Chap 003

Chapter 03
Engagement Planning
True / False Questions

1. An important element of a public accounting firm's system of quality
control is the decision about client acceptance and retention.
True
False
2. The Code of Professional Conduct permits predecessor auditors to give

information to the auditors without client consent.
True
False
3. Engagement letters are not necessary for continuing clients.

True
False
4. A second audit partner is required for audits of financial statements

filed with the SEC.
True
False
5. CAATs software requires auditors to do the original programming.

True
False
6. A first-time audit requires more work than a repeat engagement.

True
False
7. A major reason for thinking about overall materiality at the planning

stage is to try to fine-tune the audit for effectiveness and efficiency.
True
False
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8. The use of computer-assisted auditing techniques has significantly

changed auditing objectives.
True
False
9. The computer has simplified auditing by providing a better audit trail.

True
False
10 The use of computer systems has increased the potential for

. management supervision of the internal control system.
True
False
11 The degree of computer complexity and use may influence the nature,
. timing, and extent of audit procedures.
True
False
12 Control activities in computerized accounting systems may have

. characteristics that differ from manual control activities designed to
accomplish the same control objectives.
True
False
13 CAATs software may be utilized to read, compute, and operate on

. machine-readable records.
True
False
14 The most important facet of the current audit evidence files is the
. requirement that they show the auditor's decision-making process and
conclusions reached.
True
False
15 The concept of materiality emphasizes the accountants' and managers'

. point of view, not the users' point of view.
True
False
16 Auditors are generally left without definitive, quantitative guidelines for

. determining materiality.
True
False
17 When management can exercise discretion over an accounting

. treatment, auditors tend to exercise more care and use a more
stringent materiality criterion.
True
False
18 Auditors usually choose separate measures of materiality for each of

. the financial statements.
True
False
19 Auditors usually prepare an audit plan summarizing the preliminary

. analytical review and the materiality assessment.
True
False
20 Auditors use two kinds of audit plans, one for obtaining evidence about
. control risk, and the other for obtaining evidence about dollar amounts
and disclosures.
True
False
21 Audit procedures are intended to enable auditors to conduct work in

. accordance with the three performance principle.
True
False
22 Scanning is an "eyes-open" approach of looking for anything unusual in

. the accounts.
True
False
23 Audit plans are used as audit planning tools.

.
True False
Multiple Choice Questions

24 Which of the following auditor concerns most likely could be so serious
. that the auditor would conclude that a financial statement audit cannot
be conducted?
A. The entity has no formal written code of conduct.

B. The integrity of entity's management is suspect.
C. Procedures requiring separation of duties are subject to management
override.
D. Management fails to modify prescribed controls for changes in
conditions.
25 Before accepting an engagement to audit a new client, an auditor is
. required to
A. Make inquiries of the predecessor auditor after obtaining the consent

of the prospective client.
B. Obtain the prospective client's signature to the engagement letter.
C. Prepare a memorandum setting forth the staffing requirements and
documenting the preliminary audit plan.
D. Discuss the management representation letter with the prospective
client's audit committee.
26 Which of the following factors most likely would cause an auditor not to
. accept a new audit engagement?
A. An inadequate understanding of the entity's internal controls.

B. The close proximity to the end of the entity's fiscal year.
C. Concluding that the entity's management probably lacks integrity.
D. The inability to perform preliminary analytical procedures before
assessing control risk.
27 The auditor is not required to ask the predecessor auditor about

.
A. Facts that might bear on the integrity of management.
B. Disagreements the predecessor may have had with management
about accounting principles and audit procedures.
C. The fees charged for the previous audit.
D. The predecessor's understanding about the reasons for the change of
auditors.
28 Audit documentation does not normally include the
.
A.
B.
C.
D.
Specific assertions under audit.

Industry accounting guides.
Record of the procedures performed.
Decisions made in the course of the audit.
29 C. Hill, CPA, has been retained to audit the financial statements of

. Monday Co. Monday's predecessor auditor was K. Post, CPA, whom
Monday has notified by that its services have been terminated. Under
these circumstances, which party should initiate the communications
between Hill and Post?
A.
B.
C.
D.
Hill, the auditor.

Post, the predecessor auditor.
Monday's controller or CFO.
The chair of Monday's board of directors.
30 Which of the following provides the best method of obtaining an

. understanding of a continuing client's business for planning an audit?
A. Performing tests of details of transactions and balances.

B. Reviewing prior year audit documentation and the permanent file for
the client.
C.
Reading specialized industry journals.
D. Reevaluating the client's internal control environment.
31 The pre-engagement activities of an audit engagement for a public

. accounting firm do not include
A. Evaluating the public accounting firm's independence with regard to

the audit engagement.
B. Obtaining predecessor audit documentation.
C.
Obtaining an engagement letter.
D. Ensuring that there are sufficient firm resources to complete the
engagement on a timely basis.
32 Which of the following procedures would an auditor most likely perform
. in planning a financial statement audit?
A. Inquiring of the client's legal counsel concerning pending litigation.

B. Comparing the financial statements to anticipated results.
C. Examining computer-generated exception reports to verify the
effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities.
33 This year, Blakeney Enterprises engaged a new auditor who must
.
A. Attempt to communicate with the predecessor auditor before
accepting the engagement.
B. Review the predecessor's audit documentation if the audit is to be in
accordance with GAAS.
C. Seek the SEC's permission to accept the engagement if Blakeney is
publicly owned.
D. Reject the engagement if the change in auditors resulted from a
dispute with the predecessor.
34 An engagement letter is used primarily to

.
A. Ensure a clear contractual understanding of the services to be
provided by the CPA.
B. Express an opinion on the financial statements.
C. Provide management representations to be included in the audit
evidence.
D.
Disclaim liability.
35 The firm of Banta, Brown, and Burgess, CPAs, requires that audit
. documentation contain the initials of the preparer and the reviewer in
the top right-hand corner. This procedure provides evidence of
professional concern regarding which generally accepted auditing
standard?
A.
Independence.
B. Adequate technical competence and capabilities.
C.
Adequate planning and supervision.
D. Gathering sufficient competent evidence.
36 During the initial planning phase of an audit, a CPA most likely would
.
A. Test specific internal control activities that are likely to prevent fraud.
B. Evaluate the reasonableness of the client's accounting estimates of
inventory obsolescence.
C. Discuss the timing of the audit procedures with the client's
management.
D. Inquire of the client's attorney as to whether any unrecorded claims
are probable of assertion.
37 Prior to beginning the fieldwork on a new audit engagement in which

. the audit team does not possess expertise in the industry in which the
client operates, the audit team should
A. Reduce audit risk by lowering the preliminary levels of materiality.

B. Design special substantive tests to compensate for the lack of
industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain knowledge of matters that relate to the nature of the entity's
business.
38 Which of the following types of transactions would be routine and
. computerized?
A.
B.
C.
D.
Capital stock sales and repurchases.

Credit sales and billings.
Income tax expense and liability.
Bank loan transactions.
39 Errors in data processed in a batch computer system may not be

. detected immediately because
A. Transaction trails in a batch system are available for only a limited

period of time.
B. There are time delays in processing transactions in a batch system.
C. Errors in some transactions cause rejection of other transactions in
the batch.
D. Random errors are more likely in a batch system than in an online
system.
40 Management's responsibility in a computer system would not include

.
A. Ensuring that the documentation of the system is complete and up to
date.
B. Maintaining a system of transaction processing that includes an audit
trail.
C.
Assessing the control risk.
D. Making computer resources and knowledgeable personnel available
for questions.
41 The characteristics that distinguish computer processing from manual
. processing would not include
A. A decrease of management supervision of operations.

B. Automatic initiation and execution of transactions.
C. The possible concentration of control activities.
D. A high potential for unauthorized access to data.
42 Which of the following is not a category of audit documentation?
.
A.
B.
C.
D.
Temporary files.
Permanent files.
Audit administrative files.
Current documentation files.
43 The essential advantages of a computer-assisted audit techniques

. (CAATs) package would not include the fact that
A. The same software can be used on different types of clients'

computer environments.
B. A large number of CAATs packages are currently available.
C. Software packages are always inexpensive.
D. The ability to control and modify the program to meet an auditors'
need.
44 Computer-assisted audit techniques (CAATs) could not be used for

. which of the following audit tasks?
A. Testing calculations and making computations.

B.
Evaluating control risk assessment.
C. Summarizing, resequencing, and reformatting data.
D. Comparing audit evidence from manual audit procedures to company
needs.
45 Comparing data on separate files can be accomplished by using
. computer-assisted audit techniques (CAATs) to determine whether
comparable information is in agreement. Examples of such comparisons
would not include
A. Payroll details with personnel records.

B. Current and prior inventory to details of purchases and sales.
C.
Paid vouchers to disbursements.
D.
Observation of inventory accounts.
46 The basic auditing application of the personal computer as an audit tool
. would not include
A.
Spreadsheet analysis.
B. Sample planning, selection, and evaluation.
C. Continuous monitoring of a client's internal control system.
D.
Analytical review.
47 An auditor would most likely be use word processing software for what
. purpose?
A.
B.
C.
D.
Performing analytical procedures.

