Deck 3: Engagement Planning

Question 1

The Code of Professional Conduct permits predecessor auditors to give information to the auditors without client consent.

Answer 1

False

Question 2

The concept of materiality emphasizes the accountants' and managers' point of view,not the users' point of view.

Answer 2

False

Question 3

CAATs software may be utilized to read,compute,and operate on machine-readable records.

Answer 3

True

Question 4

The computer has simplified auditing by providing a better audit trail.

Question 5

The most important facet of the current audit evidence files is the requirement that they show the auditor's decision-making process and conclusions reached.

Question 6

Auditors use two kinds of audit plans,one for obtaining evidence about control risk,and the other for obtaining evidence about dollar amounts and disclosures.

Question 7

CAATs software requires auditors to do the original programming.

Question 8

The use of computer systems has increased the potential for management supervision of the internal control system.

Question 9

The use of computer-assisted auditing techniques has significantly changed auditing objectives.

Question 10

Control activities in computerized accounting systems may have characteristics that differ from manual control activities designed to accomplish the same control objectives.

Question 11

A major reason for thinking about overall materiality at the planning stage is to try to fine-tune the audit for effectiveness and efficiency.

Question 12

An important element of a public accounting firm's system of quality control is the decision about client acceptance and retention.

Question 13

When management can exercise discretion over an accounting treatment,auditors tend to exercise more care and use a more stringent materiality criterion.

Question 14

Auditors usually prepare an audit plan summarizing the preliminary analytical review and the materiality assessment.

Question 15

The degree of computer complexity and use may influence the nature,timing,and extent of audit procedures.

Question 16

Engagement letters are not necessary for continuing clients.

Question 17

Auditors usually choose separate measures of materiality for each of the financial statements.

Question 18

A first-time audit requires more work than a repeat engagement.

Question 19

Auditors are generally left without definitive,quantitative guidelines for determining materiality.

Question 20

A second audit partner is required for audits of financial statements filed with the SEC.

Question 21

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?

A) The entity has no formal written code of conduct.
B) The integrity of entity's management is suspect.
C) Procedures requiring separation of duties are subject to management override.
D) Management fails to modify prescribed controls for changes in conditions.

Question 22

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

A) Inquiring of the client's legal counsel concerning pending litigation.
B) Comparing the financial statements to anticipated results.
C) Examining computer-generated exception reports to verify the effectiveness of internal controls.
D) Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

Question 23

This year,Blakeney Enterprises engaged a new auditor who must

A) Attempt to communicate with the predecessor auditor before accepting the engagement.
B) Review the predecessor's audit documentation if the audit is to be in accordance with GAAS.
C) Seek the SEC's permission to accept the engagement if Blakeney is publicly owned.
D) Reject the engagement if the change in auditors resulted from a dispute with the predecessor.

Question 24

The auditor is not required to ask the predecessor auditor about

A) Facts that might bear on the integrity of management.
B) Disagreements the predecessor may have had with management about accounting principles and audit procedures.
C) The fees charged for the previous audit.
D) The predecessor's understanding about the reasons for the change of auditors.

Question 25

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 to 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.

Question 26

The pre-engagement activities of an audit engagement for a public accounting firm do not include

A) Evaluating the public accounting firm's independence with regard to the audit engagement.
B) Obtaining predecessor audit documentation.
C) Obtaining an engagement letter.
D) Ensuring that there are sufficient firm resources to complete the engagement on a timely basis.

Question 27

Audit procedures are intended to enable auditors to conduct work in accordance with the three performance principle.

Question 28

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

A) An inadequate understanding of the entity's internal controls.
B) The close proximity to the end of the entity's fiscal year.
C) Concluding that the entity's management probably lacks integrity.
D) The inability to perform preliminary analytical procedures before assessing control risk.

Question 29

Audit documentation does not normally include the

A) Specific assertions under audit.
B) Industry accounting guides.
C) Record of the procedures performed.
D) Decisions made in the course of the audit.

Question 30

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?

A) Performing tests of details of transactions and balances.
B) Reviewing prior year audit documentation and the permanent file for the client.
C) Reading specialized industry journals.
D) Reevaluating the client's internal control environment.

Question 31

An engagement letter is used primarily to

A) Ensure a clear contractual understanding of the services to be provided by the CPA.
B) Express an opinion on the financial statements.
C) Provide management representations to be included in the audit evidence.
D) Disclaim liability.

Question 32

Management's responsibility in a computer system would not include

A) Ensuring that the documentation of the system is complete and up to date.
B) Maintaining a system of transaction processing that includes an audit trail.
C) Assessing the control risk.
D) Making computer resources and knowledgeable personnel available for questions.

Question 33

The firm of Banta,Brown,and Burgess,CPAs,requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner.This procedure provides evidence of professional concern regarding which generally accepted auditing standard?

A) Independence.
B) Adequate technical competence and capabilities.
C) Adequate planning and supervision.
D) Gathering sufficient competent evidence.

