Multiple-Choice Questions - CPA Diary
Chapter 8
Multiple-Choice Questions
|1. |Which of the following is not one of the three main reasons why the auditor should properly plan engagements? |
|easy | |
|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. |Yes |Yes |
| |b. |No |No |
| |c. |Yes |No |
| |d. |No |Yes |
| | | | |
|3. |A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the|
|easy |audit is completed and an unqualified opinion has been issued is the: |
|b |a. inherent risk. |
| |b. acceptable audit risk. |
| |c. statistical risk. |
| |d. financial risk. |
| | |
|4. |A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account before |
|easy |considering the effectiveness of the client’s internal control is called: |
|d |a. control risk. |
| |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. |Yes |Yes |
| |b. |No |No |
| |c. |Yes |No |
| |d. |No |Yes |
| | |
|6. |The auditor is likely to accumulate more evidence when the audit is for a company: |
|easy | |
|a |Which has large amounts of debt | |Which is to be sold in the near future |
| |a. |Yes |Yes |
| |b. |No |No |
| |c. |Yes |No |
| |d. |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. |
| |d. 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. |Most auditors assess inherent risk as high for related parties and related-party transactions because: |
|easy | |
|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. |Which of the following is not correct regarding the communications between successor and predecessor auditors? |
|easy | |
|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 | | | |
|a |Speak to local attorneys, banks and | | |
| |other businesses regarding the | |Speak to the predecessor auditors about disagreements they had|
| |company’s reputation | |with management |
| |a. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d. |No | |Yes |
| | | | |
| | |
|12. |Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is |
|medium |appropriate? |
|b |a. More evidence is accumulated. |
| |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. |It is easier and more common to implement increased evidence accumulation for inherent risk than for acceptable audit|
|medium |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) |If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for |
|medium |agreeing to those services with the audit firm? |
|d |a. The client’s management. |
| |b. The client’s chief executive officer. |
| |c. The client’s chief financial officer. |
| |d. The client’s audit committee. |
| | |
|15. |Which of the following statements is true regarding communications between predecessor and successor auditors? |
|medium | |
|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. |Investigating new clients with a focus on assessing the auditor’s potential relationship with that new client is a |
|medium |critical element in determining: |
|b |a. inherent risk. |
| |b. acceptable audit risk. |
| |c. statistical risk. |
| |d. financial risk. |
| | |
|17. |The purpose of an engagement letter is to: |
|medium |a. document the CPA firm’s responsibility to external users of the audited financial statements. |
|b | |
| |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. |One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is the: |
|medium | |
|a |a. engagement letter. |
| |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. |
|d |b. Chief financial officer. |
| |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? |
|medium |a. Management. |
|a |b. Board of directors representative. |
| |c. Audit committee representative. |
| |d. Corporate treasurer. |
| | |
|21. |An understanding of a client’s business and industry and knowledge about operations are essential for performing an |
|medium |adequate audit. For a new client, most of this information is obtained: |
|d | |
| |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 |b. review of SEC filings. |
| |c. distribution of the engagement letter to all stockholders. |
| |d. examination of stockholders’ listings to identify principal stockholders. |
| | |
|23. |An official record of meetings of the board of directors and stockholders is included in the corporate: |
|medium | |
|c |a. bylaws. |
| |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. |The first standard of field work, which states that the work is to be adequately planned and that assistants, if any,|
|medium |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. |The corporate minutes are the official record of the meetings of the board of directors and stockholders. The |
|medium |minutes typically include authorizations related to: |
|d | |
| |The CPA’s use of outside specialists | |Management compensation |
| |a. |Yes |Yes |
| |b. |No |No |
| |c. |Yes |No |
| |d. |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 |a. The corporate charter is granted by the federal government and is required to recognize the corporation as a |
|c |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. |
| |d. The corporate charter must be annually reviewed by the PCAOB. |
| | |
|31. |Corporate bylaws include: |
