Question 1

During preliminary audit planning:
A) the auditor considers the possibility of business failure.
B) the auditor designs the audit to search for evidence to support the company's continued existence.
C) the auditor does not need to consider the possibility of business failure because that is a procedure performed during the overall evaluation at the end of the audit.
D) the auditor inquires of the company's legal advisers concerning the possibility of going concern problems.

Accepted Answer

During preliminary audit planning, the auditor considers the possibility of business failure as part of assessing the risk of material misstatement and planning the audit accordingly.

Question 2

The scope and nature of an auditor's contractual obligation to a client ordinarily is established in the:
A) engagement letter.
B) Corporations Act 2001.
C) management letter.
D) client's constitution.

Accepted Answer

The engagement letter is a written agreement between the auditor and the client that outlines the scope of the audit, the responsibilities of both parties, and the terms of the engagement. It establishes the auditor's contractual obligation to the client and is an essential part of the audit process. The other options may provide some guidance related to the auditor's obligations or the legal framework for audits, but they do not establish the specific terms of the auditor-client agreement.

Question 3

An audit program should be designed for each individual audit and should include audit steps and procedures to:
A) ensure that only material items are audited.
B) detect all fraud.
C) identify all internal control weaknesses.
D) ensure an efficient and effective audit.

Accepted Answer

An audit program should be designed to ensure an efficient and effective audit. While identifying material items, detecting fraud, and identifying internal control weaknesses are important objectives of an audit, they cannot be guaranteed by the audit program alone. The skills and judgment of the auditor are also crucial in achieving these objectives. Therefore, the primary objective of an audit program is to ensure that the audit is carried out in an efficient and effective manner, which encompasses all the other objectives.

Question 4

Because of the risk of material misstatement, an audit of a financial report in accordance with the auditing standards should be planned and performed with an attitude of:
A) objective judgment.
B) independent integrity.
C) professional scepticism.
D) impartial conservatism.

Accepted Answer

Professional scepticism is a critical attitude that an auditor should adopt in performing an audit. It involves adopting a questioning mind and being alert to situations that may indicate potential misstatements in the financial information being audited. It is also essential for auditors to maintain a level of professional skepticism throughout the audit process to identify any biases that may impact the audit's overall quality. Therefore, option (C) is the correct answer.

Question 5

When an auditor is approached to perform an audit for the first time, the auditor should make inquiries of the previous auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:
A) whether the predecessor's work should be utilised.
B) whether the company follows the policy of rotating its auditors.
C) whether the predecessor's assessment of control risk has been high.
D) whether the engagement should be accepted.

Accepted Answer

The purpose of making inquiries of the previous auditor is to gather information that will assist the successor in determining whether the engagement should be accepted or not. This includes information about the nature of the work performed by the predecessor and any significant issues identified during the previous audit. This information will help the successor in assessing the level of risk associated with accepting the engagement. The other choices are not relevant to this inquiry.

Question 6

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the:
A) illegal act affects the auditor's ability to rely on management representations.
B) illegal act has material financial report implications.
C) illegal act has received widespread publicity.
D) auditor cannot reasonably estimate the effect of the illegal act on the financial report.

Accepted Answer

If the client has committed an illegal act that affects the auditor's ability to rely on management representations, it means that the auditor can no longer trust the information provided by the client. In this situation, the auditor may be unable to obtain sufficient evidence to support their opinion on the financial statements, and therefore may have to withdraw from the engagement. Illegal acts that have material financial report implications or have received widespread publicity do not necessarily require the auditor to withdraw, as long as the auditor can obtain sufficient evidence to support their opinion. If the auditor cannot reasonably estimate the effect of the illegal act on the financial report, they may need to gather additional information or seek expert advice, but they would not necessarily need to withdraw from the engagement.

Question 7

Time budgets on audit engagements are not used for which of the following reasons?
A) Monitor actual audit hours worked by staff on an engagement.
B) Ensure that adequate time is allocated to significant areas of the audit.
C) Estimate an appropriate fee for the engagement.
D) To ensure that audit staff working on the engagement are paid the correct amount.

Accepted Answer

Time budgets on audit engagements are not used to ensure that audit staff working on the engagement are paid the correct amount. Time budgets are used to monitor actual hours worked by staff on an engagement, to ensure that adequate time is allocated to significant areas of the audit, and to estimate an appropriate fee for the engagement.

Question 8

Which of the following factors most likely would cause an auditor to not accept a new audit engagement?
A) An inadequate understanding of the entity's internal control.
B) The close proximity to the end of the entity's fiscal year.
C) The conclusion that the entity's management probably lacks integrity.
D) An inability to perform preliminary analytical procedures before assessing control risk.

