Planning Activities

Question 1

Included in engagement letter from auditor to client?

“The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.”

Answer 1

No.

Question 2

Included in engagement letter from auditor to client?

The CPA firm is responsible for ensuring that the client complies with applicable laws.

Answer 2

No.

Question 3

Included in engagement letter from auditor to client?

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

Answer 3

Yes.

Question 4

Included in engagement letter from auditor to client?

The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

Answer 4

No.

Question 5

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

Answer 5

Understanding as to the reasons for the change of auditors.

Question 6

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

Answer 6

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

Question 7

A successor auditor’s inquiries of the predecessor auditor should include questions regarding

Answer 7

AICPA Professional Standards state that the successor auditor should inquire of the predecessor about 5 specific matters: (1) information that might bear on the integrity of management; (2) disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; (3) communications to those charged with governance regarding fraud and illegal acts by clients; (4) communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control; and (5) the predecessor auditor’s understanding as to the reasons for the change of auditors.

Question 8

A successor auditor ordinarily should request to review the predecessor’s audit documentation relating to

Answer 8

Contingencies & Internal Control

Question 9

What would most likely would cause an auditor not to accept a new audit engagement?

Answer 9

Concluding that the entity’s management lacks integrity.

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.

Question 11

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

Answer 11

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 12

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 12

The initiative belongs to Hill, the successor auditor. 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 should contact the predecessor auditor prior to final acceptance of the engagement.

Question 13

An auditor’s engagement letter most likely would include

Answer 13

The engagement letter would typically refer to:
the objective of the audit;
management’s responsibilities for the financial statements, for internal control over financial reporting, and for compliance with laws and regulations;
availability of financial records;
representation letter;
auditor’s responsibilities;
components of an audit; and
correction of misstatements.
The engagement letter would include management’s acknowledgment of its responsibility for maintaining effective internal control over financial reporting.

Question 14

What does an auditor usually include in the engagement letter?

Answer 14

The engagement letter identifies the respective responsibilities of the entity and the auditor, and essentially constitutes the contract between the parties. It is customary for the engagement letter to address fee-related issues.

Question 15

The understanding with the client regarding a financial statement audit generally includes what?

Answer 15

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 16

The scope and nature of an auditor’s contractual obligation to a client ordinarily is set forth in the

Answer 16

engagement letter.

Question 17

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

Answer 17

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

Question 18

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

Answer 18

Client’s business risk & CPA’s business risk

Question 19

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 19

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 20

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

Answer 20

Contingencies & Balance Sheet

Question 21

What reason would cause a CPA to not accept a new audit engagement?

Answer 21

The prospective client is unwilling to make all financial records available to the CPA.

Question 22

Audit programs should be designed so that

Answer 22

The audit evidence gathered supports the auditor’s conclusions.

Question 23

The senior auditor responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to

Answer 23

Give guidance to the staff regarding both technical and personnel aspects of the audit.

Question 24

What procedures would an auditor most likely perform in planning a financial statement audit?

Answer 24

In planning an audit, an auditor would coordinate client assistance to be rendered, discuss matters that may affect the audit with consulting and tax staff, and read the current year’s interim financial statements. The auditor would not select a sample of vendors’ invoices for comparison to receiving reports as this is a substantive evidence-gathering procedure, not a planning procedure.

Question 25

Would the following condition would pose a great risk in accepting a new audit engagement?
There will be a client-imposed scope limitation.

Answer 25

ANY client-imposed scope limitation is a problem. When you add that problem to the greater risk arising from a new client, you have greatly increased the risk related to the new engagement. A new client, by definition, is a client that will require more time to study and understand in order to perform the audit. If the client is also telling the auditors that certain audit procedures will not be allowed, the risk of missing a material misstatement becomes very high.

Question 26

To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would

Answer 26

Review prior-year audit documentation and the permanent file for the client.Knowledge of a client’s business is generally obtained though experience with the client or the industry and inquiry of client personnel.

Question 27

What factor is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls?

Answer 27

The degree to which information technology is used in the accounting function.

Question 28

What could be difficult to determine because electronic evidence may not be retrievable after a specific period?

Answer 28

The timing of control and substantive tests.

Question 29

What procedures would an auditor most likely perform in the planning stage of an audit?

Answer 29

Make a preliminary judgment about materiality.

Question 30

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

Answer 30

How the results of various auditing procedures performed by the assistants should be evaluated.

Question 31

An auditor obtains knowledge about a new client’s business and its industry to

Answer 31

Understand the events and transactions that may have an effect on the client’s financial statements.

Question 32

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?
I. Financial statement accounts likely to contain a misstatement.

II. Conditions that require extension of audit tests

Answer 32

Both I and II

Question 33

What circumstance would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?

Answer 33

Supporting records that should be readily available are frequently not produced when requested.

Question 34

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

Answer 34

Obtain an understanding of the entity’s risk assessment process.

Question 35

What characteristic would heighten an auditor’s concern about the risk of material misstatements in an entity’s financial statements?

Answer 35

The entity’s industry is experiencing declining customer demand.

Question 36

Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of

Answer 36

An overall response.
AICPA Professional Standards discuss responses to the auditor’s assessment of the risks of material misstatement at two levels: (1) overall response; and (2) response at the relevant assertion level. Increasing the extent of supervision would be an example of an overall response.

Question 37

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

Answer 37

Professional skepticism

Question 38

The audit program usually cannot be finalized until the

Answer 38

Consideration of the entity’s internal control structure has been completed.

Question 39

In planning a new engagement, what is a factor that affects the auditor’s judgment as to the quantity, type, and content of audit documentation?

Answer 39

In planning a new engagement, an auditor would consider:
the nature of the engagement;
the type of report to be issued;
the nature of the financial statements, schedules, or other information on which the auditor is reporting;
the nature and condition of the client’s records;
the assessed level of control risk (including the estimated occurrence rate of attributes); and
the needs in the particular circumstances for supervision and review of the work.

Question 40

What procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Answer 40

Compare financial information with nonfinancial operating data.

The auditor is required to perform analytical procedures in planning the audit engagement. By definition, analytical procedures may involve a study of plausible relationships among both financial and nonfinancial data, consistent with this answer.