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Audit Planning

Multiple-Choice Questions
1.

Which of the following is not one of the three main reasons why the auditor
should properly plan engagements?
a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.

2.

Avoiding misunderstandings with the client is important for:


Good client relations
a.
b.
c.
d.

Yes
No
Yes
No

Facilitating high-quality work at a reasonable


cost
Yes
No
No
Yes

3.

A measure of how willing the auditor is to accept that the financial statements
may be materially misstated after the audit is completed and an unqualified
opinion has been issued is the:
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

4.

A measure of the auditors assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the
clients internal control is called:
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

5.

When inherent risk is high, there will need to be:

a.
b.
c.
d.
6.

A lower assessment of
audit risk
Yes
No
Yes
No

More evidence accumulated by the auditor


Yes
No
No
Yes

The auditor is likely to accumulate more evidence when the audit is for a
company:
Which
has
amounts of debt

large

Which is to be sold in the near future

a.
b.
c.
d.

Yes
No
Yes
No

Yes
No
No
Yes

7.

Which of the following is not typically included in initial audit planning?


a. Client acceptance/continuation decisions.
b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
d. Perform analytical procedures as substantive tests.

8.

Initial audit planning involves four matters. Which of the following is not one of
these?
a. Develop an overall audit strategy.
b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the clients reason for the audit.

9.

Most auditors assess inherent risk as high for related parties and related-party
transactions because:
a. of the unique classification of related-party transactions required on the
balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the
income statement.
d. it is required by generally accepted accounting principles.

10.

Which of the following is not correct regarding the communications between


successor and predecessor auditors?
a. The burden of initiating the communication rests with the predecessor
auditor.
b. The burden of initiating the communication rests with the successor
auditor.
c. The predecessor auditor must receive their former clients permission prior
to divulging information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a
successor auditor.

11.

A successor auditor may perform which of the following for a new audit client?

a.
b.
c.
d.

Speak to local
attorneys, banks and
other businesses
regarding the
companys reputation
Yes
No
Yes
No

Speak to the predecessor auditors about


disagreements they had with management
Yes
No
No
Yes

12.

Which of the following is not a potential effect of an auditors decision that a


lower acceptable audit risk is appropriate?
a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to
the engagement.

13.

It is easier and more common to implement increased evidence accumulation


for inherent risk than for acceptable audit risk because:
a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which
must be
accumulated.

14.
(SOX
)

If an auditor is requested to perform nonaudit services for a public company


audit client, who is responsible for agreeing to those services with the audit
firm?
a.
b.
c.
d.

The
The
The
The

clients
clients
clients
clients

management.
chief executive officer.
chief financial officer.
audit committee.

15.

Which of the following statements is true regarding communications between


predecessor and successor auditors?
a. The burden of initiating the communication rests with the predecessor.
b. The predecessors response can be limited to stating that no information
will be provided.
c. The predecessor should communicate with the successor only if the client
is public.
d. There must be communication between the predecessor and successor if
the successor is to accept the engagement.

16.

Investigating new clients with a focus on assessing the auditors potential


relationship with that new client is a critical element in determining:
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

17.

The purpose of an engagement letter is to:


a. document the CPA firms responsibility to external users of the audited
financial
statements.
b. document the terms of the engagement in writing to minimize
misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel
scheduling can be facilitated.

d.

emphasize managements responsibility for approving the audit program.

18.

One means of informing the client that the auditor is not responsible for the
discovery of all acts of fraud is the:
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.

19.

Which of the following normally signs the engagement letter for an audit of a
public company?
a. Corporate treasurer.
b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.

20.

Which of the following normally signs the engagement letter for an audit of a
private company?
a. Management.
b. Board of directors representative.
c. Audit committee representative.
d. Corporate treasurer.

21.

An understanding of a clients business and industry and knowledge about


operations are essential for performing an adequate audit. For a new client,
most of this information is obtained:
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the clients premises.

22.

The least effective method of identifying related parties for a public company
would be a(n):
a. inquiry of management.
b. review of SEC filings.
c. distribution of the engagement letter to all stockholders.
d. examination of stockholders listings to identify principal stockholders.

23.

An official record of meetings of the board of directors and stockholders is


included in the corporate:
a. bylaws.
b. charter.
c. minutes.
d. license.

24.