Accepted Answer

An auditor is required to consider the integrity of the entity's management as a factor in deciding whether or not to accept an audit engagement. If the auditor concludes that management lacks integrity, it is likely that they would not accept the engagement as there is a risk that the financial statements may contain material misstatements due to fraud or other unethical behavior. Inadequate understanding of internal control, close proximity to the end of the fiscal year, and an inability to perform preliminary analytical procedures are issues that can be addressed during the audit planning process and do not necessarily preclude the acceptance of an audit engagement.

Question 9

To ascertain the exact name of the corporate client, the auditor relies primarily on:
A) corporate minutes.
B) by-laws.
C) company constitution.
D) tax returns.

Accepted Answer

The answer of To ascertain the exact name of the...

Question 10

A prospective client's refusal to give permission to communicate with the previous auditor and review certain portions of the previous auditor's working papers will bear directly on the auditor's decision concerning the:
A) ability to establish consistency in application of accounting principles.
B) apparent scope limitation.
C) integrity of management.
D) adequacy of the planned audit program.

Accepted Answer

Refusal to allow communication with the previous auditor raises concerns about the integrity of management, as it may indicate they are trying to hide something.

Question 11

What is the responsibility of an auditor with respect to communicating with the previous auditor in connection with a prospective new audit client?
A) The auditor has no responsibility to contact the previous auditor.
B) The auditor should contact the previous auditor regardless of whether the prospective client authorises contact.
C) The auditor need not contact the previous auditor if the successor is aware of all available facts.
D) The auditor should obtain permission from the prospective client to contact the previous auditor.

Accepted Answer

The auditor should obtain permission from the prospective client to contact the previous auditor. This is because confidentiality agreements may prevent communication with the previous auditor without permission from the prospective client. However, it is important to contact the previous auditor to obtain information regarding the integrity and reliability of financial records and management, identify any significant problems encountered during the previous audit, and determine whether there were any disagreements between the previous auditor and the client. This information can assist in assessing the risks associated with accepting the new client.

Question 12

An audit firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:
A) inquiry of management as to whether disagreements between the previous auditor and the prospective client were resolved satisfactorily.
B) consideration of whether sufficient appropriate audit evidence may be obtained to afford a reasonable basis for an opinion.
C) inquiry of third parties, such as the prospective client's bankers and solicitors, about information regarding the prospective client and its management.
D) consideration of whether the internal control is sufficiently effective to permit a reduction in the extent of required substantive tests.

Accepted Answer

Quality control procedures for accepting a new audit client typically include inquiries of third parties to gather information about the prospective client and its management, ensuring the auditor understands the client's background and reputation.

Question 13

An auditor obtains knowledge about a new client's business and its industry in order to:
A) make constructive suggestions concerning improvements to the client's internal control.
B) develop an attitude of professional scepticism concerning management's financial report assertions.
C) evaluate whether the aggregation of known misstatements causes the financial report taken as a whole to be materially misstated.
D) understand the events and transactions that may have an effect on the client's financial report.

Accepted Answer

Obtaining knowledge about the client's business and industry is important for the auditor to understand the events and transactions that may have an effect on the client's financial report. This helps the auditor to plan and execute the audit effectively and efficiently. Option A is incorrect because internal control suggestions come as a part of the audit engagement itself. Option B is incorrect because professional scepticism is an attitude that the auditor should possess throughout the audit and is not solely dependent on the knowledge of the client's business and industry. Option C is incorrect because the aggregation of known misstatements is a part of the audit procedures and not solely dependent on the knowledge of the client's business and industry. Therefore, the best choice is D.

Question 14

Engagement letters include all of the following except:
A) a list of additional services that will be provided.
B) a list of adjusting journal entries.
C) information about the audit fee.
D) arrangements involving the use of experts.

Accepted Answer

Engagement letters generally do not include a list of adjusting journal entries, as those are typically prepared by the audit team during the course of the engagement based on their findings. The other three options - a list of additional services, information about the audit fee, and arrangements involving the use of experts - are commonly included in an engagement letter.

Question 15

An auditor searching for related-party transactions should obtain an understanding of each subsidiary's relationship to the total entity because:
A) intercompany transactions may have been consummated on terms equivalent to arm's length transactions.
B) this might reveal whether particular transactions would have taken place if the parties had not been related.
C) the business structure may be deliberately designed to obscure related-party transactions.
D) this might permit the audit of intercompany account balances to be performed as of concurrent dates.

Accepted Answer

The answer of An auditor searching for related-party transactions should...

Question 16

Before accepting an engagement to audit a new client, an auditor is required to:
A) make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
B) obtain the prospective client's signature on the engagement letter.
C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D) discuss the management representation letter with the prospective client's audit committee.

