Chapter 4: THE AUDIT PROCESS - Accepting an Engagement Flashcards by Ma. Isabella Beatrice

The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. the fairness of the financial statements in all material respects.
b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the accuracy of the balance sheet and income statement.

a. the fairness of the financial statements in all material respects.

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The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:
a. the auditor.
b. management.
c. both management and the auditor equally.
d. management for the statements and the auditor for the
notes.

b. management.

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Auditors accumulate evidence to:
a. defend themselves in the event of a lawsuit.
b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Securities and Exchange Commission.
d. enable them to reach conclusions about the fairness of the financial statements.

d. enable them to reach conclusions about the fairness of the financial statements.

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Management assertions are:
a. directly related to the financial reporting framework used by the company.
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the company’s financial condition.
d. provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

a. directly related to the financial reporting framework used by the company.

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This assertion addresses whether all transactions that should be included in the financial statements are in fact included.
a. Occurrence
b. completeness
c. rights and obligations
d. existence

b. completeness

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Which of the following is not one of the five broad categories of management assertions?
a. General or specific transaction objectives
b. Existence or occurrence
c. Valuation or allocation
d. Presentation and disclosure

a. General or specific transaction objectives

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Which of the following statements is not correct?
a. It would be a violation of the completeness assertion if management would record a sale that did not take place.
b. The completeness assertion deals with matters opposite from those of the existence assertion.
c. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included.
d. The existence assertion is concerned with inclusion of amount that should not have been.

a. It would be a violation of the completeness assertion if management would record a sale that did not take place.

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Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or Allocation
d. Rights and Obligation

b. Occurrence

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Which of the following statements is correct?
a. Existence relates to whether the amounts in accounts are understated.
b. Completeness relates to whether balances exist.
c. Existence relates to whether the balances are valid.
d. Occurrence relates to whether the amounts in accounts occurred in the proper year.

c. Existence relates to whether the balances are valid.

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Which of the following management assertions is not associated with transaction-related audit objectives?
a. Occurrence
b. Classification and understandability
c. Accuracy
d. Completeness

b. Classification and understandability

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An assertion that transactions are recorded in the proper accounting period is:
a. classification
b. accuracy
c. Occurrence
d. cut-off

d. cut-off

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The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed and recorded. The auditor is gathering evidence about which transaction related audit objective?
a. existence
b. completeness
C. accuracy
d. cut-off

C. accuracy

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In testing for cutoff, the objective is to determine:
a. whether all of the current period’s transactions are recorded.
b. whether transactions are recorded in the correct accounting period.
c. the proper cutoff between capitalizing and expensing expenditures.
d. the proper cutoff between disclosing items in footnotes or in account balances.

b. whether transactions are recorded in the correct accounting period.

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When the auditor examines the client’s documents and records to substantiate information on the financial statements, it is commonly referred to as
a. Inquiry
b. Confirmation
c. Vouching
d. Physical examination

d. Physical examination

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Which of the following statement is not correct?
a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives.
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
c. The cost of accumulating the evidence should be minimized.
d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

c. The cost of accumulating the evidence should be minimized.

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When the auditor uses tracing as an audit procedure for tests of transactions, the auditor is primarily concerned with which
audit objective?
a. Occurrence
b. Completeness
c. Cut-off
d. Classification

b. Completeness

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Which of the following is an example of vouching?
a. Trace inventory purchases from the acquisitions journal to supporting invoices
b. Trace selected sales invoices to the sales journal
c. Trace details of employee paychecks to the payroll journal
d. All of the above are examples of vouching

a. Trace inventory purchases from the acquisitions journal to supporting invoices

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A document which the auditor receives from the client, but which was prepared by someone outside the client’s organization, is a(n)
a. Confirmation
b. Internal document
c. External document
d. Inquiry

a. Confirmation

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In performing your audit for a privately-held firm your inquiries have yielded that one of the company’s owner’s primary motivations is to pay the least amount of income tax that is possible. Based on this observation which audit objective for ending inventory would the auditor be most concerned about ascertaining?
a. Completeness
b. Accuracy
C. Rights and obligations
d. Existence