Which of the following is not likely to be a related party?


a. Affiliated companies.
b. A major stockholder of the company.
c. A warehouse employee.
d. The chief executive officer.

25.

Which of the following is most likely to occur at the beginning of an initial audit
engagement?
a. Prepare a rough draft of the financial statements and of the auditors
report.
b. Study and evaluate the system of internal administrative control.
c. Determine the clients reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to
discussing the
engagement with the client management.

26.

An
a.
b.
c.
d.

27.

The first standard of field work, which states that the work is to be adequately
planned and that assistants, if any, are to be properly supervised, recognizes
that:
a. early appointment of the auditor is advantageous to the auditor and the
client.
b. acceptance of an audit engagement after the close of the clients fiscal
year is generally not
permissible.
c. appointment of the auditor subsequent to the physical count of inventories
requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim
dates.

28.

The corporate minutes are the official record of the meetings of the board of
directors and stockholders.
The minutes typically include authorizations
related to:

a.
b.
c.
d.

auditor should examine minutes of the board of directors meetings:


through the date of the financial statements.
through the date of the audit report.
only at the beginning of the audit.
on a test basis.

The CPAs use of outside


specialists
Yes
No
Yes
No

Management compensation
Yes
No
No
Yes

29.

An engagement letter sent to an audit client usually would not include a(n):
a. reference to the auditors responsibility for the detection of errors or
irregularities.
b. estimation of the time to be spent on the audit work by audit staff and
management.
c. statement that management advisory services would be made available
upon request.
d. reference to managements responsibility for the financial statements.

30.

Which of the following is correct with respect to a companys corporate


charter?

a. The corporate charter is granted by the federal government and is required


to recognize the
corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a
corporation.
c. The corporate charter includes the exact name of the corporation, the date
of incorporation, and the types of business the corporation is authorized to
conduct.
d. The corporate charter must be annually reviewed by the PCAOB.
31.

Corporate bylaws include:

a.
b.
c.
d.

The types and amounts of


capital stock the corporation
is authorized to issue
Yes
No
Yes
No

The rules and procedures used to


operate the corporation
Yes
No
No
Yes

32.

In what order should the following steps occur?


A. Assess client business risk
B. Understand the clients business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.

33.

Which of the following statements is not correct with respect to analytical


procedures?
a. Auditing standards emphasize the need for auditors to develop and use
expectations.
b. Analytical procedures must be performed throughout the audit.
c. Analytical procedures may be performed at any time during the audit.
d. Analytical procedures use comparisons and relationships to assess whether
account
balances appear reasonable.

34.

The most widely used profitability ratio is the:


a. quick ratio.
b. profit margin.
c. return on assets.
d. earnings per share.

35.

The purpose of the requirement in SAS No. 84 of having communication


between the predecessor and successor auditor is to:
a. allow the predecessor to disclose information which would otherwise be
confidential.
b. help the successor auditor to evaluate whether to accept the engagement.
c. help the client by facilitating the change of auditors.

d.

ensure the predecessor collects all unpaid fees prior to a change in auditor.

36.

The predecessor auditor is required to respond to the request of the successor


auditor for information, but the response can be limited to stating that no
information will be provided when:
a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessors work.
c. there are actual or potential legal problems between the client and the
predecessor.
d. the predecessor believes that the client lacks integrity.

37.

Which of the following is correct with respect to the use of analytical


procedures?
a. Analytical procedures may be used in evaluating balances in the testing
phase as long as the auditor also uses them in assessing the going concern
assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily
used to direct an auditors attention so that the auditors understanding of
the business is improved.
d. Analytical procedures are performed by studying plausible relationships
between financial and nonfinancial data.

38.

Which of the following ratios is best used to assess a companys ability to meet
its long-term debt obligations?
a. Quick ratio.
b. Return on common equity.
c. Debt to equity.
d. Current ratio.

39.

Which of the following statements is not correct?


a. Analytical procedures used in the planning phase of the audit are primarily
directed at understanding the clients business and directing the auditors
attention to areas that may
contain possible misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at
assessing going
concern and secondarily aimed at directing the auditors
attention to areas that may
contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases
of the audit, and are optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at
directing the
auditors attention to areas that may contain possible
misstatements and secondarily aimed at assessing going concern.

40.

