Chapter 8

Question 1

1. 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:

Answer 1

B. acceptable audit risk.

Question 2

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:

Answer 2

D. inherent risk.

Question 3

5. The auditor uses knowledge gained from the understanding of the client’s business and industry to assess:

Answer 3

A. client business risk.

Question 4

3. Initial audit planning involves four matters. Which of the following is not one of these?

Answer 4

B. Request that bank balances be confirmed.

Question 5

4. Smith, CPA has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client’s refusal to allow this communication to occur would impact Rodgers decision concerning:

Answer 5

C. the desirability of accepting the prospective engagement.

Question 6

6. When dealing with audit risk:

Answer 6

D. if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the audit fee.

Question 7

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:

Answer 7

B. engagement letter.

Question 8

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?

Answer 8

D. The client’s audit committee

Question 9

9. Which of the following statements is true regarding communications between predecessor and successor auditors?

Answer 9

B. The predecessor’s response can be limited to stating that no information will be provided.

Question 10

10. The purpose of an engagement letter is to:

Answer 10

B. document the terms of the engagement.

Question 11

11. Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:

Answer 11

A. engagement letter.

Question 12

12. Which of the following normally signs the engagement letter for an audit of a private company?

Answer 12

A. Management

Question 13

13. The two major factors affecting acceptable audit risk are:

Answer 13

C. the likely statement users and the intended uses of the statements.

Question 14

15. The preliminary audit strategy:

Answer 14

B. guides the development of the audit plan.

Question 15

16. The purpose of the requirement in having communication between the predecessor and successor auditors is to:

Answer 15

B. help the successor auditor to evaluate whether to accept the engagement.

Question 16

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:

Answer 16

C. there are actual or potential legal problems between the client and the predecessor.

Question 17

18. Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

Answer 17

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.

Question 18

20. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

Answer 18

B. obtain a knowledge of matters that relate to the nature of the entity’s business.

Question 19

4. The auditor determines that Mathews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is:

Answer 19

C. a related party transaction in which a major shareholder owns the office tower.

Question 20

5. An official record of meetings of the board of directors and stockholders is included in the corporate:

Answer 20

C. minutes.

Question 21

6. A related party transaction may be indicated when another company:

Answer 21

A. subsidizes certain operating expenses of the company.

Question 22

7. Which of the following is not a primary reason for obtaining a good understanding of the client’s industry and external environment?

Answer 22

C. Risk associated with a specific industry may affect the auditor’s assessment of acceptable control risk.

Question 23

9. Which of the following would most likely not be classified as a related-party transaction?

Answer 23

A. An advance of one week’s salary to an employee

Question 24

10. Which of the following best describes the corporate minutes of an entity?

Answer 24

A. Official record of the meetings of the board of directors and the stockholders

Question 25

11. Related party:

Answer 25

B. disclosures include the nature of the related party relationship and a description of the transaction.

Question 26

1. An auditor has accessed client business risk and the risk of material misstatements to the clients financial statements. These are done in order to:

Answer 26

A. apply the audit risk model to determine the appropriate extent of audit evidence.

Question 27

2. Business risk:

Answer 27

C. can include a new technology which threatens to erode a company’s competitive advantage.

Question 28

1. During audit planning, the auditor uses analytical procedures primarily to:

Answer 28

D. determine the nature, extent, and timing of audit procedures.

Question 29

2. Which of the following is most correct with respect to the use of analytical procedures?

Answer 29

D. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data.

Question 30

3. Analytical procedures:

Answer 30

D. performed in the completion phase serve as a final review for material misstatements or financial problems.

Question 31

1. Which of the following is a correct statement regarding analytical procedures?

Answer 31

C. Auditors should investigate the most significant differences between budgeted and actual results.

Question 32

2. Which of the following would not be classified as an analytical procedure?

Answer 32

D. Reconciling fixed asset dispositions with the fixed asset ledger

Question 33

3. Which of the following statements is not correct with respect to analytical procedures?

Answer 33

B. Analytical procedures must be performed throughout the audit.

Question 34

4. When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should:

Answer 34

A. investigate the possibility the client may have made an error in their cost of goods sold computation.

Question 35

5. When are auditors likely to encounter judgment problems in the use of analytical procedures?

Answer 35

D. The auditor is likely to encounter judgment problems in each of the above instances.

Question 36

6. The major concern when using nonfinancial data in analytical procedures is the:

Answer 36

A. accuracy of the nonfinancial data.