C. Rights and obligations

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When the auditor used the audit procedure vouching, the auditor is primarily concerned with which of the following audit objectives when testing classes of transactions?
a. Occurrence
b. Completeness
c. Authorization
d. Classification

b. Completeness

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Traditionally, confirmations are used to verify
a. Individual transactions between organizations, such as sales transactions
b. Bank balances and accounts receivables
C. Fixed asset additions
d. All three of the above

a. Individual transactions between organizations, such as sales transactions

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After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on:
a. generally accepted auditing standards.
b. the Code of Professional Ethics.
C. PFRS.
d. the auditor’s professional judgment.

d. the auditor’s professional judgment.

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Which of the following audit procedures is used extensively throughout the audit and often is complementary to performing
other audit procedures?
a. Inspection
b. Observation
c. Inquiry
d. Confirmation

c. Inquiry

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Which statement is incorrect regarding Inquiry?
a. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence.
b. Responses to inquiries might provide information that differs significantly from other information that the auditor has obtained.
C. Responses to inquiries may provide a basis for the auditor to modify or perform additional audit procedures.
d. Inquiry alone is sufficient to test the operating effectiveness of controls.

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25. Observation a. Consists of looking at a process or procedure being performed by others. b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity. C. Is the process of obtaining a representation of information or of an existing condition directly from a third party. d. Is the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control.

a. Consists of looking at a process or procedure being performed by others.

This consists of checking the mathematical accuracy of documents or records. a. Reperformance b. Recalculation C. Confirmation d. Inspection

b. Recalculation

Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every: a. transaction b. financial statement account C. material financial statement account d. financial statement account that will be relied upon by third parties

C. material financial statement account

The sequence of steps in gathering evidence as the basis of the auditor's opinion is a. Substantive tests, documentation of control structure, and tests of controls b. Documentation of control structure, tests of controls, and substantive tests c. Documentation of control structure, substantive tests, and tests of controls d. Tests of controls, documentation of control structure, and substantive tests

b. Documentation of control structure, tests of controls, and substantive tests

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

c. To ensure that there is no misunderstanding with the client as to the terms of the engagement.

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. Evaluate compliance with ethical requirements, including independence. c. Establish an understanding of the terms of the engagement. d. Obtain understanding of the legal and regulatory framework applicable to the entity

b. Evaluate compliance with ethical requirements, including independence.

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

d. D, B,E, A,C

In making a decision to accept or continue with a client, the auditor should consider:

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. Preparing an engagement letter d. Making a preliminary estimate of materiality

Before accepting an engagement to audit a new client, a CPA is required to obtain a. A preliminary understanding of the prospective client's industry and business. b. The prospective client's signature to the engagement letter. c.An understanding of the prospective client's control environment. d. A representation letter from the prospective client.

Preliminary knowledge about the client's business and industry must be obtained prior to the acceptance of the engagement primarily to a. Determine the degree of knowledge and expertise required by the engagement. b. Determine the integrity of management. C. Determine whether the firm is independent with the client. d. Gather evidence about the fairness of the financial statements.

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

Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a. 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. b. 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. c. 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. d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

The purpose of the requirement in having communication between the predecessor and successor auditors is to: a. allow the predecessor to disclose information which would otherwise be confidential. b. help the successor auditor 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.

In an audit, communication between the predecessor and incoming auditor should be a. authorized in an engagement letter b. acknowledged in a representation letter C. either written or oral d. written and included in the working paper

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 predecessor's work. c. there are actual or potential legal problems between the client and the predecessor. d. the predecessor believes that the client lacks integrity.

