Which of the following is not typically included in initial audit planning?. A successor auditor may perform which of the following for a new audit client?. medium Which of the following
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Multiple-Choice Questions
1
easy
Which of the following is not one of the three main reasons why the auditor should properly
plan engagements?
a a To enable proper on-the-job training of employees
b To enable the auditor to obtain sufficient appropriate evidence
c To avoid misunderstandings with the client
d To help keep audit costs reasonable
2 Avoiding misunderstandings with the client is important for:
easy
a Good client relations Facilitating high-quality work at a reasonable cost
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
3
easy
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 is the:
b acceptable audit risk
c statistical risk
d financial risk
4
easy
A measure of the auditor’s assessment of the likelihood that there are material misstatements in
an account before considering the effectiveness of the client’s internal control is called:
b acceptable audit risk
c statistical risk
d inherent risk
5 When inherent risk is high, there will need to be:
Easy
d A lower assessment of audit risk More evidence accumulated by the auditor
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
6 The auditor is likely to accumulate more evidence when the audit is for a company:
easy
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
7 Which of the following is not typically included in initial audit planning?
easy a Client acceptance/continuation decisions
d b Determination of the purpose of the audit
c Obtain an understanding with the client
Trang 2d Perform analytical procedures as substantive tests
8 Initial audit planning involves four matters Which of the following is not one of these?
easy a Develop an overall audit strategy
b b Request that bank balances be confirmed
c Schedule engagement staff and audit specialists
d Identify the client’s reason for the audit
9
easy
Most auditors assess inherent risk as high for related parties and related-party transactions because:
b a of the unique classification of related-party transactions required on the balance sheet
b of the lack of independence between the parties
c of the unique classification of related-party transactions required on the income statement
d it is required by generally accepted accounting principles
10
easy
Which of the following is not correct regarding the communications between successor and predecessor auditors?
a a The burden of initiating the communication rests with the predecessor auditor
b The burden of initiating the communication rests with the successor auditor
c The predecessor auditor must receive their former client’s permission prior to divulging information to the successor auditor
d The predecessor auditor may choose to provide a limited response to a successor auditor
11 A successor auditor may perform which of the following for a new audit client?
easy
and other businesses regarding the company’s reputation
Speak to the predecessor auditors about disagreements they had with management
12
medium
Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is appropriate?
b Less evidence is accumulated
c Special care is required in assigning experienced staff
d Review of audit documentation is performed by personnel not assigned to the engagement
13
medium
It is easier and more common to implement increased evidence accumulation for inherent risk than for acceptable audit risk because:
a a inherent risk can usually be isolated to specific accounts
b inherent risk applies to the entire audit
c acceptable audit risk and sample sizes are set statistically
d acceptable audit risk does not impact on the amount of evidence which must be accumulated
14 (SOX)
medium
If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?
b The client’s chief executive officer
c The client’s chief financial officer
d The client’s audit committee
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medium
Which of the following statements is true regarding communications between predecessor and successor auditors?
b a The burden of initiating the communication rests with the predecessor
b The predecessor’s response can be limited to stating that no information will be provided
c The predecessor should communicate with the successor only if the client is public
d There must be communication between the predecessor and successor if the successor is to accept the engagement
16
medium
Investigating new clients with a focus on assessing the auditor’s potential relationship with that new client is a critical element in determining:
b acceptable audit risk
c statistical risk
d financial risk
17 The purpose of an engagement letter is to:
medium
b
a document the CPA firm’s responsibility to external users of the audited financial statements
b document the terms of the engagement in writing to minimize misunderstandings
c notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
d emphasize management’s responsibility for approving the audit program
18
medium
One means of informing the client that the auditor is not responsible for the discovery of all acts
of fraud is the:
b representation letter
c responsibility letter
d client letter
19 Which of the following normally signs the engagement letter for an audit of a public company? medium a Corporate treasurer
c Chairman of the board of directors
d Audit committee
20 Which of the following normally signs the engagement letter for an audit of a private company?
a b Board of directors representative
c Audit committee representative
d Corporate treasurer
21
medium
d
An understanding of a client’s business and industry and knowledge about operations are essential for performing an adequate audit For a new client, most of this information is obtained:
a from the predecessor auditor
b from the Securities and Exchange Commission
c from the permanent file
d at the client’s premises
22 The least effective method of identifying related parties for a public company would be a(n): medium a inquiry of management
c distribution of the engagement letter to all stockholders
d examination of stockholders’ listings to identify principal stockholders
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medium
An official record of meetings of the board of directors and stockholders is included in the corporate:
