CHAPTER 8

Multiple-Choice Questions
1.
easy
Which of the following is not one of the three main reasons why the auditor should properly
plan engagements?
a a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate eidence.
c. To aoid misunderstandings with the client.
d. To help !eep audit costs reasonable.
". #oiding misunderstandings with the client is important for$
easy a. good client relations.
d b. facilitating high-%uality wor! at a reasonable cost.
c. either a or b& but not both.
d. both a and b.
'.
easy
# measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an un%ualified opinion has been issued is
the$
b a. inherent ris!.
b. acceptable audit ris!.
c. statistical ris!.
d. financial ris!.
(.
easy
# measure of the auditor)s assessment of the li!elihood that there are material misstatements
in an account before considering the effectieness of the client)s internal control is called$
d a. control ris!.
b. acceptable audit ris!.
c. statistical ris!.
d. inherent ris!.
*. When inherent ris! is high& there will need to be$
easy a. more eidence accumulated.
d b. more e+perienced staff assigned to the wor!.
c. either a or b& but not both.
d. both a and b.
,. The auditor is li!ely to accumulate more eidence when the audit is for a company$
easy a. whose stoc! is publicly traded.
d b. which has large amounts of debt.
c. which is to be sold in the near future.
d. #ll three of the aboe.
-. Which of the following is not typically included in initial audit planning?
easy a. Client acceptance.continuation decisions.
d b. /etermination of the purpose of the audit.
c. 0btain an understanding with the client.
d. 1erform preliminary analytical procedures.
2-1
2. 3nitial audit planning inoles four matters. Which of the following is not one of these?
easy a. /eelop an oerall audit strategy.
b b. 4e%uest that ban! balances be confirmed.
c. 5chedule engagement staff and audit specialists.
d. 3dentify the client)s reason for the audit.
6.
easy
Most auditors assess inherent ris! as high for related parties and related-party transactions
because$
c a. of the accounting disclosure re%uirement.
b. of the lac! of independence between the parties.
c. both a and b.
d. it is re%uired by generally accepted accounting principles.
17.
easy
Which of the following is not correct regarding the communications between successor and
predecessor auditors?
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 receie their former client)s permission prior to diulging
information to the successor auditor
d. The predecessor auditor may choose to proide a limited response to a successor auditor.
11. # successor auditor may perform which of the following for a new audit client?
easy a. 5pea! to local attorneys& ban!s and other businesses regarding the company)s reputation.
d b. 5pea! to the predecessor auditor about disagreements they had with management.
c. 3nteriew client personnel to better understand the business and associated ris!s.
d. #ll of the aboe.
1".
medium
# C1# firm may choose to not continue wor!ing with an audit client for which of the
following reasons?
d a. Conflicts oer past audits.
b. /isagreements regarding the type of opinion to issue.
c. /isagreements regarding audit fees.
d. #ll of the aboe.
1'.
medium
Which of the following is not a potential effect of an auditor)s decision that a lower acceptable
audit ris! is appropriate?
b a. More eidence is accumulated.
b. 8ess eidence is accumulated.
c. 5pecial care is re%uired in assigning e+perienced staff.
d. 4eiew of audit documentation is performed by personnel not assigned to the
engagement.
1(.
medium
3t is easier and more common to implement increased eidence accumulation for inherent ris!
than for acceptable audit ris! because$
a a. inherent ris! can usually be isolated to one or two accounts.
b. inherent ris! applies to the entire audit.
c. acceptable audit ris! and sample si9es are set statistically.
d. acceptable audit ris! does not impact on the amount of eidence which must be
accumulated.
2-"
1*. :50;<
medium
3f an auditor is re%uested to perform nonaudit serices for a public company audit client& who
is responsible for agreeing to those serices with the audit firm?
d a. The client)s management.
b. The client)s chief e+ecutie officer.
c. The client)s chief financial officer.
d. The client)s audit committee.