Question 34

During the initial planning phase of an audit,a CPA most likely would

A) Test specific internal control activities that are likely to prevent fraud.
B) Evaluate the reasonableness of the client's accounting estimates of inventory obsolescence.
C) Discuss the timing of the audit procedures with the client's management.
D) Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

Question 35

Errors in data processed in a batch computer system may not be detected immediately because

A) Transaction trails in a batch system are available for only a limited period of time.
B) There are time delays in processing transactions in a batch system.
C) Errors in some transactions cause rejection of other transactions in the batch.
D) Random errors are more likely in a batch system than in an online system.

Question 36

C.Hill,CPA,has been retained to audit the financial statements of Monday Co.Monday's predecessor auditor was K.Post,CPA,whom Monday has notified by that its services have been terminated.Under these circumstances,which party should initiate the communications between Hill and Post?

A) Hill, the auditor.
B) Post, the predecessor auditor.
C) Monday's controller or CFO.
D) The chair of Monday's board of directors.

Question 37

Scanning is an "eyes-open" approach of looking for anything unusual in the accounts.

Question 38

Audit plans are used as audit planning tools.

Question 39

Which of the following types of transactions would be routine and computerized?

A) Capital stock sales and repurchases.
B) Credit sales and billings.
C) Income tax expense and liability.
D) Bank loan transactions.

Question 40

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates,the audit team should

A) Reduce audit risk by lowering the preliminary levels of materiality.
B) Design special substantive tests to compensate for the lack of industry expertise.
C) Engage financial experts familiar with the nature of the industry.
D) Obtain knowledge of matters that relate to the nature of the entity's business.

Question 41

Looking at vendors' invoices for particular information is an example of

A) Physical observation.
B) Confirmation.
C) Inspection of documents.
D) Scanning.

Question 42

Which of the following is not a way in which auditors use the concept of overall materiality?

A) As a guide to planning the audit plan.
B) As a guide to the evaluation of evidence.
C) As a guide for making decisions about the audit report.
D) As a guide for assessing control risk.

Question 43

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

A) Assessment of inherent risk, yes; assessment of control risk, yes
B) Assessment of inherent risk, yes; assessment of control risk, no
C) Assessment of inherent risk, no; assessment of control risk, yes
D) Assessment of inherent risk, no; assessment of control risk, no

Question 44

Which of the following would be a step in an internal control program?

A) Obtain an aged trial balance of the accounts receivable.
B) Prepare and send confirmations on a sample of customers' accounts receivable.
C) Assess the control risk for sales and collections.
D) Read sales contracts for evidence of customers' rights of return or price allowance terms.

Question 45

Which of the following is not a category of audit documentation?

A) Temporary files.
B) Permanent files.
C) Audit administrative files.
D) Current documentation files.

Question 46

In testing the existence assertion for an asset,an auditor ordinarily works from the

A) Financial statements to the potentially unrecorded items.
B) Potentially unrecorded items to the financial statement.
C) Accounting records to the supporting evidence.
D) Supporting evidence to the accounting records.

Question 47

Which of the following is not one of the four major cycles?

A) Revenue and cash collection.
B) Acquisition and expenditure.
C) Cash receipts and disbursements.
D) Financing and investing.

Question 48

Which of the following is not considered an accounting estimate?

A) Allowance for loan losses.
B) Credit sales.
C) Net realizable value of inventory.
D) Percentage-of-completion revenue to be recorded.

Question 49

The basic auditing application of the personal computer as an audit tool would not include

A) Spreadsheet analysis.
B) Sample planning, selection, and evaluation.
C) Continuous monitoring of a client's internal control system.
D) Analytical review.

Question 50

The essential advantages of a computer-assisted audit techniques (CAATs)package would not include the fact that

A) The same software can be used on different types of clients' computer environments.
B) A large number of CAATs packages are currently available.
C) Software packages are always inexpensive.
D) The ability to control and modify the program to meet an auditors' need.

Question 51

An auditor would most likely be use word processing software for what purpose?

A) Performing analytical procedures.
B) Preparing a trial balance.
C) Preparing an audit plan.
D) Obtaining a sample selection.

Question 52

A primary advantage of using computer-assisted audit techniques (CAATs)packages to audit the financial statements of a client that uses computerized information systems is that the auditor may

A) Access information stored on computer files even with a limited understanding of the client's hardware and software features.
B) Consider increasing the use of substantive tests of transactions in place of analytical procedures.
C) Substantiate the accuracy of data by using self-checking digits and hash totals.
D) Reduce the level of required tests of controls to a relatively small amount.

Question 53

The idea of the cycle approach is to group accounts together by

A) Specific function.
B) Financial statement assertion.
C) Audit objective.
D) Transactions that affect all accounts in that particular group.

Question 54

Computer-assisted audit techniques (CAATs)could not be used for which of the following audit tasks?

A) Testing calculations and making computations.
B) Evaluating control risk assessment.
C) Summarizing, resequencing, and reformatting data.
D) Comparing audit evidence from manual audit procedures to company needs.

Question 55

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on

A) Absolute size.
B) Relative size.
C) Nature of the item.
D) Cumulative effects.

