Module 2 - Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks [WILEY]

Financial statement assertions are established for account balances: Classes of transactions and/or disclosures.

a. Yes Yes

b) Yes No

c) No Yes

d) No No

a. Yes Yes

Which of the following is not a financial statement assertion relating to account balances?

a. completeness

b. existence

c. rights and obligations

d. valuation and competence

d. valuation and competence

As the acceptable level of detection risk decreases, an auditor may

a. reduce substantive testing by relying on the assessments of inherent risk and control risk

b. postpone the planned timing of substantive tests from interim dates to year-end

c. Eliminate the assessed level of inherent risk form consideration as planning factor

d. Lower the assessed level of control risk from the maximum level to below the maximum

b. postpone the planned timing of substantive tests from interim dates to year-end

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

a. Sampling risk

b. Detection risk

c. Nonsampling risk

d. Inherent risk

b. Detection risk

As the acceptable level of detection risk decreases, the assurance directly provided from

a. Substantive tests should increase

b. Substantive tests should decrease

c. Tests of controls should increase

d. Tests of controls should decrease

a. Substantive tests should increase

Which of the following audit risk components may be assessed in non-quantitative terms? Control risk, detection risk, inherent risk.

a. yes yes no

b. yes no yes

c. yes yes yes

d. no yes yes

c. yes yes yes

Inherent risk and control risk differ from detection risk in that they

a. Arise from the misapplication of auditing procedures

b. May be assessed in either quantitative or non-quantitative terms

c. Exist independently of the financial statement audit

d. Can be changed at the auditor's discretion

c. Exist independently of the financial statement audit

On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would

a. Decrease substantive testing

b. Decrease detection risk

c. Increase inherent risk

d. Increase materiality levels

b. Decrease detection risk

Relationship between control risk and detection risk is ordinarily

a. Parallel

b. Inverse

c. Direct

d. Equal

b. Inverse

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

a. The anticipated sample size of the planned substantive tests.

b. The entity's annualized interim financial statements

c. The results of the internal control questionnaire

d. The contents of the management representation letter.

b. The entity's annualized interim financial statements

Which of the following statements is not correct about materiality?

a. the concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Which of the following is a function of the risks of material misstatement and detection risk?

a. Internal control

b. Corroborating evidence

c. Quality Control

d. Audit Risk

d. Audit Risk

Which of the following is correct concerning performance materiality on an audit?

a. It will ordinarily be less than financial statement materiality

b. It should be established at beginning of an audit not to be revised thereafter

c. It should be established at separate amounts for the various financial statements

d. It need not be documented in the working papers

a. It will ordinarily be less than financial statement materiality

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

a. The results of the initial assessment of control risk

b. The anticipated sample size for planned substantive tests.

c. The entity's financial statements of the prior year.

d. The assertions that are embodied in the financial statements.

c. The entity's financial statements of the prior year.

Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could tolerate most likely would cause the auditor to

a. Apply the planned substantive tests prior to the balance sheet date

b. Perform the planned auditing procedures closer to the balance sheet date

c. Increase the assessed level of control risk for relevant financial statement assertions

d. Decrease the extent of auditing procedures to be applied to the class of transactions

b. Perform the planned auditing procedures closer to the balance sheet date

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the

a. Amount of known misstatement is documented in the management representation letter

b. Estimate of the total likely misstatement is acknowledged and recorded by the client

c. Amount of known misstatement is acknowledged and recorded by the client.

d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

b. Estimate of the total likely misstatement is acknowledged and recorded by the client

Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending inventory, while understating COGS.

b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.

c. An employee steals inventory and the "shrinkage" is recorded in costs of goods sold.

d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

a. Company management changes inventory count tags and overstates ending inventory, while understating COGS.

Which of the following best describes what is meant by the term "fraud risk factor"?

a. Factors whose presence indicates that the risk of fraud is high.

b. Factors whose presence often have been observed in circumstances where frauds have occurred.

c. Factors whose presence requires modification of planned audit procedures.

d. Material weaknesses identified during an audit.

b. Factors whose presence often have been observed in circumstances where frauds have occurred.

