Question 1

The Sarbanes-Oxley Act requires that all public companies have an audit committee comprised of at least three independent financial experts and at least one other person.

Accepted Answer

A) True 
 B)False  False

Question 2

A company's recent restatement of previously issued financial statements is a favorable indicator that the company's internal controls are effective in the timely detection of errors and misstatements.

Accepted Answer

A) True 
 B)False  False

Question 3

An audit engagement letter:

Accepted Answer

A)   is prepared by the client company and signed by a representative of the audit firm.
B)   provides a guarantee that the auditor will express an opinion as a result of the audit.
C)   is signed by management at the conclusion of the audit engagement.
D)   specifies that management is responsible for establishing and maintaining effective ICFR. D

Question 4

Earnings management pertains to:

Accepted Answer

A)   accounting manipulations for the purpose of presenting the company in a biased manner.
B)   conservative accounting treatments included in the financial disclosures.
C)   the company's ability to limit production, if needed.
D)   assigning responsibility for new accounting requirements.

Question 5

By communicating with the predecessor auditor, an incoming auditor may gain valuable information pertaining to:

Accepted Answer

A)   potential problem areas as indicated in the predecessor's work papers.
B)   the updated status of a pending lawsuit.
C)   the results of the current year budget variance analysis.
D)   the audit tests that must be performed on a recurring basis.

Question 6

Which of the following is least important to the auditor when investigating a potential new audit client?

Accepted Answer

A)   The audit committee does not have the requisite number of independent members or financial experts.
B)   The company has experienced recent operating losses and other financial difficulties.
C)   The company has a highly decentralized organizational structure.
D)   The company has experienced high turnover rates among management or members of the accounting, internal audit, or IT staff.

Question 7

What are the characteristics of fraud, and how does the suspicion of fraud in a company affect an auditor's client acceptance or continuance decision?

Accepted Answer

The answer of What are the characteristics of fraud, and...

Question 8

The engagement letter states that an auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the following type of evidential matter:

Accepted Answer

A)   results of audit testing.
B)   responses to auditor inquiry.
C)   management representation letter.
D)   All of the above.

Question 9

Items documented in an engagement letter about which the auditor and client establish an understanding include:

Accepted Answer

A)   management's responsibility for ensuring that the company complies with applicable laws and regulations.
B)   management's responsibility for providing reasonable assurance about whether the financial statements are free of material misstatement.
C)   the auditor's responsibility for maintaining effective ICFR throughout the audit engagement.
D)   the auditor's responsibility for signing a management representation letter at the conclusion of the audit engagement.

Question 10

Which of the following is not a likely reason why an audit firm does not possess the necessary resources to perform an audit engagement?

Accepted Answer

A)   The client company is very large and has multiple geographic locations.
B)   The client company is in a highly regulated industry for which significant industry expertise is required.
C)   The client company has a very complex IT system for which significant technical expertise is required.
D)   The client company has a decentralized structure for providing management oversight.

Question 11

In an audit engagement letter, a clause addressing document retention states that the auditors will retain the client company's accounting records until the audit fees have been collected.

Accepted Answer

A) True 
 B)False

Question 12

Audit firms should always avoid a potential client company that conducts significant related party transactions in the ordinary course of business.

Accepted Answer

A) True 
 B)False

Question 13

Related party transactions are:

Accepted Answer

A)   quite rare, and are therefore a reason for auditors to avoid new client relationships due to the increased risk.
B)   required to be disclosed in the financial statements.
C)   assumed to be arms-length transactions unless they are disclosed in the financial statements.
D)   considered to be a warning sign of going concern issues.

Question 14

An audit engagement letter specifies that management of the client company is responsible for all of the following except:

Accepted Answer

A)   preparing the financial statements.
B)   maintaining effective ICFR.
C)   providing the company's financial records for the auditor.
D)   performing the audit in accordance with PCAOB standards.

Question 15

An auditor's professional competence depends upon each of the following except:

Accepted Answer

A)   knowledge.
B)   a reputation for issuing unqualified audit opinions.
C)   the availability of professional staff and other resources necessary for the audit engagement.
D)   the requisite training and proficiency necessary for the audit engagement.

Question 16

The New York Stock Exchange requirements regarding composition of the audit committee include each of the following except:

Accepted Answer

A)   the audit committee must have at least three members who are financially sophisticated, and one of those members must be independent.
B)   the audit committee must have at least three members who are independent, and one of those members must be financially sophisticated.
C)   each member of the audit committee must not have participated in the preparation of the financial statements of the issuer at any time during the past three years.
D)   each member of the audit committee must have the ability to read and understand fundamental financial statements.

Question 17

By speaking with individuals inside the company, an auditor may learn about:

Accepted Answer

A)   Management's philosophy and integrity.
B)   The composition of the Board of Directors and audit committee.
C)   The organizational structure and accounting functions.
D)   All of the above.

Question 18

Which of the following are least problematic for an auditor about going concern issues of a potential audit client?

Accepted Answer

A)   Recent cash flow trends raise questions about the company's ability to pay its audit fees and other financial obligations.
B)   Recent financial instability heightens the company's risk for being sued.
C)   Escalating financial pressures heighten the company's risk of experiencing management fraud.
D)   Changing economic conditions create additional demand for the company's products.

Question 19

Facts that warn an auditor that fraud may be occurring can also inform the auditor's judgments on client acceptance and continuance.

Accepted Answer

A) True 
 B)False

Question 20

An auditor's professional competence is directly related to the audit fees it is able to negotiate as part of the client acceptance or continuance activities.

Accepted Answer

A) True 
 B)False

Exam 5: Client Acceptance and Continuance and Preliminary Engagement Procedures

The Sarbanes-Oxley Act requires that all public companies have an audit committee comprised of at least three independent financial experts and at least one other person.

A company's recent restatement of previously issued financial statements is a favorable indicator that the company's internal controls are effective in the timely detection of errors and misstatements.

An audit engagement letter:

Earnings management pertains to:

By communicating with the predecessor auditor, an incoming auditor may gain valuable information pertaining to:

Which of the following is least important to the auditor when investigating a potential new audit client?

What are the characteristics of fraud, and how does the suspicion of fraud in a company affect an auditor's client acceptance or continuance decision?

The engagement letter states that an auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the following type of evidential matter:

Items documented in an engagement letter about which the auditor and client establish an understanding include:

Which of the following is not a likely reason why an audit firm does not possess the necessary resources to perform an audit engagement?

In an audit engagement letter, a clause addressing document retention states that the auditors will retain the client company's accounting records until the audit fees have been collected.

Audit firms should always avoid a potential client company that conducts significant related party transactions in the ordinary course of business.

Related party transactions are:

An audit engagement letter specifies that management of the client company is responsible for all of the following except:

An auditor's professional competence depends upon each of the following except:

The New York Stock Exchange requirements regarding composition of the audit committee include each of the following except:

By speaking with individuals inside the company, an auditor may learn about:

Which of the following are least problematic for an auditor about going concern issues of a potential audit client?

Facts that warn an auditor that fraud may be occurring can also inform the auditor's judgments on client acceptance and continuance.

An auditor's professional competence is directly related to the audit fees it is able to negotiate as part of the client acceptance or continuance activities.