|Medium | | | |
|d |The types and amounts of capital stock the | |The rules and procedures used to operate the |
| |corporation is authorized to issue | |corporation |
| |a. |Yes |Yes |
| |b. |No |No |
| |c. |Yes |No |
| |d. |No |Yes |
| | |
|32. |In what order should the following steps occur? |
|medium |A. Assess client business risk |
|b |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. |
|d |b. profit margin. |
| |c. return on assets. |
| |d. earnings per share. |
| | |
|35. |The purpose of the requirement in SAS No. 84 of having communication between the predecessor and successor auditor is|
|challenging |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. |The predecessor auditor is required to respond to the request of the successor auditor for information, but the |
|challenging |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 |a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses |
|d |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 and nonfinancial data. |
| | |
|38. |Which of the following ratios is best used to assess a company’s ability to meet its long-term debt obligations? |
|challenging | |
|c |a. Quick ratio. |
| |b. Return on common equity. |
| |c. Debt to equity. |
| |d. Current ratio. |
| | |
|39. |Which of the following statements is not correct? |
|challenging |a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the |
|b |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. |
|d |b. The date of incorporation. |
| |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. |
|a |b. Declaration of dividends. |
| |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 |a. Whenever the auditor places reliance on management’s explanations for unusual fluctuations in account balances |
|d |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 subsidiary’s relationship |
|challenging |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. |The first standard of fieldwork requires, in part, that audit work be properly planned. Proper planning as intended |
|challenging |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. |Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the |
|medium |two items below are concerns. |
|a | | | |
| |Assessing whether the budgets were realistic | |Client data may have been altered to conform to the |
| |plans | |budget |
| |a. |A concern | |A concern |
| |b. |Not a concern | |Not a concern |
| |c. |A concern | |Not a concern |
| |d. |Not a concern | |A concern |
| | |
|49. |An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should: |
|challenging | |
|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? |
|medium |a. Profit margin |
|b |b. Inventory turnover |
| |c. Return on assets |
| |d. Times interest earned |
| | |
|51. |Which is usually included in an engagement letter? |
| | |
| |Estimate of hours required to complete | |Dollar estimate of fees to be billed to the |
|medium |audit | |client |
|d |a. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d. |No | |Yes |
| | | | |
|52. |Which is usually included in an engagement letter? |
|medium | | | |
|a |A reference to GAAP | |A reference to GAAS |
| |a. Yes | |Yes |
| |b. No | |No |
| |c. Yes | |No |
| |d. No | |Yes |
| | | | |
|53. |Which is usually included in an engagement letter? |
|medium | | | |
|c |The financial statements are the | | |
| |responsibility of the company’s | |Ratios to be used by the auditor in the planning phase |
| |management | | |
| |a. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d |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. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d |No | |Yes |
| | | | | |
|55. |Which is usually included in the engagement letter? |
|medium | | | | |
|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. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d |No | |Yes |
| | | | | |
|56. |Which is usually included in the engagement letter? |
|medium | | | | |
|b |List of audit procedures to be used in | | |
| |inventory observation | |The auditors’ assessment of Audit Risk |
| |a. |Yes | |Yes |
| |b. |No | |No |
| |c. |Yes | |No |
| |d |No | |Yes |
| | | | | |
| | | | | |
Essay Questions
|57. |Discuss the factors an auditor should consider before accepting a company as an audit client. |
|easy | |
| |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. |Discuss the primary purpose of an audit engagement letter. Is an engagement letter required? |
|easy | |
| |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. |Define the term “related party” and discuss why an auditor should identify the client’s related parties early in the |
|easy |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. |There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons. |
|medium | |
| |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. |Discuss the essential activities involved in the initial planning of an audit. |
|medium | |
| |Answer: |
| |There are four essential activities involved in the initial planning of an audit. These are: |
| |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. |