Preparing a trial balance.
Preparing an audit plan.
Obtaining a sample selection.
48 Which of the following use of computer-assisted audit techniques

. (CAATs) would most likely be considered a search for fraudulent
activities?
A. Selecting customers' accounts receivable for confirmation.

B.
Recalculating inventory extensions.
C. Scanning accounts receivable balances for amounts over the credit
limit.
D. Comparing a list of vendor addresses to employee address files.
49 An auditor would least likely use computer software to
.
A.
Access client data files.
B.
Prepare spreadsheets.
C. Assess information systems control risk.
D. Construct parallel simulations to test the client's computing system.
50 A primary advantage of using computer-assisted audit techniques
. (CAATs) packages to audit the financial statements of a client that uses
computerized information systems is that the auditor may
A. Access information stored on computer files even with a limited

understanding of the client's hardware and software features.
B. Consider increasing the use of substantive tests of transactions in
place of analytical procedures.
C. Substantiate the accuracy of data by using self-checking digits and
hash totals.
D. Reduce the level of required tests of controls to a relatively small
amount.
51 For which of the following judgments may an independent auditor share

. responsibility with an entity's internal auditor who is assessed to be
both competent and objective?
A.
B.
C.
D.
Assessment of inherent risk, yes; assessment of control risk, yes

Assessment of inherent risk, yes; assessment of control risk, no
Assessment of inherent risk, no; assessment of control risk, yes
Assessment of inherent risk, no; assessment of control risk, no
52 Which of the following is not considered an accounting estimate?

.
A.
Allowance for loan losses.
B.
Credit sales.
C.
Net realizable value of inventory.
D. Percentage-of-completion revenue to be recorded.
53 Which of the following would be a step in an internal control program?
.
A. Obtain an aged trial balance of the accounts receivable.
B. Prepare and send confirmations on a sample of customers' accounts
receivable.
C. Assess the control risk for sales and collections.
D. Read sales contracts for evidence of customers' rights of return or
price allowance terms.
54 The idea of the cycle approach is to group accounts together by
.
A.
Specific function.
B.
Financial statement assertion.
C.
Audit objective.
D. Transactions that affect all accounts in that particular group.
55 Which of the following is not one of the four major cycles?

.
A.
B.
C.
D.
Revenue and cash collection.

Acquisition and expenditure.
Cash receipts and disbursements.
Financing and investing.
56 Looking at vendors' invoices for particular information is an example of

.
A.
B.
C.
D.
Physical observation.
Confirmation.
Inspection of documents.
Scanning.
57 An auditor who uses 7 percent of income before taxes as a basis for

. overall materiality would be basing judgment on
A.
B.
C.
D.
Absolute size.
Relative size.
Nature of the item.
Cumulative effects.
58 Which of the following is not a way in which auditors use the concept of
. overall materiality?
A.
As a guide to planning the audit plan.
B. As a guide to the evaluation of evidence.
C. As a guide for making decisions about the audit report.
D.
As a guide for assessing control risk.
59 The auditor looked at a bank statement received and held by the client.
. What kind of audit procedure would this be considered?
A.
B.
C.
D.
Recalculation.
Confirmation.
Examination of documents.
60 In testing the existence assertion for an asset, an auditor ordinarily

. works from the
A. Financial statements to the potentially unrecorded items.

B. Potentially unrecorded items to the financial statement.
C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.
61 In determining whether transactions have been recorded, the direction
. of the audit testing should start from the
A.
B.
C.
D.
General ledger balances.

Adjusted trial balance.
Original source documents.
General journal entries.
62 Auditors should design the written audit plan so that

.
A. All material transactions will be selected for substantive testing.
B. Substantive tests prior to the balance sheet date will be minimized.
C. The audit procedures selected will achieve specific audit objectives.
D. Each account balance will be tested under either tests of controls or
tests of transactions.
63 In designing written audit plans, an auditor should establish specific
. audit objectives that relate primarily to the
A.
B.
C.
D.
Timing of audit procedures.

Cost-benefit of gathering techniques.
Selected audit techniques.
Financial statement assertions.
64 In considering overall materiality for planning purposes, an auditor

. believes that misstatements aggregating $10,000 would have a
material effect on an entity's income statement but that misstatements
would have to aggregate $20,000 to materially affect the balance
sheet. Ordinarily, it would be appropriate to design audit procedures
that would be expected to detect misstatements aggregating
A.
B.
C.
D.
$10,000.
$15,000.
$20,000.
$30,000.
65 The independent auditors' audit design prepared prior to the start of

. fieldwork is appropriately considered documentation of
A.
B.
C.
D.
Planning.
Supervision.
Information evaluation.
Quality assurance.
66 In the preparation of an audit plan, which of the following items is not

. essential?
A.
A review of material from prior audits.
B. The preparation of a budget identifying the costs of resources
needed.
C. An understanding of controls established by management.
D.
Assessment of inherent risk.
67 To satisfy the valuation assertion when auditing an investment in

. another company that is publicly and actively traded, an auditor most
likely would seek to
A. Inspect the stock certificates evidencing the investment.

B. Examine the audited financial statements of the investee company.
C. Review the broker's advice or canceled check for the investment's
acquisition.
D. Obtain market quotations from The Wall Street Journal or another
independent source.
68 Cutoff tests designed to detect credit sales made before the end of the
. year that have been recorded in the subsequent year provide
assurance about management's assertion of
A.
B.
C.
D.
Presentation and disclosure.

Completeness.
Rights and obligations.
Existence.
69 Which of the following audit procedures probably would provide the

. most reliable evidence concerning the entity's assertion of rights and
obligations related to inventories?
A. Trace test counts noted during the physical count of inventory to the
summarization of quantities.
B. Inspect agreements for evidence of inventory held on consignment.
C. Select the last few shipping advices used before the physical count
and determine whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments to
consider for disclosure.
70 During an audit of an entity's stockholders' equity accounts, the auditor

. determines whether there are restrictions on retained earnings
resulting from loans, agreements, or state law. This audit procedure
most likely is intended to verify management's assertion
A.
B.
C.
D.
Existence or occurrence.
Completeness.
Valuation or allocation.
71 Which of the following most likely would give the most assurance
. concerning the valuation assertion of accounts receivable?
A. Tracing amounts in the subsidiary ledger to details on shipping

documents.
B. Comparing receivable turnover rates to industry statistics for
reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for
reasonableness.
72 An auditor most likely would inspect additions to the audit client's
. Property, Plant, and Equipment account to obtain evidence concerning
management's assertions about
A.
B.
C.
D.
73 Which of the following is a substantive test that an auditor most likely

. would perform to verify the existence and valuation of recorded
accounts payable?
A. Investigating the open purchase order file to ascertain that

prenumbered purchase orders are used and accounted for.
B. Receiving the client's unopened mail for a reasonable period of time
after year-end to search for unrecorded vendor's invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger
to purchase orders and receiving reports.
D. Confirming accounts payable balances with known vendors and
suppliers who have zero balances at year-end.
74 An auditor most likely would review an entity's periodic accounting for
. the numerical sequence of shipping documents and invoices to support
management's financial statement assertion of
A.
B.
C.
D.

Completeness.
75 In auditing accrued liabilities, an auditor's procedures most likely would

. focus primarily on management's assertion of
A.
B.
C.
D.
Completeness.
76 An auditor selected items for test counts from a client's inventory listing
. before observing the client's physical inventory at the warehouse. The
auditor then found the items selected at the warehouse and counted
them. This procedure most likely obtained evidence concerning
management's assertion of
A.
B.
C.
D.

Completeness.
Valuation.
77 An auditor tests an entity's control that matches shipping documents to

. sales invoices before they are recorded in the financial statements as
revenue in support of management's financial statement assertion of
A.
B.
C.
D.
78 Which of the following audit procedures would an auditor most likely

. perform to test controls relating to management's valuation assertion
for accounts receivable?
A. Verify that extensions and footings on the entity's sales invoices and
monthly customer statements have been recomputed.
B. Inspect the entity's reports of prenumbered shipping documents that
have not been recorded in the sales journal.
C. Compare the invoiced prices on prenumbered sales invoices to the
entity's authorized price list.
D. Inquire about the entity's credit-granting policies and test whether
credit checks have been consistently applied to new customers.
79 The confirmation of a cash balance provides primary evidence

. regarding which management assertion?
A.
B.
C.
D.
Existence.
Valuation.
Allocation.
Completeness.
80 The confirmation of an accounts receivable balance provides primary

. evidence regarding which management assertion?
A.
B.
C.
D.
Completeness.
Valuation.
Allocation.
Existence.
81 In testing the completeness assertion for a liability account, an auditor

. ordinarily works from the

B. Potentially unrecorded items to the financial statements.
D.
Trial balance to the subsidiary ledger.
82 An auditor's purpose in auditing the information contained in the
. pension footnote most likely is to obtain evidence concerning
management's assertion about
A.
B.
C.
D.