b charter
c minutes
d license
24 Which of the following is not likely to be a related party?
medium a Affiliated companies
c b A major stockholder of the company
c A warehouse employee
d The chief executive officer
25 Which of the following is most likely to occur at the beginning of an initial audit engagement? medium a Prepare a rough draft of the financial statements and of the auditor’s report
c b Study and evaluate the system of internal administrative control
c Determine the client’s reason for an audit
d Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management
26 An auditor should examine minutes of the board of directors’ meetings:
medium a through the date of the financial statements
b b through the date of the audit report
c only at the beginning of the audit
d on a test basis
27
medium
The first standard of field work, which states that the work is to be adequately planned and that assistants, if any, are to be properly supervised, recognizes that:
a a early appointment of the auditor is advantageous to the auditor and the client
b acceptance of an audit engagement after the close of the client’s fiscal year is generally not permissible
c appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion
d performance of substantial parts of the examination is necessary at interim dates
28
medium
The corporate minutes are the official record of the meetings of the board of directors and stockholders The minutes typically include authorizations related to:
d
The CPA’s use of outside specialists Management compensation
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
29 An engagement letter sent to an audit client usually would not include a(n):
medium a reference to the auditor’s responsibility for the detection of errors or irregularities
c 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 management’s responsibility for the financial statements
30 Which of the following is correct with respect to a company’s corporate charter?
medium
c
a The corporate charter is granted by the federal government and is required to recognize the corporation as a separate entity
b The corporate charter includes the rules and procedures used to operate a corporation
c The corporate charter includes the exact name of the corporation, the date of incorporation, and the types of business the corporation is authorized to conduct
Trang 5d The corporate charter must be annually reviewed by the PCAOB
Medium
the corporation is authorized to issue
The rules and procedures used to operate the corporation
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
32
medium
b
In what order should the following steps occur?
A Assess client business risk
B Understand the client’s business and industry
C Perform preliminary analytical procedures
D Assess acceptable audit risk
a D, B, C, A
b B, A, D, C
c B, D, A, C
d D, C, B, A
33 Which of the following statements is not correct with respect to analytical procedures?
medium a Auditing standards emphasize the need for auditors to develop and use expectations
b b Analytical procedures must be performed throughout the audit
c Analytical procedures may be performed at any time during the audit
d Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable
34 The most widely used profitability ratio is the:
medium a quick ratio
c return on assets
d earnings per share
35
challenging
The purpose of the requirement in SAS No 84 of having communication between the predecessor and successor auditor is to:
b a allow the predecessor to disclose information which would otherwise be confidential
b help the successor auditor to evaluate whether to accept the engagement
c help the client by facilitating the change of auditors
d ensure the predecessor collects all unpaid fees prior to a change in auditor
36
challenging
The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:
c a the predecessor auditor has poor relations with the successor auditor
b the client is dissatisfied with the predecessor’s work
c there are actual or potential legal problems between the client and the predecessor
d the predecessor believes that the client lacks integrity
37 Which of the following is correct with respect to the use of analytical procedures?
challenging
d
a Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption
b Analytical procedures must be used throughout the audit
c Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s attention so that the auditor’s understanding of the business is improved
d Analytical procedures are performed by studying plausible relationships between financial
Trang 6and nonfinancial data
38
challenging
Which of the following ratios is best used to assess a company’s ability to meet its long-term debt obligations?
b Return on common equity
c Debt to equity
d Current ratio
39 Which of the following statements is not correct?
challenging
b
a Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client’s business and directing the auditor’s attention to areas that may contain possible misstatements
b Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may contain possible misstatements
c Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase
d Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s attention to areas that may contain possible misstatements and secondarily aimed
