QB Chapter 2: Process of assurance: obtaining an engagement Flashcards
1 Which two of the following are auditors always required to do on being invited to accept an
audit engagement?
A Ensure they are professionally qualified to act
B Ensure they have adequate existing resources to carry out the audit
C Obtain references for key personnel within the entity to be audited
D Communicate with the predecessor auditors to discover any reasons they should not
accept appointment
1 A,B The answer is not option C as it will not be necessary to obtain references when the
entity is already known to the firm. It will not be necessary to contact previous auditors
in the case of a company’s first audit.
2 Which two of the following might indicate that an assurance client could be higher than
normal inherent or control risk?
A Poor recent performance
B Strong internal controls
C Unusual transactions
D The existence of an internal audit department
2 A,C Poor recent performance may indicate a high risk that the company may misstate its
financial statements in order to show improved recent performance. A company
carrying out unusual transactions would also be a high risk, as each transaction would
require a separate understanding leading to a higher risk of error. Strong internal
controls and the existence of an internal audit department would be low risk indicators
3 Claret LLP, an assurance firm, has the following two clients among its client portfolio. For
each client, select whether inherent risk is high or low.
Tulip Ltd is planning to list on the local stock exchange within the next two years.
A High risk
B Low risk
Dhalia Ltd is currently facing financial difficulties and is seeking alternative forms of finance.
C High risk
D Low risk
3 A,C Given its intention to list on the stock exchange, Tulip Ltd may be motivated to show a
better picture of itself than that which exists, hence it is a high risk client. Dhalia Ltd is
also a high risk client given that it is seeking alternative forms of finance. It has the
incentive to show itself as a more healthy company than it actually is in order to attract
the finance it requires.
4 Which three of the following are benefits of an engagement letter in respect of assurance
services?
A Clearly defines the extent of the assurance provider’s responsibilities
B Provides written confirmation of the acceptance of the engagement
C Confirms the scope of the engagement
D Certifies the assurance provider’s opinion
4 A,B,C
The engagement letter does not contain any certification of the assurance provider’s
opinion. An engagement letter does serve the other purposes listed.
5 For each of the following factors present at a prospective client, select whether that factor
indicates that that client is high risk or low risk.
Company has prudent accounting policies
A High risk
B Low risk
Company carries out unusual transactions
C High risk
D Low risk
Company currently has no finance director
E High risk
F Low risk
5 B,C,E
Prudent accounting policies would constitute a low risk indicator as directors would
appear not to be aggressive in interpreting accounting policies in order to enhance the
performance portrayed by the financial statements.
A company carrying out unusual transactions would be high risk, as each transaction
would require a separate understanding leading to a higher risk of error.
Having no finance director is a high risk indicator – the staff in the function may not be
supervised and they may not have the skills or the knowledge to apply accounting
standards and address the key risks in the systems of the company
6 Which three of the following procedures should be carried out after the audit firm has
decided to accept appointment as auditor?
A Ensure that the outgoing auditors’ removal/resignation has been properly conducted
B Ensure that a resolution has been passed at the general meeting to appoint the new
auditors
C Perform checks to ensure that there are no legal or ethical reasons why the new audit
firm cannot act as auditor
D Submit a letter of engagement to the directors
6 A,B,D
Checks on legal and ethical restrictions should be performed before the appointment
is accepted. Once the appointment is accepted, legal and professional obligations
need to addressed, options A and B (as per Companies Act 2006) and option D as per
ISA 210, Agreeing the Terms of Audit Engagements.
7 For each of the following statements, select whether they are true or false in respect of the
audit engagement letter.
The engagement letter should be sent before acceptance of appointment.
A True
B False
The engagement letter should be sent after the appointment of the auditor but before the
commencement of the audit.
C True
D False
The engagement letter should be sent after the commencement of the audit but before the
signing of the auditor’s report.
E True
F False
An engagement letter should be sent to all new clients.
G True
H False
7 B,C,F, G
The engagement letter is essentially the contract between the client and the auditor
and therefore should be sent to all clients. It confirms acceptance of the appointment
by the auditor so must be issued after acceptance but before work is commenced.
8 Which one of the following correctly describes the period for which client identification
documents must be kept under money laundering regulations?
A For a minimum of five years and until five years have elapsed since the relationship
with the client has ceased
B For a minimum of seven years and until seven years have elapsed since the relationship
with the client has ceased
C For a minimum of five years and until seven years have elapsed since the relationship
with the client has ceased
D For a minimum of seven years and until five years have elapsed since the relationship
with the client has ceased
8 A The Money Laundering Regulations state that client identification documents must be
kept for a minimum of five years and until five years since the relationship elapses.
9 Which two of the following must be included in the engagement letter?
A The responsibilities of the auditor
B Arrangements regarding the planning and performance of the audit
C The form of any reports
D Basis on which fees are computed
9 A,C Arrangements regarding the planning and performance and the basis of the fee
calculation are not essential to be included in the engagement letter, whereas the
responsibilities of the auditor and the form of any reports must be included in the
engagement letter.
10 Which three of the following are purposes of a letter of engagement?
A Setting out the form of any report to be issued
B Providing constructive suggestions to management concerning improvements in
internal control
C Documenting and confirming acceptance of the appointment
D Narrowing the expectations gap
E Providing evidence on matters where other evidence is not expected to exist
10 A,C,D
The following are not purposes of an engagement letter:
providing constructive suggestions to management concerning improvements to
internal control
providing evidence on matters where other evidence is not expected to exist (eg,
on management plans for the future of the entity) – this is the purpose of a written
representation SAMPLE PAPER
11 Which one of the following best describes professional scepticism?
The assurance provider should:
A not believe anything that management tells him
B not believe anything that management tells him, without obtaining supporting
evidence
C apply a questioning mind to the information and evidence he obtains
D always assume the worst outcome in cases of uncertainty
11 C Apply a questioning mind to the information and evidence he obtains would indicate
professional scepticism. The alternative options offered are all a step too far.
12 Which two of the following must be included in the engagement letter?
A The scope of the audit
B The reporting framework that is applicable for the financial statements being prepared
C Details of client identification procedures to be performed in relation to Money
Laundering Regulations
D A statement that, in accordance with the Companies Act 2006, the auditor’s liability
cannot be restricted
12 A,B Verifying the client’s identity would be performed before the engagement letter is
prepared and signed.
The Companies Act 2006 does not stop auditors from making agreements with clients
to restrict their liability, so it would be incorrect to state this is in the engagement letter.
13 Ferenczi LLP is in the process of being appointed as auditor of two clients, Klein Ltd and
Breuer Ltd.
The predecessor auditor of Klein Ltd has gone into liquidation and cannot be contacted.
Can Ferenczi LLP accept the appointment as auditor of Klein Ltd?
A Yes
B No
The managing director of Breuer Ltd was not previously known to Ferenczi LLP. An enquiry
with Companies House has shown that she has a bankruptcy order.
Can Ferenczi LLP accept the appointment as auditor of Breuer Ltd?
C Yes
D No
13 A,D This is not an indication that there is anything that would prevent Ferenczi LLP from
acting as auditor, so the appointment may be accepted.
Being an undischarged bankrupt would prevent her from being a company director, so
the appointment should be declined