Existence.
Valuation.
83 When initiating communications with predecessor auditors, prospective

. auditors should expect
A. To take responsibility for obtaining the client's consent for the

predecessor to give information about prior audits.
B. To conduct interviews with the partner and manager in charge of the
predecessor public accounting firm's engagement.
C. To obtain copies of some or all of the predecessor auditors' audit
documentation.
D.
All of the above.
84 When planning an audit, which of the following is not a factor that
. affects auditors' decisions about the quantity, type, and content of
audit documentation?
A. The auditors' need to document compliance with generally accepted

auditing standards.
B. The existence of new sales contracts important for the client's
business.
C. The auditors' judgment about their independence with regard to the
client.
D. The auditors' judgments about materiality.
85 Audit documentation that shows the detailed evidence and procedures
. regarding the balance in the accumulated depreciation account for the
year under audit will be found in the
A. Current file evidence audit documentation.

B.
Permanent file audit documentation.
C. Administrative audit documentation in the current file.
D. Planning memorandum in the current file.
86 An auditor's permanent file audit documentation most likely will

. contain
A.
B.
C.
D.
Internal control analysis for the current year.

The most recent engagement letter.
Memoranda of conference with management.
Excerpts of the corporate charter and bylaws.
87 Which of the following is not a benefit claimed for the practice of

. determining materiality in the initial planning stage of an audit?
A. Being able to fine-tune the audit work for effectiveness and

efficiency.
B. Avoiding the problem of doing more work than necessary
(overauditing).
C. Being able to decide early what type of audit opinion to issue.
D. Avoiding the problem of doing too little work (underauditing).
88 Spreadsheet software would be most useful for which of the following
. audit activities?
A. Testing internal controls over computerized accounting applications.

B.
C. Preparing a comparison of current-year expenses with those from the
previous year.
D.
Drafting a planning memorandum.
89 Which of the following is an advantage of computer-assisted audit
. techniques (CAATs)?
A. The CAATs programs are all written in one computer language.

B. The software can be used for audits of clients that use differing
computer equipment and file formats.
C. The use of CAATs has reduced the need for the auditor to study input
controls for computer-related procedures.
D. The use of CAATs can be substituted for a relatively large part of the
required testing.
90 A primary advantage of using CAATs in the audit of an advanced

. computerized system is that it enables the auditor to
A. Substantiate the accuracy of data through self-checking digits and

hash totals.
B. Utilize the speed and accuracy of the computer.
C. Verify the performance of machine operations that leave visible
evidence of occurrence.
D. Gather and store large quantities of supportive audit evidence in
machine-readable form.
91 An audit engagement letter should normally include which of the
. following matters of agreement between the auditor and the client?
A. Schedules and analyses to be prepared by the client's employees.

B. Methods of statistical sampling the auditor will use.
C. Specification of litigation in progress against the client.
D. Client representations about availability of all minutes of meetings of
the board of directors.
92 When auditing Vandalay Jewelry, Costanza, CPA was not familiar with
. the quality and cut of the company's precious jewel inventory. To
address this shortcoming, Costanza hired Benes, an expert in jewel
valuation, to assist in the inventory valuation. Should Costanza refer to
Benes's work in the audit report?
A. Yes, the auditors' report should mention the fact that a specialist was
used.
B. The auditors' report should mention the use of the specialist only
when the specialist's findings affect the auditors' conclusions.
C. The use of a specialist need not be mentioned if the auditors decide
not to take responsibility for the specialist's findings.
D. The auditors' report should mention the specialist only if Vandalay
agrees with the specialist's findings.
93 Which of the following communications is most likely to be written

. before the balance-sheet date?
A. A report to the audit committee on the results of testing of internal

control over cash receipts.
B. Confirmation letters to vendors confirming the amounts they owe to
the client.
C. An attorney's letter regarding contingent liabilities.
D.
An engagement letter.
94 Which of the following procedures would most likely be performed
. during planning?
A. Surprise counts of the client's petty cash fund.

B. Reporting internal control deficiencies to the audit committee.
C. Performing a search for unrecorded liabilities.
D.
Identifying related parties.
95 Prior to accepting a new audit engagement, a public accounting firm
. should
A. Attempt to contact the predecessor auditors.

B. Evaluate the integrity of management.
C. Assess the firm's resources to ensure that they are sufficient to
permit them to accept the engagement.
D.
All of the above.
96 An audit plan contains
.
A. Specifications of audit standards relevant to the financial statements
being audited.
B. Specifications of procedures the auditors believe appropriate for the
financial statements under audit.
C. Documentation of the assertions under audit, the evidence obtained,
and the conclusions reached.
D. Reconciliation of the account balances in the financial statements
with the account balances in the client's general ledger.
97 The revenue cycle of a company generally includes which accounts?

.
A. Inventory, accounts payable, and general expenses.
B. Inventory, general expenses, and payroll.
C.
Cash, accounts receivable, and sales.
D. Cash, notes payable, and capital stock.
98 When auditing the existence assertion for an asset, auditors proceed
. from the
A. Financial statement amounts back to the potentially unrecorded

items.
B. Potentially unrecorded items forward to the financial statement
amounts.
C. General ledger back to the supporting original transaction
documents.
D. Supporting original transaction documents to the general ledger.
99 Confirmations of accounts receivable provide evidence primarily about
. which two assertions?
A.
B.
C.
D.
Completeness and valuation.

Valuation and rights and obligations.
Existence and rights and obligations.
Existence and completeness.
100 With respect to the concept of materiality, which one of the following
.
statements is correct?
A. Materiality depends only on the dollar amount of an item relative to

other items in the financial statements.
B. Materiality depends on the nature of a transaction rather than the
dollar amount of the transaction.
C. Materiality is determined by reference to AICPA guidelines.
D. Materiality is a matter of professional judgment.
101 When evaluating whether accounting estimates made by management

.
are reasonable, the audit team would be most interested in which of
the following?
A. Key factors that are consistent with prior periods.

B. Assumptions that are similar to industry guidelines.
C. Measurements that are objective and not susceptible to bias.
D. Evidence of a conservative systematic bias.
102 Generally accepted auditing standards require that auditors always
.
prepare and use
A. A written planning memorandum explaining the auditors'

understanding of the client's business.
B. A written client consent to discuss audit matters with prospective
auditors.
C.
A written audit plan.
D. The written time budgets and schedules for performing each audit.
103 Which of the following engagement planning procedures would most
.
likely assist the auditor in identifying related-party transactions before
the balance-sheet date?
A. Interviewing internal auditors about their reporting responsibilities.

B. Reviewing accounting records for recurring transactions occurring
near year-end.
C. Inspecting communications with the client's legal counsel regarding
recorded contingent liabilities.
D. Scanning the minutes for significant transactions with members of
104 An audit engagement letter should normally exclude the following

.
matter of agreement between the public accounting firm and the
client
A.
B.
C.
D.
Fees to be charged.
Terms of the engagement.
Schedules to be prepared by client.
Type of opinion to be produced.
105 The time reports are recorded by budget categories for all the
.
following purposes except for
A. Providing evidence that the audit plan was satisfied.

B. Evaluating the efficiency of the audit team members.
C. Compiling a record for billing the client.
D. Compiling a record for planning the next audit.
106 For all audits of financial statements filed with the Securities and
.
Exchange Commission, which of the following is required?
A.
B.
C.
D.
A computer specialist.
A second audit partner.
Electronic documentation.
Computer-assisted audit techniques.
107 Which of the following is used to maintain control of the audit and
.
ensure that it is completed on a timely basis?
A.
B.
C.
D.
Engagement letter.
Termination letter.
Time budget.
Analytical procedures.
108 Which of the following is not an example of early information-gathering

.
activities?
A. Review of the corporate charter and bylaws.

B. Review of contracts, agreements, and legal proceedings.
C. Reading and studying the minutes of the meetings of directors and
committees of the board of directors.
D.
Preparing a time budget.
109 In a computerized information system, uniform processing of
.
transactions
A. Means that transactions will never be processed incorrectly.

B. Requires that a company use the same program for all functions.
C. Subjects similar transactions to the same processing instructions.
D.
Always leaves an audit trail.
110 Auditing standards do not require that documentation show that
.
A.
It conforms to AICPA model papers.
B. The work was adequately planned and supervised.
C. The client's accounting records agree or reconcile with financial
statements.
D. Sufficient appropriate evidential matter was obtained.
111 Which of the following can CAATs not do?
.
A. Scan inventory quantities for negative balances.
B. Determine the reasonableness of the allowance for doubtful
accounts.
C.
Recalculate depreciation.
D. Select customers' accounts receivable for confirmation.
112 The major cycles that auditors typically group accounts by do not
.
include
A.
B.
C.
D.
Revenue and collection.

Production and conversion.
Finance and investment.
Assets and liabilities.
113 Physical observation by an audit team would include

.
A.
Examination of a sales invoice.
B.
Recalculation of depreciation.
C.
Examination of securities certificates.
D. Scanning of the expense accounts for unusual transactions.
114 The concept of materiality is not used by auditors as a guide to
.
A.
B.
C.
D.
Planning the audit plan.

