Question 1

An engagement letter can affect the CPA firm's legal responsibilities to the client,but does not affect responsibility to external users of audited financial statements.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is a correct statement regarding analytical procedures?

Accepted Answer

A)  A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B)  Common-size financial statements display all items as a percentage change from a base year. 
C)  Auditors should investigate the most significant differences between budgeted and actual results. 
D)  In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances. 
A)  A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B)  Common-size financial statements display all items as a percentage change from a base year. 
C)  Auditors should investigate the most significant differences between budgeted and actual results. 
D)  In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

Question 3

Which is usually included in an engagement letter?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 4

Related party:

Accepted Answer

A)  transactions must be disclosed in the footnotes even if the amounts are immaterial. 
B)  disclosures include the nature of the related party relationship and a description of the transaction. 
C)  transactions are considered arms-length transactions. 
D)  disclosures are required only for public companies. 
A)  transactions must be disclosed in the footnotes even if the amounts are immaterial. 
B)  disclosures include the nature of the related party relationship and a description of the transaction. 
C)  transactions are considered arms-length transactions. 
D)  disclosures are required only for public companies.

Question 5

Because of the requirements of Rule 201 of the AICPA's Code of Professional Conduct which state that auditors should "undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence," auditors are not normally permitted to consult with,or rely on the work of,outside specialists during an audit engagement.

Accepted Answer

A) True 
 B)False

Question 6

The quick ratio has the same denominator as the current ratio.

Accepted Answer

A) True 
 B)False

Question 7

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a primary reason for obtaining a good understanding of the client's industry and external environment?

Accepted Answer

A)  Risk associated with a specific industry may affect the auditor's assessment of client business risk. 
B)  Risk associated with a specific industry may affect the auditor's assessment of acceptable audit risk. 
C)  Risk associated with a specific industry may affect the auditor's assessment of acceptable control risk. 
D)  Many control risks are common to all clients in certain industries. 
A)  Risk associated with a specific industry may affect the auditor's assessment of client business risk. 
B)  Risk associated with a specific industry may affect the auditor's assessment of acceptable audit risk. 
C)  Risk associated with a specific industry may affect the auditor's assessment of acceptable control risk. 
D)  Many control risks are common to all clients in certain industries.

Question 9

Which is usually included in the engagement letter?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 10

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor,but it is optional for private companies.

Accepted Answer

A) True 
 B)False

Question 11

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Accepted Answer

A) True 
 B)False

Question 12

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

Accepted Answer

There are a number of reasons an auditor

Question 13

When are auditors likely to encounter judgment problems in the use of analytical procedures?

Accepted Answer

A)  Whenever the auditor places reliance on management's explanations for unusual fluctuations in account balances without first developing independent expectations 
B)  Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances 
C)  Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them 
D)  The auditor is likely to encounter judgment problems in each of the above instances. 
A)  Whenever the auditor places reliance on management's explanations for unusual fluctuations in account balances without first developing independent expectations 
B)  Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances 
C)  Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them 
D)  The auditor is likely to encounter judgment problems in each of the above instances.

Question 14

A 100 % audit risk is complete certainty.

Accepted Answer

A) True 
 B)False

Question 15

Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.

Accepted Answer

A) True 
 B)False

Question 16

Business risk:

Accepted Answer

A)  is the risk after considering the effectiveness of top management controls. 
B)  is the risk that the client's internal controls will fail. 
C)  can include a new technology which threatens to erode a company's competitive advantage. 
D)  cannot be mitigated by management. 
A)  is the risk after considering the effectiveness of top management controls. 
B)  is the risk that the client's internal controls will fail. 
C)  can include a new technology which threatens to erode a company's competitive advantage. 
D)  cannot be mitigated by management.

Question 17

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:

Accepted Answer

A)  management letter requested by the auditor. 
B)  engagement letter. 
C)  Audit Plan. 
D)  Audit Strategy for the client. 
A)  management letter requested by the auditor. 
B)  engagement letter. 
C)  Audit Plan. 
D)  Audit Strategy for the client.

Question 18

An auditor has accessed client business risk and the risk of material misstatements to the clients financial statements.These are done in order to:

Accepted Answer

A)  apply the audit risk model to determine the appropriate extent of audit evidence. 
B)  determine the reliance on the company's internal control systems for financial reporting. 
C)  determine the test of balances to be performed by the audit team. 
D)  assure the CPA firm that they can perform the audit effectively and efficiently. 
A)  apply the audit risk model to determine the appropriate extent of audit evidence. 
B)  determine the reliance on the company's internal control systems for financial reporting. 
C)  determine the test of balances to be performed by the audit team. 
D)  assure the CPA firm that they can perform the audit effectively and efficiently.

Question 19

Most auditors assess inherent risk as high for related parties and related-party transactions because:

Accepted Answer

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. 
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.

Question 20

During audit planning,the auditor uses analytical procedures primarily to:

Accepted Answer

A)  identify weaknesses in internal control. 
B)  determine if the company's financial statements appear reasonable and are free of material misstatement. 
C)  determine the correspondence of the company's financial statements to the valuation and accuracy audit objectives. 
D)  determine the nature, extent, and timing of audit procedures. 
A)  identify weaknesses in internal control. 
B)  determine if the company's financial statements appear reasonable and are free of material misstatement. 
C)  determine the correspondence of the company's financial statements to the valuation and accuracy audit objectives. 
D)  determine the nature, extent, and timing of audit procedures.

Exam 8: Audit Planning

An engagement letter can affect the CPA firm's legal responsibilities to the client,but does not affect responsibility to external users of audited financial statements.

Which of the following is a correct statement regarding analytical procedures?

Which is usually included in an engagement letter?

Related party:

The quick ratio has the same denominator as the current ratio.

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Which of the following is not a primary reason for obtaining a good understanding of the client's industry and external environment?

Which is usually included in the engagement letter?

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor,but it is optional for private companies.

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

When are auditors likely to encounter judgment problems in the use of analytical procedures?

A 100 % audit risk is complete certainty.

Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.

Business risk:

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the:

An auditor has accessed client business risk and the risk of material misstatements to the clients financial statements.These are done in order to:

Most auditors assess inherent risk as high for related parties and related-party transactions because:

During audit planning,the auditor uses analytical procedures primarily to:

The Assurance Services Market

The Audit Standards Setting Process

Audit Reports

Legal Liability Considerations for Auditors

Ethics and the Audit Profession

Audit Responsibilities and Objectives

Nature and Type of Audit Evidence

Considering Materiality and Audit Risk

Considering Internal Control

Considering the Risk of Fraud

Implications of Information Technology for the Audit Process

Developing the Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Inventory and Warehousing Cycle

Audit of the Payroll and Personnel Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Audit Completion

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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