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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

1)

Management assertions are a) b) c) d) Stated as the footnoted to the financial statements Implied or expressed representations about the accounts in the financial statements Explicitly expressed representations about the financial statements Provided to the auditor in the Assertions Letter, but are not disclosed on the financial statements

2)

Which of the following statements is not correct? a) b) c) It would be a violation of the completeness assertion if the management would record a sale that did not take place The completeness assertion deals with matters opposite from those of the existence assertion The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included d) The existence assertion is concerned with the inclusion of amount that should not have been

3)

Which of the following assertions does not relate to balances at period end? a) b) c) d) Existence Occurrence Valuation or allocation Rights and obligation

4)

Which of the assertions does not relate to classes of transactions and events for the period? a) b) c) d) Completeness Cut-off Valuation Accuracy

5)

An assertion that transactions are recorded in the proper accounting period is a) b) c) d) Classification Accuracy Occurrence Cut-off

6)

Which of the following statements is not correct? a) b) c) d) There are many ways an auditor can accumulate evidence to meet the overall audit objectives Sufficient appropriate evidence must be accumulated to meet the auditors professional responsibility The cost of accumulating the evidence should be minimized Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditors select

7)

Which of the following is the correct order of steps in the audit process? A. B. C. D. E. a) b) c) Perform tests of control Develop an overall strategy for the expected conduct and scope of the audit Obtain clients written representation Prepare engagement letter Perform substantive tests

DABEC DBAEC DBCAE


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eeb.6.30.2013

Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

d) 8)

DBEAC

Which of the following would an auditor least likely perform as part of the auditors preliminary engag ement activities? a) b) c) d) Perform procedures regarding the continuance of the client relationship and the specific audit engagement Evaluate compliance with ethical requirements, including independence Establish an understanding of the terms of the engagement Obtain understanding of the legal and regulatory framework applicable to the entity

9)

Which of the following is not one of the reasons why auditor should perform preliminary engagement activities? a) b) To ensure that the auditor maintains the necessary independence and ability to perform the engagement To help ensure that there are no issues with management integrity that may affect the auditors willingness to continue the engagement c) d) To ensure that there is no misunderstanding with the client as to the terms of the engagement To ensure that sufficient appropriate evidence will be obtained to support the auditors opinion on the financial statements

10) Which of the following is not normally performed in the preplanning or pre-engagement phase? a) b) c) d) Deciding whether to accept pr reject an audit engagement Inquiring from predecessor auditor Preparing an engagement letter Making a preliminary estimate of materiality

11) In making a decision to accept or continue with a client the auditor should consider a. Its competence Its independence Its ability to serve the client properly The integrity of clients management Yes Yes Yes Yes b. Yes No Yes Yes c. Yes Yes Yes No d. Yes No No Yes

12) Before accepting an engagement to audit a new client, a CPA is required to obtain a) b) c) d) A preliminary understanding of the prospective clients industry and business The prospective clients signature to the engagement letter An understanding of the prospective clients control environment A representation letter from the prospective client

13) Preliminary knowledge about the clients business and industry must be obtained prior to the acceptance of the engagement pri marily to a) b) c) d) Determine the degree of knowledge and expertise required by the engagement Determine the integrity of management Determine whether the firm is independent with the client Gather evidence about the fairness of the financial statements

14) A CPA firms quality control procedures pertaining to the acceptance of a prospective audit client would most likely include a) Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily b) c) Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion Inquiry of third parties, such as the prospective clients bankers ad attorneys, about information regarding the prospective client and its management
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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

d)

Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests

15) Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a) Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstance leading to the termination with the understanding that all information disclosed will be kept confidential b) Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination c) Not communicate with the predecessor auditor because this would affect be asking the auditor to violate the confidential relationship between the auditor and client d) Advise the client of the intention to contact the predecessor auditor and request permission for the contact

16) When a CPA is approached to perform an audit for the first time the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the incoming auditor with information that will assist the incoming auditor in determining a) b) c) d) Whether the predecessors work should be utilized Whether the company follows the policy of rotating its auditors Whether in the predecessors opinion internal control of the company has been satisfactory Whether the engagement should be accepted

17) Danny, CPA, has been retained to audit the financial statements if San Antonio, Co. San Antonios predecessor auditor was Gar y, CPA, who has been notified by San Antonio that Garys services have been terminated. Under the circumstances, which party should initiate the communication between Danny and Gary? a) b) c) d) Danny, the incoming auditor Gary, the predecessor auditor San Antonios controller or CFO The chairman of San Antonios board of directors

18) In audit, communication between the predecessor and incoming auditor should be a) b) c) d) Authorized in an engagement letter Acknowledged in a representation letter Either written or oral Written and included in the working papers

19) Gerry, CPA, is succeeding Rodel, CPA, on the audit engagement of CPAR Corporation. Gerry plans to consult Rodel and to review Rodels prior year working papers. Gerry may do so if a) b) c) d) Rodel and CPAR consent CPAR consent Rodel consent Gerry and Rodel consent

20) Upon discovering material misstatements in a clients financial statements that the client would not revise, the auditor with drew from the engagement. If asked by the incoming auditor about the termination the engagement, the predecessor auditor should a) b) State that the found material misstatements that the client would not revise Suggest that the incoming auditor ask the client
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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

c) d)

Suggest that the incoming auditor obtain the clients permission to discuss the reasons Indicate that a misunderstanding occurred

21) Before accepting an audit engagement, an incoming auditor should make specific inquiries of the predecessor auditor regarding the predecessors a) b) c) d) Opinion of any subsequent events occurring since the predecessors audit report was issued Understanding as to the reasons for the change of auditors Awareness of the consistency in the application of GAAP between periods Evaluation of all matters of continuing accounting significance