Evaluating the evidence.
Applying the responsibilities principle.
Making decisions about the audit report.
115 An internal control program for understanding the client's inherent risk
.
and control risk would not include which of the following procedures?
A. Communicate with predecessor auditors.

B. Study previous year audit documentation.
C. Evaluate the competence and independence of the internal
auditors.
D. Obtain written representation from the client concerning
collectability of receivables.
Fill in the Blank Questions
116 When companies change auditors, the former auditors are referred to
.
as the ________________________________________
________________________________________
117 Auditing standards require the auditors to ask that client consent be
.
given to permit the _________________________ auditors to speak.
________________________________________
118 A(n) ________________________________________________ is recommended
.
as a means of reducing risk of misunderstanding between a client and
auditor.
________________________________________
119 ____________________________________________________________ include
.
programs that may be utilized to read, compute, and operate on
machine-readable records.
________________________________________
120 ____________________________________________________________ refers to
.
procedures performed shortly before and after the balance sheet
date.
________________________________________
121 The ____________________________________________________ is the amount
.
by which a particular account may be misstated and cause the
financial statements to be materially misleading.
________________________________________
122 For continuing audits, specific information about the client is available
.
in ____________________________________________________.
________________________________________
123 Audit _____________________________ can often be realized by working in

.
tandem with _____________________________ auditors.
________________________________________
124 _____________________________ are persons skilled in fields other than
.
accounting and auditing who are not members of the audit team.
________________________________________
125 A(n) _______________________________ is a chain of evidence provided
.
through coding, cross-references, and documentation connecting
account balances and other summary results with the original
transaction documents calculations.
________________________________________
126 The _____________________________ of the client's computer operations
.
should be considered in audit ____________________________.
________________________________________
127 The ________________________________ contains information of continuing
.
audit significance over many years' audits of the same client.
________________________________________
128 _____________________________ is the auditor's record of compliance with
.
generally accepted auditing standards.
________________________________________
129 The ____________________________ approach to quantifying materially
.
assigns an overall material amount for the financial statements and
then allocates it to the particular accounts.
________________________________________
130 In vouching, an item of financial information is selected from an

.
account, and then the audit team goes _____________________________
through the accounting and control system to find the
____________________________.
________________________________________
131 _____________________________ is a procedure that generally involves the
.
collection of oral evidence from independent parties and client
officials.
________________________________________
132 Management is responsible for making the accounting
.
____________________________, and auditors are responsible for
evaluating their ____________________________.
________________________________________
133 ________________________________ are composed of independent, outside
.
members of the board of directors (those not involved in the
company's day-to-day operations) who can provide a buffer between
the public accounting firm and management.
________________________________________
134 Procedures used to detect material misstatements in dollar amounts
.
and disclosures in financial statements are known as
_______________________________________________.
________________________________________
135 Planning becomes a basis for preparing the
.
_________________________________.
________________________________________
136 A __________________________________________ program contains

.
specification of audit procedures for gathering direct evidence on
______________________________________ about
_____________________________ and _____________________________ in
financial statements.
________________________________________
137 Auditors cannot place complete reliance on
.
_____________________________________ to the exclusion of other audit
procedures.
________________________________________
138 Information is _____________________________ if it is likely to influence
.
financial statement users' decisions.
________________________________________
Short Answer Questions
139 For each of the descriptions in Column A, match the correct word or
.
words from Column B.
140 For each of the descriptions 1-6, match the correct word or phrase
.
from A-H.
Essay Questions
141 Explain the bottom-up approach and the top-down approach to

.
quantifying overall materiality.
142 Do the following regarding auditors' concepts of overall "materiality"

.
considered at the planning stage (i.e., "planning materiality").
a. Define or describe independent auditors' concept of "planning
materiality."
b. Name (but do not describe or explain) three common relationships
or considerations used by auditors when assessing the dollar amount
considered to be material.
143 What are the characteristics that distinguish computer processing from
.
manual processing?
144 What are the advantages and limitations derived from using computer.
assisted audit techniques (CAATs) packages?
145 D. Jackson, CPA, audited Washington Company's financial statements

.
for the year ended December 31, 2007. On November 1, 2008,
Washington notified Jackson that it was changing auditors and that
Jackson's services were being terminated. On November 5, 2008,
Washington invited Lincoln, CPA, to make a proposal for an
engagement to audit its financial statements for the year ended
December 31, 2008.
Required:
What procedures concerning Jackson should Lincoln perform before
accepting the engagement?
146 Identify the two types of audit plans and indicate the purpose of each.
.
Chapter 03 Engagement Planning Answer Key
True / False Questions

1.
An important element of a public accounting firm's system of quality

control is the decision about client acceptance and retention.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted
in accordance with professional standards.
Topic: Audit Plan
2.
The Code of Professional Conduct permits predecessor auditors to

give information to the auditors without client consent.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
3.
Engagement letters are not necessary for continuing clients.

FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
4.
A second audit partner is required for audits of financial statements

filed with the SEC.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.
Topic: Audit Documentation
5.
CAATs software requires auditors to do the original programming.

FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the
client's computer environment and describe how CAATs can be used to improve the efficiency of the audit
process.
Topic: Planning in a Computerized Environment
6.
A first-time audit requires more work than a repeat engagement.

TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
7.
A major reason for thinking about overall materiality at the planning

stage is to try to fine-tune the audit for effectiveness and efficiency.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 03-03 Define materiality and explain its importance in the audit planning process.
Topic: Materiality
8.
The use of computer-assisted auditing techniques has significantly

changed auditing objectives.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
9.
The computer has simplified auditing by providing a better audit

trail.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
10.
The use of computer systems has increased the potential for

management supervision of the internal control system.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
11.
The degree of computer complexity and use may influence the

nature, timing, and extent of audit procedures.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
12.
Control activities in computerized accounting systems may have

characteristics that differ from manual control activities designed to
accomplish the same control objectives.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
13.
CAATs software may be utilized to read, compute, and operate on

TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
process.
14.
The most important facet of the current audit evidence files is the
requirement that they show the auditor's decision-making process
and conclusions reached.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
15.
The concept of materiality emphasizes the accountants' and

managers' point of view, not the users' point of view.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Materiality
16.
Auditors are generally left without definitive, quantitative guidelines

for determining materiality.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Materiality
17.
When management can exercise discretion over an accounting

treatment, auditors tend to exercise more care and use a more
stringent materiality criterion.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Materiality
18.
Auditors usually choose separate measures of materiality for each of

the financial statements.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Materiality
19.
Auditors usually prepare an audit plan summarizing the preliminary

analytical review and the materiality assessment.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
20.
Auditors use two kinds of audit plans, one for obtaining evidence
about control risk, and the other for obtaining evidence about dollar
amounts and disclosures.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
21.
Audit procedures are intended to enable auditors to conduct work in

accordance with the three performance principle.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.
Topic: Audit Procedures for Obtaining Audit Evidence
22.
Scanning is an "eyes-open" approach of looking for anything unusual

in the accounts.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Procedures for Obtaining Audit Evidence
23.
Audit plans are used as audit planning tools.

FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Topic: Audit Plan
Multiple Choice Questions

24.
Which of the following auditor concerns most likely could be so

serious that the auditor would conclude that a financial statement
audit cannot be conducted?
A. The entity has no formal written code of conduct.

B. The integrity of entity's management is suspect.
C. Procedures requiring separation of duties are subject to
management override.
D. Management fails to modify prescribed controls for changes in
conditions.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Learning Objective: 03-01 List and describe the required preengagement activities that auditors undertake
before beginning an audit engagement.
Source: AICPA
Topic: Pre-Engagement Activities
25.
Before accepting an engagement to audit a new client, an auditor is

required to
A. Make inquiries of the predecessor auditor after obtaining the

consent of the prospective client.
B. Obtain the prospective client's signature to the engagement letter.
C. Prepare a memorandum setting forth the staffing requirements
and documenting the preliminary audit plan.
D. Discuss the management representation letter with the
prospective client's audit committee.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
26.
Which of the following factors most likely would cause an auditor not
to accept a new audit engagement?
A. An inadequate understanding of the entity's internal controls.

B. The close proximity to the end of the entity's fiscal year.
C. Concluding that the entity's management probably lacks integrity.
D. The inability to perform preliminary analytical procedures before
assessing control risk.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: AICPA
27.
The auditor is not required to ask the predecessor auditor about
A. Facts that might bear on the integrity of management.

B. Disagreements the predecessor may have had with management
about accounting principles and audit procedures.
C. The fees charged for the previous audit.
D. The predecessor's understanding about the reasons for the change
of auditors.
AACSB: Analytic
Blooms: Remember
Source: Original
28.
Audit documentation does not normally include the
A.
B.
C.
D.
Specific assertions under audit.

Industry accounting guides.
Record of the procedures performed.
Decisions made in the course of the audit.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Source: Original
29.
C. Hill, CPA, has been retained to audit the financial statements of

Monday Co. Monday's predecessor auditor was K. Post, CPA, whom
Monday has notified by that its services have been terminated. Under
these circumstances, which party should initiate the communications
between Hill and Post?
A.
B.
C.
D.
Hill, the auditor.