Jenna, CPA, has been retained to audit the financial statements of JMV Co. JMV's predecessor auditor was Moshe, CPA, who has been notified by JMV that Moshe's services have been terminated. Under these circumstances, which party should initiate the communication between Jenna and Moshe? a. Jenna, the incoming auditor b. Moshe, the predecessor auditor c. JMV's controller. d. The chairman of JMV's board of directors 40. In an audit, communication between the predecessor and incoming auditor should be a. authorized in an engagement letter b. acknowledged in a representation letter C. either written or oral d. written and included in the working pape

Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Jin Corporation. Arnel plans to consult Von and to review Von's prior year working papers. Arnel may do so if 2. Von and Jin consent b. Jin consents c. Von consents d. Von and Arnel consent

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

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 the engagement, the predecessor auditor should a. State that he found material misstatements that the client would not revise b. Suggest that the incoming auditor ask the client c. Suggest that the incoming auditor obtain the client's permission to discuss the reasons d. Indicate that a misunderstanding occurred

Before accepting an engagement to audit a new client, a CPA is required to obtain a. An understanding of the prospective client's industry and business b. The prospective client's signature to the engagement letter. c. A preliminary understanding of the prospective client's control environment d. The prospective client's consent to make inquiries of the predecessor auditor, if any.

Before accepting an audit engagement, à successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's a. Opinion of any subsequent events occurring since the predecessor's audit report was issued b. Understanding as to the reasons for the change of auditors c. Awareness of the consistency in the application of PFRS between periods d. Evaluation of all matters of continuing accounting significance

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

What information should an incoming auditor obtain during the inquiry of the predecessor auditor prior to 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. Disagreement with management concerning auditing procedures IV. The effect of the client's internal audit function on the scope of the independent auditor's examination a. I and II b. I and III c. I and IV d. III and IV

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

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. Yes, Yes b. Yes, No C. No, Yes d. No, Yes

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

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

In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which are audited by Jell, require substantial revisions. Under these circumstances, Land should a.Notify Star's audit committee and stockholders that the prior year's financial statements cannot be relied on. b. Request Star to reissue the prior year's financial statements with the appropriate revisions. C. Notify Jell about the information and make inquiries about the integrity of Star's management d. Request Star to arrange a meeting among the three parties to resolve the matter

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

In making client acceptance decisions the audit firm will consider: a. inherent and control risk of the client. b. audit risk to the CPA Firm. c. the client's business risk and the CPA firm's engagement risk. d. CPA Firm's potential ongoing revenue from the audit client.

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's working paper analyses relating to Contingencies, Balance sheet accounts a. Yes, Yes b. yes, No c. No, Yes d. No, No

The purpose of an engagement letter is to: a. document the CPA firm's responsibility to external users of the audited financial statements. b. document the terms of the engagement. c. notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. d. emphasize management's responsibility for approving the audit program.

Before performing any audit procedures. The auditor and the client should agree on the Type of opinion to be expressed, Terms of the engagement a.Yes Yes b. No Yes c. No Yes d. Yes Yes

Engagement letters a. may be either oral or written. b. must be written. C. must be written and notarized. d. must be written if the client is regulated by the Securities and Exchange Commission.

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 auditing working papers b. engagement letter C. client representation letter d. comfort letter

Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in: a. engagement letter. b. representation letter. c. responsibility letter. d. client letter.

The auditor should document the understanding established with a client through a(n) a. Oral communication with the client b. Written communication with the client C. Written or oral communication with the client d. Completely detailed audit plan

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

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

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

Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent to the client. a. before the audit report is issued b. after the audit report is issued c. at the end of fieldwork d. before the commencement of the engagement

Which of the following matters is generally 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 explicit liability for illegal acts committed by its employees d. The auditor's responsibility to search for significant internal control deficiencies

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

70. Which of the following is not one of the principal contents of an engagement letter? a. objective of the financial statements b. unrestricted access to records and documents c. limitations of the engagement d. management's responsibility for the financial statements

