Deck 7: Client Evaluation and Planning the Audit

Question 1

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.

Answer 1

B

Question 2

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.

Answer 2

D

Question 3

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)Determining the existence of related parties.
B)Preparation of the engagement letter.
C)Ethical considerations.
D)Client evaluation.

Answer 3

A

Question 4

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 5

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)Audit planning.
B)Client evaluation.
C)Issuing the audit report.
D)Collecting audit evidence.

Question 6

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 7

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.

Question 8

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 9

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

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

Question 10

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 11

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

A)Bankers.
B)Customers.
C)The chamber of commerce.
D)Legal advisers/solicitors.

Question 12

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 13

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 14

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

A)An audit manager.
B)An audit senior.
C)An audit partner.
D)Internal auditors.

Question 15

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

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

Question 16

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 17

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 18

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 19

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

A)Identify the existence of related parties.
B)Investigate the background of all related parties.
C)Review procedures for identifying related parties.
D)Obtain a list of all board members and place in the working papers.

Question 20

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 21

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 22

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)Opportunities.
B)Incentives/pressures.
C)Length of employment.
D)Attitudes/rationalisation.

Question 23

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 24

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 25

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

Question 26

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

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

Question 27

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

Question 28

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 29

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 and accounting practices.For each of these areas, list two activities that the auditor would need to gain an understanding of.

Question 30

Which of the following would not be considered an analytical procedure?

A)Comparing source dockets with journal entries.
B)Comparing payroll costs with the number of employees.
C)Comparing actual sales to budgeted sales.
D)Comparing financial ratio results with industry averages.

Question 31

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 32

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.

Question 33

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.