II. Planning Activities - Pre-Engagement Planning Issues

Question 1

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

Answer 1

A successor auditor should communicate with the predecessor auditor about matters that will assist the successor auditor in deciding whether to accept the engagement. These would include the:

• integrity of management,
• disagreements with management, and
• the predecessor’s understanding of the reason for the change in auditors.

Question 2

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 the communications between Hill and Post?

Answer 2

When an auditor has been retained to audit the financial statements of an entity, the auditor contacts the predecessor auditor to obtain information about matters that may affect the conduct of the audit and to review the prior year audit documentation. The successor auditor (Hill) should contact the predecessor auditor (Post) prior to final acceptance of the engagement.

Question 3

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working paper analyses relating to

Answer 3

The successor auditor normally reviews the predecessor’s audit documentation relating to:

• planning,
• internal control,
• audit results,
• balance sheet accounts, and
• contingencies.

Thus, this is the correct answer. The successor auditor would request a review of contingency and balance sheet documentation.

Question 4

**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 4

1. the objective of the audit;
2. management’s responsibilities with regard to:
   
   1. the financial statements,
   2. internal control,
   3. compliance with laws and regulations,
   4. availability of records, and
   5. the management representation letter;
3. the auditor’s responsibilities for GAAS and reportable conditions;
4. a description of an audit; and
5. management’s responsibilities regarding correction of material misstatements and evaluation of immaterial adjustments.

Question 5

In assessing whether to accept a client for an audit engagement, a CPA should consider the

Client’s business risk (Yes or No)

CPA’s business risk (Yes or No)

Answer 5

Yes

Yes

Note:

The client’s business risk is the risk that the client will fail to meet its objectives, particularly with regard to survival and profitability.

The CPA’s business risk is the risk that the CPA’s business will suffer due to association with the client. The CPA should consider both risks in determining whether to accept a client for an audit engagement.

Question 6

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

Answer 6

A CPA would not accept a client who was unwilling to make all financial records available.

Access to all financial records would be a minimum requirement for the audit, and management is required to state in the management representation letter that all financial records and data have been made available to the auditors.

Question 7

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

Answer 7

The responsibilities of the auditor.

Note: An engagement letter, which documents the agreed upon terms of the audit engagement, specifically addresses the respective responsibilities of management and the auditor, among other matters.​

Question 8

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

Answer 8

Auditors are required by professional standards to:

• make inquiries pertaining to the integrity of management,
• disagreements with management regarding accounting principles and auditing procedures, and
• the predecessor’s understanding of the reason for the change in auditors.

Question 9

Which of the following matters does an auditor usually include in the engagement letter?

Answer 9

Engagement letter identifies the respective responsibilities of the entity and the auditor, and essentially constitutes the contract between the parties.

Note: It is customary for the engagement letter to address fee-related issues.

Question 10

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

Answer 10

The prospective client’s consent to make inquiries of the predecessor, if any.

Note: AICPA standards addressing required communications between successor and predecessor auditors state that an auditor should not accept an engagement until the successor auditor’s required communications with the predecessor auditor have been evaluated.

Question 11

An auditor’s engagement letter most likely would include

Answer 11

1. “The objective and scope of the audit of the financial statements.
2. The responsibilities of the auditor.
3. The responsibilities of management.
4. A statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS.
5. Identification of the applicable financial reporting framework for the preparation of the financial statements.
6. Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content.”

Question 12

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the

Answer 12

This answer is correct because financial statements are the representations of management, and they have the responsibility for producing proper financial statements.

Question 13

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

Answer 13

Whether the engagement should be accepted.

Summary:

The successor auditor is required to communicate with the predecessor auditor to obtain information concerning the client to help determine whether the engagement should be accepted.

Question 14

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

Answer 14

AU-C 510 states that it is advisable that a successor auditor request to be allowed to review the predecessor’s working papers.

NOT the engagement letter though

Question 15

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 15

The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor’s attention.

Note: understanding does not ordinarily involve preliminary judgments about materiality and audit risk factors.

Question 16

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

Answer 16

the successor should request information such as

• (1) facts that might bear on the integrity of management,
• (2) disagreements with management as to accounting principles, auditing procedures, or other significant matters, and
• (3) the predecessor’s understanding of the reasons for the change of auditors.

Question 17

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 17

The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor’s attention.

Question 18

****When establishing an understanding with an audit client, that understanding should be documented

Answer 18

Through use of an engagement letter.