Question 56

An auditor would least likely use computer software to

A) Access client data files.
B) Prepare spreadsheets.
C) Assess information systems control risk.
D) Construct parallel simulations to test the client's computing system.

Question 57

The characteristics that distinguish computer processing from manual processing would not include

A) A decrease of management supervision of operations.
B) Automatic initiation and execution of transactions.
C) The possible concentration of control activities.
D) A high potential for unauthorized access to data.

Question 58

Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs)to determine whether comparable information is in agreement.Examples of such comparisons would not include

A) Payroll details with personnel records.
B) Current and prior inventory to details of purchases and sales.
C) Paid vouchers to disbursements.
D) Observation of inventory accounts.

Question 59

Which of the following use of computer-assisted audit techniques (CAATs)would most likely be considered a search for fraudulent activities?

A) Selecting customers' accounts receivable for confirmation.
B) Recalculating inventory extensions.
C) Scanning accounts receivable balances for amounts over the credit limit.
D) Comparing a list of vendor addresses to employee address files.

Question 60

The auditor looked at a bank statement received and held by the client.What kind of audit procedure would this be considered?

A) Recalculation.
B) Physical observation.
C) Confirmation.
D) Examination of documents.

Question 61

The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of

A) Planning.
B) Supervision.
C) Information evaluation.
D) Quality assurance.

Question 62

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

A) Presentation and disclosure.
B) Completeness.
C) Rights and obligations.
D) Existence.

Question 63

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A) Trace test counts noted during the physical count of inventory to the summarization of quantities.
B) Inspect agreements for evidence of inventory held on consignment.
C) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.
D) Inspect the open purchase order file for significant commitments to consider for disclosure.

Question 64

In designing written audit plans,an auditor should establish specific audit objectives that relate primarily to the

A) Timing of audit procedures.
B) Cost-benefit of gathering techniques.
C) Selected audit techniques.
D) Financial statement assertions.

Question 65

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

A) Rights and obligations.
B) Completeness.
C) Presentation and disclosure.
D) Existence or occurrence.

Question 66

In considering overall materiality for planning purposes,an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet.Ordinarily,it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating

A) $10,000.
B) $15,000.
C) $20,000.
D) $30,000.

Question 67

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

A) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
B) Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices.
C) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
D) Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end.

Question 68

During an audit of an entity's stockholders' equity accounts,the auditor determines whether there are restrictions on retained earnings resulting from loans,agreements,or state law.This audit procedure most likely is intended to verify management's assertion

A) Existence or occurrence.
B) Completeness.
C) Valuation or allocation.
D) Presentation and disclosure.

Question 69

The confirmation of a cash balance provides primary evidence regarding which management assertion?

A) Existence.
B) Valuation.
C) Allocation.
D) Completeness.

Question 70

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?

A) Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
B) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.
C) Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
D) Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.

Question 71

In auditing accrued liabilities,an auditor's procedures most likely would focus primarily on management's assertion of

A) Existence or occurrence.
B) Completeness.
C) Presentation and disclosure.
D) Valuation or allocation.

Question 72

An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of

A) Valuation or allocation.
B) Presentation and disclosure.
C) Existence or occurrence.
D) Rights and obligations.

Question 73

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

A) Tracing amounts in the subsidiary ledger to details on shipping documents.
B) Comparing receivable turnover rates to industry statistics for reasonableness.
C) Inquiring about receivables pledged under loan agreements.
D) Assessing the allowance for uncollectible accounts for reasonableness.

Question 74

The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion?

A) Completeness.
B) Valuation.
C) Allocation.
D) Existence.

Question 75

An auditor most likely would inspect additions to the audit client's Property,Plant,and Equipment account to obtain evidence concerning management's assertions about

A) Existence or occurrence.
B) Rights and obligations.
C) Presentation and disclosure.
D) Valuation or allocation.

Question 76

An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse.The auditor then found the items selected at the warehouse and counted them.This procedure most likely obtained evidence concerning management's assertion of

A) Rights and obligations.
B) Completeness.
C) Existence or occurrence.
D) Valuation.

Question 77

To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded,an auditor most likely would seek to

A) Inspect the stock certificates evidencing the investment.
B) Examine the audited financial statements of the investee company.
C) Review the broker's advice or canceled check for the investment's acquisition.
D) Obtain market quotations from The Wall Street Journal or another independent source.

Question 78

In determining whether transactions have been recorded,the direction of the audit testing should start from the

A) General ledger balances.
B) Adjusted trial balance.
C) Original source documents.
D) General journal entries.

Question 79

Auditors should design the written audit plan so that

A) All material transactions will be selected for substantive testing.
B) Substantive tests prior to the balance sheet date will be minimized.
C) The audit procedures selected will achieve specific audit objectives.
D) Each account balance will be tested under either tests of controls or tests of transactions.

Question 80

In the preparation of an audit plan,which of the following items is not essential?

A) A review of material from prior audits.
B) The preparation of a budget identifying the costs of resources needed.
C) An understanding of controls established by management.
D) Assessment of inherent risk.