Question 1

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

Accepted Answer

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. A

Question 2

The purpose of using analytical procedures in auditing is to:

Accepted Answer

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

Question 3

A common fee structure for audit engagements is:

Accepted Answer

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

Question 4

The main purpose of the audit engagement letter is to:

Accepted Answer

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

Question 5

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

Accepted Answer

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 6

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

Accepted Answer

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

Question 7

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.

Accepted Answer

The answer of Smith & Jones audit firm is determining...

Question 8

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.

Accepted Answer

The answer of Clements & Partners are the audit firm...

Question 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

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?

Accepted Answer

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 12

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

Accepted Answer

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 13

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?

Accepted Answer

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

Question 14

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.

Accepted Answer

The answer of In order for an auditor to gain...

Question 15

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

Accepted Answer

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 16

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

Accepted Answer

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 17

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

Accepted Answer

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 18

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?

Accepted Answer

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

Question 19

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?

Accepted Answer

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 20

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.

Accepted Answer

The answer of Identify the primary considerations that apply to...

Exam 7: Client Evaluation and Planning the Audit