Which of the following is correct concerning requirements about auditor communications about fraud?

a. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the SEC

c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter"

d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

a. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to

a. Errors

b. Fraud

c. Illegal Acts

d. Business Risk

b. Fraud

Audits of financial statements are designed to obtain assurance of detecting misstatement due to: errors, fraudulent financial reporting, misappropriation of assets

a. yes yes yes

b. yes yes no

c. yes no yes

d. no yes no

a. yes yes yes

An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the following except

a. Employee collusion

b. Falsified documentation

c. Need to apply professional judgment in evaluating fraud risk factors

d. Professional Skepticism

d. Professional Skepticism

An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as

a. Due professional care

b. Professional skepticism

c. Reasonable assurance

d. Supervision

b. Professional skepticism

Professional skepticism requires that an auditor assume that management is:

a. Honest, in the absence of fraud risk factors.

b. Dishonest until competition of audit tests.

c. Neither honest nor dishonest.

d. Offering reasonable assurance of honesty.

c. Neither honest nor dishonest.

The most difficult type of misstatement to detect is fraud based on:

a. The overrecording of transactions.

b. The nonrecording of transactions.

c. Recorded transactions in subsidiaries.

d. Related-party receivables.

b. The nonrecording of transactions.

When considering fraud risk factors relating to management's characteristics, which of the following is least likely to indicate a risk of possible misstatement due to fraud?

a. Failure to correct known significant deficiency on a timely basis.

b. Nonfinancial management's preoccupation with the selection of accounting principles.

c. Significant portion of management's compensation represented by bonuses based upon achieving unduly aggressive operating results.

d. Use of unusually conservative accounting practices.

d. Use of unusually conservative accounting practices.

Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor's assessment of the risk of misstatement due to fraud?

a. Checks for significant amounts outstanding at year-end.

b. Computer generated documents.

c. Missing documents.

d. Year-end adjusting journal entries.

c. Missing documents.

Which of the following is most likely to be a response to the auditor's assessment that the risk of material misstatement due to fraud for the existence of inventory is high?

a. Observe test counts of inventory at certain locations on an unannounced basis.

b. Perform analytical procedures rather than taking test counts.

c. Request that inventories be counted prior to year-end.

d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count.

a. Observe test counts of inventory at certain locations on an unannounced basis.

Which of the following is most likely to be an example of fraud?

a. Defalcations occurring due to invalid electronic approvals.

b. Mistakes in the application of accounting principles.

c. Mistakes in processing data.

d. Unreasonable accounting estimates arising from oversight.

a. Defalcations occurring due to invalid electronic approvals.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

a. Turnover of senior accounting personnel is low.

b. Insiders recently purchased additional shares of the entity's stock.

c. Management places substantial emphasis on meeting earnings projections.

d. The rate of change in the entity's industry is slow.

c. Management places substantial emphasis on meeting earnings projections.

Which of the following statements reflects an auditor's responsibility for detecting misstatements due to errors and fraud?

a. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.

b. An auditor should plan the audit to detect misstatements due to errors and fraud that are caused by departures from GAAP.

c. An auditor is not responsible for detecting misstatements due to errors and fraud unless the application of GAAS would result in such detection.

d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements.

d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements.

Disclosure of fraud to parties other than a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose fraud exist?

1. To the SEC when the client reports an auditor change

2. To a successor when the successor makes appropriate inquiries

3. To a government funding agency from which the client receives financial assistance

a. 1)Yes 2)Yes 3)No

b. 1)Yes 2)No 3)Yes

c. 1)No 2)Yes 3)Yes

d. 1)Yes 2)Yes 3)Yes

d. 1)Yes 2)Yes 3)Yes

Under Statements of Auditing Standards, which of the following would be classified as an error?

a. Misappropriation of assets for the benefit of management.

b. Misinterpretation by management of facts that existed when the financial statements were prepared.

c. Preparation of records by employees to cover a fraudulent scheme.

d. Intentional omission of the recording of a transaction to benefit a third party.

b. Misinterpretation by management of facts that existed when the financial statements were prepared.