Which of the following would not likely be classified as a related-party


transaction?
a. An advance of one weeks salary to an employee.
b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of the client company.
d. Exchanges of equipment between two companies owned by the same
person.

41.

Which of the following would not be found in the corporate charter?


a. The kinds and amount of capital stock authorized.
b. The date of incorporation.
c. The types of business activity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stockholders.

42.

Which of the following would not usually be included in the minutes of the
board of directors?
a. The duties and powers of the corporate officers.
b. Declaration of dividends.
c. Authorization of long-term loans.
d. Approval of executive bonuses.

43.

When are auditors likely to encounter judgment problems in the use of


analytical procedures?
a. Whenever the auditor places reliance on managements explanations for
unusual
fluctuations in account balances without first developing
independent expectations.
b. Whenever the auditor allows unaudited balances to unduly influence
his/her expectations
of current balances.
c. Whenever the auditor fails to consider the pattern reflected by several
unusual fluctuations
when trying to explain what caused them.
d. The auditor is likely to encounter judgment problems in each of the above
instances.

44.

The major concern when using nonfinancial data in analytical procedures is


the:
a. accuracy of the nonfinancial data.
b. source of the nonfinancial data.
c. type of nonfinancial data.
d. presence of multiple sources of nonfinancial data.

45.

An auditor searching for related party transactions should obtain an


understanding of each subsidiarys relationship to the total entity because:
a. the business structure may be deliberately designed to obscure related
party transactions.
b. this may reveal whether transactions would have taken place if the parties
had been
unrelated.
c. transactions may have been consummated on terms equivalent to armslength
transactions.
d. this may permit the audit of intercompany account balances to be
performed as of
concurrent dates.

46.

The first standard of fieldwork requires, in part, that audit work be properly
planned. Proper planning as intended by the first standard of fieldwork would
occur when the auditor:
a. physically observes the movement of securities already counted to guard
against the substitution of such securities for others that are not actually on
hand.

b. uses negative accounts receivable confirmations instead of positive


confirmations because
the latter require mailing of second requests and
review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing timeconsuming cash cutoff
procedures.
d. eliminates the possibility of counting inventory items more than once by
arranging to make extensive test counts.
47.

Early appointment of the independent auditor will enable:


a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

48.

Whenever an auditor compares client data to client-prepared budgets, there


are two special concerns. Indicate if the two items below are concerns.

a.
b.
c.
d.

Assessing whether the


budgets were realistic
plans
A concern
Not a concern
A concern
Not a concern

Client data may have been altered to


conform to the budget
A concern
Not a concern
Not a concern
A concern

49.

An auditor who accepts an audit engagement and does not possess the industry
expertise of the business entity should:
a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entitys
business.
c. refer a substantial portion of the audit to another CPA who will act as the
principal auditor.
d. first inform management that an unqualified opinion cannot be issued.

50.

Which is a liquidity activity ratio?


a.
Profit margin
b.
Inventory turnover
c.
Return on assets
d.
Times interest earned

51.

Which is usually included in an engagement letter?


Estimate of hours
required to complete
audit
a.
Yes
b.
No
c.
Yes
d.
No

Dollar estimate of fees to be billed to


the client
Yes
No
No
Yes

52.

Which is usually included in an engagement letter?

a.
b.
c.
d.
53.

The financial
statements are the
responsibility of the
companys
management
Yes
No
Yes
No

Ratios to be used by the auditor in the


planning phase
Yes
No
No
Yes

Only if the specialist assisted in the audit of an


account material to the financial statements
Yes
No
No
Yes

Which is usually included in the engagement letter?


The projected type of
opinion on the financials
statement to be audited
a.
Yes
b.
No
c.
Yes
d
No

56.

Yes
No
No
Yes

When may the auditor refer to a specialist in the audit report?


Only if the specialists
report results in a
modification of the audit
opinion
a.
Yes
b.
No
c.
Yes
d
No

55.

A reference to GAAS

Which is usually included in an engagement letter?

a.
b.
c.
d
54.

A reference to
GAAP
Yes
No
Yes
No

Name(s) of the client personnel responsible for


supplying the auditor with information
Yes
No
No
Yes

Which is usually included in the engagement letter?


List of audit procedures to
be used in inventory
observation
a.
Yes
b.
No

The auditors assessment of Audit Risk


Yes
No

c.
d

Yes
No

No
Yes