Audit Ch. 3 MCQ/Notes

When initiating communications with predecessor auditors, prospective auditors should expect

a. To take responsibility for obtaining the client’s consent for the predecessor to give information about prior audits.

b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm’s engagement.

c. To obtain copies of some or all of the predecessor auditors’ audit documentation.

d. All of the above.

d. All of the above.

Generally accepted auditing standards require that auditors always prepare and use

a. A written planning memorandum explaining the auditors’ understanding of the client’s business.

b. A written client consent to discuss audit matters with prospective auditors.

c. A written audit plan.

d. The written time budgets and schedules for performing each audit.

c. A written audit plan.

When planning an audit, which of the following is not a factor that affects auditors’ decisions about the quantity, type, and content of audit documentation?

a. The auditors’ need to document compliance with generally accepted auditing standards. b. The auditors’ need to verify the existence of new sales contracts important for the client’s business.

c. The auditors’ judgment about their independence with regard to the client.

d. The auditors’ judgments about materiality.

c. The auditors’ judgment about their independence with regard to the client.

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

a. Current file audit documentation.

b. Permanent file audit documentation.

c. Administrative audit documentation in the current file.

d. Planning memorandum in the current file.

a. Current file audit documentation.

An auditor's permanent file audit documentation most likely will contain

a. Internal control analysis for the current year.

b. The most recent engagement letter.

c. Memoranda of conference with management.

d. Excerpts of the corporate charter and bylaws.

d. Excerpts of the corporate charter and bylaws.

Which of the following is NOT a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

a. Being able to fine-tune the audit work for effectiveness and efficiency.

b. Avoiding the problem of doing more work than necessary (overauditing).

c. Being able to decide early on what type of audit opinion to issue.

d. Avoiding the problem of doing too little work (underauditing).

c. Being able to decide early on what type of audit opinion to issue.

Spreadsheet software would be most useful for which of the following audit activities?

a. Testing internal controls over computerized accounting applications.

b. Preparing an audit plan.

c. Preparing a comparison of current-year expenses with those from the previous year.

d. Drafting a planning memorandum

c. Preparing a comparison of current-year expenses with those from the previous year.

Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

a. All the CAATs programs are written in one computer language.

b. The software can be used for audits of clients that use differing computer equipment and file formats.

c. The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures.

d. The use of CAATs can be substituted for a relatively large part of the required testing.

b. The software can be used for audits of clients that use differing computer equipment and file formats.

A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to

a. Substantiate the accuracy of data through self-checking digits and hash totals.

b. Utilize the speed and accuracy of the computer.

c. Verify the performance of machine operations that leave visible evidence of occurrence.

d. Gather and store large amounts of supportive audit evidence in machine-readable form

b. Utilize the speed and accuracy of the computer.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

a. Schedules and analyses to be prepared by the client's employees.

b. Methods of statistical sampling the auditor will use.

c. Specification of litigation in progress against the client.

d. Client representations about availability of all minutes of meetings of the board of directors.

a. Schedules and analyses to be prepared by the client's employees.

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report?

a. Yes, the auditors' report should mention the fact that an audit specialist was used.

b. The auditors' report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions.

c. the use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings.

d. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings.

b. The auditors' report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

a. Interviewing internal auditors about their reporting responsibilities.

b. Reviewing accounting records for recurring transactions occurring near year-end.

c. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities.

d. Scanning the minutes for significant transactions with members of the board of directors

d. Scanning the minutes for significant transactions with members of the board of directors

Which of the following communications is most likely to be written before the balance-sheet date?

a. A report to the audit committee on the results of testing of internal control over cash receipts.

b. Confirmation letters to vendors confirming the amounts they owe to the client.

c. An attorney's letter regarding contingent liabilities.

d. An engagement letter.

d. An engagement letter.

Which of the following procedures would most likely be performed during planning?

a. Surprise counting of the clients petty cash fund.

b. Reporting internal control deficiencies to the audit committee.

c. Performing a search for unrecorded liabilities.

d. Identifying related parties.

d. Identifying related parties.

Prior to accepting a new audit engagement, a public accounting firm should

a. Attempt to contact the predecessor auditors.

b. Evaluate the integrity of management.

c. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement.

d. All of the above.

d. All of the above.

An audit plan contains

a. Specifications of audit standards relevant to the financial statements being audited.

b. Specifications of procedures the auditors believe appropriate for the financial statements under audit.

c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.

d. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger.

b. Specifications of procedures the auditors believe appropriate for the financial statements under audit.

