Auditing Quiz No.

5 Accepting the Engagement and Planning the Audit

MULTIPLE CHOICE QUESTIONS

1. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor audit regarding:
a. The predecessor’s evaluation of matters of continuing accounting significance.
b. The predecessor’s assessment of inherit risk and judgement about materiality.
c. The degree of corporation the predecessor received concerning the inquiry of the
client’s legal counsel.
d. Disagreements which the predecessor had with the client concerning the inquiry of the
client’s legal counsel.

2. Before accepting an engagement to audit a client, a CPA is required to obtain

a. The prospective client’s signature to the engagement letter.
b. An understanding of the prospective client’s control environment.
c. A representation letter from the prospective client.
d. A preliminary understanding of the prospective client’s industry and business.

3. 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 auditor may
be able to provide the incoming auditor with information that will assist the incoming auditor in
determining
a. Whether the predecessor auditor’s work should be utilized.
b. Whether the engagement should be accepted.
c. Whether the company follows the policy of rotating its auditor.
d. Whether in the predecessor’s opinion the internal control of the company has been
satisfactory.
4. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Gather the evidence about the fairness of the financial statements.
b. Determine the degree of knowledge and expertise required by the engagement.
c. Determine whether the firm is independent with the client.
d. Determine the integrity of management.

5. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit
client would most likely include
a. Inquiry of third parties, such as the prospective client’s banker and attorneys, about
information regarding the prospective client and its management.
b. Inquiry of management as to whether disagreements between the predecessor auditor
and the prospective client were resolved satisfactorily.
c. Consideration of whether the internal control structure is sufficiently effective to permit
a reduction in the required substantive tests.
d. Consideration of whether sufficient competent evidential matter may be obtained to
afford a reasonable basis for an opinion.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

6. Prior to the acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should
a. Not communicate with the predecessor auditor because this would in effect be asking
the auditor to violate the confidential relationship between the auditor and client.
b. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding
that all information disclosed will be kept confidential.
c. Advise the client of the intention to contact the predecessor auditor and request
permission for the contact.
d. Accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination.

7. Bonjo, CPA, has been retained to audit the financial statements of Joven Co. Joven’s predecessor
auditor was Pamela , CPA, who has been notified by Joven that Pamela’s services have been
terminated. Under these circumstances, which party should initiate the communication
between Bonjo and Pamela?
a. The chairman of Joven’s board of directors.
b. Pamela, the predecessor auditor.
c. Joven’s controller.
d. Bonjo, the incoming auditor.

8. In an audit, communication between the predecessor auditor and incoming auditor should be
a. Written and included in the working papers.
b. Either written or oral.
c. Authorized in an engagement letter.
d. Acknowledge in a presentation letter.
9. Ram, CPA, is succeeding Rox, CPA, on the engagement Lang Corporation. Ramplans to consult
Rox’s prior year working papers. Ram may do so if
a. Rox consents.
b. Rox and Ram consent.
c. Rox and Lang consent.
d. Lang consents.

10. Upon discovering material misstatements in a client’s financial statements that the client would
not revise, the auditor withdrew from the engagement. If asked by the incoming auditor about
the termination of the engagement, the predecessor should
a. Suggest that the incoming auditor obtain the client’s permission to discuss the reasons.
b. Suggest that the incoming auditor ask the client.
c. State that he found material misstatements that the client would not revise.
d. Indicate that a misunderstanding occurred.

11. Before accepting an audit engagement, an incoming auditor should make specific inquiries of
the predecessor auditor regarding the predecessor’s
a. Understanding as to the reasons for the change of auditors.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

b. Opinion of any subsequent events occurring since the predecessor’s audit report was
issued.
c. Evaluation of all matters of continuing accounting significance.
d. Awareness of the consistency in the application GAAP between periods.

12. An incoming auditors most likely would make specific inquiries of the predecessor auditor
regarding
a. Disagreements with management as to auditing procedures.
b. Specialized accounting principles of the client’s industry.
c. The competency of the client’s internal audit staff.
d. The uncertainty inherent in applying sampling procedures.