22) An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding a) b) c) d) Specialized accounting principles of the clients industry The competency of the clients internal audit staff The uncertainty inherent in applying sampling procedures Disagreements with management as to auditing procedures

23) Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement a) b) c) d) Analysis of balance sheet accounts Analysis of income statement accounts All matters of continuing accounting significance Facts that might bear on the integrity of management

24) What information should an incoming auditor obtain during the inquiry of the predecessor auditor to acceptance of the audit? I. II. III. IV. a) b) c) d) Facts that bear on the integrity of management Whether statistical or non-statistical sampling was used to gather evidence Disagreement with management concerning auditing procedures The effect of the clients internal audit function on the scoped of the independent auditors examination I and II I and III I and IV III and IV

25) An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessors Engagement letter a) b) c) d) Yes Yes No No Working paper Yes No Yes No

26) Which of the following factors most likely would cause an auditor not to accept a new audit engagement? a) b) c) d) An inadequate understanding of the entitys internal control The close proximity to the end of the entitys fiscal year Concluding that the entitys management probably lacks integrity An inability to perform preliminary analytical procedures before assessing control risk

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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

27) Which of the following factors most likely would influence an auditors determination of the auditability of the entitys fin ancial statements a) b) c) d) The complexity of the accounting system The existence of related party transactions The adequacy of the accounting records The operating effectiveness of control procedures

28) Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor audit ors work papers. The prospective clients refusal to permit this will bear directly on Hawkins decision concerning the: a) b) c) d) Adequacy of the preplanned audit program Ability to establish consistency in application of accounting principles between years Apparent scope limitation Integrity of management

29) Before performing any audit procedures. The auditor and the client should agree on the Type of opinion to be expressed a) b) c) d) Yes No No Yes Terms of engagement Yes Yes No No

30) According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a (n): a) b) c) d) Memorandum to be placed in the permanent section of the audit working papers Engagement letter Client representation letter Comfort letter

31) Which of the following is (are) valid reasons why an auditor send to client an engagement letter? I. II. III. IV. a) b) c) d) To avoid misunderstanding with respect to engagement To confirm the auditors acceptance of the appointment To document the objective and scope of the audit To ensure CPAs compliance to PSA I, II only I, II and III only All of the above statements All of the above statements except III

32) If an auditor believes that an understanding with the client has not been established, he or she should ordinarily a) b) c) d) Perform the audit with increased professional skepticism Decline to accept or perform the audit Assess the control risk at the minimum level and perform a primarily substantive audit Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud

33) Engagement letter that documents and confirms the auditors acceptance of the engagement would normally be sent to the client a) Before the audit report is issued
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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

b) c) d)

After the audit report is issued At the end of fieldwork Before the commencement of the engagement

34) An engagement letter should ordinarily include information on the objectives of the engagement and CPAs responsibilities a) b) c) d) Yes Yes Yes No Clients responsibilities Yes No No No Limitation of engagement Yes Yes No No

35) Which of the following would be least likely to be included in the auditors engagement letter a) b) c) d) Forms of the report Extent of his responsibilities to his client Objectives and scope of the audit Type of opinion to be issued

36) Which of the following is not one of the principal contents of an engagement letter? a) b) c) d) Objective of the financial statements Unrestricted access to records and documents Limitations of the engagement Managements responsibility for the financial statements

37) An engagement letter would not normally include a) b) c) d) Billing arrangement Arrangement concerning clients assistance Details of the procedure that will be performed Expectation of receiving a representation letter from management

38) The audit engagement letter should generally include a reference to each of the following except a) b) c) d) The expectation of receiving a written management representation letter A request for the client to confirm the terms of the engagement A description of the auditors method of sample selection The risk that material misstatements may remain undiscovered

39) After preliminary audit, arrangements have been made, an engagement confirmation letter should be sent to the client. The letter usually would not include a) b) c) d) A reference to the auditors responsibility for the detection of errors and irregularities An estimate of the time to be spent on the audit work by audit staff and management A statement that the management advisory services would be made available upon request A statement that a management letter will be issued outlining comments and suggestions as to any procedures requiring the clients attention 40) Arrangements concerning which of the following are least likely to be included in engagement letter a) b) c) Auditors responsibilities Fees and billing CPA investment in client securities
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Auditing and Assurance Services

Polytechnic University of the Philippines College of Accountancy

Accepting an Engagement

d)

Other forms of reports to be issued in addition to the audit report

41) The use of an engagement letter is the best method of documenting I. II. III. IV. a) b) c) d) The required communication of significant deficiencies in internal control structure Significantly lower materiality levels that those used in the prior audit The description of any letters or reports that the auditor expects to issue Notification of any changes In the original arrangements of the audit I and II I and IV II and III III and IV

42) In which of the following situations would the auditor be unlikely to send a new engagement letter to a continuing client? a) b) c) d) Change in terms of the engagement Significant change in the nature or size of the clients busi ness Recent change of the client management Recent change in the partner and/or staff in the audit engagement

43) In a continuing engagement, the continuing auditor would most likely send a new engagement letter when a) b) c) d) There is a change in the partner assigned to the engagement There is a recent change in clients management There are new accounting pronouncements affecting the clients financial statements There are expected minor changes in the nature or size of the clients business

44) When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component); which of the following factors would least likely influence the auditors decision to send separate letter to a component of a parent entity? a) b) c) d) Geographical location of the component Legal requirements Degree of ownership by parent Degree of independent of components management

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