Deck 8: Client Evaluation and Planning the Audit

Question 1

The reliance on client internal audit personnel on the audit is:

A) strictly prohibited by professional standards.
B) acceptable whenever a client has employed them.
C) acceptable if the auditor reviews and tests their work.
D) acceptable if the auditor re-performs all their work.

Answer 1

C

Question 2

In the investigation of a potential new client, if the client refuses to give permission to inquire of the existing auditor, or if the existing auditor does not respond fully, the prospective auditor should:

A) consider the implications in making the acceptance or rejection decision.
B) not accept the engagement.
C) request a CPA Australia/ICAA-sanctioned peer review of the predecessor.
D) request assistance from the ASIC.

Answer 2

B

Question 3

Which of these would not be part of a typical audit team?

A) an audit partner.
B) an audit manager.
C) internal auditors.
D) an audit senior.

Answer 3

C

Question 4

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

A) the public.
B) the client.
C) the client and the public.
D) the public, the client, and other members of the profession.

Question 5

The auditor should regularly evaluate clients in respect of specified events to determine whether to continue the relationship. Which of the following is not a specified event that should prompt an evaluation?

A) the expiration of a time period.
B) a significant change in the business.
C) a change in the audit partner.
D) the existence of conditions that would lead that auditor to reject a client had those conditions existed at the time of the initial acceptance of the audit engagement.

Question 6

The initial phase of a financial statement audit involves the acceptance decision for the client in question. Which of the following is not a consideration during this phase of the audit:

A) ethical considerations.
B) client evaluation.
C) preparation of the engagement letter.
D) determining the existence of related parties.

Question 7

Which of these is not an example of an expert as defined by ASA 620 (ISA 620)?

A) actuaries.
B) internal auditors.
C) appraisers.
D) all are examples of experts as defined by ASA620/ISA620

Question 8

Setting materiality levels, assessing audit risk and its components and obtaining an understanding of the internal control structure are all part of which audit stage?

A) client evaluation.
B) audit planning.
C) collecting audit evidence
D) issuing the audit report.

Question 9

When assessing the industry conditions of a client, which of the following would not normally be assessed?

A) the market for the client's products.
B) competitors.
C) price competition.
D) economy-wide factors.

Question 10

In assessing independence, an audit firm may do which of the following?

A) decline the engagement due to a lack of independence.
B) circulate the name of a prospective client to staff to identify any relationships inconsistent with independence.
C) complete a professional independence questionnaire.
D) all of the above.

Question 11

Which of the following is not normally found in the audit engagement letter?

A) a disclaimer on detecting all material irregularities.
B) the objective or purpose of the audit.
C) a space for the client's approving signature.
D) the use of binding arbitration in the case of a dispute.

Question 12

A common fee structure for audit engagements is:

A) fixed fee from a tendering process.
B) contingent fee.
C) daily charge-out rates plus expenses.
D) out-of-pocket plus normal profit.

Question 13

In the investigation of a potential new client, besides inquiring of the existing auditor, the prospective auditor should make inquires of other third parties. Which of the following is least likely to be included in this inquiry?

A) legal advisers/solicitors.
B) bankers.
C) customers.
D) the chamber of commerce.

Question 14

Which of the following is not a consideration in the planning phase of the audit?

A) obtaining an understanding of the entity's business and industry.
B) assessing competence to perform the audit.
C) considering audit risk.
D) making preliminary judgements about materiality levels.

Question 15

The main purpose of the audit engagement letter is to:

A) avoid litigation.
B) confirm the terms of the engagement.
C) outline the cost of the audit
D) all of the above.

Question 16

Which of these is not an ethical consideration for the auditor in deciding whether to accept an audit engagement?

A) identifying intended users of the audited financial statements.
B) evaluate circumstances that would compromise their independence.
C) assessing their competence to perform the audit.
D) determine their ability to use due care in performing the audit.

Question 17

Which of these steps in planning the audit is out of sequence?

A) obtaining an understanding of the entity's internal control structure.
B) obtaining an understanding of the entity and its environment.
C) making preliminary judgements about materiality levels.
D) considering the audit risk

Question 18

Before accepting an engagement, the auditor should identify special circumstances and unusual risks. Which of these conditions is not directly part of a review of such a circumstance or risk?

A) reviewing industry and economic data.
B) identifying intended users of the audited financial statements.
C) assessing a prospective client's legal and financial stability.
D) evaluating the entity's auditability.