13. Which of the following should an auditor obtain from the predecessor auditor prior to accepting
an audit engagement?
a. Facts that might bear on the integrity of management.
b. Analysis of income statement accounts.
c. Analysis of balance sheet accounts.
d. All matters of continuing accounting significance.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

14. What information should an incoming auditor obtain during the inquiry of the predecessor
auditor prior to the acceptance of the audit?
I. Facts that bear on the integrity of management.
II. Whether statistical or non-statistical sampling was used to gather evidence.
III. Disagreements with management concerning audit procedures.
IV. The effects of the client’s internal audit function on the scope of the independent auditor’s
examination.
a. III and IV
b. I and IV
c. I and III
d. I and II

15. Engagement letter that documents and confirms the auditor’s acceptance of the engagement
would normally be sent to the client
a. Before the commencement of the engagement.
b. Before the audit report is issued.
c. At the end of the fieldwork.
d. After the audit report is issued.

16. An engagement letter should ordinarily include information on the objectives of the
engagement and

CPAs responsibility Client’s responsibility Limitation of engagement

a. YES NO NO
b. NO NO NO
c. YES YES YES
d. YES NO YES

17. Which of the following would be least likely to be included in the auditor’s engagement letter?
a. Type of opinion to be issued.
b. Objectives and scope of the audit.
c. Forms of the report.
d. Extent of his responsibilities to his client.

18. Which of the following is not one of the principal contents of an engagement letter?
a. Unrestricted access to record and documents.
b. Objective of the financial statements.
c. Management’s responsibility for the financial statements.
d. Limitations of the engagement

19. An engagement letter would not normally include

a. Expectation of receiving a representation letter from management.
b. Details of the procedure that will be performed.
c. Billing arrangement.
d. Arrangement concerning client’s assistance.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

20. The audit engagement letter should generally include a reference to each of the following
except
a. The risk that material misstatements may remain undiscovered.
b. The expectation of receiving a written management representation letter.
c. A request for the client to confirm the terms of the engagement.
d. A description of the auditor’s method of sample selection.

21. After preliminary audit arrangements have been made, an engagement confirmation letter
should be sent to the client. The letter usually would not include
a. An estimate of the time to be spent on the audit work by audit staff and management.
b. A statement that management advisory services would be made available upon request.
c. A statement that a management letter will be issued outlining comments and
suggestions as to any procedures requiring the client’s attention.
d. A reference to the auditor’s responsibility for the detention of errors or irregularities.

22. Arrangement concerning which of the following are least likely to be included in engagement
letter/
a. Auditor’s responsibilities.
b. CPA investment in client securities.
c. Fees and billing.
d. Other forms of reports to be issued in addition to the audit report.

23. The use of an engagement letter is the best method of documenting the following except
I. The required communication of significant deficiencies in internal control structure
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue.
IV. Notification of any changes in the original arrangements of the audit.
a. III and IV
b. II and III
c. I and IV
d. I and II

24. In which of the following situations would the auditor be unlikely to send a new engagement
letter to a continuing client?
a. A significant change in the nature or size of the client’s business.
b. A recent change of client management.
c. A recent change in the partner and/or staff in the audit engagement.
d. A change in terms of the engagement.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

25. In a continuing engagement, the continuing auditor would most likely send a new engagement
letter when
a. There is a recent change in client’s management.
b. There is a change in the partner assigned to the engagement.
c. There are new accounting pronouncements affecting the client’s financial statements.
d. There are expected minor changes in the nature or size of the client’s business.

26. When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component); which of the following factors would least likely influence the auditor’s decision to
send separate letter to a component of a parent entity?
27. With respect to planning an audit, which of the following statements is always true?
a. An engagement should not be accepted after the client’s year-end.
b. An inventory count must be observed at year-end.
c. Final staffing decision must be made prior to completion of the planning stage.
d. It is acceptable to perform a portion of the audit of a continuing client at interim dates.

28. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed.
b. Procedures to be undertaken to discover litigation, claims, and assessments.
c. Pending legal matters to be included in the inquiry of the client’s attorney.
d. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.

29. The audit plan should (select the exception)

a. Be cost-beneficial.
b. Be flexible.
c. Precede performance of procedures.
d. Succeed action.

