QUIZ 1 AT REVIEW

The use of management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted.

• Terms of audit engagement

• Preconditions for the audit

• Scope of the audit

• FS audit

Statement 1: If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so.

Statement 2: The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.

• Both statements are true.

• Both statements are false.

• Only statement 1 is true.

• Only statement 2 is true.

Preliminary arrangements agreed to and by the auditor and the audit client should be reduced to writing by the auditor. The best place to set forth these arrangements is in

• A memorandum to be placed in the permanent section of the auditing working papers.

• An audit engagement letter.

• A client representation letter.

• A confirmation letter attached to the constructive services letter.

It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before

• The performance of the substantive testing.

• The commencement of the engagement.

• The completion of the audit.

• Before the issuance of audit report.

On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when:

• There is a change in the auditors who will assist in the conduct of the audit.

• There is a legal requirement.

• There is a change in the client’s accounting policy for inventories.

• There is a change in the estimated life of the client’s property and equipment.

On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when:

• Any indication that the entry misunderstands the objective and scope of the audit.

• A change in the financial reporting framework adopted in the preparation of the financial statements or other reporting requirements.

• A significant change in ownership.

• All of the given choices.

An audit engagement letter least likely includes

• A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.

• Identification of specific audit procedures that the auditor needs to undertake.

• Description of any letters or reports that the auditor expects to submit to the client.

• Arrangements concerning the involvement of internal auditors and other client’s staff.

When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on the revised engagement.

• Should not contain a separate paragraph that refers to the original engagement.

• Should not refer to any procedures that may have been performed in the original engagement.

• Omits reference to the original engagement.

• All of the given choices.

Given that an audit in accordance with generally accepted auditing standards is influenced by the possibility of materials errors and fraud, the auditor should conduct the audit with an attitude of

• Professional responsiveness.

• Conservative advocacy.

• Objective judgment.

• Professional skepticism.

The risk that the auditor may unknowingly fail to appropriately modify the unmodified opinion in financial statements that are materially misstated is referred to as

• Audit risk

• Detection risk

• Information risk

• Business risk