1,.
medium
Which of the following statements is true regarding communications between predecessor and
successor auditors?
b a. The burden of initiating the communication rests with the predecessor.
b. The predecessor should attempt to respond fully and truthfully to the successor)s
in%uiries.
c. The predecessor should communicate with the successor only if the client is public.
d. There is no re%uirement that the predecessor and successor communicate.
1-.
medium
3nestigating new clients with a focus on assessing the auditor)s potential relationship with
that new client is a critical element in determining$
b a. inherent ris!.
b. acceptable audit ris!.
c. statistical ris!.
d. financial ris!.
12. The purpose of an engagement letter is to$
medium
b
a. document the C1# firm)s responsibility to e+ternal users of the audited financial
statements.
b. document the terms of the engagement in writing to minimi9e misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. all of the aboe.
16.
medium
0ne means of informing the client that the auditor is not responsible for the discoery of all
acts of fraud is the$
a a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.
"7. 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. #udit committee.
"1. Which of the following normally signs the engagement letter for an audit of a priate
company?
medium a. Management.
a b. =oard of directors representatie.
c. #udit committee representatie.
d. >one of the aboe.
2-'
"".
medium
#n understanding of a client)s business and industry and !nowledge about operations are
essential for doing an ade%uate audit. ?or a new client& most of this information is obtained$
d a. from the predecessor auditor.
b. from the 5ecurities and @+change Commission.
c. from the permanent file.
d. at the client)s premises.
"'.
medium
Which of the following factors partially e+plains the increased importance of understanding
the client)s business?
d a. @+pansion of business to include global operations.
b. 3ncreased connectedness of clients with their suppliers and customers ia technology.
c. 3ncreased importance of human capital and other intangible assets.
d. #ll of the aboe.
"(. The least effectie method of identifying related parties for a public company would be a:n<$
medium a. in%uiry of management.
c b. reiew of 5@C filings.
c. reiew of the purchases and sales journals for the period under audit.
d. e+amination of stoc!holders) listings to identify principal stoc!holders.
"*.
medium
#n official record of meetings of the board of directors and stoc!holders is included in the
corporate$
c a. bylaws.
b. charter.
c. minutes.
d. license.
",. #n understanding of a company)s industry and e+ternal enironment includes$
medium a. general economic conditions.
d b. the e+tent of competition within the industry.
c. regulatory re%uirements.
d. all of the aboe.
"-. Which of the following is not li!ely to be a related party?
medium a. #ffiliated companies.
c b. # major stoc!holder of the company.
c. # warehouse employee.
d. The chief e+ecutie officer.
"2. 4elated parties are commonly identified in which of the following ways?
medium a. 4eiew of 5@C filings.
d b. @+amination of stoc!holder listings.
c. 3n%uiry of management.
d. #ll of the aboe.
"6.
medium
# tour of the client)s facilities is helpful in obtaining an understanding of the operations
because$
d a. the auditor will be able to assess the physical safeguards oer assets.
b. the auditor may be better able to assess certain inherent ris!s.
c. the auditor obtains a broader perspectie about the company as a whole.
d. all of the aboe.
2-(
'7. Which of the following is most li!ely to occur at the beginning of an initial audit engagement?
medium a. 1repare a rough draft of the financial statements and of the auditor)s report.
c b. 5tudy and ealuate the system of internal administratie control.
c. /etermine the client)s reason for an audit.
d. Consult with and reiew the wor! of the predecessor auditor prior to discussing the
engagement with the client management.
'1. #n auditor should e+amine 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.
'".
medium
The first standard of field wor!& which states that the wor! is to be ade%uately planned and
that assistants& if any& are to be properly superised& recogni9es that$
a a. early appointment of the auditor is adantageous 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 subse%uent to the physical count of inentories re%uires a
disclaimer of opinion.
d. performance of substantial parts of the e+amination is necessary at interim dates.
''.
medium
The corporate minutes are the official record of the meetings of the board of directors and
stoc!holders. The minutes typically include authori9ations related to$
d a. significant ac%uisitions or dispositions of property& plant and e%uipment.
b. diidend payments.
c. management compensation.
d. all of the aboe.
