A2 Engagement Quality & Acceptance

Question 1

Which of the following matters generally is included in an auditor’s engagement letter?

A. The factors to be considered in setting preliminary judgments about materiality.

B. The auditor’s responsibility to search for significant internal control deficiencies.

C. Management’s responsibility for the fair presentation of the financial statements.

D. Management’s vicarious liability for violations of laws and regulations committed by its employees.

Answer 1

C. Management’s responsibility for the fair presentation of the financial statements.

Question 2

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s:

Engagement letter:
Working papers:

Answer 2

Engagement letter: No
Working papers: Yes

Question 3

Each of the following identifies one of the principal purposes of an auditor’s communication with those charged with governance, except:

A. To report timely observations arising from the audit that are relevant to the responsibilities of those overseeing the financial reporting process.

B. To obtain information relevant to the audit.

C. To provide an overview of the scope and timing of the audit.

D. To obtain approval of the planned scope of the audit procedures.

Answer 3

D. To obtain approval of the planned scope of the audit procedures.

Question 4

The primary objective of an auditor when considering the acceptance of an initial audit engagement of a nonissuer is to:

A. Agree with management on the timing of tests at interim and year end.

B. Specify the degree to which management intends to rely on the auditor’s testing of internal controls.

C. Establish whether the preconditions for an audit are present.

D. Limit the auditor’s responsibility if management fails to provide written representations.

Answer 4

C. Establish whether the preconditions for an audit are present.

Question 5

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?

A. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

B. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.

C. There are significant differences between the entity’s forecasted financial statements and the financial statements to be audited.

D. There have been substantial inventory write-offs just before the year-end in each of the past four years.

Answer 5

A. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

Question 6

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

A. Internal control activities requiring the segregation of duties are subject to management override.

B. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

C. There are significant related party transactions that management claims occurred in the ordinary course of business.

D. Management continues to employ an inefficient system of information technology to record financial transactions.

Answer 6

B. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

Question 7

An auditor’s engagement letter most likely would include a statement regarding:

A. Conditions under which the auditor may modify the preliminary judgment about materiality.

B. Materiality matters that could modify the auditor’s preliminary assessment of fraud risk.

C. Management’s responsibility to provide certain written representations to the auditor.

D. Internal control activities that would reduce the auditor’s assessment of risk.

Answer 7

C. Management’s responsibility to provide certain written representations to the auditor.

Question 8

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?

A. The CPA firm is responsible for ensuring that the client complies with applicable laws.

B. The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

C. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.

D. The CPA firm will involve information technology specialists in the performance of the audit.

Answer 8

D. The CPA firm will involve information technology specialists in the performance of the audit.

Question 9

Which of the following statements would most likely appear in an auditor’s engagement letter?

A. We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements.

B. Management is responsible for making all financial records and related information available to us.

C. Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets.

D. Management agrees to correct all deficiencies in internal control activities identified by us.

Answer 9

B. Management is responsible for making all financial records and related information available to us.

Question 10

In connection with an audit of a nonissuer, the auditor would ordinarily use an engagement letter to:

A. Assert that a properly planned audit will detect and identify all material misstatements.

B. Determine which of the company’s financial statement notes will be compiled by the auditor during the audit.

C. Mutually agree upon contingent fees between the company and the auditor.

D. Specify any arrangements concerning the involvement of the company’s internal auditors on the audit.

Answer 10

D. Specify any arrangements concerning the involvement of the company’s internal auditors on the audit.

Question 11

Before accepting an engagement to audit a new client, a CPA is required to obtain:

A. The prospective client’s signature to the representation letter.

B. The prospective client’s consent to make inquiries of the predecessor auditor.

C. An understanding of the prospective client’s industry and business.

D. A preliminary understanding of the prospective client’s control environment.

Answer 11

B. The prospective client’s consent to make inquiries of the predecessor auditor.

Question 12

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

A. The competency of the client’s internal audit staff.

B. Disagreements with management as to auditing procedures.

C. Specialized accounting principles of the client’s industry.

D. The uncertainty inherent in applying sampling procedures.

Answer 12

B. Disagreements with management as to auditing procedures.

Question 13

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant’s review report should include reference to the:

Scope limitation that caused the changed engagement:

Original engagement that was agreed to:

Answer 13

Scope limitation that caused the changed engagement: No

Original engagement that was agreed to: No

Question 14

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant’s review report be modified?

A. The accountant should include in the review report a disclaimer of an audit opinion.

B. The accountant should include in the review report a reference to the original engagement but not the reason for the change.

C. The accountant should issue the review report without mentioning the change in engagement.

D. The accountant should include in the review report the circumstances that resulted in the change in engagement.

Answer 14

C. The accountant should issue the review report without mentioning the change in engagement.

Question 15

An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity’s request to change the engagement to a compilation?

A. The accountant is prohibited from corresponding with the entity’s legal counsel.

B. The accountant is prevented from examining the minutes of the board of directors’ meetings.

C. The entity’s management does not provide the accountant with a signed representation letter.

D. The entity’s principal creditors no longer require the entity to furnish audited financial statements.

Answer 15

D. The entity’s principal creditors no longer require the entity to furnish audited financial statements.

Question 16

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?

A. Withdraw from the engagement.

B. Discuss the matter with the client’s legal counsel.

C. Review the risk assessment of the opening balances of the financial statements.

D. Disclaim an opinion due to a scope limitation.

Answer 16

C. Review the risk assessment of the opening balances of the financial statements.

Question 17

Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?