Post, the predecessor auditor.
Monday's controller or CFO.
The chair of Monday's board of directors.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
30.
Which of the following provides the best method of obtaining an

understanding of a continuing client's business for planning an
audit?
A. Performing tests of details of transactions and balances.

B. Reviewing prior year audit documentation and the permanent file
for the client.
C. Reading specialized industry journals.
D. Reevaluating the client's internal control environment.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
Topic: Planning
31.
The pre-engagement activities of an audit engagement for a public

accounting firm do not include
A. Evaluating the public accounting firm's independence with regard

to the audit engagement.
B. Obtaining predecessor audit documentation.
C.
Obtaining an engagement letter.
D. Ensuring that there are sufficient firm resources to complete the
engagement on a timely basis.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
32.
Which of the following procedures would an auditor most likely

perform in planning a financial statement audit?
A. Inquiring of the client's legal counsel concerning pending

litigation.
B. Comparing the financial statements to anticipated results.
C. Examining computer-generated exception reports to verify the
effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
Topic: Planning
33.
This year, Blakeney Enterprises engaged a new auditor who must
A. Attempt to communicate with the predecessor auditor before

accepting the engagement.
B. Review the predecessor's audit documentation if the audit is to be
in accordance with GAAS.
C. Seek the SEC's permission to accept the engagement if Blakeney is
publicly owned.
D. Reject the engagement if the change in auditors resulted from a
dispute with the predecessor.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
34.
An engagement letter is used primarily to
A. Ensure a clear contractual understanding of the services to be

provided by the CPA.
B. Express an opinion on the financial statements.
C. Provide management representations to be included in the audit
evidence.
D.
Disclaim liability.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
35.
The firm of Banta, Brown, and Burgess, CPAs, requires that audit
documentation contain the initials of the preparer and the reviewer in
the top right-hand corner. This procedure provides evidence of
professional concern regarding which generally accepted auditing
standard?
A.
Independence.
B. Adequate technical competence and capabilities.
C.
Adequate planning and supervision.
D. Gathering sufficient competent evidence.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
36.
During the initial planning phase of an audit, a CPA most likely would
A. Test specific internal control activities that are likely to prevent

fraud.
B. Evaluate the reasonableness of the client's accounting estimates
of inventory obsolescence.
C. Discuss the timing of the audit procedures with the client's
management.
D. Inquire of the client's attorney as to whether any unrecorded
claims are probable of assertion.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
Topic: Planning
37.
Prior to beginning the fieldwork on a new audit engagement in which

the audit team does not possess expertise in the industry in which
the client operates, the audit team should
A. Reduce audit risk by lowering the preliminary levels of materiality.

B. Design special substantive tests to compensate for the lack of
industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain knowledge of matters that relate to the nature of the
entity's business.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
Topic: Planning
38.
Which of the following types of transactions would be routine and

computerized?
A.
B.
C.
D.
Capital stock sales and repurchases.

Credit sales and billings.
Income tax expense and liability.
Bank loan transactions.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: Original
Topic: Information Technology
39.
Errors in data processed in a batch computer system may not be

detected immediately because
A. Transaction trails in a batch system are available for only a limited

period of time.
B. There are time delays in processing transactions in a batch
system.
C. Errors in some transactions cause rejection of other transactions in
the batch.
D. Random errors are more likely in a batch system than in an online
system.
AACSB: Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: AICPA
40.
Management's responsibility in a computer system would not include
A. Ensuring that the documentation of the system is complete and up

to date.
B. Maintaining a system of transaction processing that includes an
audit trail.
C.
Assessing the control risk.
D. Making computer resources and knowledgeable personnel
available for questions.
AACSB: Technology
Blooms: Remember
Difficulty: 1 Easy
process.
Source: Original
41.
The characteristics that distinguish computer processing from

manual processing would not include
A.
B.
C.
D.
A decrease of management supervision of operations.

Automatic initiation and execution of transactions.
The possible concentration of control activities.
A high potential for unauthorized access to data.
AACSB: Technology
Blooms: Remember
Difficulty: 1 Easy
process.
Source: Original
42.
Which of the following is not a category of audit documentation?
A.
B.
C.
D.
Temporary files.
Permanent files.
Audit administrative files.
Current documentation files.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
43.
The essential advantages of a computer-assisted audit techniques

(CAATs) package would not include the fact that
A. The same software can be used on different types of clients'

computer environments.
B. A large number of CAATs packages are currently available.
C. Software packages are always inexpensive.
D. The ability to control and modify the program to meet an auditors'
need.
AACSB: Technology

Blooms: Understand
Difficulty: 1 Easy
process.
Source: Original
44.
Computer-assisted audit techniques (CAATs) could not be used for

which of the following audit tasks?
A. Testing calculations and making computations.

B.
Evaluating control risk assessment.
C. Summarizing, resequencing, and reformatting data.
D. Comparing audit evidence from manual audit procedures to
company needs.
AACSB: Technology
Blooms: Apply
process.
Source: Original
45.
Comparing data on separate files can be accomplished by using

computer-assisted audit techniques (CAATs) to determine whether
comparable information is in agreement. Examples of such
comparisons would not include
A. Payroll details with personnel records.

B. Current and prior inventory to details of purchases and sales.
C.
Paid vouchers to disbursements.
D. Observation of inventory accounts.
AACSB: Technology
Blooms: Apply
process.
Source: Original
46.
The basic auditing application of the personal computer as an audit

tool would not include
A.
Spreadsheet analysis.
B. Sample planning, selection, and evaluation.
C. Continuous monitoring of a client's internal control system.
D.
Analytical review.
AACSB: Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: Original
47.
An auditor would most likely be use word processing software for

what purpose?
A.
B.
C.
D.
Performing analytical procedures.

Preparing a trial balance.
Obtaining a sample selection.
AACSB: Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: Original
48.
Which of the following use of computer-assisted audit techniques

(CAATs) would most likely be considered a search for fraudulent
activities?
A. Selecting customers' accounts receivable for confirmation.

B.
Recalculating inventory extensions.
C. Scanning accounts receivable balances for amounts over the credit
limit.
D. Comparing a list of vendor addresses to employee address files.
AACSB: Technology
Blooms: Remember
process.
Source: Original
49.
An auditor would least likely use computer software to
A.
Access client data files.
B.
Prepare spreadsheets.
C. Assess information systems control risk.
D. Construct parallel simulations to test the client's computing
system.
AACSB: Technology
Blooms: Remember
process.
Source: AICPA
50.
A primary advantage of using computer-assisted audit techniques

(CAATs) packages to audit the financial statements of a client that
uses computerized information systems is that the auditor may
A. Access information stored on computer files even with a limited

understanding of the client's hardware and software features.
B. Consider increasing the use of substantive tests of transactions in
place of analytical procedures.
C. Substantiate the accuracy of data by using self-checking digits and
hash totals.
D. Reduce the level of required tests of controls to a relatively small
amount.
AACSB: Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: AICPA
51.
For which of the following judgments may an independent auditor

share responsibility with an entity's internal auditor who is assessed
to be both competent and objective?
A. Assessment of inherent risk, yes; assessment of control risk, yes

B. Assessment of inherent risk, yes; assessment of control risk, no
C. Assessment of inherent risk, no; assessment of control risk, yes
D. Assessment of inherent risk, no; assessment of control risk, no
AACSB: Analytic
AICPA BB: Legal
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
Topic: Planning
52.
Which of the following is not considered an accounting estimate?
A.
Allowance for loan losses.
B.
Credit sales.
C.
Net realizable value of inventory.
D. Percentage-of-completion revenue to be recorded.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Accounting Estimates
53.
Which of the following would be a step in an internal control

program?
A. Obtain an aged trial balance of the accounts receivable.

B. Prepare and send confirmations on a sample of customers'
accounts receivable.
C. Assess the control risk for sales and collections.
D. Read sales contracts for evidence of customers' rights of return or
price allowance terms.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Control Testing
54.
The idea of the cycle approach is to group accounts together by
A.
Specific function.
B.
Financial statement assertion.
C.
Audit objective.
D. Transactions that affect all accounts in that particular group.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Accounting Cycles
55.
Which of the following is not one of the four major cycles?
A.
B.
C.
D.
Revenue and cash collection.

Acquisition and expenditure.
Cash receipts and disbursements.
Financing and investing.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
56.
Looking at vendors' invoices for particular information is an example

of
A.
B.
C.
D.
Confirmation.
Inspection of documents.
Scanning.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 1 Easy
Source: Original
Topic: Audit Procedures
57.
An auditor who uses 7 percent of income before taxes as a basis for

overall materiality would be basing judgment on
A.
B.
C.
D.
Absolute size.
Relative size.
Nature of the item.
Cumulative effects.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Measurement
Blooms: Understand
Source: Original
Topic: Materiality
58.
Which of the following is not a way in which auditors use the concept
of overall materiality?
A.
As a guide to planning the audit plan.
B. As a guide to the evaluation of evidence.
C. As a guide for making decisions about the audit report.
D. As a guide for assessing control risk.
AACSB: Analytic
AICPA BB: Legal
Blooms: Remember
Source: Original
Topic: Materiality
59.
The auditor looked at a bank statement received and held by the

client. What kind of audit procedure would this be considered?
A.
B.
C.
D.
Recalculation.
Confirmation.
Examination of documents.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Source: Original
60.
In testing the existence assertion for an asset, an auditor ordinarily

works from the
A.
B.
C.
D.
Financial statements to the potentially unrecorded items.

