Question 1

A clear understanding of the terms of the engagement should exist between the client and the public accounting firm as documented in the engagement letter required by:
A) ASA 620.
B) ASA 220.
C) ASA 210.
D) APES 110.

Accepted Answer

ASA 210 requires that the auditor and the client agree on the terms of the audit engagement, which should be documented in an engagement letter.

Question 2

The minutes of meetings of the board of directors and/or shareholders include:
A) declaration of dividends.
B) appointment and retirement of directors.
C) allotment and issue of shares.
D) all of the above

Accepted Answer

The minutes of meetings of the board of directors and/or shareholders include all of the options listed, as they are significant actions and decisions taken by the company during these meetings. Declaration of dividends involves the distribution of profits to shareholders, appointment and retirement of directors impacts the governance of the company, and the allotment and issue of shares influence the ownership structure and financing of the company.

Question 3

An example of a reclassification entry would be an entry:
A) to reduce inventory when client failed to write down its obsolete raw materials.
B) to increase the income tax liability account when it was discovered that the tax rate would be higher than originally estimated.
C) to change material credit balances in accounts receivable accounts to accounts payable accounts.
D) to increase the allowance for doubtful accounts when it was discovered that a customer had filed for bankruptcy.

Accepted Answer

Reclassification entries are used to move amounts from one account to another to correct classification errors. Changing credit balances from accounts receivable to accounts payable is a reclassification.

Question 4

Which of the following eliminates voluminous details from the auditor's working trial balance by classifying and summarising similar or related items?
A) Supporting schedules
B) Control accounts
C) Lead schedules
D) Account analyses

Accepted Answer

Lead schedules eliminate voluminous details from the auditor's working trial balance by classifying and summarising similar or related items. Supporting schedules provide details for specific accounts or transactions. Control accounts summarize the balances of subsidiary ledger accounts. Account analyses are detailed reviews of specific accounts.

Question 5

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:
A) the client is dissatisfied with predecessor's work.
B) the predecessor believes the client lacks integrity.
C) there are legal problems between the client and predecessor.
D) the predecessor auditor has poor relations with successor auditor.

Accepted Answer

The answer of The predecessor auditor is required to respond...

Question 6

Assessing acceptable audit risk and inherent risk is an important part of audit planning, because:
A) it helps to determine the timing of audit procedures.
B) it helps to determine the fees to charge for the audit.
C) it helps to determine the amount of evidence that will need to be accumulated.
D) all of the above

Accepted Answer

Assessing acceptable audit risk and inherent risk helps auditors determine the amount of evidence needed to achieve a desired level of assurance, impacting the nature, timing, and extent of audit procedures.

Question 7

Which one of the following would you NOT expect to find in a company's constitution? Rules and procedures for:
A) implementing internal control systems.
B) issuing shares.
C) calling general meetings.
D) appointment and retirement of directors.

Accepted Answer

A company's constitution typically outlines the company's purpose, how it will operate, and the rights and duties of its members. While the constitution may include rules and procedures for issuing shares, calling general meetings, and appointing and retiring directors, it is unlikely to include rules and procedures for implementing internal control systems, as this is typically addressed in internal policies and procedures.

Question 8

Which of the following is NOT one of the three main reasons why the auditor should properly plan engagements?
A) To enable proper on- the- job training of employees
B) To avoid misunderstandings with the client
C) To help keep audit costs reasonable
D) To enable the auditor to obtain sufficient competent evidence

Accepted Answer

While on-the-job training of employees is important, it is not one of the main reasons for proper planning of engagements. The three main reasons are to obtain sufficient competent evidence, keep audit costs reasonable, and avoid misunderstandings with the client.

Question 9

Because company policies are reflected in the financial statements, it is important that auditors:
A) carefully evaluate basic policy decisions.
B) periodically review information on accounting policies to determine if there has been a change.
C) include the primary accounting policies in the permanent file.
D) all of the above

Accepted Answer

All three options are important for auditors to ensure that company policies are accurately reflected in the financial statements. They must carefully evaluate policy decisions to ensure they are in compliance with accounting standards and regulations. They should periodically review information on accounting policies to ensure they are consistent and have not been changed without proper documentation. Finally, including primary accounting policies in the permanent file provides a reference for future audits to ensure consistency in treatment of accounting policies.

Question 10

When a company changes auditors, the Code of Ethics for Professional Accountants requires communication between the predecessor and successor auditors. The burden of initiating the communication rests with the:
A) client.
B) predecessor.
C) successor.
D) ASIC.

Accepted Answer

The successor auditor is responsible for initiating communication with the predecessor auditor to understand the reasons for the change and any issues that might affect the audit.

Question 11

There are three main reasons why the auditor should properly plan engagements. Which are the three? 1. to enable the auditor to obtain sufficient appropriate evidence
2) to help keep audit costs reasonable
3) to avoid misunderstandings with the client
4) to earn audit fees for the firm.
A) 1, 3, 4
B) 2, 3, 4
C) 1, 2, 3
D) 1, 2, 4

Accepted Answer

The three main reasons why the auditor should properly plan an engagement are to enable the auditor to obtain sufficient appropriate evidence, to help keep audit costs reasonable, and to avoid misunderstandings with the client. The fourth option, to earn audit fees for the firm, is not a reason to properly plan engagements as it is not related to the quality and effectiveness of the audit.