| |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. |
| |Obtain an understanding with the client. An understanding with the client should be obtained to avoid |
| |misunderstandings. Auditors are required to obtain an understanding with their clients. This understanding must be |
| |written. |
| |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. |
|62. |Discuss the required communications between predecessor and successor auditors as outlined by SAS No. 84. |
|medium | |
| |Answer: |
| |Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a |
| |client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate |
| |whether to accept the engagement. While the burden of initiating the communication rests on the successor auditor, |
| |the predecessor auditor must respond to the request for information. However, because of the requirements related to |
| |confidentiality, the predecessor must obtain the former client’s permission prior to providing information to the |
| |successor. |
| | |
|63. |Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client. |
|medium | |
| |Answer: |
| |There are a number of reasons an auditor may choose not to continue a relationship with an existing client. Examples|
| |include: |
| | |
| |Previous conflicts over accounting issues, scope of the audit, type of opinion, or fees. |
| |Management integrity may be deemed to be insufficient. |
| |Legal action initiated by either the auditor or client related to prior audit services. |
| |If fees remain unpaid for services performed more than one year prior to the date of the current year’s audit report.|
| |The presence of excessive risk. |
| | |
|64. |Discuss four of the matters that should be specified in an engagement letter. |
|medium | |
| |Answer: |
| |Matters that should be specified in the engagement letter include: |
| |Whether the auditor will perform an audit, a review, or a compilation, plus any other services such as tax returns or|
| |management advisory services. |
| |Any restrictions to be imposed on the auditor’s work. |
| |Deadlines for completing the audit. |
| |Assistance to be provided by the client’s personnel in obtaining records and documents, and schedules to be prepared |
| |for the auditor. |
| |Agreement on fees. |
| |The letter should state that the auditor is not responsible for the discovery of all acts of fraud. |
| | |
|65. |What documents do auditors routinely obtain to aid in their understanding of a client’s governance system? Briefly |
|medium |discuss each of these documents. |
| |Answer: |
| |Auditors commonly obtain the client’s corporate charter, bylaws, and minutes of meetings of the board of directors |
| |and shareholders. The corporate charter is issued by the state in which the company is incorporated and specifies the|
| |exact name of the corporation along with the date of incorporation, the kinds and amounts of stock the corporation is|
| |authorized to issue, and the types of business that the corporation is authorized to conduct. The bylaws include the |
| |rules and procedures adopted by the stockholders of the corporation. They specify the duties and powers of corporate |
| |officers, the method of voting for directors, and |
| | |
| | |
| |the frequency of stockholder meetings. The corporate minutes are the official record of the meetings of the board of|
| |directors and stockholders. They include summaries of the most important topics discussed and decisions made at the |
| |board meetings. |
| | |
|66. |What are three factors that have increased the importance of obtaining an understanding of a client’s business and |
|medium |industry? How can an auditor obtain this understanding? |
| |Answer: |
| |Factors that have increased the importance of obtaining an understanding of a client’s business and industry include:|
| |Advances in information technology have increased connectivity among companies, customers, and vendors. Auditors must|
| |understand the risks associated with this increased connectivity. |
| |Companies have expanded operations to have global reaches, often through joint ventures and strategic alliances. |
| |Information technology affects internal control processes, improving the quality and timeliness of accounting |
| |information. |
| |The increased importance of human capital and other intangible assets has increased accounting complexity and the |
| |importance of management judgments and estimates. |
| |Auditors need a better understanding of the client’s business and industry to provide additional value-added |
| |services. |
| | |
| |The auditor can obtain a sound understanding of the client’s business and industry through several means, including |
| |discussions with previous auditors and by reviewing the permanent files for the client; conferences with the client’s|
| |personnel; studying AICPA industry audit guides, textbooks, technical magazines, and specialized journals; and by |
| |participating in industry associations and training programs. |
| | |
|67. |There are three primary reasons for obtaining a thorough understanding of the client’s industry and external |
