Question 1

Which is usually included in an engagement letter?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)    A

Question 2

There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment.What are these reasons?

Accepted Answer

The three reasons are:
•Risks associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk.
•Certain inherent risks are typically common to all clients in certain industries.Familiarity with those risks aids the auditor in assessing their relevance to the client.
•Many industries have unique accounting requirements that the auditor must understand to evaluate whether the client's financial statements are in accordance with accounting standards.

Question 3

The audit team gathers information about a new client's business and industry in order to obtain:

Accepted Answer

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 control risk. 
D) information regarding whether the company is engaging in financial statement fraud. 
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 control risk. 
D) information regarding whether the company is engaging in financial statement fraud. B

Question 4

When are auditors likely to encounter judgment problems in the use of analytical procedures?

Accepted Answer

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. 
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.

Question 5

In what order should the following steps occur?
A.Assess client business risk
B.Understand the client's business and industry
C.Perform preliminary analytical procedures
D.Assess acceptable audit risk

Accepted Answer

A) D, B, C, A 
B) B, A, C, D 
C) B, D, A, C 
D) D, C, B, A 
A) D, B, C, A 
B) B, A, C, D 
C) B, D, A, C 
D) D, C, B, A

Question 6

Because of the lack of independence between related parties, the Sarbanes-Oxley Act prohibits all related party transactions.

Accepted Answer

A) True 
 B)False

Question 7

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

Accepted Answer

A) True 
 B)False

Question 8

Management is the primary source for identifying client business risks.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

Accepted Answer

A) Management asserts there are no errors, material or immaterial, in the general ledger. 
B) Auditors assert that the primary audit goal is audit efficiency. 
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. 
D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements. 
A) Management asserts there are no errors, material or immaterial, in the general ledger. 
B) Auditors assert that the primary audit goal is audit efficiency. 
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. 
D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

Question 10

All know related parties must be identified and included in the auditor's permanent files related to the client.

Accepted Answer

A) True 
 B)False

Question 11

Define the term "related party" and discuss why an auditor should identify the client's related parties early in the audit.

Accepted Answer

A related party is an affiliated company

Question 12

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

Accepted Answer

A) bylaws. 
B) charter. 
C) minutes. 
D) license. 
A) bylaws. 
B) charter. 
C) minutes. 
D) license.

Question 13

Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:

Accepted Answer

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

Question 14

Which of the following statements is true regarding communications between predecessor and successor auditors?

Accepted Answer

A) The burden of initiating the communication rests with the predecessor. 
B) The predecessor's response can be limited to stating that no information will be provided. 
C) The predecessor should communicate with the successor only if the client is public. 
D) The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor. 
A) The burden of initiating the communication rests with the predecessor. 
B) The predecessor's response can be limited to stating that no information will be provided. 
C) The predecessor should communicate with the successor only if the client is public. 
D) The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.

Question 15

When inherent risk is high, there will need to be:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 16

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

Accepted Answer

A) True 
 B)False

Question 17

When using financial ratios, the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

Accepted Answer

A) True 
 B)False

Question 18

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following normally signs the engagement letter for an audit of a private company?

Accepted Answer

A) Management 
B) Board of directors representative 
C) Audit committee representative 
D) Corporate treasurer 
A) Management 
B) Board of directors representative 
C) Audit committee representative 
D) Corporate treasurer

Question 20

Which of the following is a correct statement regarding analytical procedures?

Accepted Answer

A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B) Common-size financial statements display all items as a percentage change from a base year. 
C) Auditors should investigate the most significant differences between budgeted and actual results. 
D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances. 
A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. 
B) Common-size financial statements display all items as a percentage change from a base year. 
C) Auditors should investigate the most significant differences between budgeted and actual results. 
D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

Exam 8: Audit Planning and Analytical Procedures

Which is usually included in an engagement letter?

There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment.What are these reasons?

The audit team gathers information about a new client's business and industry in order to obtain:

When are auditors likely to encounter judgment problems in the use of analytical procedures?

In what order should the following steps occur? A.Assess client business risk B.Understand the client's business and industry C.Perform preliminary analytical procedures D.Assess acceptable audit risk

Because of the lack of independence between related parties, the Sarbanes-Oxley Act prohibits all related party transactions.

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

Management is the primary source for identifying client business risks.

Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm?

All know related parties must be identified and included in the auditor's permanent files related to the client.

Define the term "related party" and discuss why an auditor should identify the client's related parties early in the audit.

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

Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:

Which of the following statements is true regarding communications between predecessor and successor auditors?

When inherent risk is high, there will need to be:

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

When using financial ratios, the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

A tour of the client's facilities can help the auditor assess physical safeguards over assets and interpret accounting data related to assets such as factory equipment.

Which of the following normally signs the engagement letter for an audit of a private company?

Which of the following is a correct statement regarding analytical procedures?

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Materiality and Risk

Internal Control, Control Risk, and Section 404 Audits

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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