Audit Assurance Principles Flashcards
A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the:
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk
Answer: B
2) A measure of the auditor’s assessment of the likelihood that there are material misstatements in an
account before considering the effectiveness of the client’s internal control is called:
A) control risk.
B) acceptable audit risk.
C) statistical risk.
D) inherent risk.
Answer: D
3) When inherent risk is high, there will need to be:
A)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes Yes
B)
A lower assessment of audit risk More evidence accumulated by the auditor
No No
C)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes No
D)
A lower assessment of audit risk More evidence accumulated by the auditor
No Yes
Answer: D
4) In what order should the following steps occur?
A. assess client business risk
B. understand the client’s business and industry
C. perform preliminary analytical procedures
D. assess acceptable audit risk
A) D, B, C, A
B) B, A, D, C
C) B, D, A, C
D) D, C, B, A
Answer: B
5) The auditor uses knowledge gained from the understanding of the client’s business and industry to
assess:
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
Answer: A
There are three main reasons why an auditor should properly plan audit engagements. Discuss each of
these reasons.
Answer: Three reasons why an auditor should properly plan audit engagements are:
* To enable the auditor to obtain sufficient competent evidence for the circumstances. This is essential
for minimizing legal liability and maintaining a good profession reputation.
* To help keep audit costs reasonable. Given the competitive auditing environment, keeping costs
reasonable helps the firm obtain and retain clients.
* To avoid misunderstandings with the client. This is important for good client relations.
7) When an auditor decides there is higher inherent risk for an account, one potential effect is that more
audit evidence will be required for that account.
A) True
B) False
Answer: A
8) As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
A) True
B) False
Answer: A
9) Acceptable audit risk is a measure of the auditor’s willingness to accept that the financial statements do
not contain material misstatements after the audit is completed and a qualified audit report has been
issued.
A) True
B) False
Answer: B
10) Two major factors that affect acceptable audit risk are the likely users of the financial statements and
the likelihood of issuing an unqualified audit opinion.
A) True
B) False
Answer: B
1) One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is
important for:
A)
Good client relations
Facilitating high-quality work at a
reasonable cost
Yes Yes
B)
Good client relations
Facilitating high-quality work at a
reasonable cost
No No
C)
Good client relations
Facilitating high-quality work at a
reasonable cost
Yes No
D)
Good client relations
Facilitating high-quality work at a
reasonable cost
No Yes
Answer: A
2) The auditor is likely to accumulate more evidence when the audit is for a company:
A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes
B)
Which has large amounts of debt Which is to be sold in the near future
No No
C)
Which has large amounts of debt Which is to be sold in the near future
Yes No
D)
Which has large amounts of debt Which is to be sold in the near future
No Yes
Answer: A
3) Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client’s reason for the audit
Answer: B
4) Rodgers CPA has requested permission to communicate with predecessor auditor in order to review
certain workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow
this communication to occur would impact Rodgers decision concerning:
A) the auditor’s ability to design audit tests.
B) possible scope exception due to lack of access.
C) integrity of management concerning possible accounting misstatements.
D) violation of the GAAP rules concerning consistency and comparability of financial information.
Answer: C
5) A successor auditor may perform which of the following for a new audit client?
A)
Speak to local attorneys, banks and other
businesses regarding the company’s reputation
Speak to the predecessor auditors about
disagreements they had with management
Yes Yes
B)
Speak to local attorneys, banks and other
businesses regarding the company’s reputation
Speak to the predecessor auditors about
disagreements they had with management
No No
C)
Speak to local attorneys, banks and other
businesses regarding the company’s reputation
Speak to the predecessor auditors about
disagreements they had with management
Yes No
D)
Speak to local attorneys, banks and other
businesses regarding the company’s reputation
Speak to the predecessor auditors about
disagreements they had with management
No Yes
Answer: A
6) Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit risk
is appropriate?
A) More evidence is accumulated.
B) Less evidence is accumulated.
C) Special care is required in assigning experienced staff.
D) Review of audit documentation is performed by personnel not assigned to the engagement.
Answer: B
7) A written understanding detailing what the auditors will do in determining if the financial statements
are fair representations of the company’s financial statements and what the auditor expects from the
client in performing an audit will normally be expressed in the
A) management letter requested by the auditor.
B) engagement letter.
C) Audit Plan.
D) Audit Strategy for the client.
Answer: B
8) If an auditor is requested to perform nonaudit services for a public company audit client, who is
responsible for agreeing to those services with the audit firm?
A) the client’s management
B) the client’s chief executive officer
C) the client’s chief financial officer
D) the client’s audit committee
Answer: D
9) Which of the following statements is true regarding communications between predecessor and
successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor’s response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) There must be communication between the predecessor and successor if the successor is to accept the
engagement
Answer: B
10) The purpose of an engagement letter is to:
A) document the CPA firm’s responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
D) emphasize management’s responsibility for approving the audit program
Answer: B
11) Written communication that the auditor will provide reasonable assurance for the detection of fraud
is found in:
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter
Answer: A
12) Which of the following normally signs the engagement letter for an audit of a private company?