|medium |environment. What are these reasons? |
| |Answer: |
| |The three reasons are: |
| |Risks associated with specific industries may affect the auditor’s assessment of client business risk and acceptable |
| |audit risk. |
| |Certain inherent risks are typically common to all clients in certain industries. Familiarity with those risks aids |
| |the auditor in assessing their relevance to the client. |
| |Many industries have unique accounting requirements that the auditor must understand to evaluate whether the client’s|
| |financial statements are in accordance GAAP. |
| | |
|68. |Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit. |
|medium | |
| |Answer: |
| |The four primary purposes of preliminary analytical procedures are: |
| |to help the auditor understand the client’s industry and business, |
| |to help the auditor assess the going concern assumption, |
| |to indicate areas of possible misstatements, and |
| |to reduce the extent of detailed tests. |
| | |
|69. |Define business risk. List several factors that may impact the auditor’s assessment of business risk. |
|challenging | |
| |Answer: |
| |Business risk is the risk that a company will fail to achieve its objectives. |
| |Factors that may impact business risk include: |
| |General economic conditions, |
| |Extent of competition within an industry, |
| |Changing regulatory requirements, |
| |Competence of management, |
| |Ability to maintain sufficient cash flows and secure financing, and |
| |Successful implementation of business strategies. |
|70. |Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit. |
|challenging |Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit. |
| |Answer: |
| |Planning – The primary purposes are to understand the client’s business and industry and indicate areas of possible |
| |misstatements. The secondary purposes are to assess going concern and reduce the extent of detailed tests. |
| |Testing – The primary purpose is to reduce the extent of detailed tests, while the secondary purpose is to indicate |
| |areas of possible misstatements. |
| |Completion –The primary purpose is to indicate areas of possible misstatements, while the secondary purpose is to |
| |assess going concern. |
|71. |Three types of legal documents and records that auditors examine in the planning phase of an audit are the corporate |
|challenging |charter and bylaws, corporate minutes of meetings of the board of directors and stockholders, and contracts. Discuss |
| |the audit-relevant information contained in each of these three types of documents that an auditor should be aware of|
| |early in the audit. |
| |Answer: |
| |Corporate charter and bylaws. This includes the amounts of capital stock the corporation is authorized to issue, its |
| |par or stated value, preferences and conditions for dividends, and information concerning voting rights of each class|
| |of stock. The bylaws specify such things as the fiscal year of the corporation, the frequency of stockholder |
| |meetings, the method of voting for directors, and the duties and powers of the corporate officers. |
| |Minutes of meetings. There are two categories of audit-relevant information contained in the minutes: authorizations |
| |and discussions by the board of directors affecting inherent risk. Common authorizations in the minutes include |
| |compensation of officers, new contacts and agreements, acquisitions of property, loans, and dividend payments. |
| |Contracts. The auditor should examine contracts early in the engagement to gain a better perspective of the |
| |organization and to become familiar with potential problem areas. Contracts will also be examined during the tests of|
| |individual audit areas. |
| | |
Other Objective Answer Format Questions
|72. |When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit |
|easy |evidence will be required for that account. |
|a |a. True |
| |b. False |
|73. |As acceptable audit risk is decreased, the likely cost of conducting an audit increases. |
|easy |a. True |
|a |b. False |
|74. |Before accepting a new client, most CPA firms investigate the company to determine its acceptability. However, AICPA |
|easy |confidentiality requirements prohibit CPA firms from contacting certain parties—namely the company’s attorneys and |
|b |bankers—during this investigation. |
| |a. True |
| |b. False |
|75. |For prospective clients that have previously been audited by another CPA firm, the predecessor auditor is required to|
|easy |communicate with the successor auditor. |
|b |a. True |
| |b. False |
|76. |When a successor auditor contacts a company’s previous auditor, the predecessor auditor is required to respond fully |
|easy |and without limit to the request for information. |
|b |a. True |
| |b. False |
|77. |A predecessor auditor who has been contacted by a successor auditor for information about the client does not have to|
|easy |obtain permission from the former client before providing any confidential information to the successor auditor |
|b |because the confidentiality requirement does not extend to former clients. |
