A3: Engagement Acceptance, Planning, and Risk Assessment

Question 1

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit CANNOT be performed?

Answer 1

There is substantial risk of intentional misapplication of accounting principles

Intentional misapplication of accounting principles would indicate that management lacks integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed

Question 2

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Answer 2

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

A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement

Question 3

A scope limitation sufficient to preclude an unmodified opinion always will result when management:

Answer 3

Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP

The introductory paragraph of the standard unmodified report includes a statement that the financial statements are the responsibility of the company’s management. Management’s refusal to accept responsibility for the fair presentation of the financial statements therefore precludes issuance of this standard report

Question 4

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

Answer 4

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

An understanding with the client should be established regarding management’s responsibilities, which include the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. The understanding should be documented through a written communication, such as an engagement letter

Question 5

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

Answer 5

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

Inquiry of the predecessor auditor is a required pre-acceptance procedure. However, consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor

Question 6

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

Answer 6

After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement

The auditor does not consult with the client about audit procedures that will be performed

Question 7

Hill, CPA has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was Post, CPA, who has been notified by Monday that Post’s services have been terminated. Under these circumstances, which party should initiate between Hill and Post?

Answer 7

Hill, the successor auditor

The initiative to communicate with the predecessor auditor rests with the successor auditor. Note, however, that the successor auditor must first receive permission from the client.

Question 8

A successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s:

Answer 8

Understanding of the reasons for the change in auditors

The successor auditor is required to make inquiries of the predecessor auditor before accepting an engagement. These inquiries should include the predecessor’s understanding as to the reasons for the change in auditors

Question 9

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?

Answer 9

The integrity of the entity’s management is suspect

An auditor’s faith in the integrity of management is of the utmost importance in performing a financial statement audit. When an auditor is concerned that the integrity of management is suspect, the situation is serious enough to prevent the auditor from performing the audit

Question 10

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

Answer 10

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

An understanding between the auditor and the client generally includes the auditor’s responsibilities. One of the auditor’s responsibilities is to ensure that those charged with governance (e.g. the audit committee) are aware of any significant deficiencies in internal control that come to the auditor’s attention

Question 11

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

Answer 11

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

The auditor’s understanding with the client often includes discussion of any specialists who will be involved in the engagement

Question 12

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?

Answer 12

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory

An independent auditor may accept an engagement after the close of the fiscal year as long as he or she can address any limitations resulting from accepting the engagement at that time. For example, the auditor may not be able to observe the ending inventory count, but may be able to perform acceptable alternative procedures sufficient to support the year-end inventory balance

Question 13

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

Answer 13

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years should be discussed after accepting an audit engagement

Question 14

When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except:

Answer 14

Whether there has been any turnover of the component’s board members

Turnover of the component’s board of directors generally would not influence the decision to obtain an additional engagement letter from the component

Question 15

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements most likely would consider the:

Answer 15

Internal auditing standards developed by The Institute of Internal Auditors

Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors)

Question 16

Which of the following statements is correct concerning an auditor’s use of the work of a specialist?

Answer 16

The work of a management specialist who has a contractual relationship with the client may be acceptable under certain circumstances

The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack. The work of a management specialist who has a relationship with a client may be acceptable under certain circumstances. If the management specialist has a relationship with the client, the auditor should assess the risk that the specialist’s objectivity might be impaired. If the auditor believes that the relationship might impair the management specialist’s objectivity, the auditor should perform additional procedures with respect to the specialist’s assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose

Question 17

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgement about materiality?

Answer 17

The entity’s annualized interim financial statements

The auditor’s preliminary judgement about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period

Question 18

An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about the:

Answer 18

Existence of fixed asset additions

In making judgments about the extent of the effect of the internal auditor’s work on the auditor’s procedures, the auditor considers the materiality of financial statement amounts, the risk of material misstatements of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases. Testing of the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor’s testing in this area

Question 19

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

Answer 19

Timing of inventory observation procedures to be performed

In order to observe the physical inventory count, the auditor would have to coordinate schedules with the client. This timing is usually agreed upon before implementation of the audit strategy

Question 20

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Answer 20

Influence the design of internal control

The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is sued in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures

Question 21

Which of the following statements is NOT correct about materiality?

Answer 21

An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements

Question 22

Which of the following statements is correct about the auditor’s use of the work of a specialist?

Answer 22

The auditor should obtain an understanding of the methods and assumptions used by the specialist

Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements

Question 23

In assessing the competence, objectivity, and application of a systematic and disciplined approach by the entity’s internal audit function, an independent auditor would LEAST likely consider information obtained from:

Answer 23

The results of analytical procedures

Analytical procedures may be used to enhance the auditor’s understanding of the client’s business or to evaluate financial statement assertions, but generally would not be helpful in assessing competence, objectivity, and application of a systematic and disciplined approach by the entity’s internal audit function

Question 24

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Answer 24

An audit plan setting forth in detail the procedures necessary to accomplish the engagement’s objectives

In an audit conducted in accordance with GAAS, the auditor must document the audit plan, setting forth in detail the procedures necessary to accomplish the engagement’s objectives

Question 25

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

Answer 25

The control activities are operating effectively

Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively

Question 26

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:

Answer 26

Potentially increases the risk that errors that exist at the balance sheet date will not be detected

Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, as it is possible that errors will occur between the date of interim testing and the balance sheet date. For this reason, the auditor generally selects for interim examination only accounts that are reasonably predictable with respect to amount, relative significance, and composition, and must also identify procedures sufficient to extend interim conclusions to year-end

Question 27

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the:

Answer 27

Estimate of the total misstatement is less than a material amount

An unmodified opinion states that the financial statements are presented fairly, in all material respects. Accordingly, if the auditor believes that total misstatement (includes factual, judgmental, and projected misstatements) is immaterial, an unmodified opinion is appropriate

Question 28

In developing an overall audit strategy, an auditor should consider:

Answer 28

Preliminary evaluations of materiality, audit risk, and internal control

In developing an overall audit strategy, an auditor should consider preliminary evaluations of materiality, audit risk, and internal control

Question 29

Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should:

Answer 29

Assess the difficulty in controlling the incremental audit risk

When audit procedures are performed before year-end, the auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end

Question 30

Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?

Answer 30

The auditor is required to understand the objectives and scope of the actuary’s work

The auditor should obtain an understanding of the nature of the actuary’s work, including its objectives and scope

Question 31

According to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements?

Answer 31

The client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed time frame

The client’s request for an extension to submit documentation generally would not have an impact on established materiality levels or tolerable misstatements