What assurance does the auditor provide that misstatements due to errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected?

1. Errors 2. Fraud 3. Direct effect of illegal acts

a. 1)Limited 2)Negative 3)Limited

b. 1)Limited 2)Limited 3)Reasonable

c. 1)Reasonable 2)Limited 3)Limited

d. 1)Reasonable 2)Reasonable 3)Reasonable

d. 1)Reasonable 2)Reasonable 3)Reasonable

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

a. Objective judgment.

b. Independent integrity.

c. Professional skepticism.

d. Impartial conservatism.

c. Professional skepticism.

Which of the following most accurately summarizes what is meant by the term "material misstatement?"

a. Fraud and direct-effect illegal acts.

b. Fraud involving senior management and material fraud.

c. Material error, material fraud, and certain illegal acts.

d. Material error and material illegal acts.

c. Material error, material fraud, and certain illegal acts.

Which of the following statements best describes the auditor's responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employees?

a. The auditor is required to plan the audit to detect these conditions on all audits.

b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to detect these conditions when the client is exposed to a risk of misappropriation of assets.

c. The auditor is required to plan the audit to detect these conditions whenever they may result in misstatements.

d. The auditor is not required to plan the audit to discover these conditions, but should consider them is he or she becomes aware of them during the audit.

d. The auditor is not required to plan the audit to discover these conditions, but should consider them is he or she becomes aware of them during the audit.

When the auditor believes a misstatement is or may be the result of fraud but that the effect of the misstatement is not material to the financial statements, which of the following steps is required?

a. Consider the implications for other aspects of the audit.

b. Resign from the audit.

c. Commence a fraud examination.

d. Contact regulatory authorities.

a. Consider the implications for other aspects of the audit.

Which of the following statements is correct relating to the auditor's consideration of fraud?

a. The auditor's interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements.

b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while errors are generally, but not always, intentional.

c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of assets.

d. While an auditor should be aware of the possibility of fraud, management, and not the auditor, is responsible for detecting fraud.

a. The auditor's interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements.

Which of the following factors or conditions is an auditor least likely to plan an audit to discover?

a. Financial pressures affecting employees.

b. High turnover of senior management.

c. Inadequate monitoring of significant controls.

d. Inability to generate positive cash flows from operations.

a. Financial pressures affecting employees.

At which stage(s) of the audit may fraud risk factors be identified?

1. Planning 2. Obtaining understanding 3. Conducting fieldwork

a. 1)Yes 2)Yes 3)Yes

b. 1)Yes 2)Yes 3)No

c. 1)Yes 2)No 3)No

d. 1)No 2)Yes 3)Yes

a. 1)Yes 2)Yes 3)Yes

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when"

a. External policies established by parties outside the entity affect its accounting practices.

b. Management is dominated by one individual who is also a shareholder.

c. Internal auditors have direct access to the board of directors and the entity's management.

d. The audit committee is active in overseeing the entity's financial reporting policies.

b. Management is dominated by one individual who is also a shareholder.

Which of the following is least likely to be required on an audit?

a. Test appropriateness of journal entries and adjustment.

b. Review accounting estimates for biases.

c. Evaluate the business rationale for significant unusual transactions.

d. Make a legal determination of whether fraud has occurred.

d. Make a legal determination of whether fraud has occurred.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

a. Supervise members of the audit team less closely and rely more upon judgment.

b. Use less predictable audit procedures.

c. Only use certified public accountants on the engagement.

d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

b. Use less predictable audit procedures.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?

a. Are financial reporting operations controlled by and limited to one location?

b. Does it have knowledge of fraud or suspect fraud?

c. Does it have programs to mitigate fraud risks?

d. Has it reported to the audit committee the nature of the company's internal control?

a. Are financial reporting operations controlled by and limited to one location?