| |a. True |
| |b. False |
|78. |Auditors should obtain copies of the client’s articles of incorporation, bylaws, and minutes of the meetings of the |
|easy |board of directors to aid in their understanding of the company’s management and governance structure. |
|a |a. True |
| |b. False |
|79. |An auditor must evaluate a specialist’s professional qualifications and understand the objectives of the specialist’s|
|easy |work. |
|a |a. True |
| |b. False |
|80. |To evaluate a specialist’s work the auditor must himself/herself be considered a specialist. |
|medium |a. True |
|b |b. False |
|81. |An engagement letter establishes a clear understanding of the terms of the engagement between the client and the |
|medium |auditor, but it is optional for private companies. |
|a |a. True |
| |b. False |
|82. |Because of the requirements of Rule 201 of the AICPA’s Code of Professional Conduct which state that auditors should |
|easy |“undertake only those professional services that the member or the member’s firm can reasonably expect to be |
|b |completed with professional competence,” auditors are not normally permitted to consult with, or rely on the work of,|
| |outside specialists during an audit engagement. |
| |a. True |
| |b. False |
|83. |Acceptable audit risk is a measure of the auditor’s willingness to accept that the financial statements do not |
|medium |contain material misstatements after the audit is completed and a qualified audit report has been issued. |
|b |a. True |
| |b. False |
|84. |If a prospective client has been audited in the past, the successor auditor will typically rely solely on the |
|medium |representations about the client by the predecessor auditor. |
|b |a. True |
| |b. False |
|85. |Two major factors that affect acceptable audit risk are the likely users of the financial statements and the |
|medium |likelihood of issuing an unqualified audit opinion. |
|b |a. True |
| |b. False |
|86. |A major consideration in assigning staff to an audit engagement is the experience levels required for the work, while|
|medium |a less important consideration is maintaining staff continuity on the engagement. |
|b |a. True |
| |b. False |
|87. |Inherent risks typically vary across industries. |
|medium |a. True |
|b |b. False |
|88. |Transactions with related parties must be disclosed in the financial statements if they are deemed to be material. |
|medium |a. True |
|a |b. False |
|89. |All known related parties must be identified and included in the auditor’s permanent files related to the client. |
|medium |a. True |
|a |b. False |
|90. |Generally, auditors assess inherent risk as moderate for related party transactions because they expect clients to be|
|medium |aware of their scrutiny of such transactions. |
|b |a. True |
| |b. False |
|91. |The corporate charter typically establishes the company’s fiscal year and frequency of stockholder meetings. |
|medium |a. True |
|b |b. False |
|92. |Ordinarily, the auditor should review and abstract copies of contracts during the later stages of an audit. |
|medium |a. True |
|b |b. False |
|93. |When a successor auditor requests information from a company’s previous auditor, and there are legal problems or |
|medium |disputes between the client and the predecessor auditor, the predecessor auditor’s response to the new auditor may be|
|a |limited to stating that no information will be provided. |
| |a. True |
| |b. False |
|94. |One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor |
|medium |make a preliminary assessment of control risk. |
|b |a. True |
| |b. False |
|95. |Material transactions between the client and the client’s related parties must be disclosed in the auditor’s report. |
|medium |a. True |
|b |b. False |
|96. |An engagement letter can affect the CPA firm’s legal responsibilities to the client, but does not affect |
|challenging |responsibility to external users of audited financial statements. |
|a |a. True |
| |b. False |
|97. |Two categories of audit-relevant information found in corporate charters and bylaws are authorizations and |
|challenging |discussions of matters affecting inherent risk. |
|b |a. True |
| |b. False |
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- science enhanced s s biology
- chemistry enhanced scope sequence
- 7th grade essay format summary
- inspirasian scholarship application
- university of birmingham
- writing a cover letter personal essay for a scholarship
- multiple choice questions cpa diary
- australian core skills framework
- 6th grade reading writing argumentative texts unit
Related searches
- strategic management multiple choice questions
- reading comprehension multiple choice pdf
- photosynthesis multiple choice test questions
- free multiple choice reading comprehension
- strategic management multiple choice qu
- physics multiple choice questions pdf
- fun multiple choice questions meeting
- multiple choice questions in physics
- apush multiple choice questions pdf
- anatomy multiple choice questions and answers
- english multiple choice questions pdf
- multiple choice questions answer key