Exam 7: Accepting the Engagement and

Assessing a prospective client's legal and financial stability is a necessary part of the accept/reject decision. Which of the following situations would be of most concern to the auditor?

In accepting an engagement, an auditor takes on professional responsibilities to:

In evaluating a firm's independence with respect to a prospective audit client, it is not necessary to consider whether acceptance of the client would result in any conflicts of interest with other clients.

Because of the "deep pockets" trend in modern litigation, auditors should attempt to identify and reject prospective clients that pose a high risk of litigation.

Typically, the more able and experienced the personnel assigned to a particular engagement, the less is the need for direct supervision.

For a continuing client, evaluating the integrity of management is not considered necessary.

When considering whether to accept an engagement, the auditor should consider the implications for accepting the engagement if:

Concerning such matters as the integrity of management, errors, and illegal acts, the auditor should plan the audit with an attitude of:

John Anders, CPA, has worked three years for a regional CPA firm. His responsibilities have been limited primarily to working on retail store audits and their related tax problems. Due to the resignation of several staff members during the year and the addition of several new clients, the firm is badly understaffed. John's firm is asked on December 10 to do the audit of a construction company for the year ending December 31. The president of the construction company, who is under indictment for income tax fraud, apologized for the late timing of the invitation. He explained that another CPA firm had been fired on December 9 due to sloppy work and incompetence. The client states that it must have the audit report for the annual meeting of stockholders on January 25.The managing partner of the firm decides to accept the engagement. A major factor in the decision is that the firm does not have any clients in the construction industry and this will provide valuable experience. He promptly calls the president and accepts the audit. The managing partner assigns John to the audit with instructions to start immediately and do the best possible job within the specified time constraints. By working alone for long hours and weekends, John completes the audit on January 23 and submits his working papers and audit report to the managing partner for review. The partner carefully reads the audit report and congratulates John on a job well done. REQUIRED: A.What steps in accepting the engagement were violated? Explain. B.What auditing standard (s) was (were) violated in performing the audit? Explain.

An engagement letter constitutes a legal contract between the auditor and the client.

The main purpose of the engagement letter is to:

Auditor changes result from a variety of factors except:

What items are usually included in an effective engagement letter? Must a new engagement letter be prepared every year for a recurring engagement?

Generally accepted auditing standards require auditors to obtain an understanding of an entity's objectives, strategies and related business risks.

The auditor is most likely to reject the use of a specialist who:

In a recurring audit engagement, review of prior year's working papers is not desirable while planning the current year's engagement.

A typical engagement letter should contain the following comment: Because of the concept of reasonable assurance and because we will not perform a detailed examination of all transactions, there is a risk that:

Management and auditors use financial performance measures in different ways.

In the communication with the predecessor auditor, the potential successor should make specific and reasonable inquiries regarding matters that may affect the decision to accept the engagement. Which of the following items is least likely to be included in the inquiries?

SAS 73 covers the use of a specialist from inside the auditor's firm.