Question 1

Which one of the following is not an inherent risk factor in the financial statements?

Accepted Answer

A)  The company made 3 acquistions during the year in different lines of business. 
B)  The company's industry is experiencing downward pricing pressure for its goods and services. 
C)  The company's inventory, because of multiple locations, is difficult to count. 
D)  The company has hired 3 different chief accounting officers for the year.

Question 2

The purpose of the requirement in having communication between the predecessor and successor auditors is to:

Accepted Answer

A)  allow the predecessor to disclose information which would otherwise be confidential. 
B)  help the successor auditor to evaluate whether to accept the engagement. 
C)  help the client by facilitating the change of auditors. 
D)  ensure the predecessor collects all unpaid fees prior to a change in auditor.

Question 3

An engagement letter can affect the CPA firm's legal responsibilities to the client, but does not affect responsibility to external users of audited financial statements.

Accepted Answer

A) True 
 B)False

Question 4

The auditor uses knowledge gained from the understanding of the client's business and industry to assess:

Accepted Answer

A)  client business risk. 
B)  control risk. 
C)  inherent risk. 
D)  audit risk.

Question 5

Which of the following best expresses the requirement to establish with the client an understanding of the responsibilities the auditor and company is taking for the audit engagement?

Accepted Answer

A)  Management asserts there are no material misstatements in the financials. 
B)  Auditors assert that the primary audit goal is audit efficiency. 
C)  Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. 
D)  Management's assertion that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

Question 6

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should:

Accepted Answer

A)  investgate the possibility the client may have made an error in their cost of goods sold computation. 
B)  assist management in developing greater cost efficiencies in their product line. 
C)  prepare a going concern opinion for the client. 
D)  advise the client to have extensive disclosure to alleviate investor concerns.

Question 7

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

Accepted Answer

A) True 
 B)False

Question 8

Which is usually included in an engagement letter?

Accepted Answer

A)   
B)   
C)   
D)

Question 9

Which of the following statements is not correct with respect to analytical procedures?

Accepted Answer

A)  Auditing standards emphasize the need for auditors to develop and use expectations. 
B)  Analytical procedures must be performed throughout the audit. 
C)  Analytical procedures may be performed at any time during the audit. 
D)  Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.

Question 10

During audit planning, the auditor uses analytical procedures primarily to:

Accepted Answer

A)  identify weaknesses in internal control. 
B)  determine if the company's financial statements appear reasonable and are free of material misstatement. 
C)  determine the correspondence of the company's financial statements to the valuation and accuracy audit objectives. 
D)  understand the client's business and industry and to indicate possible misstatements.

Question 11

A successor auditor may perform which of the following for a new audit client?

Accepted Answer

A)   
B)   
C)   
D)

Question 12

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Accepted Answer

A) True 
 B)False

Question 13

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for:

Accepted Answer

A)   
B)   
C)   
D)

Question 14

Generally, auditors assess inherent risk as moderate for related party transactions because they expect clients to be aware of their scrutiny of such transactions.

Accepted Answer

A) True 
 B)False

Question 15

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

Accepted Answer

A)  engage financial experts familiar with the nature of the business entity. 
B)  obtain a knowledge of matters that relate to the nature of the entity's business. 
C)  refer a substantial portion of the audit to another CPA who will act as the principal auditor. 
D)  first inform management that an unqualified opinion cannot be issued.

Question 16

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:

Accepted Answer

A)  inherent risk. 
B)  acceptable audit risk. 
C)  statistical risk. 
D)  financial risk.

Question 17

An auditor has accessed client business risk and the risk to material misstatements to the clients financial statements. These are done in order to:

Accepted Answer

A)  apply the audit risk model in determining the appropriate audit procedures to perform. 
B)  determine the reliance on the company's internal control systems for financial reporting. 
C)  determine the test of balances to be performed by the audit team. 
D)  assure the CPA firm that they can perform the audit effectively and efficiently,

Question 18

An auditor should examine minutes of the board of directors' meetings:

Accepted Answer

A)  through the date of the financial statements. 
B)  through the date of the audit report. 
C)  only at the beginning of the audit. 
D)  on a test basis.

Question 19

Which is usually included in the engagement letter?

Accepted Answer

A)   
B)   
C)   
D)

Question 20

Discuss four of the matters that should be specified in an engagement letter.

Accepted Answer

The answer of Discuss four of the matters that should...

Exam 8: Audit Planning and Analytical Procedures

Which one of the following is not an inherent risk factor in the financial statements?

The purpose of the requirement in having communication between the predecessor and successor auditors is to:

An engagement letter can affect the CPA firm's legal responsibilities to the client, but does not affect responsibility to external users of audited financial statements.

The auditor uses knowledge gained from the understanding of the client's business and industry to assess:

Which of the following best expresses the requirement to establish with the client an understanding of the responsibilities the auditor and company is taking for the audit engagement?

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should:

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

Which is usually included in an engagement letter?

Which of the following statements is not correct with respect to analytical procedures?

During audit planning, the auditor uses analytical procedures primarily to:

A successor auditor may perform which of the following for a new audit client?

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for:

Generally, auditors assess inherent risk as moderate for related party transactions because they expect clients to be aware of their scrutiny of such transactions.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:

An auditor has accessed client business risk and the risk to material misstatements to the clients financial statements. These are done in order to:

An auditor should examine minutes of the board of directors' meetings:

Which is usually included in the engagement letter?

Discuss four of the matters that should be specified in an engagement letter.