Potentially unrecorded items to the financial statement.
Accounting records to the supporting evidence.
Supporting evidence to the accounting records.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
Topic: Assertions
61.
In determining whether transactions have been recorded, the

direction of the audit testing should start from the
A.
B.
C.
D.
General ledger balances.

Adjusted trial balance.
Original source documents.
General journal entries.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
62.
Auditors should design the written audit plan so that
A. All material transactions will be selected for substantive testing.

B. Substantive tests prior to the balance sheet date will be
minimized.
C. The audit procedures selected will achieve specific audit
objectives.
D. Each account balance will be tested under either tests of controls
or tests of transactions.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Source: AICPA
Topic: Planning
63.
In designing written audit plans, an auditor should establish specific

audit objectives that relate primarily to the
A.
B.
C.
D.
Timing of audit procedures.

Cost-benefit of gathering techniques.
Selected audit techniques.
Financial statement assertions.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA
Topic: Planning
64.
In considering overall materiality for planning purposes, an auditor

believes that misstatements aggregating $10,000 would have a
material effect on an entity's income statement but that
misstatements would have to aggregate $20,000 to materially affect
the balance sheet. Ordinarily, it would be appropriate to design audit
procedures that would be expected to detect misstatements
aggregating
A.
B.
C.
D.
$10,000.
$15,000.
$20,000.
$30,000.
AACSB: Analytic
AICPA BB: Legal
Blooms: Apply
Source: AICPA
Topic: Materiality
65.
The independent auditors' audit design prepared prior to the start of

fieldwork is appropriately considered documentation of
A.
B.
C.
D.
Planning.
Supervision.
Information evaluation.
Quality assurance.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
Topic: Planning
66.
In the preparation of an audit plan, which of the following items is not

essential?
A.
A review of material from prior audits.
B. The preparation of a budget identifying the costs of resources
needed.
C. An understanding of controls established by management.
D.
Assessment of inherent risk.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
Topic: Planning
67.
To satisfy the valuation assertion when auditing an investment in

another company that is publicly and actively traded, an auditor most
likely would seek to
A. Inspect the stock certificates evidencing the investment.

B. Examine the audited financial statements of the investee
company.
C. Review the broker's advice or canceled check for the investment's
acquisition.
D. Obtain market quotations from The Wall Street Journal or another
independent source.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
68.
Cutoff tests designed to detect credit sales made before the end of
the year that have been recorded in the subsequent year provide
assurance about management's assertion of
A.
B.
C.
D.

Completeness.
Existence.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
69.
Which of the following audit procedures probably would provide the

most reliable evidence concerning the entity's assertion of rights and
obligations related to inventories?
A. Trace test counts noted during the physical count of inventory to

the summarization of quantities.
B. Inspect agreements for evidence of inventory held on
consignment.
C. Select the last few shipping advices used before the physical count
and determine whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments
to consider for disclosure.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
70.
During an audit of an entity's stockholders' equity accounts, the

auditor determines whether there are restrictions on retained
earnings resulting from loans, agreements, or state law. This audit
procedure most likely is intended to verify management's assertion
A.
B.
C.
D.
Completeness.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
71.
Which of the following most likely would give the most assurance
concerning the valuation assertion of accounts receivable?
A. Tracing amounts in the subsidiary ledger to details on shipping

documents.
B. Comparing receivable turnover rates to industry statistics for
reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for
reasonableness.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
72.
An auditor most likely would inspect additions to the audit client's

Property, Plant, and Equipment account to obtain evidence
concerning management's assertions about
A.
B.
C.
D.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
73.
Which of the following is a substantive test that an auditor most likely

would perform to verify the existence and valuation of recorded
accounts payable?
A. Investigating the open purchase order file to ascertain that

prenumbered purchase orders are used and accounted for.
B. Receiving the client's unopened mail for a reasonable period of
time after year-end to search for unrecorded vendor's invoices.
C. Vouching selected entries in the accounts payable subsidiary
ledger to purchase orders and receiving reports.
D. Confirming accounts payable balances with known vendors and
suppliers who have zero balances at year-end.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
74.
An auditor most likely would review an entity's periodic accounting

for the numerical sequence of shipping documents and invoices to
support management's financial statement assertion of
A.
B.
C.
D.

Completeness.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
75.
In auditing accrued liabilities, an auditor's procedures most likely

would focus primarily on management's assertion of
A.
B.
C.
D.
Completeness.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
Topic: Assertions
76.
An auditor selected items for test counts from a client's inventory

listing before observing the client's physical inventory at the
warehouse. The auditor then found the items selected at the
warehouse and counted them. This procedure most likely obtained
evidence concerning management's assertion of
A.
B.
C.
D.

Completeness.
Valuation.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
77.
An auditor tests an entity's control that matches shipping documents

to sales invoices before they are recorded in the financial statements
as revenue in support of management's financial statement assertion
of
A.
B.
C.
D.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
78.
Which of the following audit procedures would an auditor most likely

perform to test controls relating to management's valuation assertion
for accounts receivable?
A. Verify that extensions and footings on the entity's sales invoices

and monthly customer statements have been recomputed.
B. Inspect the entity's reports of prenumbered shipping documents
that have not been recorded in the sales journal.
C. Compare the invoiced prices on prenumbered sales invoices to the
entity's authorized price list.
D. Inquire about the entity's credit-granting policies and test whether
credit checks have been consistently applied to new customers.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
79.
The confirmation of a cash balance provides primary evidence

regarding which management assertion?
A.
B.
C.
D.
Existence.
Valuation.
Allocation.
Completeness.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Assertions
80.
The confirmation of an accounts receivable balance provides primary

evidence regarding which management assertion?
A.
B.
C.
D.
Completeness.
Valuation.
Allocation.
Existence.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Assertions
81.
In testing the completeness assertion for a liability account, an

auditor ordinarily works from the

B. Potentially unrecorded items to the financial statements.
D. Trial balance to the subsidiary ledger.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
82.
An auditor's purpose in auditing the information contained in the

pension footnote most likely is to obtain evidence concerning
management's assertion about
A.
B.
C.
D.

Existence.
Valuation.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Assertions
83.
When initiating communications with predecessor auditors,

prospective auditors should expect
A. To take responsibility for obtaining the client's consent for the

predecessor to give information about prior audits.
B. To conduct interviews with the partner and manager in charge of
the predecessor public accounting firm's engagement.
C. To obtain copies of some or all of the predecessor auditors' audit
documentation.
D.
All of the above.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
84.
When planning an audit, which of the following is not a factor that

affects auditors' decisions about the quantity, type, and content of
audit documentation?
A. The auditors' need to document compliance with generally

accepted auditing standards.
B. The existence of new sales contracts important for the client's
business.
C. The auditors' judgment about their independence with regard to
the client.
D. The auditors' judgments about materiality.
AACSB: Analytic
Blooms: Apply
Source: Original
Topic: Planning
85.
Audit documentation that shows the detailed evidence and

procedures regarding the balance in the accumulated depreciation
account for the year under audit will be found in the
A. Current file evidence audit documentation.

B.
Permanent file audit documentation.
C. Administrative audit documentation in the current file.
D. Planning memorandum in the current file.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
86.
An auditor's permanent file audit documentation most likely will

contain
A. Internal control analysis for the current year.

B.
The most recent engagement letter.
C. Memoranda of conference with management.
D. Excerpts of the corporate charter and bylaws.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
87.
Which of the following is not a benefit claimed for the practice of

determining materiality in the initial planning stage of an audit?
A. Being able to fine-tune the audit work for effectiveness and

efficiency.
B. Avoiding the problem of doing more work than necessary
(overauditing).
C. Being able to decide early what type of audit opinion to issue.
D. Avoiding the problem of doing too little work (underauditing).
AACSB: Analytic
Blooms: Remember
Source: Original
Topic: Materiality
88.
Spreadsheet software would be most useful for which of the following

audit activities?
A. Testing internal controls over computerized accounting

applications.
B.
C. Preparing a comparison of current-year expenses with those from
the previous year.
D.
Drafting a planning memorandum.
AACSB: Technology
Blooms: Apply
Difficulty: 1 Easy
process.
Source: Original
89.
Which of the following is an advantage of computer-assisted audit

techniques (CAATs)?
A. The CAATs programs are all written in one computer language.

