IAT22_M2

1. Before accepting an audit engagement, a successor auditor should make specific inquiries of
the predecessor auditor regarding *
a. The degree of cooperation the predecessor received concerning the inquiry of the client’s
lawyer
b. The predecessor’s evaluation of matters of continuing accounting significance
c. Disagreements the predecessor had with the client concerning auditing procedures and
accounting principles
d. The predecessor’s assessments of inherent risk and judgments about materiality

2. Which of the following factors most likely would cause a CPA to not accept a new audit
engagement? *
a. The CPA lacks an understanding of the prospective client's operations and industry
b. The prospective client is unwilling to make all financial records available to the CPA
c. The prospective client has already completed its physical inventory count
d. The CPA is unable to review the predecessor auditor's audit documentation

3. The auditor should design the written audit program so that *

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

4. The following are considered by a CPA firm in deciding whether to accept a new client, except  *
a. The client’s financial ability
b. The client’s probability of achieving an unqualified opinion
c. The client’s standing in the business community
d. The client’s relations with its previous CPA firm

5. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff
assistants *
a. What benefits may be attained by the assistants' adherence to established time budgets
b. How the results of various auditing procedures performed by the assistants should be
evaluated
c. That fraud is not to be reported to those charged with governance
d. Why certain documents are being transferred from the current file to the permanent file

6. As the acceptable level of detection risk decreases, the assurance directly provided from *
a. Tests of controls should decrease
b. Tests of controls should increase
c. Substantive tests should increase
d. Substantive tests should decrease

7. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected? *
a. Management has a reputation for consulting with several accounting firms about significant
accounting issues
b. It is unlikely that sufficient appropriate evidence is available to support an opinion on the
financial statements
c. Internal control activities requiring the segregation of duties are subject to management
override
d. The details of most recorded transactions are not available after a specified period of time

8. In relation to audit planning, the auditor should document the following: *

a. The overall audit strategy
b. The detailed audit plan
c. Significant changes made during the audit engagement
d. All of the above

9. An auditor should obtain sufficient knowledge of an entity's information system relevant to

financial reporting to understand the: *
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud

10. In using the work of a specialist, an auditor of a non-issuer may refer to the specialist in the
auditor's report if, as a result of the specialist's findings, the auditor *
a. Becomes aware of conditions causing substantial doubt about the entity's ability to continue as
a going concern
b. Desires to disclose the specialist's findings, which imply that a more thorough audit was
performed
c. Discovers significant deficiencies in the design of the entity's internal control that management
does not correct
d. Is able to corroborate another specialist's earlier findings that were consistent with
management's representations

11. An auditor is required to establish an understanding with a client regarding the services to be
performed for each engagement. This understanding generally includes *
a. The auditor’s responsibility for ensuring that the audit committee is aware of any significant
deficiencies in internal control that come to the auditor’s attention
b. The auditor’s responsibility for determining preliminary about materiality and audit risk factors
c. Management’s responsibility for errors and the illegal activities of employees that may cause
material misstatement
d. Management’s responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud

12. The work of internal auditors may affect the independent auditor's: I. Procedures performed in
obtaining an understanding of internal control; II. Procedures performed in assessing the risk of
material misstatement; III. Substantive procedures performed in gathering direct evidence.  *
a. I, II, and III
b. II and Ill only
c. I and II only
d. I and III only
13. If a change in the type of engagement from higher to lower level of assurance is not justified,
the auditor should *
a. Qualify the report on the original engagement
b. Continue with the revised engagement, but make explicit reference about the original
engagement
c. Refuse to agree to management’s request on the change of engagement and continue with
the original engagement
d. Withdraw from the engagement

14. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if *
a. Statistical sampling techniques were not used on the audit engagement
b. The fraud was perpetrated by one client employee, who circumvented the existing internal
controls
c. Accountants performing important parts of the work failed to discover a close relationship
between the treasurer and the cashier
d. The auditor planned the work in a hasty and inefficient manner

15. A retail entity uses electronic data interchange (EDI) in executing and recording most of its
purchase transactions. The entity's auditor recognizes that the documentation of the
transactions will be retained for only a short period of time. To compensate for this limitation,
the auditor most likely would *
a. Increase the sample of EDI transactions to be selected for cutoff tests
b. Plan to make a 100% count of the entity's inventory at or near the year-end
c. Decrease the assessed level of control risk for the existence or occurrence assertions
d. Perform tests several times during the year, rather than only at year-end