30. Which of the following is least likely considered by the auditor in establishing the overall audit
strategy and developing the audit plan?
a. Risk and materiality.
b. The involvement of other auditors in the audit of major subsidiaries.
c. The terms of payment pertaining to other auditors and their respective clients.
d. Understanding the accounting and internal control systems.

31. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting
estimates.
b. The content of the representation letter.
c. The effect of information technology on audit.
d. The nature and timing of reports and other communication with the entity that are
expected under the engagement.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

32. In relation to audit planning, the auditor should document the following:
a. Significant changes made during the engagement.
b. The detailed audit plan.
c. The overall audit strategy.
d. All of the answers.

33. This is the listing of all things which the auditor will use to gather sufficient appropriate audit
evidence:
a. Audit risk model.
b. Audit program.
c. Audit procedures.
d. Audit plan.

34. The auditor should design the written audit program so that:
a. The audit procedures selected will achieve specific audit objectives.
b. Substantive tests to prior to the balance sheet date will be minimized.
c. Each account balance will be tested under either tests of controls or tests of
transactions.
d. All material transactions will be selected for substantive testing.

35. The audit program usually cannot be finalized until the

a. Search for unrecorded liabilities has been performed and documented.
b. Reportable condition has been communicated to the audit committee.
c. Engage letter has been signed by the auditor and the client.
d. Consideration of the entity’s internal control has been completed.

36. Which of the following is the correct order of steps in the audit process?
A. Perform test of control.
B. Develop an overall strategy for the expected conduct and scope of the audit.
C. Obtains client’s written representation.
D. Prepare engagement letter.
E. Perform substantive tests.
a. D, B, E, A, C
b. D, B, C, A, E
c. D, B, A, E, C
d. D, A, B, E, C

37. Which of the following would an auditor least likely perform as part of the auditor’s preliminary
engagement activities?
a. Perform procedures regarding the continuance of the client relationship and the specific
audit engagement?
b. Obtain understanding of the legal and regulatory framework applicable to the entity.
c. Evaluate compliance with ethical requirements, including independence.
d. Establish an understanding of the terms of the engagement.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

38. Which of the following is not one of the reasons why auditor should perform preliminary
engagement activities?
a. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s
opinion on the financial statements.
b. To ensure that the auditor maintains the necessary independence and ability to perform
preliminary engagement.
c. To ensure that there is no misunderstanding with the client as to terms of the
engagement.
d. To help ensure that there are no issues with management integrity that may affect the
auditor’s willingness to continue the engagement.

39. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement.
b. Inquiring from predecessor auditor.
c. Making a preliminary estimate of materiality.
d. Preparing an engagement letter.

40. In making a decision to accept or continue with a client, the auditor should consider:
a b c d
Its competence YES YES YES YES
Its independence YES NO YES NO
Its ability to serve the client properly YES YES YES NO
The integrity of the client’s management YES YES NO YES

41. An incoming auditor should request the new client to authorize the predecessor auditor to allow
a review of the predecessor’s
Engagement letter Working paper
a. No Yes
b. No No
c. Yes Yes
d. Yes No

42. Which of the following factors most likely would cause an auditor not to accept a new
engagement?
a. An inability to perform preliminary analytical procedures before assessing control risk.
b. An inadequate understanding of the entity’s internal control structure.
c. Concluding that the entity’s management probably lacks integrity.
d. The close proximity to the end of the entity’s fiscal year.

43. Which of the following factors most likely influence an auditor’s determination of the
auditability of the entity’s financial statements?
a. The adequacy of the accounting records.
b. The complexity of the accounting system.
c. The existence of related party transactions.
d. The operating effectiveness of control procedures.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

44. Emmanne requested permission to communicate with the predecessor auditor and review
certain portions of the predecessor’s working papers. The prospective client’s refusal to permit
this will bear directly on Emmanne’s decision concerning the:
a. Integrity of management.
b. Apparent scope limitation.
c. Adequacy of the preplanned audit program.
d. Ability to establish consistency in application of accounting principles between years.