Individuals who commit fraud are ordinarily able to rationalize the act and also have an:

1. Incentive 2. Opportunity

a. 1)Yes 2)Yes

b. 1)Yes 2)No

c. 1)No 2)Yes

d. 1)No 2)No

a. 1)Yes 2)Yes

What is an auditor's responsibility who discovers management involved in what is financially immaterial fraud?

a. Report the fraud to the audit committee.

b. Report the fraud to the Public Company Oversight Board

c. Report the fraud to a level of management at least one below those involved in the fraud,

d. Determine that the amounts involved are immaterial, and if so, there is no reporting responsibility.

a. Report the fraud to the audit committee.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

a. Domination of management by top executives

b. Large amounts of cash processed

c. Negative cash flows from operations

d. Small high-dollar inventory items

c. Negative cash flows from operations

Which of the following is most likely to be presumed to represent fraud risk on an audit?

a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account

b. Improper revenue recognition

c. Improper interest expense accrual

d. Introduction of significant new products

b. Improper revenue recognition

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

a. The payments violated the clients policies regarding the prevention of illegal acts

b. The client receives financial assistance from a federal government agency

c. Documentation that is necessary to prove that the bribes were paid does not exist

d. Management fails to take the appropriate remedial action

d. Management fails to take the appropriate remedial action

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

a. The prospective client has already completed its physical inventory count

b. The CPA lacks an understanding of the prospective client's operation and industry

c. The CPA is unable to review the predecessor auditor's working papers

d. The prospective client is unwilling to make all financial records available to the CPA

d. The prospective client is unwilling to make all financial records available to the CPA

Which of the following factors would most likely heighten an auditor's concern about the risk of fraudulent financial reporting?

a. Large amounts of liquid assets that are easily convertible into cash

b. Low growth and profitability as compared to other entities in the same industry

c. Financial management's participation in the initial selection of accounting principles

d. An overly complex organizational structure involving unusual lines of authority

d. An overly complex organizational structure involving unusual lines of authority

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the

a. Client receives financial assistance from a federal government agency

b. Evidence that is necessary to prove that the illegal acts were committed does not exist

c. Employees' actions affect the auditor's ability to rely on management's representations

d. Notes to the financial statements fail to disclose the employees' actions.

c. Employees' actions affect the auditor's ability to rely on management's representations

Which of the following illegal acts should an audit be designed to obtain reasonable assurance of detecting?

a. Securities purchased by relatives of management based on knowledge of inside information

b. Accrual and billing of an improper amount of revenue under government contracts

c. Violations of antitrust laws

d. Price fixing

b. Accrual and billing of an improper amount of revenue under

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

a. An illegal payment to a foreign official that was not recorded

b. A piece of obsolete office equipment that was not retired

c. A petty cash fund disbursement that was not properly authorized

d. An uncollectible account receivable that was not written off

a. An illegal payment to a foreign official that was not recorded

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditory, determined that illegal political contributions had been made during each of the past seven years, including the year under audit, Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the

a. Letter of audit inquiry to the client's attorney

b. Prior years' audit plan

c. Management representation letter

d. Preliminary judgment about materiality levels

c. Management representation letter

The most likely explanation why the auditor's examination cannot reasonably be expected to bring noncompliance with all laws by the client to the auditor's attention is that

a. Illegal acts are perpetrated by management override of internal control

b. Illegal acts by clients often relate to operating aspects rather than accounting aspects

c. The client's internal control may be so strong that the auditor performs only minimal substantive testing

d. Illegal acts may be perpetrated by the only person in the client's organization with access to both assets and accounting records

b. Illegal acts by clients often relate to operating aspects rather than accounting aspects

If specific information comes to an auditor's attention that implies noncompliance with laws that could result in a material, but indirect effect on the financial statements, the auditor should next

a. Apply auditing procedures specifically directed to ascertaining whether compliance has occurred

b. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities

c. Report the matter to an appropriate level of management at least one level about those involved.

d. Discuss the evidence with the client's audit committee, or others with equivalent authority and responsibility

a. Apply auditing procedures specifically directed to ascertaining whether compliance has occurred

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if

a. The illegal act is a violation of generally accepted accounting principles

b. The client does not take the remedial action that the auditor considers necessary

c. The illegal act was committed during a prior year that was not audited

d. The auditor has already assessed control risk at the maximum level

b. The client does not take the remedial action that the auditor considers necessary