'(. #n 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 wor! by audit staff and management.
c. statement that management adisory serices would be made aailable upon re%uest.
d. reference to management)s responsibility for the financial statements.
'*. Which of the following is correct with respect to a company)s corporate charter?
medium
c
a. The corporate charter is granted by the federal goernment and is re%uired to recogni9e
the corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a corporation.
c. The corporate charter includes the e+act name of the corporation& the date of
incorporation& and the types of business the corporation is authori9ed to conduct.
d. >one of the aboe is correct.
',. Corporate bylaws include$
medium a. the corporation)s e+act name.
b b. the rules and procedures used to operation the corporation.
c. the !inds and amounts of capital stoc! the corporation is authori9ed to issue.
d. all of the aboe.
2-*
'-.
medium
b
3n what order should the following steps occur?
#. #ssess client business ris!
=. Anderstand the client)s business and industry
C. 1erform preliminary analytical procedures
/. #ssess ris! of material misstatements
a. /& =& C& #.
b. =& #& /& C.
c. =& /& #& C.
d. /& C& =& #.
'2. Which of the following would be least li!ely to occur in assessing a client)s business ris!?
medium a. @aluating management controls.
d b. 0btaining an understanding of the client)s industry.
c. #ssess ris!s of material misstatements.
d. #ll of the aboe are e%ually li!ely to occur.
'6. Which of the following statements is not correct with respect to analytical procedures?
medium a. #uditing standards emphasi9e the need for auditors to deelop and use e+pectations.
b b. #nalytical procedures must be performed throughout the audit.
c. #nalytical procedures may be performed at any time during the audit.
d. #nalytical procedures use comparisons and relationships to assess whether account
balances appear reasonable.
(7. The most widely used profitability ratio is the$
medium a. %uic! ratio.
d b. profit margin.
c. return on assets.
d. earnings per share.
(1.
challenging
The purpose of the re%uirement in 5#5 >o. 2( of haing communication between the
predecessor and successor auditor is to$
b a. allow the predecessor to disclose information which would otherwise be confidential.
b. help the successor auditor to ealuate 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.
(".
challenging
The predecessor auditor is re%uired to respond to the re%uest of the successor auditor for
information& but the response can be limited to stating that no information will be proided
when$
c a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessor)s wor!.
c. there are actual or potential legal problems between the client and the predecessor.
d. the predecessor beliees that the client lac!s integrity.
('. Which of the following is correct with respect to the use of analytical procedures?
challenging
d
a. #nalytical procedures may be used in ealuating balances in the testing phase as long as
the auditor also uses them in assessing the going concern assumption.
b. #nalytical procedures must be used throughout the audit.
c. #nalytical 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 improed.
d. >one of the aboe is correct.
2-,
((.
challenging
Which of the following ratios is best used to assess a company)s ability to meet its long-term
debt obligations?
c a. Quic! ratio.
b. 4eturn on common e%uity.
c. /ebt to e%uity.
d. >one of the aboe.
(*. Which of the following statements is not correct?
challenging
b
a. #nalytical procedures used in the planning phase of the audit are primarily directed at
understanding the client)s business and directing the auditor)s attention to areas that may
contain possible misstatements.
b. #nalytical 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. #nalytical procedures must be used in the planning and completion phases of the audit&
and are optional in the testing phase.
d. #nalytical 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.
(,. Which of the following would not li!ely be classified as a related-party transaction?
challenging a. #n adance of one wee!)s salary to an employee.
a b. 5ales of merchandise between affiliated companies.
c. 8oans or credit sales to the principal owner of the client company.
d. @+changes of e%uipment between two companies owned by the same person.
(-. Which of the following would not be found in the corporate charter?
challenging a. The !inds and amount of capital stoc! authori9ed.
d b. The date of incorporation.
c. The types of business actiity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stoc!holders.
(2. 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. /eclaration of diidends.
c. #uthori9ation of long-term loans.
d. #ll of the aboe would be included.