An engagement letter should ordinarily include information on the objectives of the engagement and CPA's responsibilities Client's responsibilities Limitation of engagement a. Yes Yes Yes b. Yes No Yes c. Yes No No d. No No No

An engagement letter would not normally include a. billing arrangement b. arrangement concerning client's assistance c. details of the procedure that will be performed d. expectation of receiving a representation letter from management

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

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

Arrangements concerning which of the following are least likely to be included in engagement letter? a. auditor's responsibilities b. Fees and billing c. CPA investment in client securities d. Other forms of reports to be issued in addition to the audit report

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

The use of an engagement letter is the best method of documenting 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. I and II b. I and IV c. II and III d. III and IV

In a continuing engagement, the continuing auditor would most likely send a new, engagement letter. when a. there is a change in the partner assigned to the engagement b. there is a recent change in client's management 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.

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? a. Geographical location of the component. b. Legal requirements c. Degree of ownership by parent d. Degree of independence of component's management.

An audit process is a well-defined methodology for organizing an audit to ensure that a. The evidence gathered is both sufficient and competent b. All appropriate audit objectives are specified C. All appropriate audit objectives are met d. All of the above

If the auditor were responsible for making certain that all the assertions of management in the statements were correct. a. Bankruptcies could no longer occur b. Bankruptcies would be reduced to a very a small number C. Audits would be much easier to complete d. Audits would not be economically feasible.

Which of the following statements is true? a. The auditor's objectives follow and are closely related to management assertions b. Management's assertions follow and are closely related to the auditor's objectives c. The auditors primary responsibility is to find and disclose fraudulent management assertions d. Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts

Management assertions are a. Implied or expressed representations about classes of transactions and the related accounts in the financial statements b. Stated in the footnotes to the financial statements c. Explicitly expressed representations about the financial statements d. Provided to the auditor in the assertions letter, but are not disclosed on the financial statements

Which of the following statements about the existence and completeness objectives is not true? a. The existence and completeness objectives emphasize opposite audit concerns b. Existence deals with overstatements and completeness deals with understatements C. Existence deals with understatements and completeness deals with overstatements d. The completeness objective deals with unrecorded transactions

Only three management assertions are associated with transaction-related audit objectives. Which one of the following is not? a. Existence or occurrence b. Completeness C. Valuation or allocation d. Presentation and disclosure

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 client's permission prior to divulging information to the successor auditor d. The predecessor auditor may choose to provide a limited response to a successor auditor.

Investigation of new clients and reevaluation of existing ones is an essential part of deciding a. Inherent risk b. Whether to accept engagement C. Statistical risk d. Financial risk

Which of the following statement is not true? a. Balance-related audit objectives are applied to account balances b. Transaction-related audit objectives are applied to classes of transactions C. Balance-related audit objectives are applied to the ending balance in balance sheet accounts d. Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

In testing for cut-off, the objective is to determine a. Whether all of the current period's transactions are recorded b. Whether transactions are recorded in the proper period c. That no transactions of the current period have been delayed and recorded in a future period. d. That no transactions from the prior period are included in the current period's balances.

Which of the following is not one of the four phases in the audit process? a. Plan and design an audit approach b. Test controls and transactions C. Inform client of any adjustments or corrections to be made to the financial statements d. Complete the audit and issue the report. 88. 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 client's permission prior to divulging information to the successor auditor d. The predecessor auditor may choose to provide a limited response to a successor auditor. 89. Investigation of new clients and reevaluation of existing ones is an essential part of deciding a. Inherent risk b. Whether to accept engagement C. Statistical risk d. Financial ris

The purpose of an engagement letter is to a. Document the CPA firm's responsibility to external users of the audited financial statements b. Document the terms of the engagement to writing in order to minimize misunderstandings. C. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated d. All of the above

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

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. Predecessor auditor has poor relations with successor auditor b. Client is dissatisfied with predecessor's work C. There are legal problems between client and predecessor d. Predecessor believes that client lacks integrity