When an Auditor Agrees to Perform an Audit Because the Preconditions

question 106

Multiple Choice

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.The engagement letter includes:

• A)the purpose of the audit (to express an opinion on particular financial statements).
• B)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).
• C)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).
• D)the inherent limitations of an audit engagement (material misstatements may not be detected).

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Definitions:

Expense with Revenues

Represents the relationship between the costs incurred and the revenues generated in a specific period.

Direct Write-off Method

An accounting method for treating bad debts that writes off specific invoices as uncollectable only at the time they are deemed irrecoverable.

Allowance Method

An accounting technique used to estimate and account for doubtful accounts, providing a more accurate reflection of realizable revenue.

Cash Realizable Value

The amount of money that can be expected to be received from receivables or other assets, after accounting for any discounts or allowances.