at assessing going concern
40 Which of the following would not likely be classified as a related-party transaction?
medium a An advance of one week’s salary to an employee
a b Sales of merchandise between affiliated companies
c Loans or credit sales to the principal owner of the client company
d Exchanges of equipment between two companies owned by the same person
41 Which of the following would not be found in the corporate charter?
challenging a The kinds and amount of capital stock authorized
c The types of business activity that the corporation is allowed to conduct
d The rules and procedures adopted by the stockholders
42 Which of the following would not usually be included in the minutes of the board of directors? challenging a The duties and powers of the corporate officers
c Authorization of long-term loans
d Approval of executive bonuses
43 When are auditors likely to encounter judgment problems in the use of analytical procedures? challenging
d
a Whenever the auditor places reliance on management’s explanations for unusual fluctuations in account balances without first developing independent expectations
b Whenever the auditor allows unaudited balances to unduly influence his/her expectations
of current balances
c Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them
d The auditor is likely to encounter judgment problems in each of the above instances
44 The major concern when using nonfinancial data in analytical procedures is the:
challenging a accuracy of the nonfinancial data
a b source of the nonfinancial data
c type of nonfinancial data
d presence of multiple sources of nonfinancial data
45 An auditor searching for related party transactions should obtain an understanding of each
Trang 7challenging subsidiary’s relationship to the total entity because:
b a the business structure may be deliberately designed to obscure related party transactions
b this may reveal whether transactions would have taken place if the parties had been unrelated
c transactions may have been consummated on terms equivalent to arm’s-length transactions
d this may permit the audit of intercompany account balances to be performed as of concurrent dates
46
challenging
The first standard of fieldwork requires, in part, that audit work be properly planned Proper planning as intended by the first standard of fieldwork would occur when the auditor:
a a physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand
b uses negative accounts receivable confirmations instead of positive confirmations because the latter require mailing of second requests and review of subsequent cash collections
c compares all cash as of a particular date to avoid performing time-consuming cash cutoff procedures
d eliminates the possibility of counting inventory items more than once by arranging to make extensive test counts
47 Early appointment of the independent auditor will enable:
challenging a a more thorough examination to be performed
d b a proper study and evaluation of internal control to be performed
c sufficient competent evidential matter to be obtained
d a more efficient examination to be planned
48
medium
Whenever an auditor compares client data to client-prepared budgets, there are two special concerns Indicate if the two items below are concerns
a
Assessing whether the budgets were
realistic plans
Client data may have been altered to conform
to the budget
49
challenging
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:
b a engage financial experts familiar with the nature of the business entity
b obtain a knowledge of matters that relate to the nature of the entity’s business
c refer a substantial portion of the audit to another CPA who will act as the principal auditor
d first inform management that an unqualified opinion cannot be issued
50 Which is a liquidity activity ratio?
c Return on assets
d Times interest earned
51 Which is usually included in an engagement letter?
medium
Estimate of hours required to complete audit
Dollar estimate of fees to be billed to
the client
b
c
Yes
No Yes
Yes
No
No
Trang 8d No Yes
52 Which is usually included in an engagement letter?
medium
Yes
No
No Yes
53 Which is usually included in an engagement letter?
medium
the responsibility of the company’s management
Ratios to be used by the auditor in the planning
phase
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
54 When may the auditor refer to a specialist in the audit report?
medium
c
Only if the specialist’s report results in a modification of the audit
opinion
Only if the specialist assisted in the audit of an account material to the financial statements
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
55 Which is usually included in the engagement letter?
b The projected type of opinion on
the financials statement to be
audited
Name(s) of the client personnel responsible for supplying the auditor with information
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
56 Which is usually included in the engagement letter?
b List of audit procedures to be used
in inventory observation The auditors’ assessment of Audit Risk
a
b
c
d
Yes
No Yes
No
Yes
No
No Yes
Essay Questions
Trang 957
easy
Discuss the factors an auditor should consider before accepting a company as an audit client
Answer:
The auditor should investigate and consider the prospective client’s standing in the business community, financial stability, management’s 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
58
easy
Discuss the primary purpose of an audit engagement letter Is an engagement letter required?
Answer:
The purpose of an audit engagement letter is to establish a clear understanding between the auditor and the client regarding the terms of the engagement An engagement is required for both public and private company audits
59
easy
Define the term ―related party‖ and discuss why an auditor should identify the client’s 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 client’s related parties are early in the audit to enable the auditor to identify related-party transactions, especially those that have not been disclosed
60
medium
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
61
medium
Discuss the essential activities involved in the initial planning of an audit
Answer:
There are four essential activities involved in the initial planning of an audit These are:
1 Client acceptance or continuation In the case of a new client, the auditor must determine whether the client is one with which (s)he wishes to be associated In the case of a continuing client, an auditor must determine whether continuing the relationship is appropriate and in the firm’s best interest
2 Determine reason for the audit The auditor should determine the reason for the audit
as soon as practical The remainder of the planning activities may be impacted by the client’s reason for requesting the audit
3 Obtain an understanding with the client An understanding with the client should be obtained to avoid misunderstandings Auditors are required to obtain an understanding
Trang 10with their clients This understanding must be written
4 Develop an overall audit strategy The strategy should consider the reasons for the audit, including areas where there is greater risk of significant misstatements Setting a strategy helps the auditor determine the resources required for the engagement