45. Before performing any audit procedures, the auditor and the client should agree on the

Type of opinion to be expressed Terms of engagement

a. Yes Yes
b. Yes No
c. No Yes
d. No No

46. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the audit working papers.
b. Engagement letter.
c. Comfort letter.
d. Client representation letter.

47. The objective and the scope of the audit and the extent of the auditor’s responsibilities to client
are best documented in:
a. Independent auditor’s report.
b. Client’s representation letter.
c. Audit program.
d. Audit engagement letter.

48. Engagements letter are widely used in practice for:

a. Assurance engagement only.
b. Audits only
c. Professional engagements of all types.
d. Related services only.

49. The primary purpose of the engagement letter is to:

a. Satisfy the requirements of the CPA liability insurance policy.
b. Remind management that the primary responsibility for the financial statements rests
with management.
c. Provide a written record of the agreement with the client as to the services to be
provided.
d. Provide a starting point for the auditor’s preparation of the preliminary audit program.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

50. Which of the following is (are) valid reason why an auditor sends to his client an engagement
letter?
a. b. c. d.
To ensure CPAs compliance to PSA Yes No No Yes
To document the objective and scope of the audit Yes Yes Yes Yes
To confirm the auditor’s acceptance of the appointment Yes Yes Yes No
To avoid misunderstanding with respect to engagement Yes Yes No Yes

51. If an auditor believes that an understanding with the client has not been established, he should
ordinarily
a. Perform the audit with increased professional skepticism.
b. Modify the scope of the audit to reflect an increased risk of material misstatement due
to fraud.
c. Decline to accept or perform the audit.
d. Assets the control risk at the maximum level and perform a preliminary substantive
audit.

52. In developing a preliminary audit strategy, an auditor should consider

a. Findings from substantive tests performed at interim dates.
b. Potential risks of material misstatement.
c. Only when there is a material misstatement in the financial statements.
d. Whether the inquiry of the client’s attorney identifies any litigation, claims, or
assessments not properly disclosed in the financial statements.

53. After client acceptance, the terms of the engagement are agreed by the auditor with the client.
The objective and scope of the audit and the extent of the auditor’s responsibilities to the client
are best documented in:
a. Independence auditor’s report.
b. Engagement letter.
c. Client’s representation letter.
d. Comfort letter.

54. Audit programs should be designed so that

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to managements.
d. The audit evidence gathered supports the auditor’s conclusions.

55. An engagement letter is prepared with the interest(s) of ___________ in mind.

a. The auditor.
b. The client.
c. The Public.
d. Both the client and the auditor.

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Auditing Quiz No.5 Accepting the Engagement and Planning the Audit

56. The engagement letter will do one, some, or all of the following:

a. b. c. d.
1. State whether the CPA will perform audit, review or Yes Yes Yes Yes
compilation services.
2. State whether the CPA will perform tax or Yes Yes No Yes
management advisory or other services.
3. State any restriction to be imposed on the CPA’s No Yes Yes Yes
work.
4. Identify deadlines for completing the work. Yes Yes No Yes
5. State the amount and type of work to be done by No No Yes Yes
client’s personnel in generating auditor’s work papers.

57. Preliminary arrangements agreed to by the auditor and the client should be related to writing by
the auditor. The best place to set fourth these arrangements is in.
a. A memorandum to be placed in the permanent section of the auditing working papers.
b. An engagement letter.
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.

58. In designing written audit programs, an auditor should establish specific audit objectives that
relate primarily to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected and techniques.
d. Financial statement assertions.

59. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
a. Methods of statistical sampling to be used in confirming accounts receivable.
b. Pending legal matters to be included in the inquiry of the client’s attorney.
c. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
d. Schedules and analyses to be prepared by the client’s staff.

60. In obtaining an understanding of an entity’s internal control policies and procedures that are
relevant to audit planning, and auditor is required to obtain knowledge about the
a. Steadiness with which the policies and procedures are currently being applied.
b. Effectiveness of control procedures related to each principal transaction class and
account balance.
c. Design of the policies and procedures pertaining to the internal control components.
d. Effectiveness of the policies and procedures that have been placed in operation.

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