(6. When are auditors li!ely to encounter judgment problems in the use of analytical procedures?
challenging
d
a. Wheneer the auditor places reliance on management)s e+planations for unusual
fluctuations in account balances without first deeloping independent e+pectations.
b. Wheneer the auditor allows unaudited balances to unduly influence his.her e+pectations
of current balances.
c. Wheneer the auditor fails to consider the pattern reflected by seeral unusual
fluctuations when trying to e+plain what caused them.
d. The auditor is li!ely to encounter judgment problems in each of the aboe instances.
*7. 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.
2--
*1.
challenging
#n auditor searching for related party transactions should obtain an understanding of each
subsidiary)s relationship to the total entity because$
b a. the business structure may be deliberately designed to obscure related party transactions.
b. this may reeal whether transactions would hae ta!en place if the parties had been
unrelated.
c. transactions may hae been consummated on terms e%uialent to arm)s-length
transactions.
d. this may permit the audit of intercompany account balances to be performed as of
concurrent dates.
*".
challenging
The first standard of fieldwor! re%uires& in part& that audit wor! be properly planned. 1roper
planning as intended by the first standard of fieldwor! would occur when the auditor$
a a. physically obseres the moement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negatie accounts receiable confirmations instead of positie confirmations because
the latter re%uire mailing of second re%uests and reiew of subse%uent cash collections.
c. compares all cash as of a particular date to aoid performing time-consuming cash cutoff
procedures.
d. eliminates the possibility of counting inentory items more than once by arranging to
ma!e e+tensie test counts.
*'. @arly appointment of the independent auditor will enable$
challenging a. a more thorough e+amination to be performed.
d b. a proper study and ealuation of internal control to be performed.
c. sufficient competent eidential matter to be obtained.
d. a more efficient e+amination to be planned.
*(.
challenging
Wheneer an auditor compares client data to client-prepared budgets& there are two special
concerns. Which of the following is not one of these concerns?
c a. #ssessing whether the budgets were realistic plans.
b. Client data may hae been altered to conform to the budget.
c. # and = are both concerns.
d. >either # nor =
**.
challenging
#n auditor who accepts an audit engagement and does not possess the industry e+pertise of the
business entity should$
b a. engage financial e+perts familiar with the nature of the business entity.
b. obtain a !nowledge of matters that relate to the nature of the entity)s business.
c. refer a substantial portion of the audit to another C1# who will act as the principal
auditor.
d. first inform management that an un%ualified opinion cannot be issued.
@ssay Questions
*,.
easy
/iscuss the factors an auditor should consider before accepting a company as an audit client.
#nswer$
The auditor should inestigate and consider the prospectie client)s standing in the
business community& financial stability& management)s integrity& and relations with its
ban!ers& attorneys& and preious C1# firm. The auditor should also determine whether he
or she possesses the re%uired competence and independence to do the audit.
*-.
easy
/iscuss the primary purpose of an audit engagement letter. 3s an engagement letter re%uired?
#nswer$
The purpose of an audit engagement letter is to establish a clear understanding
2-2
between the auditor and the client regarding the terms of the engagement. #n engagement is
re%uired for both public and priate company audits.
*2.
easy
/efine the term Brelated partyC and discuss why an auditor should identify the client)s related
parties early in the audit.
#nswer$
# 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. #uditors 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 hae not been disclosed.
*6.
medium
There are three main reasons why an auditor should properly plan audit engagements. /iscuss
each of these reasons.
#nswer$
Three reasons why an auditor should properly plan audit engagements are$
To enable the auditor to obtain sufficient competent eidence for the circumstances.
This is essential for minimi9ing legal liability and maintaining a good profession
reputation.
To help !eep audit costs reasonable. Dien the competitie auditing enironment&
!eeping costs reasonable helps the firm obtain and retain clients.
To aoid misunderstandings with the client. This is important for good client
relations.
,7.
medium
/iscuss the essential actiities inoled in the initial planning of an audit.
