Week 4

Question 1

Which of the following forms of advertising is permissible?

Answer 1

Advertising that indicates the auditor’s educational and professional attainments.

Question 2

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

Answer 2

make enquiries of the predecessor auditor after obtaining the consent of the prospective client.

Question 3

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

Answer 3

Entity’s business risk.
Auditor’s engagement risk.
Integrity of management.

Question 4

A prospective client’s refusal to give permission to communicate with the previous auditor and review certain portions of the previous auditor’s working papers will bear directly on the auditor’s decision concerning the:

Answer 4

integrity of management.

Question 5

Enquiry of the previous auditor is:

Answer 5

required about matters that have a bearing on acceptance of the client.

Question 6

When an auditor is approached to perform an audit for the first time, the auditor should make enquiries of the previous 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 6

whether the engagement should be accepted.

Question 7

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

Answer 7

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

Question 8

Which of the following items should an auditor obtain from the previous auditor prior to accepting an audit engagement?

Answer 8

Facts that might bear on the integrity of management.

Question 9

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

Answer 9

The conclusion that the entity’s management probably lacks integrity.

Question 10

Engagement letters include all of the following except:

Answer 10

a list of adjusting journal entries.

Question 11

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

Answer 11

engagement letter.

Question 12

An audit firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:

Answer 12

enquiry of third parties, such as the prospective client’s bankers and solicitors, about information regarding the prospective client and its management.

Question 13

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

Answer 13

illegal act affects the auditor’s ability to rely on management representations.

Question 14

Prior to the acceptance of an audit engagement with a client who has terminated the services of the previous auditor, the proposed auditor should?

Answer 14

advise the client of the intention to contact the previous auditor and request permission for the contact.

Question 15

Audit planning:

Answer 15

Requires an understanding of the entity.

Question 16

Audit planning assists the auditor to:

Answer 16

Identify and resolve potential problems on a timely basis.
Devote appropriate attention to important areas of the audit.
Perform the audit effectively and efficiently.

Question 17

Which of the following situations would most likely require special audit planning by the auditor?

Answer 17

Inventory is comprised of precious gemstones.

Question 18

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

Answer 18

understand the events and transactions that may have an effect on the client’s financial report.

Question 19

An auditor searching for related-party transactions should obtain an understanding of each subsidiary’s
relationship to the total entity because:

Answer 19

the business structure may be deliberately designed to obscure related-party transactions.

Question 20

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

Answer 20

Verify proper evaluation of inventory subject to technological obsolescence.

Question 21

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

Answer 21

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

Question 22

Which of the following actions is the most likely first step that an auditor will perform after accepting an initial audit engagement?

Answer 22

Tour the client’s facilities and review the general records.

Question 23

Which of the following items is not an important consideration in an auditor’s evaluation of an entity’s business risk?

Answer 23

Auditing standards require the auditor to evaluate the entity’s business risk in order to provide suggestions to improve the entity’s profitability.

Question 24

An audit program should be designed for each individual audit and should include audit steps and procedures to:

Answer 24

ensure an efficient and effective audit.

Question 25

Which of the following would be included in the audit strategy document?

Answer 25

The decision as to the combination of substantive testing and tests of control that would be adopted.

Question 26

Time budgets on audit engagements are not used for which of the following reasons?

Answer 26

To ensure that audit staff working on the engagement are paid the correct amount.

Question 27

Analytical procedures used in planning an audit should focus on identifying:

Answer 27

areas that may represent specific risk relevant to the audit.

Question 28

Which of the following procedures is not a typical analytical procedure?

Answer 28

Comparison of recorded amounts of major disbursements with appropriate invoices.

Question 29

Analytical procedures may be classified as being primarily:

Answer 29

substantive tests.

Question 30

Analytical procedures are:

Answer 30

required for planning and overall review of the financial report.

Question 31

The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

Answer 31

income statement items.

Question 32

An example of an analytical procedure is the comparison of:

Answer 32

financial information with similar information regarding the industry in which the entity operates.

Question 33

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Answer 33

Relationships involving income statement accounts.

Question 34

Analytical procedures that are required in all audits of financial reports are analytical procedures:

Answer 34

used in the planning and overall review stages.

Question 35

In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

Answer 35

judgment by the auditor.

Question 36

An auditor compares this year’s revenues and expenses with those of the previous year and investigates all changes exceeding 10 per cent. By carrying out this procedure the auditor would be most likely to learn that:

Answer 36

the client changed its capitalisation policy for small non-current assets.

Question 37

Which of the following is not a benefit of analytical procedures?

Answer 37

Provides adjustments to error levels during tests of control.

Question 38

An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Answer 38

Unrecorded sales.

Question 39

One reason why the independent auditor performs analytical procedures of the client’s operations is to identify:

Answer 39

unusual transactions.

Question 40

The auditor is most likely to rely on analytical procedures alone if a balance is:

Answer 40

immaterial and internal controls are good.

Question 41

Significant unexpected differences identified by analytical procedures will usually necessitate?

Answer 41

investigation by the auditor.

Question 42

Which of the following is a nonfinancial performance measure?

Answer 42

Warranty rates.

Question 43

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of:

Answer 43

analytical procedures.

Question 44

The auditor notices significant fluctuations in key elements of the company’s financial report. If management is unable to provide an acceptable explanation, the auditor should:

Answer 44

perform additional audit procedures to investigate the matter further.

Question 45

An auditor would place most reliance on the results of analytical procedures when there is:

Answer 45

immaterial balance, low inherent risk, low control risk.