B. The software can be used for audits of clients that use differing
computer equipment and file formats.
C. The use of CAATs has reduced the need for the auditor to study
input controls for computer-related procedures.
D. The use of CAATs can be substituted for a relatively large part of
the required testing.
AACSB: Technology
Blooms: Remember
process.
Source: Original
Topic: CAATs
90.
A primary advantage of using CAATs in the audit of an advanced

computerized system is that it enables the auditor to
A. Substantiate the accuracy of data through self-checking digits and

hash totals.
B. Utilize the speed and accuracy of the computer.
C. Verify the performance of machine operations that leave visible
evidence of occurrence.
D. Gather and store large quantities of supportive audit evidence in
machine-readable form.
AACSB: Technology
Blooms: Apply
process.
Source: Original
Topic: CAATs
91.
An audit engagement letter should normally include which of the

following matters of agreement between the auditor and the client?
A. Schedules and analyses to be prepared by the client's employees.

B. Methods of statistical sampling the auditor will use.
C. Specification of litigation in progress against the client.
D. Client representations about availability of all minutes of meetings
of the board of directors.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember

Source: Original
Topic: Planning
92.
When auditing Vandalay Jewelry, Costanza, CPA was not familiar with
the quality and cut of the company's precious jewel inventory. To
address this shortcoming, Costanza hired Benes, an expert in jewel
valuation, to assist in the inventory valuation. Should Costanza refer
to Benes's work in the audit report?
A. Yes, the auditors' report should mention the fact that a specialist
was used.
B. The auditors' report should mention the use of the specialist only
when the specialist's findings affect the auditors' conclusions.
C. The use of a specialist need not be mentioned if the auditors
decide not to take responsibility for the specialist's findings.
D. The auditors' report should mention the specialist only if Vandalay
agrees with the specialist's findings.
AACSB: Analytic
AICPA BB: Resource Management
Blooms: Apply
Difficulty: 3 Hard
Source: Original
Topic: Specialists
93.
Which of the following communications is most likely to be written

before the balance-sheet date?
A. A report to the audit committee on the results of testing of internal

control over cash receipts.
B. Confirmation letters to vendors confirming the amounts they owe
to the client.
C. An attorney's letter regarding contingent liabilities.
D.
An engagement letter.
AACSB: Communication
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Planning
94.
Which of the following procedures would most likely be performed

during planning?
A. Surprise counts of the client's petty cash fund.

B. Reporting internal control deficiencies to the audit committee.
C. Performing a search for unrecorded liabilities.
D.
Identifying related parties.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Planning
95.
Prior to accepting a new audit engagement, a public accounting firm

should
A. Attempt to contact the predecessor auditors.

B. Evaluate the integrity of management.
C. Assess the firm's resources to ensure that they are sufficient to
permit them to accept the engagement.
D.
All of the above.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
96.
An audit plan contains
A. Specifications of audit standards relevant to the financial

statements being audited.
B. Specifications of procedures the auditors believe appropriate for
the financial statements under audit.
C. Documentation of the assertions under audit, the evidence
obtained, and the conclusions reached.
D. Reconciliation of the account balances in the financial statements
with the account balances in the client's general ledger.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
97.
The revenue cycle of a company generally includes which accounts?
A. Inventory, accounts payable, and general expenses.

B. Inventory, general expenses, and payroll.
C. Cash, accounts receivable, and sales.
D. Cash, notes payable, and capital stock.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
98.
When auditing the existence assertion for an asset, auditors proceed

from the
A. Financial statement amounts back to the potentially unrecorded

items.
B. Potentially unrecorded items forward to the financial statement
amounts.
C. General ledger back to the supporting original transaction
documents.
D. Supporting original transaction documents to the general ledger.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
99.
Confirmations of accounts receivable provide evidence primarily

about which two assertions?
A.
B.
C.
D.
Completeness and valuation.

Valuation and rights and obligations.
Existence and rights and obligations.
Existence and completeness.

AACSB: Analytic
AICPA BB: Legal
Blooms: Understand
Source: Original
Topic: Assertions
100. With respect to the concept of materiality, which one of the following
statements is correct?
A. Materiality depends only on the dollar amount of an item relative

to other items in the financial statements.
B. Materiality depends on the nature of a transaction rather than the
dollar amount of the transaction.
C. Materiality is determined by reference to AICPA guidelines.
D. Materiality is a matter of professional judgment.
AACSB: Analytic
AICPA BB: Legal
Blooms: Understand
Source: Original
Topic: Materiality
101. When evaluating whether accounting estimates made by

management are reasonable, the audit team would be most
interested in which of the following?
A.
B.
C.
D.
Key factors that are consistent with prior periods.

Assumptions that are similar to industry guidelines.
Measurements that are objective and not susceptible to bias.
Evidence of a conservative systematic bias.

AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Source: Original
102. Generally accepted auditing standards require that auditors always

prepare and use
A. A written planning memorandum explaining the auditors'

understanding of the client's business.
B. A written client consent to discuss audit matters with prospective
auditors.
C.
A written audit plan.
D. The written time budgets and schedules for performing each audit.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Planning
103. Which of the following engagement planning procedures would most

likely assist the auditor in identifying related-party transactions
before the balance-sheet date?
A. Interviewing internal auditors about their reporting responsibilities.

B. Reviewing accounting records for recurring transactions occurring
near year-end.
C. Inspecting communications with the client's legal counsel
regarding recorded contingent liabilities.
D. Scanning the minutes for significant transactions with members of
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Planning
104. An audit engagement letter should normally exclude the following

matter of agreement between the public accounting firm and the
client
A.
B.
C.
D.
Fees to be charged.
Terms of the engagement.
Schedules to be prepared by client.
Type of opinion to be produced.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
105. The time reports are recorded by budget categories for all the
following purposes except for
A. Providing evidence that the audit plan was satisfied.

B. Evaluating the efficiency of the audit team members.
C. Compiling a record for billing the client.
D. Compiling a record for planning the next audit.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Planning
106. For all audits of financial statements filed with the Securities and
Exchange Commission, which of the following is required?
A.
B.
C.
D.
A computer specialist.
A second audit partner.
Electronic documentation.
Computer-assisted audit techniques.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Planning
107. Which of the following is used to maintain control of the audit and
ensure that it is completed on a timely basis?
A.
B.
C.
D.
Engagement letter.
Termination letter.
Time budget.
Analytical procedures.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Source: Original
Topic: Planning
108. Which of the following is not an example of early informationgathering activities?
A. Review of the corporate charter and bylaws.

B. Review of contracts, agreements, and legal proceedings.
C. Reading and studying the minutes of the meetings of directors and
committees of the board of directors.
D.
Preparing a time budget.
AACSB: Analytic
AICPA BB: Legal
Blooms: Apply
Difficulty: 1 Easy
Source: Original
109. In a computerized information system, uniform processing of

transactions
A. Means that transactions will never be processed incorrectly.

B. Requires that a company use the same program for all functions.
C. Subjects similar transactions to the same processing instructions.
D.
Always leaves an audit trail.
AACSB: Technology
Blooms: Remember
Difficulty: 1 Easy
process.
Source: Original
110. Auditing standards do not require that documentation show that
A. It conforms to AICPA model papers.

B. The work was adequately planned and supervised.
C. The client's accounting records agree or reconcile with financial
statements.
D. Sufficient appropriate evidential matter was obtained.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
111. Which of the following can CAATs not do?
A. Scan inventory quantities for negative balances.

B. Determine the reasonableness of the allowance for doubtful
accounts.
C.
Recalculate depreciation.
D. Select customers' accounts receivable for confirmation.
AACSB: Technology
Blooms: Apply
process.
Source: Original
Topic: CAATs
112. The major cycles that auditors typically group accounts by do not
include
A.
B.
C.
D.
Revenue and collection.

Production and conversion.
Finance and investment.
Assets and liabilities.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
113. Physical observation by an audit team would include
A.
Examination of a sales invoice.
B.
Recalculation of depreciation.
C. Examination of securities certificates.
D. Scanning of the expense accounts for unusual transactions.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
Source: Original
114. The concept of materiality is not used by auditors as a guide to
A.
B.
C.
D.
Planning the audit plan.

Evaluating the evidence.
Applying the responsibilities principle.
Making decisions about the audit report.

AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
Source: Original
Topic: Planning
115. An internal control program for understanding the client's inherent

risk and control risk would not include which of the following
procedures?
A. Communicate with predecessor auditors.