#nswer$
There are four essential actiities inoled in the initial planning of an audit. These
are$
1. Client acceptance or continuation. 3n the case of a new client& the auditor must
determine whether the client is one with which :s<he wishes to be associated. 3n the
case of a continuing client& an auditor must determine whether continuing the
relationship is appropriate and in the firm)s best interest.
". /etermine reason for the audit. The auditor should determine the reason for the audit
as soon as practical. The remainder of the planning actiities may be impacted by the
client)s reason for re%uesting the audit.
'. 0btain an understanding with the client. #n understanding with the client should be
obtained to aoid misunderstandings. #uditors are re%uired to obtain an
understanding with their clients. This understanding must be written.
(. /eelop an oerall audit strategy. The strategy should consider the reasons for the
audit& including areas where there is greater ris! of significant misstatements. 5etting
a strategy helps the auditor determine the resources re%uired for the engagement.
,1.
medium
/iscuss the re%uired communications between predecessor and successor auditors as outlined
by 5#5 >o. 2(.
#nswer$
#uditing standards re%uire a successor auditor to communicate with the predecessor
auditor wheneer accepting a client that has been preiously audited. The purpose of the
communication is to help the successor auditor ealuate whether to accept the
engagement. While the burden of initiating the communication rests on the successor
auditor& the predecessor auditor must respond to the re%uest for information. Eoweer&
2-6
because of the re%uirements related to confidentiality& the predecessor must obtain the
former client)s permission prior to proiding information to the successor.
,".
medium
/iscuss seeral reasons why an auditor may not wish to continue a relationship with an
e+isting audit client.
#nswer$
There are a number of reasons an auditor may choose not to continue a relationship with
an e+isting client. @+amples include$
1. 1reious conflicts oer accounting issues& scope of the audit& type of opinion& or fees.
". Management integrity may be deemed to be insufficient.
'. 8egal action initiated by either the auditor or client related to prior audit serices.
(. 3f fees remain unpaid for serices performed more than one year prior to the date of
the current year)s audit report.
*. The presence of e+cessie ris!.
,'.
medium
/iscuss four of the matters that should be specified in an engagement letter.
#nswer$
Matters that should be specified in the engagement letter include$
Whether the auditor will perform an audit& a reiew& or a compilation& plus any other
serices such as ta+ returns or management adisory serices.
#ny restrictions to be imposed on the auditor)s wor!.
/eadlines for completing the audit.
#ssistance to be proided by the client)s personnel in obtaining records and
documents& and schedules to be prepared for the auditor.
#greement on fees.
The letter should state that the auditor is not responsible for the discoery of all acts
of fraud.
,(.
medium
What documents do auditors routinely obtain to aid in their understanding of a client)s
goernance system? =riefly discuss each of these documents.
#nswer$
#uditors 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 e+act name of the corporation along
with the date of incorporation& the !inds and amounts of stoc! the corporation is
authori9ed to issue& and the types of business that the corporation is authori9ed to
conduct. The bylaws include the rules and procedures adopted by the stoc!holders of the
corporation. They specify the duties and powers of corporate officers& the method of
oting for directors& and
the fre%uency of stoc!holder meetings. The corporate minutes are the official record of
the meetings of the board of directors and stoc!holders. They include summaries of the
most important topics discussed and decisions made at the board meetings.
,*.
medium
What are three factors that hae increased the importance of obtaining an understanding of a
client)s business and industry? Eow can an auditor obtain this understanding?
#nswer$
?actors that hae increased the importance of obtaining an understanding of a client)s
2-17
business and industry include$
#dances in information technology hae increased connectiity among companies&
customers& and endors. #uditors must understand the ris!s associated with this
increased connectiity.
Companies hae e+panded operations to hae global reaches& often through joint
entures and strategic alliances.
3nformation technology affects internal control processes& improing the %uality and
timeliness of accounting information.
The increased importance of human capital and other intangible assets has increased
accounting comple+ity and the importance of management judgments and estimates.
#uditors need a better understanding of the client)s business and industry to proide
additional alue-added serices.