Question 19

All of the following are ways in which an auditor can assess the integrity of management except:

A) arranging a police search on the police confidential data base
B) making enquiries of third parties.
C) communicating with the previous auditor.
D) considering previous experience with the client's management.

Question 20

Concerning errors, irregularities and illegal acts, the auditor should plan the audit with an attitude of:

A) cautious mistrust.
B) seasoned pessimism.
C) professional scepticism.
D) adversarial pursuit.

Question 21

Auditors must consider whether there are any fraud risk factors present when they are obtaining an understanding of the entity and its environment. Which of the following is not considered a fraud factor?

A) incentives/pressures.
B) attitudes/rationalisation.
C) opportunities.
D) length of employment.

Question 22

When obtaining knowledge about the entity's objectives and strategies and the related business risks, an auditor should consider:

A) industry developments.
B) new products and services.
C) expansion of the business.
D) all of the above.

Question 23

Which of these best describes the auditor's planning responsibilities concerning related parties?

A) review procedures for identifying related parties.
B) identify the existence of related parties
C) obtain a list of all board members and place in the working papers.
D) investigate the background of all related parties.

Question 24

When auditing for fraud the auditors should do all of the following except:

A) consider any unusual or unexpected relationships that have been identified in performing analytical procedures.
B) conduct a brainstorming session to discuss the risk of fraud.
C) only investigate areas where all three fraud risk factors are present.
D) examine journal entries and other adjustments for evidence of possible material fraud.

Question 25

Which of these would not normally be included in the permanent file portion of the working papers?

A) extracts or copies of the company replaceable rules.
B) a copy of prior years' working trial balances.
C) analysis of accounts that are important to the audit each year.
D) analytical review schedules from previous years.

Question 26

A high risk condition for the fraud risk factor 'opportunity' would be:

A) known or expected future layoffs
B) that the company is close to its debt covenants.
C) behavior indicating displeasure or dissatisfaction with the company or its treatment of an employee
D) large amounts of cash on hand.

Question 27

Knowledge of the entity's financing activities includes understanding the entity's:

A) debt structure.
B) inventory management policies
C) location of property, plant and equipment.
D) all of the above

Question 28

The purpose of using analytical procedures in auditing is to:

A) identify inefficiencies in operations.
B) test internal controls.
C) identify unexpected fluctuations and relationships.
D) none of the above.

Question 29

Working papers provide all of the following except:

A) evidence that the audit was properly planned and carried out.
B) a means of supervising the audit.
C) the principal support for the financial statements.
D) support for the conclusions reached.

Question 30

Williams, Sparks and Kent audit partners have been conducting the audit for Just Fine Ltd, an importer of fine chocolate. The auditors have requested the clients accounting staff to prepare some of the schedules and analyses. Who retains the property rights for these working papers?
A) ASIC, as all working papers must be lodged with them.

A) the auditors, as they are the independent contractors.
B) Just Fine Ltd, as it is their staff who performed the work.
B) the accounting staff, as they are acting as agents.

Question 31

Which of these would be considered an audit adjusting entry?

A) a significant amount of inventory was found which had not been included in the accounts and subsequently was identified by the auditors.
B) payroll owing for the last five days of the financial year was recorded by management.
C) the accounts receivable balance is debited by the auditors to separately show customer accounts with credit balances relating to customer advances.
D) depreciation on the office equipment was recorded by the accountant.

Question 32

Working papers could be expected to contain all of the following except:

A) a working trial balance.
B) schedules and analyses.
C) audit memoranda and corroborating information.
D) a complete copy of all the auditing standards.

Question 33

The title of a certain working paper is "Proposed adjusting and reclassifying entries." The use of the word "proposed" indicates that the:

A) listed adjustments are not considered necessary.
B) listed adjustments are not considered material.
C) client disagrees with the adjustments listed.
D) client must first approve them.

Question 34

The least likely source of information for the auditor in obtaining an understanding of the client's industry conditions is:

A) industry Audit Guides.
B) trade journals.
C) industry statistics compiled by government or private agencies.
D) data accumulated by the audit firm

Question 35

Which of the following would not be considered an analytical procedure?
A) comparing payroll costs with the number of employees.

A) comparing source dockets with journal entries.
B) comparing actual sales to budgeted sales
C) comparing financial ratio results with industry averages.

Question 36

Identify the primary considerations that apply to accepting an audit engagement. For each consideration, indicate the primary steps involved in the decision to accept or reject the engagement.

Question 37

Which of these would not be of direct interest to an auditor who was obtaining knowledge of the entity's business operations?