Accepted Answer

Before accepting an engagement to audit a new client, an auditor is required to make inquiries of the predecessor auditor after obtaining the consent of the prospective client, as per the auditing standards. This helps the auditor to assess the integrity of the client, potential risks, and the adequacy of the previous audit, if any. Option B is not correct because obtaining the client’s signature on the engagement letter is a part of the acceptance process, but not mandatory before making inquiries of the predecessor auditor. Option C is incorrect because the preliminary audit plan is formulated after acceptance, not before. Option D is also incorrect because the management representation letter is obtained after acceptance, not before.

Question 17

Which of the following should an auditor obtain from the previous auditor prior to accepting an audit engagement?
A) Analysis of statement of financial position accounts.
B) Analysis of income statement accounts.
C) All matters of continuing accounting significance.
D) Facts that might bear on the integrity of management.

Accepted Answer

An auditor should obtain facts that might bear on the integrity of management from the previous auditor to assess the risk and appropriateness of accepting the audit engagement.

Question 18

Inquiry of the previous auditor is:
A) required about matters that have a bearing on acceptance of the client.
B) required after acceptance of a new client regarding matters the successor believes may affect the conduct of his or her audit.
C) helpful to the successor and may facilitate the successor's audit, but is not required either before or after acceptance of the client.
D) required only if the change in auditors resulted from a disagreement between the client and previous auditors.

Accepted Answer

Inquiring the previous auditor is required about matters that have a bearing on the acceptance of the client to ensure there are no issues that could affect the new auditor's ability to perform the audit.

Question 19

Which of the following situations would most likely require special audit planning by the auditor?
A) Some items of factory and office equipment do not bear identification numbers.
B) Depreciation methods used on the client's tax return differ from those used on the books.
C) Assets costing less than $500 are expensed even though the expected life exceeds one year.
D) Inventory is comprised of precious gemstones.

Accepted Answer

Inventory comprising of precious gemstones would require special audit planning as it is a high-risk area for potential fraud, theft and valuation issues. The nature of the inventory also makes it difficult to audit and verify its existence and completeness.

Question 20

Prior to the acceptance of an audit engagement with a client who has terminated the services of the previous auditor, the proposed auditor should:
A) contact the previous auditor without advising the prospective client and request a complete report of the
Circumstances leading to the termination with the understanding that all information disclosed will be kept confidential.
B) accept the engagement without contacting the previous auditor, since the proposed auditor can include audit procedures to verify the reason given by the client for the termination.
C) not communicate with the previous auditor, because this would in effect be asking the auditor to violate the confidential relationship between auditor and client.
D) advise the client of the intention to contact the previous auditor and request permission for the contact.

Accepted Answer

It is important for the proposed auditor to contact the previous auditor in order to obtain relevant information about the client and the circumstances leading to the termination of the previous audit engagement. This can help the proposed auditor assess the risks associated with the client and determine if there are any issues that need to be addressed before accepting the engagement. However, prior permission from the client should be obtained before making any contact with the previous auditor. This is important to maintain the confidentiality between the proposed auditor and the client.

Quiz 6: Planning, Understanding the Entity and Evaluating Business Risk

During preliminary audit planning:

The scope and nature of an auditor's contractual obligation to a client ordinarily is established in the:

An audit program should be designed for each individual audit and should include audit steps and procedures to:

Because of the risk of material misstatement, an audit of a financial report in accordance with the auditing standards should be planned and performed with an attitude of:

When an auditor is approached to perform an audit for the first time, the auditor should make inquiries of the previous auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

Time budgets on audit engagements are not used for which of the following reasons?

Which of the following factors most likely would cause an auditor to not accept a new audit engagement?

To ascertain the exact name of the corporate client, the auditor relies primarily on:

A prospective client's refusal to give permission to communicate with the previous auditor and review certain portions of the previous auditor's working papers will bear directly on the auditor's decision concerning the:

What is the responsibility of an auditor with respect to communicating with the previous auditor in connection with a prospective new audit client?

An audit firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:

An auditor obtains knowledge about a new client's business and its industry in order to:

Engagement letters include all of the following except:

An auditor searching for related-party transactions should obtain an understanding of each subsidiary's relationship to the total entity because:

Before accepting an engagement to audit a new client, an auditor is required to:

Which of the following should an auditor obtain from the previous auditor prior to accepting an audit engagement?

Inquiry of the previous auditor is:

Which of the following situations would most likely require special audit planning by the auditor?

Prior to the acceptance of an audit engagement with a client who has terminated the services of the previous auditor, the proposed auditor should: