AUDITING THEORY

AT. 04-Preliminary Engagement Activities

MULTIPLE CHOICE
1. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement activities
or pre-planning or pre-engagement phase?
a. Perform procedures regarding the continuance of the client relationship and specific 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.

2. 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 Yes Yes Yes No
properly
The integrity of client’s Yes Yes No Yes
management
That understanding of the Yes No Yes No
terms of engagement has
been obtained with the
management

3. The use by management of an acceptable financial reporting framework in the preparation of the financial statements
and the agreement of management and, where appropriate, those charged with governance to the premise on which
an audit is conducted.
a. Terms of audit engagement
b. Preconditions for the audit
c. Scope of the audit
d. FS Audit

4. If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms
of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an
opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement,
unless required by law or regulation to do so.

The auditor shall agree the terms of the audit engagement with management or those charged with governance, as
appropriate.
a. True, True
b. True, False
c. False, False
d. False, True

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

6. Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of
the engagement letters is to
a. Remind management that the primary responsibility for the financial statements rests with management
b. Provide a written record of the agreement with the client as to the services to be provided
c. Satisfy the requirements of the CPA’s liability for insurance policy
d. Provide a starting point for the auditor’s preparation of the preliminary audit program

7. When should an auditor obtain an engagement letter?

a. Whenever a prospective client offers to hire the audit firm
b. During the interim audit period, after the auditor has evaluated the client’s internal control and estimated the
amount of time required for the audit
c. When a new client is accepted by the auditor
d. At the conclusion of the field work, just prior to signing the audit report

8. It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before
a. The performance of substantive testing.
b. The commencement of the engagement.
c. The completion of audit.
d. Before the issuance of audit report.
9. 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.

10. The form and content of audit engagement letters may vary for each client, but they would generally include
reference to the following, except
a. The objective of the audit of financial statements.
b. Auditor’s responsibility for the financial statements.
c. The form of any reports or other communication of results of the engagement.
d. Unrestricted access to whatever records, documentation and other information requested in connection with the
audit.

11. Which of the following is not included in an engagement letter?

a. Restriction on cash balances, lines of credit by similar arrangements
b. Accessibility to all financial records
c. Client imposed limitation in the scope
d. Limitation in the scope of examination as imposed by circumstances

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

13. In determining audit fees, an auditor may take into account each of the following except
a. Volume and intricacy of work involved.
b. Degree of responsibility assumed.
c. Number and cost of manhours needed.
d. Size and amount of capital of client.

14. Retainer’s fee basis is when

a. Billing is done on the basis of actual time spent at the agreed rates/hour.
b. The client is charged on a per diem basis with a cap or ceiling amount.
c. The client is billed a fixed fee periodically for the services rendered during a designated period of time.
d. The client is billed at a single amount for the entire engagement.

15. A type of billing audit client which combines lump sum and per diem methods is known as
a. Retainer’s fee basis
b. Maximum fee basis
c. Either (a) and (b) above
d. None of the above

16. Which of the following factors do not influence the decision of the auditor to send a separate engagement letter to
the parent entity and its component (subsidiary, branch or division) assuming the same auditor handles both
entities?
a. legal requirements
b. degree of ownership by parent
c. ethical requirements
d. whether a separate audit report is to be issued on the component

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

18. On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might
decide to send a new letter when:
a. Any indication that the entity misunderstands the objective and scope of the audit.
B A change in the financial reporting framework adopted in the preparation of the financial statements or other
reporting requirements
c. A significant change in ownership
d. All of the above

19. When 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 not contain a separate paragraph that refers to the original engagement.
b. Should not refer to any procedures that may have been performed in the original engagement.
c. Omits reference to the original engagement.
d. All of the above
20. Which of the following would ordinarily be considered a reasonable basis for requesting a change in the engagement
a. a change in circumstances.
b. a misunderstanding as to the nature of the audit.
c. a restriction on the scope of the engagement, whether imposed by management or caused by circumstances.
d. Both a and b

21. The auditor should not agree for a change of engagement when there is no reasonable justification for doing so.

If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original
engagement, this will have an effect on the auditor’s report.
a. True, False c. True, True
b. False, False d. False, True

22. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement
and is not permitted to continue the original engagement?
I. Auditor should withdraw from the engagement
II. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances
necessitating withdrawal
a. I c. II
b. I, II d. Neither I nor II

23. In audit situation, communication between successor and predecessor auditors 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 papers

24. Pedro, CPA, is succeeding Maria, CPA, on the audit of Peta Manufacturing, Inc. Pedro plans to consult Maria and to
review Maria’s prior year working papers. Pedro may do so if
a. Maria consents
b. Peta Manufacturing, Inc. consents
c. Maria and Peta Manufacturing, Inc. consent
d. Maria and Pedro consent

25. 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
circumstances 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 will include procedures to verify
the reason given by the client for termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to provide 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.

26. 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.

27. Janie Jones, CPA is proposing on a prospective audit engagement for White Mountain Enterprises. After obtaining
written permission of White Mountain, Janie 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 Mountain.
b. Contact the former auditor to ensure all disagreements have been resolved.
c. Contact the former auditor about certain matters of interest in Janie’s decision to accept White Mountain 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.

28. 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 No

29. 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 internal 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.

30. 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.