A) method of obtaining revenues.
B) employment.
C) stock exchange listing requirements
D) transactions with related parties.

Question 38

Which of these would be considered a reclassifying entry?

A) a significant amount of inventory was found which had not been included in the accounts and subsequently was by the auditors.
B) payroll owing for the last five days of the financial year was recorded by management.
C) the accounts receivable balance is debited by the auditors to separately show customer accounts with credit balances relating to customer advances.
D) depreciation on the office equipment was recorded by the accountant

Question 39

How long does the Corporations Act require audit working papers to be kept for?

A) it is not specified in law.
B) for as long as they are useful.
C) for 7 years.
D) permanently.

Question 40

Anne has been preparing the audit working papers for the audit of XYZ Company and she is being very careful to use all of the basic techniques. She has given each section a heading, documented evidence and summarised the conclusions. What basic technique has Anne not included in the working papers?

A) index numbers.
B) cross-referencing.
C) signatures and dates.
D) all of the above.

Question 41

Explain the importance of analytical procedures and why auditors may also use non-financial measures in these procedures.

Question 42

To adequately plan an audit, the auditor should obtain sufficient knowledge of the entity and its selection and application of accounting policies. This includes obtaining knowledge about the entity's business operations, investments, financing and financial reporting. For each of these areas, list two activities that the auditor would need to gain an understanding of.

Question 43

Smith & Jones audit firm is determining whether to accept an audit engagement with Simple Things Ltd. As this would be a new engagement the audit firm sought the client's permission to contact the current auditor. The client did not give their permission, explaining that they did not want the current auditors to know they were thinking of changing.
Recently Simple Things Ltd had been in the media for management not disclosing an environmental disaster that occurred at one of their plant sites. The incident is still under investigation but if the company is found to be at fault then they may be subject to numerous lawsuits from the many private landholders near the plant.
From the information provided above, identify any reasons for not accepting the audit engagement with Simple Things Ltd.

Question 44

Clements & Partners are the audit firm of Manufacturing Co. and have been for 3.years. The audit firm is considering if there are any ethical or legal requirements that would prevent them from accepting the audit engagement of Manufacturing Co. again this year. The audit partner has noted the following information which may be relevant to this decision.

I. One of the junior staff members of the audit firm is related to a supervisor at Manufacturing Co.
II. One of the audit partners owns 100 shares in Manufacturing Co.
III. Clements & Partners provided taxation services to Manufacturing Co. in the last financial year.
IV. Frank Thomas, one of the audit partners at the firm, is the Uncle of one of the new directors of Manufacturing Co.
V. The audit partner on this engagement for the last 3 years has been James Underwood.
Identify if any of the above would prevent the audit firm from accepting the engagement.

Question 45

Identify whether the following high risk conditions are an example of incentives/pressures, opportunities or attitudes/rationalisation risk factors:
1.The company is very vulnerable to interest rate fluctuations
2.Management has significant financial interests in the entity
3.Many asset values are based on significant estimates that involve subjective judgements
4.Management does not place a high priority on ethical standards
5.Management shows an excessive interest in increasing the entity's share price
6.The organisational structure is overly complex
7.There is a high turnover of internal audit and information technology staff
8.The entity's industry is highly competitive
9.Internal controls are not effectively monitored
10. Management attempts to justify marginal or inappropriate accounting on the basis of materiality on a recurring basis.

Question 46

Name five items that should be included in an engagement letter.

Question 47

For each of the following, identify whether they are part of an entity's business operations, investments or financing.
1.The entity is a guarantor for a subsidiary's bank loan.
2.The entity is planning a takeover of a smaller company.
3.The entity recently loaned money to one of its management.
4.The entity recently began using derivatives.
5.The employee union negotiated a 5% pay rise on behalf of its members.
6.Credit policy has been increased from 30 days to 60 days due.
7.The entity is planning to upgrade their manufacturing plant.
8.The bank has imposed a debt covenant on the entity.
9.The entity recently sold of shares in a utilities company.
10. The entity has introduced a pricing policy of cost + 20%

Question 48

You are the senior auditor on a particular engagement. The new staff assistant who has been assigned to work on the cash area is about to begin constructing her first audit work paper.
Briefly list and discuss the essential points relating to the mechanics of working paper preparation that you would like the staff assistant to follow in completing her assignment.

Question 49

In order for an auditor to gain an understanding of an entity and its environment it should consider the entity's industry conditions, regulatory environment and any economy wide factors. Give two examples of what an auditor may consider in each.