Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

A) adequacy of the preplanned audit program.

B) ability to establish consistency in application of accounting principles between years.

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

D) All of these choices are correct.

A) the current financial health of the prospective client.

B) the integrity of management.

C) the CPA's overall engagement risk.

Evaluating a prospective client requires which of the following steps?

A) Communicate with the predecessor auditor.

C) Establish the terms of the engagement.

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:

D) whether the engagement should be accepted.

A) whether the predecessor's work should be utilized.

B) whether, in the predecessor's opinion, the financial statements are materially correct.

C) whether, in the predecessor's opinion, the company's internal controls have been satisfactory.

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

D) Facts that might bear on management integrity.

A) Analysis of balance sheet accounts.

B) Analysis of income statement accounts.

C) All matters of continuing accounting significance.

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

A) The prospective client's unwillingness to permit inquiry of its legal counsel.

B) The inability to review the predecessor auditor's documentation.

C) The CPA's lack of understanding of the prospective client's operations and industry

D) Indications that management has not investigated employees in key positions before hiring them.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if:

D) management fails to take the appropriate remedial action.

A) the payments violated the client's policies regarding the prevention of illegal acts.

B) the client receives financial assistance from a federal government agency.

C) documentation that is necessary to prove that the bribes were paid does not exist.

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

C) engagement letter and audit working papers.C) engagement letter and audit working papers.

D) It would not be typical to allow a review of either the engagement letter or the audit working papers.

Evaluating a prospective client requires which of the following steps?

C) Determine if the firm is independent of the client.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

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

A) The details of most recorded transactions are not available after a specified period of time.

B) Internal control activities requiring segregation of duties are subject to management override.

D) Management has a reputation for consulting with several accounting firms about significant accounting issues.

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

B) Management's disregard of its responsibility to maintain an adequate control environment.

A) The CPA's lack of understanding of the prospective client's internal auditor's computerassisted audit techniques.

C) The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions

D) Management's refusal to permit the CPA to perform substantive procedures before the yearend.

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

D) the prospective client's consent to make inquiries of the predecessor auditor

A) an understanding of the prospective client's industry and business.

B) the prospective client's signature on the engagement letter.

C) a preliminary understanding of the prospective client's control environment.

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

D) Inventory is comprised of precious stones.

A) Some items of factory and office equipment do not bear identification numbers.

B) Depreciation methods used on the client's tax return differ from those used on the books

C) Assets costing less than $500 are expensed even though the expected life exceeds one year.

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

C) discuss the timing of the audit procedures with the client's management.

A) identify specific internal control activities that are likely to prevent fraud.

B) evaluate the reasonableness of the client's accounting estimates.

D) inquire of the client's attorney as to any unrecorded claims.

An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes:

B) the auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.

A) management's responsibility to guarantee that there are no material misstatements due to fraud.

C) management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

D) the auditor's responsibility for the fairness of the financial statements.

A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n):

A) client representation letter.

Engagement letters include all of the following except:

B) a list of adjusting journal entries.

A) a list of additional services that will be provided.

C) information about the audit fee.

D) arrangements involving the use of specialists.

Which of the following matters generally is included in an auditor's engagement letter?

A) Management's responsibility for the entity's compliance with laws and regulations.

B) The factors to be considered in setting preliminary judgments about materiality.

C) Management's liability for illegal acts committed by its employees.

D) The auditor's responsibility to guarantee accuracy of the financial statements.

To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the:

C) audit committee of the board of directors.

All of the following refer to the competence of the internal audit function except:

A) the party in the entity to which the internal audit function reports.

B) the quality of internal audit documents and reports.

D) supervision and review of internal audit activities.

An independent auditor might consider the procedures performed by the internal audit function because:

B) they are employees whose work might be relied upon.

A) they are employees whose work must be reviewed during substantive testing.

C) their work impacts the cost/benefit tradeoff in evaluating inherent limitations.

D) their degree of independence may be inferred by the nature of their work.

As generally conceived, the audit committee of a publicly held company should be made up of:

D) members of the board of directors who are not officers or employees.

A) representatives of the major equity interests (preferred stock, common stock).

