prospective client, the CPAs should assess the backgrounds and reputations of the prospect and its major shareholders, directors, and officers. Thus, inquiries are made of underwriters, bankers, and attorneys that conduct business with the prospective client. Also, the CPAs are required to make inquiries of the prospect’s predecessor auditors to obtain information that might enter into the acceptance decision, such as information regarding the integrity of management. The prospect’s financial reports, SEC filings, credit reports, and tax returns are used as sources of financial
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In addition, the Sarbanes-Oxley Act of 2002 requires the audit committee to assume responsibility for engaging, compensating, and overseeing the auditors.

6–5 The approach described in the statement is not appropriate. Materiality depends on both the dollar amount and the nature of the item. For example, auditors apply a more rigorous standard of materiality in evaluating transactions between related parties and potentially illegal acts than they apply to misstatements in accounts.

6–6 The two types of misstatements due to fraud are (1) misstatements arising from fraudulent financial reporting, and (2) misstatements arising from misappropriation of assets (sometimes referred to as defalcation). Fraudulent financial reporting is of more concern to the auditors because it typically results in

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