A) Management.
B) Board of directors representative
C) Audit committee representative
D) Corporate treasure
Answer: A
13) The first standard of field work, which states that the work is to be adequately planned and that
assistants, if any, are to be properly supervised, recognizes that:
A) early appointment of the auditor is advantageous to the auditor and the client.
B) acceptance of an audit engagement after the close of the client’s fiscal year is generally not permissible.
C) appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of
opinion.
D) performance of substantial parts of the examination is necessary at interim dates.
Answer: A
14) An engagement letter sent to a publicly held audit client usually would not include a:
A) reference to the auditor’s responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management’s responsibility for the financial statements.
Answer: C
15) Jennings and Company has repositioned the firm’s business strategy from the basis of competing on
costs to competing on product differentiation. All the following will increase, except:
A) Audit risk.
B) Business Risk.
C) Financial risk.
D) Risk of Material Misstatements.
Answer: A
16) The purpose of the requirement in having communication b etween the predecessor and successor
auditors is to:
A) allow the predecessor to disclose information which would otherwise be confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
Answer: B
17) The predecessor auditor is required to respond to the request of the successor auditor for information,
but the response can be limited to stating that no information will be provided when:
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor’s work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity
Answer: C
18) Which of the following best expresses the requirement to establish with the client an understanding of
the responsibilities the auditor and company is taking for the audit engagement?
A) Management asserts there are no material misstatements in the financials.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide
reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management’s assertion that they will provide the auditor with a risk assessment as to material
misstatements due to errors or fraud in the company’s financial statements.
Answer: C
19) Early appointment of the independent auditor will enable:
A) a more thorough examination to be performed.
B) a proper study and evaluation of internal control to be performed.
C) sufficient competent evidential matter to be obtained.
D) a more efficient examination to be planned.
Answer: D
20) An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should:
A) engage financial experts familiar with the nature of the business entity.
B) obtain a knowledge of matters that relate to the nature of the entity’s business.
C) refer a substantial portion of the audit to another CPA who will act as the principal audit or.
D) first inform management that an unqualified opinion cannot be issued
Answer: B
21) Which is usually included in an engagement letter?
A)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
Yes Yes
B)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
No No
C)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
Yes No
D)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
No Yes
Answer: D
22) Which is usually included in an engagement letter?
A)
A reference to GAAP A reference to GAAS
Yes Yes
B)
A reference to GAAP A reference to GAAS
No No
C)
A reference to GAAP A reference to GAAS
Yes No
D)
A reference to GAAP A reference to GAAS
No Yes
Answer: A
23) Which is usually included in an engagement letter?
A)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in the
planning phase
Yes Yes
B)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in the
planning phase
No No
C)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in the
planning phase
Yes No
D)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in the
planning phase
No Yes
Answer: C
24) When may the auditor refer to a specialist in the audit report?
A)
Only if the specialist’s report
results in a modification of the audit
opinion
Only if the specialist assisted in the
audit of an account material to the
financial statements
Yes Yes
B)
Only if the specialist’s report
results in a modification of the audit
opinion
Only if the specialist assisted in the
audit of an account material to the
financial statements
No No
C)
Only if the specialist’s report
results in a modification of the audit
opinion
Only if the specialist assisted in the
audit of an account material to the
financial statements
Yes No
D)
Only if the specialist’s report
results in a modification of the audit
opinion
Only if the specialist assisted in the
audit of an account material to the
financial statements
No Yes
Answer: C
25) Which is usually included in the engagement letter?
A)
The projected type of opinion on the financials
statement to be audited
Name(s) of the client personnel responsible for
supplying the auditor with information
Yes Yes
B)
The projected type of opinion on the financials
statement to be audited
Name(s) of the client personnel responsible for
supplying the auditor with information
No No
C)
The projected type of opinion on the financials
statement to be audited
Name(s) of the client personnel responsible for
supplying the auditor with information
Yes No
D)
The projected type of opinion on the financials
statement to be audited
Name(s) of the client personnel responsible for
supplying the auditor with information
No Yes
Answer: B
26) Which is usually included in the engagement letter?
A)
List of audit procedures to be used
in inventory observation The auditors’ assessment of Audit Risk
Yes Yes
B)
List of audit procedures to be used
in inventory observation The auditors’ assessment of Audit Risk
No No
C)
List of audit procedures to be used
in inventory observation The auditors’ assessment of Audit Risk
Yes No
D)
List of audit procedures to be used
in inventory observation The auditors’ assessment of Audit Risk
No Yes
Answer: B
27) Discuss the factors an auditor should consider before accepting a company as an audit client.
Answer: The auditor should investigate and consider the prospective client’s standing in the business
community, financial stability, management’s integrity, and relations with its bankers, attorneys, and
previous CPA firm. The auditor should also determine whether he or she possesses the required
