Deck 7: Accepting the Engagement and

Question 1

Professional responsibility to colleagues requires the predecessor auditor to initiate
communication with the successor.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

Within the public accounting profession, there is little competition among firms for clients.

Answer 3

False

Question 4

Immediately after accepting a new audit client, the auditing firm must evaluate whether there are any circumstances that would impair its independence with respect to the client.

Question 5

An engagement should be declined if due professional care cannot be exercised throughout the audit.

Question 6

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

Question 7

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.

Question 8

Knowledge of an entity's investing activities includes understanding the entity's leasing of property, plant, and equipment for use in the business.

Question 9

Intended users should have no effect on audit planning.

Question 10

Immediately after accepting an audit engagement, auditors should determine whether they have the professional competence to complete the engagement in accordance with GAAS.

Question 11

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

Question 12

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

Question 13

The "performing audit tests" phase of the audit is also referred to as performing the fieldwork.

Question 14

In most cases, the accept/reject decision for an audit client is made six to nine months before the client's fiscal year-end.

Question 15

An auditor is not obligated to perform a financial statement audit for any entity that requests it.

Question 16

A CPA firm should address the acceptability and continuation of audit clients in a much different way than it addresses the acceptance of new clients.

Question 17

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

Question 18

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

Question 19

An engagement letter is a required step under generally accepted auditing standards.

Question 20

Before accepting an engagement, the auditor should evaluate whether other conditions exist that raise questions as to the prospective client's auditability.

Question 21

The importance of the accept/reject decision for a particular client is reflected in the inclusion of "acceptance and continuation of clients" as:

A) the subject of Statement of Financial Accounting Standards 96.
B) the subject of Statement on Auditing Standards 7.
C) a separate rule in the AICPA Code of Conduct.
D) an explicit part of the General Standards.
E) one of the quality control elements for CPA firms.

Question 22

The quality control element (s) most directly related to the auditor's assessment of her competence to perform the audit is (are):

A) assigning personnel to the engagement and consultation.
B) assigning personnel to the engagement.
C) consultation.
D) independence.
E) supervision.

Question 23

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

A) consider the implications in making the accept/reject decision.
B) not accept the engagement.
C) request an AICPA-sanctioned peer review of the predecessor.
D) request assistance from the SEC.
E) immediately inform the appropriate state board of accountancy.

Question 24

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.

Question 25

Knowledge of external factors affecting an entity's business is necessary when planning an audit. Which of the following factors would least likely be considered an external factor:

A) interest rates.
B) market demand.
C) Inflation.
D) industry-specific accounting practices.
E) related party transactions.

Question 26

Auditor changes result from a variety of factors except:

A) mergers between CPA firms.
B) mergers between corporations with different independent auditors.
C) satisfaction with a firm.
D) a desire to reduce the audit fee.
E) the need for expanded professional services.

Question 27

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?

A) the integrity of management
B) disagreements with management about accounting matters
C) specific areas of audit difficulty and cost
D) the predecessor's understanding of the reasons for a change in auditors
E) disagreements with management about auditing matters

Question 28

A CPA firm auditor should address the acceptability and continuation of existing audit clients the same way it addresses the acceptance of new clients.

Question 29

The third phase of the audit involves performing audit tests. The primary purpose of this step is to obtain evidence about:

A) the integrity of management.
B) the effectiveness of management.
C) the effectiveness of the internal control structure.
D) the effectiveness and the integrity of management.
E) the effectiveness of the internal control structure and the fairness of the financial statements.

Question 30

Before accepting an engagement, to perform an audit for 2006, the auditor should assess the auditability of the prospective client. Which of the following conditions would most likely cause the auditor to question the auditability of the client?

A) Since a voucher system is employed, no subsidiary accounts payable ledger exists.
B) Although the subsidiary records and the specialized journals are computerized, the general ledger and general journal are still maintained manually.
C) Due to limited personnel, a small retailer has failed to implement many of the controls that are standard in the industry.
D) The client's controller reconciles the bank statements each month.
E) Predecessor auditor workpapers for the years 2002 and 2003 are not available.

Question 31

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?

A) Two outside board members are being investigated by the SEC for insider trading.
B) A sporting goods manufacturer has a number of product liability suits outstanding.
C) A small computer chip manufacturer is being sued by a major competitor over patent infringements involving their only significant product.
D) Due to a heavy debt load, a financial services company was forced to raise needed capital through a stock issue.
E) An appliance manufacturer recently issued "junk" bonds in order to raise some quick capital.

Question 32

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

A) attorneys
B) bankers
C) the chamber of commerce
D) customers
E) the better business bureau

Question 33

The second standard of fieldwork states: The work is to be adequately planned, and assistants, if any, are to be properly supervised.

Question 34

Which of the following tools would an entity be least likely to use to monitor or review its financial performance:

A) credit ratings.
B) forecasts.
C) ratios.
D) awards.
E) variance analysis

Question 35

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

A) management welcomes visits to all locations that the auditor considers material.
B) management does not restrict contacts with customers.
C) the auditor is not engaged after year-end.
D) the predecessor auditor's workpapers are not available for review.
E) management does not restrict contacts with suppliers.

Question 36

Which of the following items is not one of the seven key steps in performing risk assessment procedures?