Under the Private Securities Litigation Reform Act of 1995, Baker, CPA reported certain uncorrected illegal acts to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to

a. Resign from the audit engagement within ten business days

b. Deliver a report concerning the illegal acts to the SEC within one business day

c. Notify the stockholders that the financial statements are materially misstated

d. Withhold an audit opinion until Supermart takes appropriate remedial action

b. Deliver a report concerning the illegal acts to the SEC within one business day

Which of the following would be least likely to be considered an audit planning procedure?

a. Use an engagement letter

b. Develop the overall audit strategy

c. Perform risk assessment

d. Develop the audit plan

c. Perform risk assessment

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

a. The CPA's lack of understanding of the prospective client's internal auditor's computer assisted audit techniques

b. Management's disregard of its responsibility to maintain an adequate internal control environment

c. The CPA's inability to determine whether related-party transactions were consummated on terms equivalent to arm's-length transactions

d. Management's refusal to permit the CPA to perform substantive tests before the year-end

b. Management's disregard of its responsibility to maintain an adequate internal control environment

Before accepting an engagement to audit a new client, a CPA is required to obtain

a. An understanding of the prospective client's industry and business

b. The prospective client's signature to the engagement letter

c. A preliminary understanding of the prospective client's control environment

d. The prospective client's consent to make inquiries of the predecessor auditor, if any

d. The prospective client's consent to make inquiries of the predecessor auditor, if any

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding

a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles

b. The predecessor's evaluation of matters of continuing accounting significance

c. The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer

d. The predecessor's assessments of inherent risk and judgment's about materiality

a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's

a. Opinion of any subsequent events occurring since the predecessor's audit report was issued

b. Understanding as to the reasons for the change of auditors

c. Awareness of the consistency in the application of GAAP between periods

d. Evaluation of all matters of continuing accounting significance

b. Understanding as to the reasons for the change of auditors

An auditor is required to establish an understanding but the client regarding the services to be performed for each engagement. This understanding generally includes

a. Management's responsibility for errors in that illegal activities of employees that may cause material misstatement

b. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor's attention

c. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud

d. The auditor's responsibility for determining preliminary judgments about materiality an audit risk factors

b. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor's attention

Which of the following matters is generally included in an auditor's engagement letter?

a. Management's responsibility for the entity's compliance with laws and regulations

b. The factors to be considered in setting preliminary judgments about materiality

c. Management's vicarious liability for illegal acts committed by its employees

d. The auditor's responsibility to search for significant internal control deficiencies

a. Management's responsibility for the entity's compliance with laws and regulations

During the initial planning phase of an audit, a CPA most likely would

a. Identify specific internal control activities that are likely to prevent fraud

b. Evaluate the reasonableness of the client's accounting estimates

c. Discuss the timing of the audit procedures with the client's management

d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion

c. Discuss the timing of the audit procedures with the client's management

Which of the following statements would least likely appear in an auditor's engagement letter?

a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses

b. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations

c. Our engagement is subject to the risk that material misstatements or fraud, if they exist, will not be detected

d. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement

d. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

a. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives

b. An indication that the accounting records agree or reconcile with the financial statements

c. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork

d. The assessment of the risks of material misstatement.

c. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork

An engagement letter should ordinarily include information on the objectives of the engagement and: CPA Responsibilities, Client Responsibilities, Limitation of engagement

a. Yes Yes Yes

b. Yes No Yes

c. Yes No No

d. No No No

a. Yes Yes Yes

Arrangements concerning which of the following are least likely to be included in an engagement letter?

a. A predecessor auditor.

b. Fees and billing.

c. CPA investment in client securities.

d. Other services to be provided in addition to the audit.

c. CPA investment in client securities.

The auditor should document the understanding established with a client through a(n)

a. Oral communication with the client.

b. Written communication with the client.

c. Written or oral communication with the client.

d. Completely detailed audit plan.

b. Written communication with the client.

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

a. The complexity of the accounting system.

b. The existence of related-party transactions.

c. The adequacy of the accounting records.

d. The operating effectiveness of control procedures.

c. The adequacy of the accounting records.

Which of the following is most likely to require special planning consideration related to asset valuation?

a. Inventory is comprised of diamond rings.

b. The client has recently purchased an expensive copy machine.

c. Assets costing less than $250 are expensed even when the expected life exceeds one year.

d. Accelerated depreciation methods are used for amortizing the costs of factory equipment.

a. Inventory is comprised of diamond rings.

A CPA wishes to determine how various publicly held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for information?

a. AICPA Codification of Statements on Auditing Standards.

b. AICPA Accounting Trends and Techniques.

c. SEC Quality Control Review.

d. SEC Statement 10-K Guide.

b. AICPA Accounting Trends and Techniques.

An auditor should design the audit plan so that

a. All material transactions will be selected for substantive testing.

b. Substantive tests prior to the balance sheet date will be minimized.

c. The audit procedures selected will achieve specific audit objectives.

d. Each account balance will be tested under either tests of controls or tests of transactions.

c. The audit procedures selected will achieve specific audit objectives.

The audit plan generally is modified when

a. The results of tests of controls differ from expectations.

b. An engagement letter has been signed by the auditor and the client.

c. A significant deficiency has been communicated to the audit committee of the board of directors.

d. The search for unrecorded liabilities has been performed and obtained results as had been expected during the planning of the audit.

a. The results of tests of controls differ from expectations.

Audit plans should be designed so that

a. Most of the required procedures can be performed as interim work.

b. Inherent risk is assessed at a sufficiently low level.

c. The auditor can make constructive suggestions to management.

d. The audit evidence gathered supports the auditor's conclusions.

d. The audit evidence gathered supports the auditor's conclusions.

In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the

a. Timing of audit procedures.

b. Cost-benefit of gathering evidence.

c. Selected audit techniques.

d. Financial statement assertions.

d. Financial statement assertions.

With respect to planning an audit, which of the following statements is always true?

a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

b. An engagement should not be accepted after the client's year-end.

c. An inventory count must be observed at year-end.

d. Final staffing decisions must be made prior to completion of the planning stage.

a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

a. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

b. Procedures to be undertaken to discover litigation, claims, and assessments.

c. Pending legal matters to be included in the inquiry of the client's attorney.

d. Timing of inventory observation procedures to be performed.

d. Timing of inventory observation procedures to be performed.

To obtain an understanding of a continuing client's business, an auditor most likely would

a. Perform tests of details of transactions and balances.

b. Review prior year working papers and permanent files for the client.

c. Read current issues of specialized industry journals.

d. Reevaluate the client's internal control environment.

b. Review prior year working papers and permanent files for the client.

On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the relevant professional accounting and auditing standards should be held by

a. The auditor with final responsibility for the audit.

b. All professionals working upon the audit.

c. All professionals working upon the audit and the partner in charge of the CPA firm.

d. All professional working in the office.

a. The auditor with final responsibility for the audit.

An auditor obtains knowledge about a new client's business and its industry to

a. Make constructive suggestions concerning improvements to the client's internal control.

b. Develop an attitude of professional skepticism concerning management's financial statement assertions.

c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.

d. Understand the events and transactions that may have an effect on the client's financial statements.

d. Understand the events and transactions that may have an effect on the client's financial statements.

Which of the following procedures would an auditor least likely perform while obtaining an understanding of a client in a financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation.

b. Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity.

c. Selecting a sample of vendors' invoices for comparison to receiving reports.

d. Reading the current year's interim financial statements.

c. Selecting a sample of vendors' invoices for comparison to receiving reports.

Ordinarily, the predecessor auditor permits the successor auditor the review the predecessor's working paper analyses relating to: Contingencies and/or Balance Sheet Accounts

a. Yes Yes

b. Yes No

c. No Yes

d. No No

a. Yes Yes

In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revision. Under these circumstances, Land should

a. Notify Star's audit committee and stockholders that the prior year's financial statements cannot be relied on.

b. Request Star to reissue the prior year's financial statements with the appropriate revisions.

c. Notify Tell about the information and make inquiries about the integrity of Star's management.

d. Request Star to arrange a meeting among the three parties to resolve the matter.

d. Request Star to arrange a meeting among the three parties to resolve the matter.