The auditor can obtain a sound understanding of the client)s business and industry
through seeral means& including discussions with preious auditors and by reiewing the
permanent files for the clientF conferences with the client)s personnelF studying #3C1#
industry audit guides& te+tboo!s& technical maga9ines& and speciali9ed journalsF and by
participating in industry associations and training programs.
,,.
medium
There are three primary reasons for obtaining a thorough understanding of the client)s industry
and e+ternal enironment. What are these reasons?
#nswer$
The three reasons are$
4is!s associated with specific industries may affect the auditor)s assessment of client
business ris! and acceptable audit ris!.
Certain inherent ris!s are typically common to all clients in certain industries.
?amiliarity with those ris!s aids the auditor in assessing their releance to the client.
Many industries hae uni%ue accounting re%uirements that the auditor must
understand to ealuate whether the client)s financial statements are in accordance
D##1.
,-.
medium
/iscuss the four primary purposes of analytical procedures performed during the planning
phase of an audit.
#nswer$
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 e+tent of detailed tests.
,2.
challenging
/efine business ris!. 8ist seeral factors that may impact the auditor)s assessment of business
ris!.
#nswer$
=usiness ris! is the ris! that a company will fail to achiee its objecties.
?actors that may impact business ris! include$
Deneral economic conditions&
@+tent of competition within an industry&
Changing regulatory re%uirements&
Competence of management&
2-11
#bility to maintain sufficient cash flows and secure financing& and
5uccessful implementation of business strategies.
,6.
challenging
#uditors routinely conduct analytical procedures in the planning& testing& and completion
phases of the audit. 3dentify the primary and secondary purposes of performing analytical
procedures in each phase of the audit.
#nswer$
1lanning G 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 e+tent of detailed tests.
Testing G The primary purpose is to reduce the e+tent of detailed tests& while the
secondary purpose is to indicate areas of possible misstatements.
Completion GThe primary purpose is to indicate areas of possible misstatements&
while the secondary purpose is to assess going concern.
-7.
challenging
Three types of legal documents and records that auditors e+amine in the planning phase of an
audit are the corporate charter and bylaws& corporate minutes of meetings of the board of
directors and stoc!holders& and contracts. /iscuss the audit-releant information contained in
each of these three types of documents that an auditor should be aware of early in the audit.
#nswer$
Corporate charter and bylaws. This includes the amounts of capital stoc! the corporation
is authori9ed to issue& its par or stated alue& preferences and conditions for diidends&
and information concerning oting rights of each class of stoc!. The bylaws specify such
things as the fiscal year of the corporation& the fre%uency of stoc!holder meetings& the
method of oting for directors& and the duties and powers of the corporate officers.
Minutes of meetings. There are two categories of audit-releant information contained in
the minutes$ authori9ations and discussions by the board of directors affecting inherent
ris!. Common authori9ations in the minutes include compensation of officers& new
contacts and agreements& ac%uisitions of property& loans& and diidend payments.
Contracts. The auditor should e+amine contracts early in the engagement to gain a better
perspectie of the organi9ation and to become familiar with potential problem areas.
Contracts will also be e+amined during the tests of indiidual audit areas.
0ther 0bjectie #nswer ?ormat Questions
-1.
easy
a
When an auditor decides there is higher inherent ris! for an account& one potential effect is
that more audit eidence will be re%uired for that account.
a. True
b. ?alse
-".
easy
a
#s acceptable audit ris! is decreased& the li!ely cost of conducting an audit increases.
a. True
b. ?alse
-'.
easy
b
=efore accepting a new client& most C1# firms inestigate the company to determine its
acceptability. Eoweer& #3C1# confidentiality re%uirements prohibit C1# firms from
contacting certain partiesHnamely the company)s attorneys and ban!ersHduring this
inestigation.
a. True
b. ?alse
-(.
easy
?or prospectie clients that hae preiously been audited by another C1# firm& the predecessor
auditor is re%uired to communicate with the successor auditor.
