Question 1

What is the first stage of any audit?

Accepted Answer

The first stage of any audit is client acceptance or a continuance decision. This involves deciding whether to take on a new client or continue with an existing client for another year. It involves evaluating various factors like reputation, business practices, financial stability, and conflicts of interest. Once the decision is made to accept or continue with the client, the auditor can move on to the next stage, which is risk assessment.

Question 2

What happens if an independence threat appears to be insurmountable?

Accepted Answer

If an independence threat appears to be insurmountable, an audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client to maintain professional integrity and comply with ethical standards.

Question 3

An engagement letter is prepared by the _______ and acknowledged by the _______ before the audit begins.

Accepted Answer

An engagement letter is a legal agreement between the auditor and the client in which the scope of the audit is defined. The letter is prepared by the auditor and acknowledged by the client before the audit begins. Therefore, the correct answer is A) auditor; client.

Question 4

The requirement that the auditor have access to all information needed to perform the audit is stated in ________.

Accepted Answer

The engagement letter outlines the auditor's responsibilities, including the requirement for access to all necessary information to perform the audit.

Question 5

The factor that influences client acceptance and retention decisions with respect to whether the accounting firm has the expertise to perform the services requested by the client is known as:

Accepted Answer

Competence issues refer to the client's perception of whether the accounting firm has the expertise to perform the requested services. If a client doubts the firm's competence, they are less likely to accept or retain their services. Independence issues, integrity of management, and special circumstances and unusual risk can also influence client acceptance and retention decisions, but they are not directly related to the firm's expertise.

Question 6

Which of the following is a positive factor influencing client acceptance and retention decisions with respect to the integrity of management?

Accepted Answer

A positive factor influencing client acceptance and retention decisions with respect to the integrity of management is when management places a premium on representational faithfulness of accounting information. This means that they prioritize accuracy and honesty in their financial reporting, which can increase the trust that clients have in their management team.

Question 7

An engagement letter is like a(an) _______.

Accepted Answer

An engagement letter is a contractual agreement between a client and a professional firm (such as an accounting or legal firm). It outlines the scope of work to be performed, the timeline for completion, the fees and payment terms, and the responsibilities of both parties.

Question 8

Which of the following is not a phase of the audit?

Accepted Answer

The risk continuance phase is not a recognized phase of the audit process. The audit process typically includes the risk assessment phase, the risk response phase, and the reporting phase, among others.

Question 9

Which of the following is true in the case of an auditor communicating with a continuing client in the beginning of a contract?

Accepted Answer

A new engagement letter is not necessarily required for each period if there are no changes to the engagement terms. However, it is good practice to ensure that the terms of the engagement are understood and agreed upon, which can sometimes involve issuing a new letter or a reminder if there are significant changes or a significant amount of time has passed.

Question 10

Which of the following is a positive factor influencing client acceptance and retention with respect to special circumstances and unusual risks?

Accepted Answer

There are minimal regulatory reporting requirements.

Question 11

Which of the following would be considered as internal information gathered primarily about the integrity of client management?

Accepted Answer

Communication with client personnel would provide direct insight into the integrity of client management as it involves interactions with individuals who work closely with the management team. Communication with the client's bankers and lawyers (B) may provide financial or legal information about the company but may not necessarily speak to the integrity of its management. Communication with the client's industry peers (C) and a review of articles in industry trade journals (D) may provide information on industry trends and competition, but would not provide direct insight into the client's management team's integrity.

Question 12

An engagement letter is prepared by an auditor and acknowledged by a client _______.

Accepted Answer

An engagement letter is prepared by an auditor before the audit begins to acknowledge the terms of the engagement and establish the auditor's and client's responsibilities.

Question 13

The engagement letter does NOT include _______.

Accepted Answer

The requirement that the auditor have access to all social security numbers of client employees in order to perform background checks is not a common or standard inclusion in an engagement letter.

Question 14

If management is preoccupied with meeting specific accounting numbers, this is a negative factor that should influence client acceptance and retention and is associated with _______.

Accepted Answer

Management's preoccupation with meeting specific accounting numbers suggests a lack of integrity, which can negatively affect the audit process and ultimately impact client acceptance and retention.

Question 15

When is it necessary to send a new engagement letter to a continuing client?

Accepted Answer

It is only necessary to send a new engagement letter when the terms of the engagement have changed. This ensures that both the client and the CPA are clear on the services to be provided and the expectations of both parties. Sending a new engagement letter every year or on a quarterly basis is not necessary unless changes to the engagement have occurred. Sending the engagement letter along with the CPA's bill for the first year of services may not provide enough time for the client to fully review and understand the terms of the engagement.

Question 16

As per the appendix to AU-C 210, Terms of Engagement, a typical engagement letter for a private company client begins with a paragraph on the ________.

Accepted Answer

The appendix to AU-C 210, Terms of Engagement, indicates that a typical engagement letter for a private company client begins with a paragraph on the objective and scope of the audit. This sets the foundation for understanding the purpose and extent of the audit work to be performed.

Question 17

Which of the following is/are the primary means of communication for gathering information while assessing management integrity?

Accepted Answer

Communication with the client personnel, the client's industry peers, and the previous auditor are all important sources of information when assessing management integrity. By communicating with client personnel, the auditor can gain insight into the day-to-day operations of the organization and identify any questionable practices or behaviors. Communication with the client's industry peers can provide information about the reputation of management within the industry and any known issues or concerns. Lastly, communication with the previous auditor can provide information about prior audits and any potential issues or concerns with management integrity that were identified.

Question 18

The main purpose of an engagement letter is to _______.

Accepted Answer

The main purpose of an engagement letter is to avoid any misunderstandings between the auditor and the client. It clearly outlines the responsibilities of both parties, the scope of the audit, the timeframe, the fees, and the deliverables. It helps to establish a professional relationship based on mutual understanding and trust. It also serves as a legal contract between the two parties.

Question 19

Which of the following would be least likely to help you assess the integrity of management?

Accepted Answer

Interviews with human resources about its long-term disability provider are unlikely to provide any information relevant to assessing the integrity of management.

Question 20

Which of the following was one of the largest accounting firms in the world during the 1990's and early 2000's?

Accepted Answer

Arthur Andersen was one of the largest accounting firms in the world during the 1990's and early 2000's, until its collapse in 2002 due to its involvement in the Enron scandal. Laventhol & Horwath filed for bankruptcy in 1990, while Arthur Young & Co merged with Ernst & Whinney in 1989 to form Ernst & Young. Supreme, Inc. is not a known accounting firm.

Quiz 3: Risk Assessment Part Iaudit Risk and Audit Strategy