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: Engagement Letter, Working Papers

a. Yes Yes

b. Yes No

c. No Yes

d. No No

c. No Yes

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

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

b. Comparing the financial statements to anticipated results.

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

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

b. Comparing the financial statements to anticipated results.

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

a. That immaterial fraud is not to be reported to the client's audit committee.

b. How the results of various auditing procedures performed by the assistants should be evaluated.

c. What benefits may be attained by the assistants' adherence to established time budgets.

d. Why certain documents are being transferred from the current file to the permanent file.

b. How the results of various auditing procedures performed by the assistants should be evaluated.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

a. Auditor's system of quality control has been maintained at a high level.

b. Results are consistent with the conclusions to be presented in the auditor's report.

c. Audit procedures performed are approved in the professional standards.

d. Audit has been performed by persons having adequate technical training and proficiency as auditors.

b. Results are consistent with the conclusions to be presented in the auditor's report.

Analytical procedures used during risk assessment in an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.

b. Providing assurance that potential material misstatements will be identified.

c. Enhancing the auditor's understanding of the client's business.

d. Assessing the adequacy of the available evidence.

c. Enhancing the auditor's understanding of the client's business.

A primary purpose of performing analytical procedures as risk assessment procedures is to identify the existence of

a) Unusual transactions and events.

b) Illegal acts that went undetected because of internal control weaknesses.

c) Related-party transactions.

d) Recorded transactions that were not properly authorized.

a) Unusual transactions and events.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?

a) Turnover of personnel in the accounting department.

b) Objectivity of audit committee members.

c) Square footage of selling space.

d) Managements plan to repurchase stock.

c) Square footage of selling space.

The accounting receivable turnover ratio increased during 20X2. This is consistent with:

a) Items shipped on consignment during December were recorded as credit sales; no cash receipts have yet been received on these consignments.

b) The company increased credit sales by 10% by allowing more lenient credit terms—30 days are now allowed whereas previously only 20 days were allowed.

c) A major credit sale on which title has passed as of December 31, 20X2 was recorded in January 20X3.

d) Sales for each month are approximately 25% higher than those of the preceding year.

c) A major credit sale on which title has passed as of December 31, 20X2 was recorded in January 20X3.

A company's gross margin percentage increased in 20X2. This is consistent with which of the following occurring in 20X2?

a) An increase in the tax rate on income.

b) An increase in units sold.

c) A decrease in the rate of sales commissions paid to sales personnel.

d) Outsourcing of a part of the manufacturing process which resulted in no additional costs.

b) An increase in units sold.

The following summarizes your client's inventory turnover for years 1 and 2. Inventory turnover for year 1: 7.00. Inventory turnover for year 2: 6.00. This change is most consistent with

a) A number of expense items were erroneously included in cost of goods sold (but not in ending inventory).

b) While inventory levels remained the same in year 2, total sales increased and a higher percentage of customers are paying their accounts.

c) Although sales for year 2 were the same as for year 1, inventory is a bit higher than normal because the last month of year 2's sales were lower than anticipated.

d) The year-end physical inventory count omitted a number of significant items. A periodic accounting inventory system is in use.

c) Although sales for year 2 were the same as for year 1, inventory is a bit higher than normal because the last month of year 2's sales were lower than anticipated.

While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and

a) Assess the risk of misstatements due to illegal acts.

b) Consider the complexity of the transactions involved.

c) Consider the likelihood that the risks could result in material misstatements.

d) Determine materiality levels.

c) Consider the likelihood that the risks could result in material misstatements.

Which of the following are considered further audit procedures that may be designed after assessing the risks of material misstatement? Substantive tests of details, risk assessment procedures.

a) Yes Yes

b) Yes No

c) No Yes

d) No No

b) Yes No