B) the audit partner, the chief financial officer, the legal counsel, and at least one outsider.

C) representatives from the client's management, investors, suppliers, and customers.

To emphasize auditor independence from management, publicly traded corporations are required to:

D) have the independent auditor report to an audit committee of independent members of the board of directors.

A) appoint a partner of the CPA firm conducting the examination to the corporation's audit committee.

B) establish a policy of discouraging social contact between employees of the corporation and the independent auditors.

C) request that a representative of the independent auditor be on hand at the annual stockholders' meeting.

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

D) understand the events and transactions that may have an effect on the client's financial statements.

A) make constructive suggestions concerning improvements to the client's internal control.

B) develop an attitude of professional skepticism concerning management's financial statement assertions.

C) evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.

Which of the following is an example of a related party transaction?

D) A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.

A) An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A.

B) A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor

C) A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A.

Which of the following would not necessarily be a related party transaction?

A) Sales to another corporation with a similar name.

B) Purchases from another corporation that is controlled by the corporation's chief stockholder.

C) Loan from the corporation to a major stockholder.

D) Sale of land to the corporation by the spouse of a director.

The existence of a related party transaction may be indicated when another entity:

B) absorbs expenses of the corporation under audit.

A) sells real estate to the corporation at a price that is comparable to its appraised value.

C) borrows from the corporation at a rate of interest which equals the current market rate.

D) lends to the corporation at a rate of interest which equals the current market rate.

In the context of an audit of financial statements, substantive procedures are audit procedures that:

C) may be either tests of details of transactions, tests of details of account balances, or analytical procedures.

A) may be eliminated under certain conditions.

B) are primarily designed to discover significant subsequent events.

D) will increase proportionately with an increase in the auditor's reliance on internal control.

Tolerable misstatement is:

D) materiality allocated to a specific account.

A) materiality allocated to an assertion.

B) materiality for the balance sheet as a whole.

C) materiality for the income statement as a whole.

Which of the following would an auditor most likely use in determining the auditor's overall materiality?

B) The entity's annualized interim (i.e., quarterly) financial statements.

A) The anticipated sample size for planned substantive procedures.

C) The results of the internal control questionnaire.

D) The contents of the management representation letter.

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

C) Firm policy sets materiality at 4% of pretax income.

B) The company is close to violating loan covenants.

D) A small misstatement would interrupt an earnings trend.

Which of the following is not a concern as to whether a misstatement is qualitatively material?

B) The misstatement is less than 5% of pretax income.

A) The misstatement hides a failure to meet analysts' expectations.

C) The misstatement increases management's compensation.

D) The misstatement changes a small amount of profit to a small reported loss.

In assessing the competence of the internal audit function, an independent CPA most likely would obtain information about the:

A) quality of the work of the internal audit function.

B) organization's commitment to integrity and ethical values.

C) influence of management on the scope of the internal audit function duties.

D) organizational levels to which the internal audit function reports.

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

D) Determining the extent of involvement of the client's internal audit function.

A) Perform detailed testing of the individual balance sheet accounts.

B) Examining documents to detect illegal acts having a material effect on the financial statements.

C) Considering whether the client's accounting estimates are reasonable in the circumstances.

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

B) how the results of various auditing procedures performed by the assistants should be evaluated.

A) that immaterial fraud is not to be reported to the client's audit committee.

C) how the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk.

D) how overall materiality was selected.

Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit?

D) Confirming purchases and sales transactions with the vendors and/or customers involved.

A) Reading "conflict-of-interest" statements obtained by the client from its management.

B) Scanning accounting records for large transactions at or just prior to the end of the period under audit.

C) Reading minutes of the Board of Directors meetings for authorization or discussion of material transactions.

Chapter 3

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Chapter 3

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The first phase of audit planning is risk assessment.

When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.

With few exceptions, the Code of Professional Conduct does not allow an auditor to disclose confidential client information without the client's consent.

If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor, the successor auditor should have reservations about accepting the client.

In order to properly preplan the audit, the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm.

If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas.

All companies must have an audit committee.

The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any accounting firm employed by a public company.

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

The engagement partner is typically responsible for doing the detailed audit testing.

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