Question 12

A related party transaction is:
A) non arm's- length transaction.
B) transaction with the auditor.
C) transaction at an undervalue.
D) all of the above

Accepted Answer

A related party transaction is a transaction between two parties who have a pre-existing relationship or connection, which may influence the terms of the transaction. Such a transaction may not be conducted at arm’s length and could potentially result in one party receiving preferential treatment. Therefore, option A is correct as it defines a related party transaction. Options B and C are incorrect as they do not accurately define a related party transaction.

Question 13

Which of the following would NOT be classified as a related- party transaction?
A) Sales of merchandise between affiliated companies
B) Exchanges of equipment between two companies owned by the same person
C) An advance of one week's salary to an employee
D) Loans or credit sales to the principal owner or client

Accepted Answer

Related-party transactions involve transactions between a company and its related parties, such as its subsidiaries, affiliates, owners, or key management personnel. Therefore, an advance of one week's salary to an employee is not considered a related-party transaction, as the employee is not a related party of the company. The other options listed involve transactions between related parties and would be considered related-party transactions.

Question 14

Permanent files contain all the data:
A) of a historical or continuing nature about the client.
B) of a historical or continuing nature pertinent to the current audit.
C) about the current audit and financial statements.
D) about the most recent audits.

Accepted Answer

The answer of Permanent files contain all the data:
A) of...

Question 15

Which of the following would NOT be a consideration of an audit firm in deciding whether to accept a new client?
A) Client's relation with its previous audit firm
B) Client's standing in the business community
C) Client's financial stability
D) Client's probability of achieving an unqualified opinion

Accepted Answer

A client's probability of achieving an unqualified opinion is a significant consideration for an audit firm in deciding whether to take on a new client. The audit firm will want to make sure that the client has adequate financial resources, competent management, and suitable internal controls to support the preparation of financial statements that comply with the appropriate accounting standards. Therefore, D would not be considered by the audit firm.

Question 16

Knowledge of the auditee's business can be obtained in a variety of ways. Which one of the following is NOT usually one of those ways?
A) From Internet resources
B) From textbooks
C) From technical magazines
D) All of the above are usual sources.

Accepted Answer

The answer of Knowledge of the auditee's business can be...

Question 17

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:
A) acceptable audit risk.
B) inherent risk.
C) statistical risk.
D) control risk.

Accepted Answer

Inherent risk is the risk of a material misstatement in an account before considering the effectiveness of internal control. Acceptable audit risk pertains to the level of audit risk that the auditor is willing to accept. Control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by internal control. Statistical risk is not a term commonly used in auditing.

Question 18

The auditor plans the engagement to avoid misunderstandings with the client. This is essential to:
A) minimise legal liability and maintain for the firm a good reputation in the business community.
B) help the firm remain competitive.
C) facilitate good client relations.
D) all of the above

Accepted Answer

The answer of The auditor plans the engagement to avoid...

Question 19

A working trial balance is:
A) a listing of the general ledger accounts and their year- end balances.
B) a summary of the effect of the auditor's reclassification entries.
C) the set of lead schedules.
D) a list of the opening subsidiary ledger account balances.

Accepted Answer

A working trial balance is a list of all the general ledger accounts and their year-end balances. It is used to ensure that debits and credits are equal and to identify any errors before the financial statements are prepared.

Question 20

The development of the audit program is the final stage in:
A) documenting independence.
B) audit planning.
C) the engagement letter.
D) the client acceptance decision.

Accepted Answer

The development of the audit program is the final stage in audit planning. It involves the creation of a detailed plan outlining the procedures to be followed during the audit in order to obtain sufficient appropriate audit evidence.

Quiz 6: Audit Planning and Documentation

A clear understanding of the terms of the engagement should exist between the client and the public accounting firm as documented in the engagement letter required by:

The minutes of meetings of the board of directors and/or shareholders include:

An example of a reclassification entry would be an entry:

Which of the following eliminates voluminous details from the auditor's working trial balance by classifying and summarising similar or related items?

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:

Assessing acceptable audit risk and inherent risk is an important part of audit planning, because:

Which one of the following would you NOT expect to find in a company's constitution? Rules and procedures for:

Which of the following is NOT one of the three main reasons why the auditor should properly plan engagements?

Because company policies are reflected in the financial statements, it is important that auditors:

When a company changes auditors, the Code of Ethics for Professional Accountants requires communication between the predecessor and successor auditors. The burden of initiating the communication rests with the:

There are three main reasons why the auditor should properly plan engagements. Which are the three? 1. to enable the auditor to obtain sufficient appropriate evidence 2) to help keep audit costs reasonable 3) to avoid misunderstandings with the client 4) to earn audit fees for the firm.

A related party transaction is:

Which of the following would NOT be classified as a related- party transaction?

Permanent files contain all the data:

Which of the following would NOT be a consideration of an audit firm in deciding whether to accept a new client?

Knowledge of the auditee's business can be obtained in a variety of ways. Which one of the following is NOT usually one of those ways?

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

The auditor plans the engagement to avoid misunderstandings with the client. This is essential to:

A working trial balance is:

The development of the audit program is the final stage in: