Chp 1 Audit

1) A measure of how willing the auditor is to accept that the financial

statements may be materially misstated after the audit is completed and an
unqualified opinion has been issued is the:

A) inherent risk.

B)_acceptable audit risk

C) statistical risk.

D) financial risk.

2) A measure of the auditor’s assessment of the likelihood that there are

material misstatements in an account before considering the effectiveness of
the client’s internal control is called:

B) acceptable audit risk.

) statistical risk.

D) inherent_risk

A) controi risk.

3) In what order should the following steps occur?

B. understand the client’s business and industry

A. assess client business risk

C. perform preliminary analytical procedures

D. assess acceptable audit risk

D)D, C,B;A

B) B ADC

) BD,A, C

A)D,B, C A
4) The auditor uses knowledge gained from the understanding of the client’s
business and industry

To assess:

A) Client business risk

B) control risk.

C) inherent risk.

D) audit risk.

5) Initial audit planning involves four matters. Which of the following

Is not one of. These?

A) Deveiop an overali audit strategy

B) Request that bank balances be confirmed

C) Schedule engagement staff and audit specialists.

) dentify the client’s reason for the aydit

6) Rodgers CPA has requested permission to communicate with predecessor

auditor

In order to review certain work papers for high risk accounts for a new audit
client. The new audit clients refusal to allow this communication to occur
would impact Rodgers decision concerning

A) the auditor's ability to design audit tests

B) possible scope exception due to lack of access.

C)_ integrity of management concerning possible accounting misstatements

D) violation of the GAAP rules concerning consistency and comparability of

financial information

7) Which of the following is not correct regarding an auditor’s decision that a

lower acceptable audit risk is appropriate?
A) More evidence Is accumulated

B)_Less evidence is accumulated

C) Special care is required in assigning experienced staff

D) Review of audit documentation is performed by personnel not assigned to

the engagement.

8) A written understanding detailing what the auditors will do in determining

if the financial statements are fair representations of the company’s financial
statements and what the auditor

Expects from the client in performing an audit will normally be expressed in

the

A) management letter requested by the auditor,

B) engagement letter

C) Audit Plan,

D) Audit Strategy for the client.

9) If an auditor Is requested to perform non-audit services for a public

company audit client is responsible for agreeing to those services with the
audit firm?

Who

A) the client's management

B) the client’s chief executive officer

C) the client’s chief financial officer

D) the client’s audit committee

10) Which of the following statements is true rcgarding communications

between predecessor and
Successor auditors?

A) The burden of initiating the communication rests with che predecessor

B)_ The predecessor’s response can be imited to_stating that no information

will be provided

C) The predecessor should communicate with the successer only if the client
is public.

D) There must be communication between the predeccssor and successor if

the successor is to acc. Pt the

Engagement

11) 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 çan be facilitated

D) emphasize ranagement’s responsibility for approving the audit program

12) Written communication that the auditor will provide reasonable

assurance for the detectior of fraud is found in:

A_ engagement letter

B) representation letter. C) responsibility letter. D) client letter.

13) 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

14) The first standard of field work, which states that the work is to be
adequately planned and that assistants, if any, are fo be properly supervised,
recognizes that:

A) early appointment of the auditor is advantageous to the auditor and the

client

B) acceptance of an audit engagement after the close of the client’s fiscal

year is generally not permissible.

C) appointment of the auditor subsequent to the physical count of

inventories requires a disclain e: of opinion.

D) performance of substantial parts of the examination is necessary at

interim dates

15) An engagement letter sent to a publicly held audit client usually would
not include a:

A) reference to the auditor’s responsibility for the detection of errors or

irregularities.

B) estimation of the time to be spent on the audit work by audit staff and
management.

C)_statement that management advisory _services would be made available

upon request

D) reference to management’s responsibility for the financial statements.

16) Jennings and Company has repositioned the firm’s business strategy
from the basis of competing on costs to competing on product differentiation.
All the following will increase , except
A) Audit risk.

B) Business Risk. C) Financial risk.

D) Risk of Material Misstatements

17) 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 to evaluate whether to occept the _

engagement.

C) help the client by facilit ating the change of auditors

D) ensure the predecessor collects all unpaid fees prior to fa change in

auditor.

18) 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 wher:

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 Tega| problems between the client and the
_predecessor

D) the predecessor believes that the client lacks integrity.

19) Which of the foilowing best expresses the requirement to establish with
the client an understanding of ‘he responsibilities the auditor and company is
taking for the audit engagement?

A) Management asserts there are no materiai misstatements in the

financials.

B) Auditors assert that the primary audit goal is audit efficiency.

C) Auditors assert that their primnary respcisibility is to plan and perform the
audit in order to provide reasorable assurance as to the detection of materiai
misstatement duc to error or fraud

D) Management's assertian that they will provide t he auditor with a risk

assessment as to material misstarements

Due to errors or fraud ir the company’s financial statements.

20) Early appointment of the independent auditor will enable:

A) a more thorough examination to be performed

R) a proper study and evaluation of internal control to be performed.

C) sufficient competent evidential matter to be obtained

D) a more efficient examination to be planned

21) An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity should:

A) engage financial experts familiar with the nature of the business entity.

B)_ obtain a knowledge of matters that relate to the nature of the entity’s
business

C) refer a substantial portion of the audit to another CPA who will act as the
principal auditor.

D) first inform management that an unqualified opinion cannot be issued

22) In making client acceptance decisions the audit firm will consider:

A) inherent and control risk of the client.

C) the client’s business risk and the CPA Firm’s engagement risk

B) audit risk to the CPA Firm.

D) CPA Firm’s potential ongoing revenue from the audit client.

23) Most auditors assess inherent risk as high for related parties and related-
party transactions

Because:

A) of the unique classification of related-party transactions required on the

balance sheet

B) of the lack of independence between the parties

C) of the unique classification of related party transactions required on the

income statement.

D) it is required by generally accepted accounting principles

24) The audit team gathers information about a new client’s business and
industry ih order to obtain:

A) an understanding of the clients internal control system for financial

reporting

B)_ an understanding of how economic events and transactions have an

effect on the company’s

Financial statements

C) information about/engagement risk

D) information regarding whether the company is engaging in financial

statement fraud

25) The auditor determines that Mathews Company occupies the 3 rd floor of
an office tower for which it pays no rent

The most likely explanation is:

A) they got lucky the landlord hasn’t noticed the lack of payments

B) landlord has weak internal controls over billings:

C )related party transaction in which a major shareholder owns the office

tower.

D) Matthews Company is engaging in fraudulent activities

26) An official record of meetings of the board of directors and stockholders
is included in the corporate:

A) bylaws.

B) charter

C)_ minutes

D) license

27) Related party transactions may be indicated when another company:

A) Subsidizes certain operating expenses of the company

B) Purchases its securities at their fair value

C) Loans to company at market rates

D) Has had a distributor relationship with the company for 1o years

28) Which one of the following is not an inherent risk factor in the financial
statements?

A) The company made 3 acquistions during|the year in different lines of

business.

B) The company’s industry is experiencing downward pricing pressure for its

goods and services,

C_The company’s inventory _ because of multiple locations is difficult_to

count.

D) The company has hired 3 different chief accounting officers for the year.

29) An auditor should examine minutes of the board of directors’ meetings

B)_through _the date of the audit report.

A) through the date of the financial statements

D) on a test basis.

C) only at the beginning of the audit.

30) Which of the following would not likely be classified as Q related party
transaction?

A an advance of one week’s salary to an employee

B)s sales of merchandise between affiliated companies

C) loans or credit sales to the principal owner of the client company

D) exchangesc of equipment between tWo companies owned by the sare

person

31) Which of the following best describes the corporate minutes of an entity?

