Chapter 3 Flashcards
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A) The CPA’s lack of understanding of the prospective client’s internal audit function’s audit plan.
B) Management’s disregard of its responsibility to maintain an adequate internal control environment.
C) The CPA’s inability to determine whether related party transactions were consummated on terms equivalent to arm’s-length transactions.
D) Management’s refusal to permit the CPA to perform substantive tests before the year-end.
B) Management’s disregard of its responsibility to maintain an adequate internal control environment.
Which of the following statements is correct with regard to the predecessor-successor communications?
A) The successor auditor has no responsibility to contact the predecessor auditor.
B) The successor auditor should obtain permission from the entity before contacting the predecessor auditor.
C) The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.
D) The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.
B) The successor auditor should obtain permission from the entity before contacting the predecessor auditor.
Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?
A) They provide documentation of management’s responsibility for the financial statements.
B) They document the audit fees and deadlines that have been agreed upon.
C) They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.
D) They help to limit auditor liability in the event of misunderstandings.
C) They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.
Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?
A) The competence and objectivity of the internal audit function.
B) The materiality or significance of the accounts examined by the internal audit function.
C) The audit risk associated with the accounts examined by the internal auditors.
D) The nature of the audit software documentation used by the internal auditors.
D) The nature of the audit software documentation used by the internal auditors.
The audit committee of a company which is responsible for the appointment of the independent audit firm should consist of
A) Members of the board of directors who are not officers or employees.
B) Representatives of major equity interests (i.e., common and preferred shareholders).
C) Representatives from management, suppliers, and shareholders.
D) Members of the board of directors who have a financial interest in the company.
A) Members of the board of directors who are not officers or employees.
Which of the following would most likely indicate the existence of related parties?
A) Failing to write down inventory to market value just before year-end.
B) Depending on one or a few products for nearly all of a firm’s operating revenues.
C) Borrowing money at an interest rate substantially below the prevailing market rate of interest.
D) Selling goods to a major customer of your main competitor.
C) Borrowing money at an interest rate substantially below the prevailing market rate of interest.
Tests of controls include all of the following except: A) Inspection of documents, files, etc. B) Analytical procedures. C) Walkthroughs. D) Observation.
B) Analytical procedures.
Which of the following would NOT be a typical supervisory activity for an audit?
A) Perform detailed testing of the accounts payable account.
B) Inform engagement team of the nature, timing, and extent of audit procedures.
C) Review the work of other engagement team members.
D) Evaluate the results of the work and whether it supports the conclusions reached.
A) Perform detailed testing of the accounts payable account.
The concept of materiality as it applies to a financial statement audit
A) Relates primarily to the audit fees involved.
B) Generally involves less professional judgment for public companies.
C) Is determined, in part, based on how financial statement users may be influenced in making decisions.
D) Relates primarily to the quantity of audit procedures performed.
C) Is determined, in part, based on how financial statement users may be influenced in making decisions.
According to the text, the first step in applying materiality to an audit is
A) To determine tolerable misstatement for each account balance.
B) To determine a materiality level for the overall financial statements.
C) To aggregate the misstatements found in each account and determine their overall affect on the financial statements.
D) To ask management what constitutes a material amount in their business.
B) To determine a materiality level for the overall financial statements.
For which laws and regulations does the auditor have the same responsibility as that for errors and fraud?
A) Laws and regulations that have an indirect effect on the determination of financial statement amounts.
B) Laws and regulations that have a material but indirect effect on the determination of financial statement amounts.
C) Laws and regulations that have a direct and material effect on the financial statements.
D) Laws and regulations that have a direct and material effect on the financial statements as well as laws and regulations that have material but indirect effect on the determination of financial statement amounts.
C) Laws and regulations that have a direct and material effect on the financial statements.
When establishing an understanding with the entity regarding the terms of the engagement, all of the following should be discussed, except:
A) The engagement letter.
B) The internal audit function.
C) The audit committee.
D) The agreed upon limits on auditor liability for an improper audit.
D) The agreed upon limits on auditor liability for an improper audit.
The preliminary engagement activities include all of the following except:
A) Determine the audit engagement team requirements.
B) Ensure that the audit team is independent.
C) Ensure that there is an independent audit committee.
D) Ensure that the audit firm is independent.
C) Ensure that there is an independent audit committee.
A dual-purpose test is
A) A procedure that provides evidence about two different account balances at the same time.
B) A procedure that serves as both a test of control and a substantive test of transactions.
C) A procedure that provides evidence about two different accounting periods at the same time.
D) A procedure that serves as both a substantive test of transactions and a substantive test of balances.
B) A procedure that serves as both a test of control and a substantive test of transactions.
When likely misstatements are greater than overall materiality, the auditor should
A) Request that the auditee adjust the financial statements.
B) Issue an unqualified opinion.
C) Modify the opinion if the auditee will not adjust the financial statements.
D) Both a and c.
D) Both a and c.
What types of inquires about a prospective client should an auditor make to third parties?
The auditor should inquire of the prospective client’s bankers and attorneys, credit agencies, and other members of the business community who may have knowledge about the integrity of the prospective client and its management.
Who is responsible for initiating the communication between the predecessor and successor auditors? What type of information should be requested from the predecessor?
The successor.
However, the successor auditor should request permission of the prospective client before contacting the predecessor auditor.
questions related to the integrity of management, disagreements with management over accounting and auditing issues, communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity, communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control, and the predecessor auditor’s understanding of the change in auditors.