B. Study previous year audit documentation.
C. Evaluate the competence and independence of the internal
auditors.
D. Obtain written representation from the client concerning
collectability of receivables.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
Source: Original
Fill in the Blank Questions

116. When companies change auditors, the former auditors are referred to
as the ________________________________________
predecessor auditors
117. Auditing standards require the auditors to ask that client consent be
given to permit the _________________________ auditors to speak.
predecessor
118. A(n) ________________________________________________ is recommended
as a means of reducing risk of misunderstanding between a client
and auditor.
engagement letter
119. ____________________________________________________________ include
programs that may be utilized to read, compute, and operate on
Computer-assisted audit techniques
120. ____________________________________________________________ refers to
procedures performed shortly before and after the balance sheet
date.
Year-end audit work
121. The ____________________________________________________ is the

amount by which a particular account may be misstated and cause
the financial statements to be materially misleading.
tolerable misstatement
122. For continuing audits, specific information about the client is
available in ____________________________________________________.
prior audit documentation
123. Audit _____________________________ can often be realized by working
in tandem with _____________________________ auditors.
efficiency; internal
124. _____________________________ are persons skilled in fields other than
accounting and auditing who are not members of the audit team.
Specialists
125. A(n) _______________________________ is a chain of evidence provided

through coding, cross-references, and documentation connecting
account balances and other summary results with the original
transaction documents calculations.
audit trail
126. The _____________________________ of the client's computer operations
should be considered in audit ____________________________.
complexity; planning
127. The ________________________________ contains information of
continuing audit significance over many years' audits of the same
client.
permanent file
128. _____________________________ is the auditor's record of compliance
with generally accepted auditing standards.
Documentation
129. The ____________________________ approach to quantifying materially

assigns an overall material amount for the financial statements and
then allocates it to the particular accounts.
top-down
130. In vouching, an item of financial information is selected from an
account, and then the audit team goes _____________________________
through the accounting and control system to find the
____________________________.
backward; source documentation
131. _____________________________ is a procedure that generally involves
the collection of oral evidence from independent parties and client
officials.
Inquiry
132. Management is responsible for making the accounting
____________________________, and auditors are responsible for
evaluating their ____________________________.
estimates; reasonableness
133. ________________________________ are composed of independent,

outside members of the board of directors (those not involved in the
company's day-to-day operations) who can provide a buffer between
the public accounting firm and management.
Audit committees
134. Procedures used to detect material misstatements in dollar amounts
and disclosures in financial statements are known as
_______________________________________________.
substantive procedures
135. Planning becomes a basis for preparing the
_________________________________.
audit plan
136. A __________________________________________ program contains
specification of audit procedures for gathering direct evidence on
______________________________________ about
_____________________________ and _____________________________ in
financial statements.
substantive audit; management's assertions; amounts;
disclosures
137. Auditors cannot place complete reliance on

_____________________________________ to the exclusion of other audit
procedures.
internal control
138. Information is _____________________________ if it is likely to influence
financial statement users' decisions.
material
Short Answer Questions
139. For each of the descriptions in Column A, match the correct word or
words from Column B.
1. D, 2. F, 3. G, 4. E, 5. A
Feedback: Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Planning
140. For each of the descriptions 1-6, match the correct word or phrase
from A-H.
1.F; 2.C; 3.H; 4.A; 5.B; 6.G

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Planning
Essay Questions
141. Explain the bottom-up approach and the top-down approach to

quantifying overall materiality.
In the bottom-up approach to judging materiality, amounts in each

account are judged separately and then combined to determine the
overall effect. In the top-down approach to judging materiality, an
overall material amount is determined for the financial statements
and then allocated to each particular account.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Materiality
142. Do the following regarding auditors' concepts of overall "materiality"

considered at the planning stage (i.e., "planning materiality").
a. Define or describe independent auditors' concept of "planning
materiality."
b. Name (but do not describe or explain) three common relationships
or considerations used by auditors when assessing the dollar amount
considered to be material.
a. Planning materiality is the largest amount of uncorrected dollar

misstatement the auditors believe could exist in published financial
statements without causing them to be considered materially
misleading.
b. Absolute size, relative size, nature of the item or issue,
circumstances, uncertainty, cumulative effects.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Materiality
143. What are the characteristics that distinguish computer processing

from manual processing?
Characteristics that distinguish computer processing from manual

processing include:
a. Computer system transaction trails may exist for only a short time.
b. Computers process similar transactions uniformly.
c. Functions are more concentrated in a computer system.
d. Increased potential for errors and irregularities exist in computer
systems.
e. Certain transactions can be initiated or executed automatically in a
computer system.
AACSB: Technology
Blooms: Remember
process.
Source: Original
144. What are the advantages and limitations derived from using
computer-assisted audit techniques (CAATs) packages?
The advantages of computer-assisted audit techniques (CAATs)

packages:
a. Original programming is not required.
b. The required programming is easy.
c. Training time to use the programming is short.
The limitations of computer-assisted audit techniques (CAATs)
packages:
a. The computer cannot observe and count physical things.
b. The computer cannot examine external and internal
documentation.
c. The computer cannot conduct inquiry procedures.
AACSB: Technology
Blooms: Remember
process.
Source: Original
Topic: CAATs
145. D. Jackson, CPA, audited Washington Company's financial statements

for the year ended December 31, 2007. On November 1, 2008,
Washington notified Jackson that it was changing auditors and that
Jackson's services were being terminated. On November 5, 2008,
Washington invited Lincoln, CPA, to make a proposal for an
engagement to audit its financial statements for the year ended
December 31, 2008.
Required:
What procedures concerning Jackson should Lincoln perform before
accepting the engagement?
a. Lincoln should explain to Washington the need to make an inquiry

of Jackson and should request permission to do so.
b. Lincoln should ask Washington to authorize Jackson to respond
fully to Lincoln's inquiries.
c. If Washington refuses to permit Jackson to respond or limits
Jackson's response, Lincoln should inquire as to the reasons and
consider the implications in deciding whether to accept the
engagement.
d. Lincoln should make specific and reasonable inquiries of Jackson
regarding matters Lincoln believes will assist in determining whether
to accept the engagement, including specific questions regarding.
(1) Facts that might bear on the integrity of management.
(2) Disagreements with management as to accounting principles,
audit procedures, or other similarly significant matters.
(3) Communications Jackson made to management about fraud,
illegal acts, or internal control recommendations.
(4) Jackson's understanding as to the reasons for the change of
auditors.
e. If Lincoln receives a limited response, Lincoln should consider its
implications in deciding whether to accept the engagement.

AACSB: Analytic
Blooms: Apply
Source: AICPA adapted
146. Identify the two types of audit plans and indicate the purpose of
each.
The two types of audit plans are (1) the internal control program and
(2) the substantive audit plan. The internal control program contains
the specification of procedures for obtaining an understanding of the
entity's business and environment, including its internal control, and
for assessing the inherent risk and the control risk related to the
financial account balances. The substantive audit plan contains the
specification of substantive tests for gathering direct evidence on the
assertions about dollar amounts in the account balances.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
Source: Original
Topic: Planning

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Chapter 03

True / False Questions

2. The Code of Professional Conduct permits predecessor auditors to give

3. Engagement letters are not necessary for continuing clients.

4. A second audit partner is required for audits of financial statements

5. CAATs software requires auditors to do the original programming.

6. A first-time audit requires more work than a repeat engagement.

7. A major reason for thinking about overall materiality at the planning

8. The use of computer-assisted auditing techniques has significantly

9. The computer has simplified auditing by providing a better audit trail.

10 The use of computer systems has increased the potential for

12 Control activities in computerized accounting systems may have

13 CAATs software may be utilized to read, compute, and operate on

15 The concept of materiality emphasizes the accountants' and managers'

16 Auditors are generally left without definitive, quantitative guidelines for

17 When management can exercise discretion over an accounting

18 Auditors usually choose separate measures of materiality for each of

19 Auditors usually prepare an audit plan summarizing the preliminary

21 Audit procedures are intended to enable auditors to conduct work in

22 Scanning is an "eyes-open" approach of looking for anything unusual in

23 Audit plans are used as audit planning tools.

Multiple Choice Questions

A. The entity has no formal written code of conduct.

A. Make inquiries of the predecessor auditor after obtaining the consent

A. An inadequate understanding of the entity's internal controls.

27 The auditor is not required to ask the predecessor auditor about

Specific assertions under audit.

29 C. Hill, CPA, has been retained to audit the financial statements of

Hill, the auditor.

30 Which of the following provides the best method of obtaining an

A. Performing tests of details of transactions and balances.

31 The pre-engagement activities of an audit engagement for a public

A. Evaluating the public accounting firm's independence with regard to

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

34 An engagement letter is used primarily to

37 Prior to beginning the fieldwork on a new audit engagement in which

A. Reduce audit risk by lowering the preliminary levels of materiality.

Capital stock sales and repurchases.

39 Errors in data processed in a batch computer system may not be

A. Transaction trails in a batch system are available for only a limited

40 Management's responsibility in a computer system would not include

A. A decrease of management supervision of operations.

43 The essential advantages of a computer-assisted audit techniques

A. The same software can be used on different types of clients'

44 Computer-assisted audit techniques (CAATs) could not be used for

A. Testing calculations and making computations.

A. Payroll details with personnel records.

Performing analytical procedures.

48 Which of the following use of computer-assisted audit techniques

A. Selecting customers' accounts receivable for confirmation.

A. Access information stored on computer files even with a limited

51 For which of the following judgments may an independent auditor share

Assessment of inherent risk, yes; assessment of control risk, yes

52 Which of the following is not considered an accounting estimate?

55 Which of the following is not one of the four major cycles?

Revenue and cash collection.

56 Looking at vendors' invoices for particular information is an example of

57 An auditor who uses 7 percent of income before taxes as a basis for

60 In testing the existence assertion for an asset, an auditor ordinarily

A. Financial statements to the potentially unrecorded items.

General ledger balances.

62 Auditors should design the written audit plan so that

Timing of audit procedures.

64 In considering overall materiality for planning purposes, an auditor