A) official record of the meetings of the board of directors and the

stockholders

B) unofficial record of the meeting of the board of directors

C) official record of management meeting with investors and creditors Of the

company

D) unofficial record of the board of directors meetings

32) An auditor searching for related party transactions should obtain an

understanding of each

Subsidiary’s relationship to the total entity because:

A) the business structure may be deliberately designed to obscure related

party transactions

B) this may reveal whether transactions would have taken place if the parties
had been unrelated

C) transactions may have been consummated on terms equivalent to arm’s-

length transactions

D) this may permit the audit of intercompany account balances to be

performed as of concurrent dates.
33) An auditor has accessed client business risk and the risk to material
misstatements to the clients financial statements. These are done in order
to:

A_ apply the audit risk model in determining the appropriate audit

procedures to penform

B) determine the reliance on the company’s internal control systems for

financial reporting

C) determinę the test of balances to be performed by the audit team.

D) assure the CPA firm that they can perform the audit effectively and
efficiently,

34) Which of the following statements is most correct concerning audit risk?

A) Audit risk can be quantified with a reasonable degree of certainty.

B) Audit risk cannot be quantified with certainty.

C) Audit risk is the same for all audit client in the same industry

D) Audit risk can be eliminated by having the correct audit procedures

35) During audit planning, the auditor uses analytical procedures primarily to

A) identify weaknesses in internal control.

B) determine if the company’s financial statements appear reasonable and

are free of material misstatement

C) determine the correspondence of the company’s financial statements to

the valuation and accuracy audit

Objectives

D) understand the client’s business and industry and to indicate possible

misstatements

36) Which of the following is most correct with respect to the use of
analytical proce dures?
A) Analytical procedures may be used in evaluating balances in the testing
phase as long as the auditor also uses

Them in assessing the going concern assumption

B) Analytical procedures must be used throughout the audit.

C) Analytical procedures used in the testing phase of the audit are primarily
used to direct an auditor’s attention so

That the auditor’s understanding of the business is improved.

D)_ Analytical procedures are_performed by_ studying_ plausible

relationships between financial and

Nonfinancial data.

37) Which of the following statements is not correct?

A) Analytical procedures used in the planning phase of the audit are

primarily directed at understanding the client’s business and directing
the auditor’s attention to areas that may contain possible
misstatements.

B)_ Analytical procedures used in the completion phase are primarily aimed
at assessing_ going concern_ and secondarily aimed at directing the
auditor’s attention to areas that may contain

Possible misstatements

B) Analytical proced ures must be used in the planning and completion

phases of the audit, and are optional in the testing phase,.

C) Analytical procedures used in the completion phase are primarily

aimed at directing the auditor’s attention to

Areas that may contain possible misstatements and secondarily aimed at

assessing going concern.
38) The major concern when using nonfinancial data in analytical procedures
is the:

A)_ accuracy of the nonfinancial data

C) type of nonfinancial deta

B) source of the nonfinancial data.

D) presence of multiple sources of nonfinancial data

39) Which of the following would not be classified as an analytical procedure?

A) Benchmarking the company’s profitability ratios against others in the

industry

B) Variance analysis of actual versus budgeted amounts for production

C) Reperforming the client’s depreciation expense using the client’s

accounting policies for capital expenditures

Made during the year.

D) Reconciling fixed asset dispositions with the fixed asset ledger

40) Which of the following statements is not correct with respect to analytical
procedures?

A) Auditing standards emphasize the need for auditors-to develop and use
expectations.

B) Analytical procedures must be performed throughout the audit.

C) Analytical procedures may-be performed at any time during the audit.

D) Analytical procedures use comparisons and relationships to assess

whether account balances appear reasonable.
41) When performing planning analytical procedures for a client the`auditor
detected that the gross profit percentage had declined by 50% from the
previous year to the year currently under audit. The

Auditor should:

A_ investigate the possibility the client may have made an error in their cost
of goods sold computation.

B) assist management in developing greater cost efficiencies in their product

line

C) prepare a going concern opinion for the client

D) advise the client to have extensive disclosure to alleviate investor

concerns

42) When are. Auditors likely to encounter judgment problems in the use of
analytical procedures?

A) Whenever the auditor places reliance on management’s explanations for

unusual fluctuations in account balances without first developing
independent expectations

B) Whenever the auditor allows unaudited balances to unduly influence

his/her expectations of current balances

C) Whenever the auditor fails to consider the pattern reflected by several

unusual fluctuations when trying to explain what caused them

D)_The auditor Is likely to encounter judgment problems in each of the above

instances