The revenue cycle of a company generally includes which accounts?

a. Inventory, accounts payable, and general expenses.

b. Inventory, general expenses, and payroll.

c. Cash, accounts receivable, and sales.

d. Cash, notes payable, and capital stock.

c. Cash, accounts receivable, and sales.

When auditing the existence assertion for an asset, auditors proceed from the

a. Financial statement amounts back to the potentially unrecorded items.

b. Potentially unrecorded items forward to the financial statement amounts.

c. General ledger back to the supporting original transaction documents.

d. Supporting original transaction documents to the general ledger.

c. General ledger back to the supporting original transaction documents.

Confirmations of accounts receivable provide evidence primarily about which two assertions?

a. Completeness and valuation.

b. Valuation and rights and obligations.

c. Existence and rights and obligations.

d. Existence and completeness.

c. Existence and rights and obligations.

With respect to the concept of materiality, which of the following statements is correct?

a. Materiality depends only on the dollar amount of an item relative to other items in the FS.

b. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.

c. Materiality is determined by reference to AICPA guidelines.

d. Materiality is a matter of professional judgment

d. Materiality is a matter of professional judgment

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?

a. Key factors that are consistent with prior periods.

b. Assumptions that are similar to industry guidelines.

c. Measurements that are objective and not susceptible to bias.

d. Evidence of a conservative systemic bias.

d. Evidence of a conservative systemic bias.

Which of the following would be considered an analytical procedure?

a. Testing purchasing, shipping, and receiving cutoff activities.

b. Comparing inventory balances to recent sales activities.

c. Projecting the deviation rate of a statistical sample to the population.

d. Reconciling physical counts to perpetual records and general ledger balances.

b. Comparing inventory balances to recent sales activities.

Which of the following procedures would a CPA most likely perform in planning a financial statement audit?

a. Make inquiries of the client's lawyer concerning pending litigation.

b. Perform cutoff tests of cash receipts and disbursements.

c. Compare financial information with nonfinancial operating data.

d. Recalculate the prior-years' accruals and deferrals.

c. Compare financial information with nonfinancial operating data.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

a. They often replace the tests of controls that are performed to assess control risk.

b. They typically use financial and nonfinancial data aggregated at a high level.

c. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.

d. They are often used to develop an auditor's preliminary judgment about materiality

b. They typically use financial and nonfinancial data aggregated at a high level.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

a. Allow the internal auditor to perform certain tests of internal control.

b. Allow the internal auditor to audit a major subsidiary of the company.

c. Not assign any task to the internal auditor because of the internal auditor's lack of independence.

d. Allow the internal auditor to perform analytical procedures but not be involved with any test details.

a. Allow the internal auditor to perform certain tests of internal control.

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

a. Staff will need to be rescheduled to cover this new client.

b. There will be a client-imposed scope limitation.

c. The firm will have to hire a specialist in one audit area.

d. The client's financial reporting system has been in place for 10 years.

b. There will be a client-imposed scope limitation.

★ In testing the existence assertion for an asset, an auditor ordinarily works from the

a. Accounting records to the supporting evidence.

b. Financial statements to the potentially unrecorded items.

c. Potentially unrecorded items to the financial statements.

d. Supporting evidence to the accounting records.

a. Accounting records to the supporting evidence.

★ Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

a. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

b.Comparing the financial statements to anticipated results.

c. Examining computer-generated exception reports to verify the effectiveness of internal controls.

d. Inquiring of the client's legal counsel concerning pending litigation.

b.Comparing the financial statements to anticipated results.

★ Which of the following is not included in the engagement letter?

a. Representations that the financial statements were prepared in accordance with generally accepted accounting principles.

b. Management's responsibilities.

c. Objectives of the audit engagement.

d. A clear explanation of the services to be performed on the engagement.

a. Representations that the financial statements were prepared in accordance with generally accepted accounting principles.

★ In deciding whether to use the work of internal auditors, external auditors must evaluate the internal auditors'

a. Age and gender.

b. Education and certification.

c. Objectivity and competence.

d. Independence and professionalism.

c. Objectivity and competence.

Which of the following is not a goal of audit planning?

a. To outline the specific audit procedures, including test of control and substantive tests that need to be executed properly in order to mitigate risk of material misstatement and be in compliance with the professional standards.

b. To make sure that the firm has the appropriate staff to conduct the audit in accordance with the professional standards.

c. To determine materiality.

d. To gain preliminary insight on the outcome of the audit.

d. To gain preliminary insight on the outcome of the audit.