2-1"
b a. True
b. ?alse
-*.
easy
b
When a successor auditor contacts a company)s preious auditor& the predecessor auditor is
re%uired to respond fully and without limit to the re%uest for information.
a. True
b. ?alse
-,.
easy
b
# predecessor auditor who has been contacted by a successor auditor for information about the
client does not hae to obtain permission from the former client before proiding any
confidential information to the successor auditor because the confidentiality re%uirement does
not e+tend to former clients.
a. True
b. ?alse
--.
easy
a
#uditors should obtain copies of the client)s articles of incorporation& bylaws& and minutes of
the meetings of the board of directors to aid in their understanding of the company)s
management and goernance structure.
a. True
b. ?alse
-2.
easy
a
#n auditor must ealuate a specialist)s professional %ualifications and understand the
objecties of the specialist)s wor!.
a. True
b. ?alse
-6.
medium
b
To ealuate a specialist)s wor! the auditor must himself.herself be considered a specialist.
a. True
b. ?alse
27.
medium
a
#n engagement letter establishes a clear understanding of the terms of the engagement
between the client and the auditor& but it is optional for priate companies.
a. True
b. ?alse
21.
easy
b
=ecause of the re%uirements of 4ule "71 of the #3C1#)s Code of Professional Conduct which
state that auditors should Bunderta!e only those professional serices that the member or the
member)s firm can reasonably e+pect to be completed with professional competence&C auditors
are not normally permitted to consult with& or rely on the wor! of& outside specialists during an
audit engagement.
a. True
b. ?alse
2".
medium
b
#cceptable audit ris! is a measure of the auditor)s willingness to accept that the financial
statements do not contain material misstatements after the audit is completed and a %ualified
audit report has been issued.
a. True
b. ?alse
2'.
medium
b
3f a prospectie client has been audited in the past& the successor auditor will typically rely
solely on the representations about the client by the predecessor auditor.
a. True
b. ?alse
2(.
medium
b
Two major factors that affect acceptable audit ris! are the li!ely users of the financial
statements and the li!elihood of issuing an un%ualified audit opinion.
a. True
b. ?alse
2-1'
2*.
medium
b
# major consideration in assigning staff to an audit engagement is the e+perience leels
re%uired for the wor!& while a less important consideration is maintaining staff continuity on
the engagement.
a. True
b. ?alse
2,.
medium
b
3nherent ris!s typically ary across industries.
a. True
b. ?alse
2-.
medium
a
Transactions with related parties must be disclosed in the financial statements if they are
deemed to be material.
a. True
b. ?alse
22.
medium
a
#ll !nown related parties must be identified and included in the auditor)s permanent files
related to the client.
a. True
b. ?alse
26.
medium
b
Denerally& auditors assess inherent ris! as moderate for related party transactions because they
e+pect clients to be aware of their scrutiny of such transactions.
a. True
b. ?alse
67.
medium
b
The corporate charter typically establishes the company)s fiscal year and fre%uency of
stoc!holder meetings.
a. True
b. ?alse
61.
medium
b
0rdinarily& the auditor should reiew and abstract copies of contracts during the later stages of
an audit.
a. True
b. ?alse
6".
medium
a
When a successor auditor re%uests information from a company)s preious auditor& and there
are legal problems or disputes between the client and the predecessor auditor& the predecessor
auditor)s response to the new auditor may be limited to stating that no information will be
proided.
a. True
b. ?alse
6'.
medium
b
0ne purpose of performing preliminary analytical procedures in the planning phase of an audit
is to help the auditor ma!e a preliminary assessment of control ris!.
a. True
b. ?alse
6(.
medium
b
Material transactions between the client and the client)s related parties must be disclosed in the
auditor)s report.
a. True
b. ?alse
6*.
challenging
a
#n engagement letter can affect the C1# firm)s legal responsibilities to the client& but does not
affect responsibility to e+ternal users of audited financial statements.
a. True
b. ?alse
6,.
challenging
Two categories of audit-releant information found in corporate charters and bylaws are
authori9ations and discussions of matters affecting inherent ris!.
2-1(
b a. True
b. ?alse
2-1*