Exercise

1) Evaluating a prospective client requires which of the following steps?
A) communicate with the predecessor auditor

B) preplan the audit
C) establish the terms of the engagement
D) none of these
2) An auditor inspects a document for proper authorization of a transaction and verifies a

transaction amount that is stated within the document. The auditor has performed a(n)
A) test of details.
B) substantive analytical procedure.
C) test of controls.
D) dual-purpose test
3) Which of the following should an 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 management integrity
4) Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
A) the prospective client's unwillingness to permit inquiry of its legal counsel
B) the inability to review the predecessor auditor’s documentation
C) the CPA's lack of understanding of the prospective client’s operations and industry
D) indications that management has not investigated employees in key positions before
hiring them
5) An auditor who discovers that a client’s employees paid small bribes to municipal officials
most likely would withdraw from the engagement if:
A) the payments violated the client’s policies regarding the prevention of illegal acts.
B) the client receives financial assistance from a federal government agency.
C) documentation that is necessary to prove that the bribes were paid does not exist.
D) management fails to take the appropriate remedial action.
6) A successor auditor should request the new client to authorize the predecessor auditor to
allow a review of the predecessor’s:
A) engagement letter.
B) audit working papers.
C) engagement letter and audit working papers.
D) it would not be typical to allow a review of either the engagement letter or the audit
working papers.
7) Evaluating a prospective client requires which of the following steps?

A) communicate with the SEC
B) preplan the audit
C) determine if the firm is independent of the client
D) communicate with the AICPA
8) Which of the following factors most likely would lead a CPA to conclude that a potential
audit engagement should be rejected?
A) The details of most recorded transactions are not available after a specified period of
time.
B) Internal control activities requiring segregation of duties are subject to management
override.
C) It is unlikely that sufficient appropriate evidence is available to support an opinion on
the financial statements.
D) Management has a reputation for consulting with several accounting firms about
significant accounting issues.
9) Which of the following factors most likely would cause a CPA to decide not to accept a new
audit engagement?
A) the CPA’s lack of understanding of the prospective client’s internal auditor’s
computer-assisted audit techniques
B) management’s disregard of its responsibility to maintain an adequate control
environment
C) the CPA’s inability to determine whether related party transactions were
consummated on terms equivalent to arm’s-length transactions
D) management’s refusal to permit the CPA to perform substantive procedures before
the year-end
10) 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 on 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.
11) Which of the following situations would most likely require special audit planning?
A) Some items of factory and office equipment do not bear identification numbers.
B) Depreciation methods used on the client's tax return differ from those used on the
books.
C) Assets costing less than $500 are expensed even though the expected life exceeds one
year.
D) Inventory is comprised of precious stones.
12) During the initial planning phase of an audit, a CPA most likely would:
A) identify specific internal control activities that are likely to prevent fraud.
B) evaluate the reasonableness of the client’s accounting estimates.
C) discuss the timing of the audit procedures with the client’s management.
D) inquire of the client’s attorney as to any unrecorded claims.
13) An auditor is required to establish an understanding with a client regarding the

responsibilities for each engagement. This understanding generally includes:
A) management’s responsibility to guarantee that there are no material misstatements
due to fraud.
B) the auditor’s responsibility to plan and perform the audit to provide reasonable, but
not absolute, assurance of detecting material errors or fraud.
C) management’s responsibility for providing the auditor with an assessment of the risk
of material misstatement due to fraud.
D) the auditor’s responsibility for the fairness of the financial statements.
14) A written understanding between the auditor and the client concerning the auditor’s
responsibility for the discovery of illegal acts is usually set forth in a(n):
A) client representation letter.
B) letter of audit inquiry.
C) management letter.
D) engagement letter.
15) Engagement letters include all of the following except:
A) a list of additional services, if any, that will be provided.
B) a list of adjusting journal entries.
C) information about the audit fee.
D) arrangements involving the use of specialists.

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1) Evaluating a prospective client requires which of the following steps?

A) communicate with the predecessor auditor

2) An auditor inspects a document for proper authorization of a transaction and verifies a

7) Evaluating a prospective client requires which of the following steps?

13) An auditor is required to establish an understanding with a client regarding the

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