|
1 | | Which of the following factors most likely would cause an independent auditor to decide not to accept a new audit engagement? |
| | A) | The auditor's lack of understanding of the prospective client’s internal audit function’s audit plan. |
| | B) | Management's disregard of its responsibility to maintain an adequate internal control environment. |
| | C) | The auditor'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 auditor to perform substantive tests before the year-end. |
|
|
|
2 | | Which of the following statements is correct with regard to the predecessor- successor communications? |
| | A) | The successor auditor has no responsibility to contact the predecessor auditor. |
| | B) | The successor auditor should obtain permission from the entity before contacting the predecessor auditor. |
| | C) | The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact. |
| | D) | The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts. |
|
|
|
3 | | Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessors |
| | A) | Awareness of the consistency in the application of accounting principles between periods. |
| | B) | Evaluation of all matters of continuing accounting significance. |
| | C) | Opinion of any subsequent events occurring since the predecessors audit report was issued. |
| | D) | Understanding as to the reasons for the change of auditors. |
|
|
|
4 | | The preliminary engagement activities include all of the following except: |
| | A) | Determine the audit engagement team requirements. |
| | B) | Ensure that the audit team is independent. |
| | C) | Ensure that there is an independent audit committee. |
| | D) | Ensure that the audit firm is independent. |
|
|
|
5 | | When establishing an understanding with the entity regarding the terms of the engagement, all of the following should be discussed, except: |
| | A) | The engagement letter. |
| | B) | The internal audit function. |
| | C) | The audit committee. |
| | D) | The agreed upon limits on auditor liability for an improper audit. |
|
|
|
6 | | Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees? |
| | A) | They provide documentation of managements responsibility for the financial statements. |
| | B) | They document the audit fees and deadlines that have been agreed upon. |
| | C) | They communicate and clarify the expectations and responsibilities of both the auditee and the auditor. |
| | D) | They help to limit auditor liability in the event of misunderstandings. |
|
|
|
7 | | A written understanding between the auditor and the entity concerning the auditors responsibility for the discovery of non-compliance with laws and regulations is usually set forth in a(n) |
| | A) | Internal control letter. |
| | B) | Letter of audit inquiry. |
| | C) | Management letter. |
| | D) | Engagement letter. |
|
|
|
8 | | Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors? |
| | A) | The competence and objectivity of the internal audit function. |
| | B) | The materiality or significance of the accounts examined by the internal audit function. |
| | C) | The audit risk associated with the accounts examined by the internal auditors. |
| | D) | The nature of the audit software documentation used by the internal auditors. |
|
|
|
9 | | Which of the following would most likely indicate the existence of related parties? |
| | A) | Failing to write down inventory to market value just before year-end. |
| | B) | Depending on one or a few products for nearly all of a firms operating revenues. |
| | C) | Borrowing money at an interest rate substantially below the prevailing market rate of interest. |
| | D) | Selling goods to a major customer of your main competitor. |
|
|
|
10 | | For which laws and regulations does the auditor have the same responsibility as that for errors and fraud? |
| | A) | Laws and regulations that have an indirect effect on the determination of financial statement amounts. |
| | B) | Laws and regulations that have a material but indirect effect on the determination of financial statement amounts. |
| | C) | Laws and regulations that have a direct and material effect on the financial statements. |
| | D) | Laws and regulations that have a direct and material effect on the financial statements as well as laws and regulations that have material but indirect effect on the determination of financial statement amounts. |
|
|
|
11 | | During the initial planning phase of an audit, an independent auditor most likely would |
| | A) | Identify specific internal control activities that are likely to prevent fraud. |
| | B) | Evaluate the reasonableness of the entitys accounting estimates. |
| | C) | Discuss the timing of the audit procedures with the entitys management. |
| | D) | Inquire of the entitys lawyer if it is probable that any unrecorded claims will be asserted. |
|
|
|
12 | | When planning an audit, an auditor should |
| | A) | Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. |
| | B) | Determine overall materiality for audit purposes. |
| | C) | Conclude whether changes in compliance with prescribed internal controls justify reliance on them. |
| | D) | Prepare a preliminary draft of the management representation letter. |
|
|
|
13 | | Which of these statements concerning non-compliance with laws and regulations by clients is correct? |
| | A) | An auditors responsibility to detect non-compliance with laws and regulations that have a direct and material effect on the financial statements is the same as that for errors and fraud. |
| | B) | An audit in accordance with the international standards on auditing normally includes audit procedures specifically designed to detect non-compliance with laws and regulations that have an indirect but material effect on the financial statements. |
| | C) | An auditor considers non-compliance with laws and regulations from the perspective of the reliability of managements representations rather than their relation to audit objectives derived from financial statement assertions. |
| | D) | An auditor has no responsibility to detect non-compliance with laws and regulations by clients that have an indirect effect on the financial statements. |
|
|
|
14 | | The engagement partner reviews the work of engagement team members to evaluate which of the following? |
| | A) | The work was performed and documented. |
| | B) | The objectives of the procedures were achieved. |
| | C) | The results of the work support the conclusions reached. |
| | D) | All of the above are correct. |
|
|
|
15 | | Which of the following would NOT be a typical supervisory activity for an audit? |
| | A) | Perform detailed testing of the accounts payable account. |
| | B) | Inform engagement team of the nature, timing, and extent of audit procedures. |
| | C) | Review the work of other engagement team members. |
| | D) | Evaluate the results of the work and whether it supports the conclusions reached. |
|
|
|
16 | | Tests of controls include all of the following except: |
| | A) | Inspection of documents, files, etc. |
| | B) | Analytical procedures. |
| | C) | Walk-throughs. |
| | D) | Observation. |
|
|
|
17 | | A dual-purpose test is |
| | A) | A procedure that provides evidence about two different account balances at the same time. |
| | B) | A procedure that serves as both a test of control and a substantive test of transactions. |
| | C) | A procedure that provides evidence about two different accounting periods at the same time. |
| | D) | A procedure that serves as both a substantive test of transactions and a substantive test of balances. |
|
|
|
18 | | The concept of materiality as it applies to a financial statement audit |
| | A) | Relates primarily to the audit fees involved. |
| | B) | Generally involves less professional judgement for public companies. |
| | C) | Is determined, in part, based on how financial statement users may be influenced in making decisions. |
| | D) | Relates primarily to the quantity of audit procedures performed. |
|
|
|
19 | | According to the text, the first step in applying materiality to an audit is |
| | A) | To determine performance materiality for each account balance. |
| | B) | To determine a materiality level for the overall financial statements. |
| | C) | To aggregate the misstatements found in each account and determine their overall affect on the financial statements. |
| | D) | To ask management what constitutes a material amount in their business. |
|
|
|
20 | | Which of the following is not a qualitative factor that may affect an auditors establishment of materiality? |
| | A) | Potential for fraud. |
| | B) | The company is close to violating loan covenants. |
| | C) | Firm policy sets materiality at four per cent of profit before tax. |
| | D) | A small misstatement would interrupt an earnings trend. |
|
|
|
21 | | Performance materiality is |
| | A) | The amount of misstatement that management is willing to accept in the financial statements. |
| | B) | Materiality for the balance sheet as a whole. |
| | C) | Materiality for the income statement as a whole. |
| | D) | Materiality used to establish a scope for the audit procedures for the individual account balance or disclosures. |
|
|
|
22 | | When misstatements are greater than overall materiality, the auditor should |
| | A) | Require that the auditee adjust the financial statements. |
| | B) | Issue an unqualified opinion. |
| | C) | Modify the opinion if the auditee will not adjust the financial statements. |
| | D) | Both A) and C). |
|
|