A. Complying with laws and regulations.

B. Considering audit risk and materiality.

C. Assigning personnel to engagements.

D. Using statistical sampling techniques.

Answer 17

C. Assigning personnel to engagements.

Question 18

Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS?

A. Quality control standards relate to the conduct of a firm’s entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement.

B. A firm that has not adopted an appropriate system of quality control may still be in compliance with professional standards with respect to individual engagements.

C. A firm’s failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

D. The adoption of quality control standards increases the likelihood of compliance with professional standards on individual engagements.

Answer 18

C. A firm’s failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

Question 19

Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?

Engagement Performance:
Relevant Ethical Requirements:
Monitoring:

Answer 19

Engagement Performance: Yes
Relevant Ethical Requirements: Yes
Monitoring: Yes

Question 20

One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:

A. A system of quality control.

B. Compliance with Generally Accepted Reporting Standards.

C. Continuing professional education.

D. A system of peer review.

Answer 20

A. A system of quality control.

Question 21

Which of the following is not true about quality control standards?

A. They apply to attestation engagements as well as to audit engagements.

B. Quality control standards relate to the firm’s practice as a whole.

C. A CPA firm is required to adopt a system of quality control.

D. Risk assessment is one of the six interrelated elements of quality control.

Answer 21

D. Risk assessment is one of the six interrelated elements of quality control.

Question 22

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?

A. Information processing.

B. Professional skepticism.

C. Technology selection.

D. Engagement performance.

Answer 22

D. Engagement performance.

Question 23

Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?

A. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.

B. Establish policies to ensure that the audit work meets applicable professional standards.

C. Consider inherent risk and control risk before determining detection risk.

D. Use attributes sampling techniques in testing internal controls.

Answer 23

B. Establish policies to ensure that the audit work meets applicable professional standards.

Question 24

Which of the following activities is not an element of a CPA firm’s quality-control system to be considered in establishing quality-control policies and procedures?

A. Deciding whether to accept or continue a client relationship.

B. Monitoring the effectiveness of professional development activities.

C. Assessing a client’s ability to establish effective internal controls.

D. Selecting personnel for advancement who have the necessary qualifications.

Answer 24

C. Assessing a client’s ability to establish effective internal controls.

Question 25

Which of the following is an element of a CPA firm’s quality-control policies and procedures applicable to the firm’s accounting and auditing practice?

A. Engagement performance

B. Information processing

C. Safeguarding of assets

D. Risk analysis

Answer 25

A. Engagement performance

Question 26

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

A. Enable the CPA firm to attest to the reliability of the client.

B. Anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

C. Minimize the likelihood of association with clients whose management lacks integrity.

D. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.

Answer 26

C. Minimize the likelihood of association with clients whose management lacks integrity.

Question 27

The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to:

A. Minimize the likelihood of association with clients whose management lacks integrity.

B. Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities.

C. Identify noncompliance with aspects of contractual agreements that affect the financial statements.

D. Monitor significant deficiencies in the design and operation of the client’s internal control.

Answer 27

A. Minimize the likelihood of association with clients whose management lacks integrity.

Question 28

Would the following factors ordinarily be considered in planning an audit engagement’s personnel requirements?

Opportunities for on-the-job training:

Continuity and periodic rotation of personnel:

Answer 28

Opportunities for on-the-job training: Yes

Continuity and periodic rotation of personnel: Yes

Question 29

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

A. The auditor’s responsibility for determining the preliminary judgments about materiality and audit risk factors.

B. Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

C. The auditor’s responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor’s attention.

D. Management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to continue as a going concern.

Answer 29

C. The auditor’s responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor’s attention.

Question 30

If differences of opinion arise between the engagement partner and the engagement quality control reviewer, then the engagement partner should:

A. Follow the firm’s policies and procedures for resolving differences of opinion.

B. Withdraw from the engagement when permissible under law or regulation.

C. Discuss the differences of opinion with the entity’s management and issue a modified auditor’s report.

D. Issue a disclaimer of opinion and report the issue to the entity’s audit committee.

Answer 30

A. Follow the firm’s policies and procedures for resolving differences of opinion.

Question 31

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To achieve this goal, the firm most likely would establish procedures for:

A. Evaluating prospective and continuing client relationships.

B. Maintaining personnel files containing documentation related to the evaluation of personnel.

C. Requiring personnel to adhere to the applicable independence rules.

D. Reviewing audit documentation and engagement reports.

Answer 31

D. Reviewing audit documentation and engagement reports.

Question 32

The nature and extent of a CPA firm’s quality control policies and procedures depend on:

The CPA firm’s size:
The nature of the CPA firm’s practice:
Cost-benefit considerations:

Answer 32

The CPA firm’s size: Yes
The nature of the CPA firm’s practice: Yes
Cost-benefit considerations: Yes

Question 33

If an audit firm determines that a quality control review is required, but it has not yet been performed, what should an audit engagement partner do?

A. Issue an unqualified audit report with an explanatory paragraph.

B. Request that the audit engagement team members perform the quality control review in a timely manner.

C. Issue a qualified audit report with an explanatory paragraph.

D. Refrain from issuing the audit report until after the quality control review has been completed.

Answer 33

D. Refrain from issuing the audit report until after the quality control review has been completed.