A) Develop preliminary audit strategies for significant assertions.
B) Consider audit risk, including the risk of fraud.
C) Test the entity's system of internal control.
D) Make preliminary judgments about materiality.
E) Obtain an understanding of the entity and its environment.

Question 37

Before accepting an engagement, the auditor should evaluate whether other conditions exist that raise questions as to the prospective client's auditability. Which of the following factors would be the least likely to cause concern about an entity's auditability?

A) Related party transactions.
B) Lack of audit trail.
C) Disregard of responsibility to maintain adequate internal controls.
D) Important evidence available only in electronic form.
E) Inability to review the details supporting beginning balances.

Question 38

Management and auditors use financial performance measures in different ways.

Question 39

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

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

Question 40

Knowledge of an entity's financial reporting activities includes understanding such matters as the entity's:

A) acquisitions, mergers, and disposals of business activities.
B) revenue recognition practices.
C) debt structure
D) use of information technology.
E) products, services and markets.

Question 41

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

A) a disclaimer on detecting all material irregularities
B) the use of binding arbitration in the case of a dispute
C) the objective or purpose of the audit
D) an indication of the fee, or method of determining the fee
E) a space for the client's approving signature

Question 42

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:

A) we will detect only material errors."
B) we cannot detect such acts that arise from collusion or direct actions on the part of upper management."
C) material errors, fraud, or other illegal acts, may exist and not be detected by us."
D) we cannot be relied upon to detect these items. We will, however, be available for special fraud-audit engagements."
E) we will probably detect all material irregularities."

Question 43

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

A) does not have the highest level of certification for their profession.
B) received his formal training at a nonaccredited institution.
C) is not a member of the national professional organization.
D) is an attorney who barely passed the state bar examination.
E) has served in the past as a consultant to the client.

Question 44

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

Question 45

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.

Question 46

The main purpose of the engagement letter is to:

A) avoid litigation.
B) indicate the likely opinion to be issued.
C) confirm the terms of the engagement.
D) clearly delineate management's responsibility for the conduct of the audit.
E) clearly delineate the auditor's responsibility for the conduct of the audit.

Question 47

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

A) cautious mistrust.
B) professional skepticism.
C) seasoned pessimism.
D) adversarial pursuit.
E) sarcastic suspicion.

Question 48

The audit committee of the board of directors may provide the auditor with special insights into the client's business and industry. Which of the following is least likely to be information obtained from the audit committee?

A) significant recent developments in the reorganization of client management
B) recent changes in the accounting department's clerical staff
C) strengths and weaknesses in divisional internal controls
D) a recently acquired subsidiary
E) a newly implemented EDP systems application

Question 49

Which one of the following is not an example of a specialist as defined by SAS 73?

A) engineers
B) appraisers
C) actuaries
D) internal auditors
E) attorneys

Question 50

Identify the two generally accepted auditing standards that apply to accepting an audit engagement. For each standard, indicate the primary means of complying with the standard.

Question 51

To adequately plan an audit, the auditor should obtain sufficient knowledge of the client's business to understand events, transactions, and practices that may have a significant effect on the financial statements. The auditor needs knowledge about, for example, the type of business, including products and services, company locations, and marketing methods.
REQUIRED:
1.List at least four additional items about which the auditor should be knowledgeable.
2.List at least four audit procedures that would normally be used in obtaining this understanding.
3.How would the auditor use this information in performing a financial statement audit?

Question 52

There are six identifiable steps associated with client acceptance and retention:
A.evaluating integrity of management
B.identifying special circumstances and unusual risks
C.assessing competence to perform audit
D.evaluating independence
E.making the decision to accept or decline the audit
F.preparing engagement letter
REQUIRED: For each of the following firm policies or actions taken during the accept/reject phase of the audit, indicate, using the above letters, the step to which it relates.
1.National office approval is required for any new audit engagement that cannot
commence until after the balance sheet data.
2.Obtain the client's approval to communicate with the predecessor auditor.
3.For new clients, determine that acceptance would not result in any conflicts of
interest with that of other clients.
4.Written contracts are required on all professional engagements.
5.Plan to review and test all work performed for the audit team by client personnel.
6.Identify the intended users of the audited financial statements.
7.Audit teams must contain a partner, at least one manager and at least one senior.
8.Formally document the nature of the engagement and the auditor's
responsibilities.
9.Assess the prospective client's legal and financial stability.
10.Before accepting a new engagement, assess the probable impact on the firm's
overall work schedule and ability to service existing clients.
11.For potential new SEC clients, review the report filed with the SEC concerning
change in auditors.
12.Assess the general condition and availability of the more important accounting
records.
13.Circulate the name of all prospective clients to the professional staff to identify
any prohibited financial or business relationships.
14.Consider the need for the use of a specialist on the engagement.
15.For continuing clients, all top management changes require partner-in-charge
review.

Question 53

Which one of the following is not a key step in planning the audit?

A) Perform analytical procedures.
B) Consider audit risk.
C) Make preliminary judgments about materiality levels.
D) Develop preliminary audit strategies for significant assertions.
E) Obtain an understanding of the client's external controls.

Question 54

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

A) investigate those transactions encountered during the audit
B) as related parties are discovered during the course of the audit, their existence should be noted in the working papers
C) obtain a list of all board members and place in the working papers
D) investigate the background of all related parties
E) determine, in the planning stage, the existence of related parties