Note:

The agreement of the terms of the engagement should be documented in an audit engagement letter and address the following:

• (1) The objective and scope of the audit;
• (2) The auditor’s responsibilities;
• (3) Management’s responsibilities;
• (4) A statement about the inherent limitations of an audit;
• (5) A statement identifying the applicable financial reporting framework;
• (6) Reference to the expected content of any reports to be issued; and
• (7) Other matters as warranted in the auditor’s judgment.

Question 19

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

Answer 19

There will be a client-imposed scope limitation.

Note: This means that management is responsible for making all financial records and related information available to the auditor—a client-imposed scope limitation is likely to present significant problems in that it raises questions as to why management would restrict the scope of the audit.

Question 20

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 20

Timing of inventory observation procedures to be performed.

Note: auditor will normally wish to observe the counting of inventory and there is therefore a need for coordination of timing between the auditor and the client.

Question 21

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

Answer 21

Limits the auditor’s responsibility to detect errors and fraud.

Question 22

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

Answer 22

The prospective client’s consent to make inquiries of the predecessor auditor, if any.

Question 23

The auditor should document the understanding established with a client through a(n)

Answer 23

The professional standards require that an auditor document the understanding through a written communication with the client.

Question 24

An engagement letter should ordinarily include information on the objectives of the engagement and

Answer 24

Yes

Yes

Yes

Question 25

During the initial planning phase of an audit, a CPA most likely would

Answer 25

Discuss the timing of the audit procedures with the client’s management.

Question 26

Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interested in reviewing?

Answer 26

Analysis of income statement accounts.

Note: Prior income statement accounts are less likely to have continuing significance than are balance sheet accounts and contingencies.

Question 27

A predecessor auditor

Answer 27

Is not required to attempt communication with a successor since this is the successor’s responsibility.

Note:

the successor auditor should attempt communication with the predecessor auditor either prior to accepting the engagement, or after the engagement has been accepted, or both. It is the successor’s responsibility, not the predecessor auditor’s responsibility.

Question 28

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Answer 28

Management is unwilling to permit inquiry of its legal counsel.

Note: management’s unwillingness to permit inquiry of its legal counsel is a scope limitation that will ordinarily result in a disclaimer of opinion; when such a disclaimer is anticipated, it is unlikely that the CPA would accept the engagement.

Question 29

What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client?

Answer 29

The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.

Note: The Successor inquries should include specific questions to management on

• (1) disagreements with management as to auditing procedures and accounting principles (reply [a]),
• (2) facts that might bear on the integrity of management and
• (3) the predecessor’s understanding as to the reasons for the change of auditors.

Question 30

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

Answer 30

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

Question 31

Early appointment of the independent auditor will enable

Answer 31

A more efficient audit to be planned.

Question 32

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Answer 32

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Question 33

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working paper analyses relating to

Contingencies

Balance sheet accounts

Answer 33

Yes

Yes

Note: predecessor auditor should ordinarily permit the successor to review working papers, including documentation of planning, internal control, audit results, and other matters of continuing accounting and auditing significance, such as the working paper analysis of balance sheet accounts and those relating to contingencies.

Question 34

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?

Answer 34

Determining the extent of involvement of the client’s internal auditors.

Question 35

Arrangements concerning which of the following are least likely to be included in engagement letter?

Answer 35

CPA investment in client securities.

Note: does not suggest any arrangement concerning CPA investment in client securities; indeed such investments are prohibited by the Code of Professional Conduct.

Question 36

What would most likely be in an engagement letter?

Answer 36

A predecessor auditor.

Fees and billing.

Other services to be provided in addition to the audit.

engagement letter may include information on the anticipated use of specialists.

Question 37

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

Answer 37

Management’s disregard of its responsibility to maintain an adequate internal control environment.

Question 38

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

Answer 38

Alternative procedures exist to remedy 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.

Question 39

What factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Answer 39

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

Note: Least Likely to be included in an audit:

Auditors ordinarily will not discuss with management the details of procedures that are necessary to perform the audit.

Question 40

In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star’s prior year’s financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should

Answer 40

Request Star to arrange a meeting among the three parties to resolve the matter.

Note: When a successor auditor becomes aware of information that indicates that financial statements reported on by the predecessor may require revision, the successor should request that the client arrange a meeting among the three parties to discuss and attempt to resolve the matter.

Question 41

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

Answer 41

The understanding should include auditor responsibilities (as well as management responsibilities).

Question 42

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

Answer 42

A client engagement letter that summarizes the timing and details of the auditor’s planned field-work.