UL INTEGRATED CPA REVIEW AU-7

2ND SEM SY 2021-2022

UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY
CPA REVIEW CENTER

AUDITING THEORY
Client Acceptance

Audit Process Model:

PHASE I: Client Acceptance
PHASE II: Planning the Audit
PHASE III: Testing and Evidence
PHASE IV: Evaluation and Reporting

PHASE I: CLIENT ACCEPTANCE

Objective Determine both acceptance of a client and acceptance by a client.
Decide on acquiring a new client or continuation of relationship with an existing one and the type and
amount of staff required.
Procedures 1. Evaluate the client’s background and reason for the audit.
2. Determine whether the auditor is able to meet the ethical requirements regarding the client.
3. Determine need for other professionals.
4. Communicate with predecessor auditor.
5. Prepare client proposal.
6. Select staff to perform the audit.
7. Obtain an engagement letter.

 Pre-engagement activities

1. The auditor should perform the following activities:

a. Perform procedures regarding the acceptance (in the case of initial audit) or continuance (in the case of current
audit) of the client relationship and the specific audit engagement.
b. On initial audit, communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
c. Evaluate compliance with ethical requirements, including independence.
d. Establish an understanding of the terms of the engagement.

2. The purpose of performing these preliminary engagement activities is to help ensure that the auditor has
considered any events or circumstances that may adversely affect the auditor’s ability to plan and perform the
audit engagement to reduce audit risk to an acceptably low level.

 Preconditions for an Audit

 In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;
(ii) For such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
(a) Access to all information of which management is aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
(b) Additional information that the auditor may request from management for the purpose of the audit;
and
(c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.

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UL INTEGRATED CPA REVIEW AU-7
2ND SEM SY 2021-2022

1. Which of the following factors would be most likely to cause a professional auditor in public practice to decline a new
engagement?
a. The prospective client has already completed its physical inventory count.
b. The auditor lacks understanding of the prospective client’s operations and industry.
c. The auditor is unable to review the predecessor auditor’s working papers.
d. The prospective client is unwilling to make all financial records available to the auditor.

2. In a financial statement audit, management is responsible for:

a. Providing staff to assist the auditor on the engagement.
b. Making all financial records and information available to the auditor.
c. Reporting to the audit committee.
d. Proposing adjusting journal entries based on the audit results.

3. Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to
acceptance?
a. Integrity of management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. All of the above must be discussed.

4. The auditor commences to understand the client and related risks of the organization for what purpose?
a. To determine the audit opinion that will be issued.
b. To determine the appropriate understanding of internal controls by management.
c. To determine the detection of audit procedures in the period under audit.
d. To determine whether the auditor has sufficient knowledge to perform the engagement.

5. Which of the following is typically not a significant factor that an auditor will consider in the client acceptance of
Stitch Magee Co.?
a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated for securities violations four years
earlier.
b. Stitch Magee Co. is a public company in the high technology industry.
c. Stitch Magee Co. is a manufacturing company that procures much of its raw materials from the Baguio
City.
d. Stitch Magee Co. sells 25% of its inventory to Nani, Inc. which is owned primarily by Nani Magee, the father of
Stitch Magee's treasurer, vice president of finance and 50% owner.

6. The auditor will utilize many resources to assess management integrity in the client acceptance process. Which of
the following will an auditor most likely refrain from using in this search?
a. predecessor auditor.
b. other professionals in the business community.
c. public databases.
d. All of the above will typically be used by an auditor in the search.

7. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding:
a. Disagreements the predecessor auditor had with the client concerning auditing procedures and
accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. Opinion on any subsequent events occurring since the predecessor auditor’s report was issued.
d. The predecessor’s assessments of inherent risk and judgments about materiality.

8. Which of the following matters is generally included in an auditor’s engagement letter?

a. Management’s liability for illegal acts.
b. The factors to be considered in setting judgments about audit risk.
c. Management’s responsibility for the entity’s financial statements.
d. Management’s responsibility to investigate internal control deficiencies.

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UL INTEGRATED CPA REVIEW AU-7
2ND SEM SY 2021-2022

9. Which of the following procedures would be an important measure to prevent “opinion shopping”?
a. Documenting the terms of engagement.
b. Communicating with the predecessor auditor.
c. Preparing client proposal.
d. Evaluating the client’s background.

10. JaNae Jones, CPA is proposing on a prospective audit engagement for White Quack Enterprises. After obtaining
written permission of White Quack, JaNae is required to perform what procedure prior to accepting it as a new
client?
a. Provide full disclosure of fees that will be billed to White Quack.
b. Contact the former auditor to ensure all disagreements have been resolved.
c. Contact the former auditor about certain matters of interest in JaNae's decision to accept White Quack
as a client.
d. Contact the former auditor to determine if all fees have been paid, the change in auditors have been approved
and integrity issues have been overcome.