16. Reasons for discontinuing clients might include the following, except *
a. Client need for specialized services the current audit firm is unable or unwilling to provide
b. Inability to negotiate an acceptable increase in the audit fee
c. Difficulty in working with client personnel
d. Evidence indicating a client’s management has integrity

17. Which of the following is required documentation in an audit in accordance with generally
accepted auditing standards? *
a. An internal control questionnaire identifying controls that assure specific objectives will be
achieved
b. An audit plan setting forth in detail the procedures necessary to accomplish the engagement's
objectives
c. A flowchart or narrative of the information system relevant to financial reporting describing the
recording and classification of transactions for financial reporting
d. A planning memorandum establishing the timing of the audit procedures and coordinating the
assistance of entity personnel

18. 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 nature and timing of reports and other communication with the entity that are expected
under the engagement.
c. The effect of information technology on the audit.
d. The content of the representation letter.

19. Which of the following matters generally is included in an auditor's engagement letter? *
a. The auditor's responsibility to search for significant internal control deficiencies
b. The factors to be considered in setting preliminary judgments about materiality
c. Management's vicarious liability for illegal acts committed by its employees
d. Management's responsibility for the entity's compliance with laws and regulations

20.Is there a need to send a new engagement letter every year? *

a. Definitely yes
b. Definitely no
c. No need to send new engagement letter every year except when there are revisions in the
agreement or in the major parties to the agreement
d. There is a need to send a new engagement letter every year especially if there are mutual
understandings.

21. The existence of audit risk is recognized by the statement in the auditor's standard report that
the *
a. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements
b. Auditor obtains reasonable assurance about whether the financial statements are free of
material misstatement
c. Financial statements are presented fairly, in all material respects, in conformity with GAAP
d. Auditor is responsible for expressing an opinion on the financial statements, which are the
responsibility of management.

22. Which of the following procedures would an auditor most likely perform in planning a financial
statement audit? *
a. Inquiring of the client's legal counsel concerning pending litigation
b. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities
c. Comparing the financial statements to anticipated results
d. Examining computer generated exception reports to verify the effectiveness of internal
controls

23. 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. Procedures to be undertaken to discover litigation, claims, and assessments
b. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
c. Pending legal matters to be included in the inquiry of the client’s attorney
d. Timing of inventory observation procedures to be performed

24.The audit program usually cannot be finalized until the *

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

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

26. This refers to the development of a general strategy and a detailed approach for the expected
nature, timing and extent of audit refers to *
a. Audit planning
b. Supervision
c. Pre-engagement
d. Direction

27. What is the objective of an audit team during the planning stage? *
a. To determine the scope of the audit procedures to be performed
b. To be able to minimize the risk of material misstatement
c. To be able to determine the extent of tests of controls
d. To be able to produce the time budget

28. In obtaining an understanding of the entity and its environment, including its internal control, an
auditor is required to obtain knowledge about the *
a. Consistency with which the internal controls are currently being applied
b. Controls related to each principal transaction class and account balance
c. Design of relevant internal controls pertaining to financial reporting in each of the five internal
control components
d. Effectiveness of the internal controls that have been implemented

29. This type of materiality is used in scoping in and out-scoping line items to be audited. *
a. Performance Materiality
b. Overall Materiality
c. Account Balance Materiality
d. Planning Materiality

30. In determining the overall materiality, which of the following is the best choice for the audit
engagement? *
a. Lowest materiality
b. Highest materiality
c. Either lowest or highest, depending on the audit team
d. None of the choices

31. Consider the following statements: 1. Materiality is directly related to audit risk; the more
material the account balance or transaction, the higher is the audit risk needed hence, more
substantive tests and vice versa; 2. Materiality is directly related to detection risk; the more
material the account balance or transaction is, the lower the detection risk is present. *
a. Both statements are correct
b. Both statements are incorrect
c. Only one statement is correct
d. Only one statement is incorrect
32. When the auditors allocate the preliminary judgment about materiality to account balances, the
materiality allocated to any given account balance is referred to as *
a. Tolerable misstatement
b. The materiality range
c. Tolerable materiality
d. The error range
33. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or
division (component), which of the following factors need not be considered in deciding whether
to send a separate engagement letter to the component? *
a. Number of reports to be prepared during the peak audit season
b. Whether a separate audit report is to issued on the component
c. Legal requirements
d. Who appoints the auditor of the component

34. Analytical procedures used in planning an audit should focus on *

a. Assessing the adequacy of the available evidence
b. Providing assurance that potential material misstatements will be identified
c. Enhancing the auditor’s understanding of the client’s business
d. Reducing the scope of tests of controls, and substantive tests

35. If the auditor anticipates reliance on the client’s internal controls, the auditor would *
a. Eliminate the need for performance of substantive tests
b. No longer perform tests of controls and proceed immediately to substantive tests
c. Perform tests of controls and increase the amount of substantive tests
d. Test controls and use the results of testing as a basis for determining the nature, extent and
timing of substantive tests
36. If a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement *
a. Should refer to the original engagement in a separate paragraph preceding the opinion
paragraph
b. Should always refer to any procedures that may have been performed in the original
engagement
c. Should qualify the opinion due to a scope limitation
d. Omits reference to the original engagement
37. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed risk of material misstatement from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would:  *
a. Increase inherent risk
b. Decrease detection risk
c. Increase materiality levels
d. Decrease substantive testing

38. Of the following nonfinancial information, what would an auditor most likely consider in
performing analytical procedures during the planning phase of an audit? *
a. Turnover of personnel in the accounting department
b. Square footage of selling space
c. Management's plans to repurchase stock
d. Objectivity of audit committee members
39. In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the *
a. Selected audit techniques
b. Cost-benefit of gathering evidence
c. Timing of audit procedures
d. Financial statement assertions

40. In planning an audit of a new client, an auditor most likely would consider the methods used to
process accounting information because such methods *
a. Affect the auditor's preliminary judgment about materiality levels
b. Influence the design of internal control
c. Determine the auditor's acceptable level of audit risk
d. Assist in evaluating the planned audit objectives

41. Holding other planning consideration equal, a decrease in the amount of misstatement in a
class of transactions that an auditor could tolerate most likely would cause the auditor to  *
a. Decrease the extent of auditing procedures to be applied to the class of transactions
b. Perform the planned auditing procedures closer to the balance sheet date
c. Apply the planned substantive tests prior to the balance sheet date
d. Increase the assessed level of control risk for relevant financial statements assertions

42. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit? *
a. Coordinating the assistance of entity personnel in data preparation
b. Selecting a sample of vendor’s invoices for comparison to receiving reports
c. Reading the current year’s interim financial statements
d. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity

43. The establishment of the overall audit strategy involves *

a. Considering the important factors that will determine the focus of the engagement team’s
efforts
b. Determining the characteristics of the engagement that defines its scope
c. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required
d. All of the answers

44. Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be performed? *
a. Management fails to modify prescribed internal controls for changes in information technology
b. Internal control activities requiring segregation of duties are rarely monitored by management
c. Management is dominated by one person who is also the majority stockholder
d. There is a substantial risk of intentional misapplication of accounting principles

45. In allocating materiality, most practitioners choose to allocate to *

a. Other comprehensive income accounts
b. Equity accounts
c. Income statement accounts
d. Balance sheet accounts

46. The following factors affect the inherent risk at the financial statement level, except *
a. Management integrity
b. Management characteristics
c. Operating characteristics
d. Systemic characteristics
47. Risk assessment procedures include the following, except *
a. Confirmation of accounts receivable
b. Observation and inspection
c. Analytical procedures
d. Inquiries of management

48. Which of the following factors most likely would influence an auditor's determination of the
auditability of an entity's financial statements? *
a. The complexity of the information system relevant to financial reporting
b. The operating effectiveness of controls
c. The existence of related party transactions
d. The adequacy of the accounting records

49. Which of the following statements would least likely appear in an auditor's engagement letter?  *
a. After performing our preliminary analytical procedures we will discuss with you the other
procedures we consider necessary to complete the engagement
b. Our engagement is subject to the risk that material errors or fraud, including defalcations,
if they exist, will not be detected
c. During the course of our audit we may observe opportunities for economy in, or improved
controls over, your operations
d. Fees for our services are based on our regular per diem rates, plus travel and other out-of-
pocket expenses
50. Which of the following would an auditor most likely use in determining the auditor's preliminary
judgment about materiality? *
a. The contents of the management representation letter
b. The results of the internal control questionnaire
c. The anticipated sample size of the planned substantive tests
d. The entity's annualized interim financial statements