Question 1

Items documented in an engagement letter about which the auditor and client establish an understanding include:
A) management's responsibility for ensuring that the company complies with applicable laws and regulations.
B) management's responsibility for providing reasonable assurance about whether the financial statements are free of material misstatement.
C) the auditor's responsibility for maintaining effective ICFR throughout the audit engagement.
D) the auditor's responsibility for signing a management representation letter at the conclusion of the audit engagement.

Accepted Answer

The engagement letter typically includes management's responsibility for compliance with laws and regulations.

Question 2

The first section of an engagement letter addresses the terms of the services and related report, including the auditor's performance of a(n):
A) integrated audit of the financial statements and ICFR.
B) integrated audit of the financial statements and income tax returns.
C) integrated audit of the information contained in each Form 10-Q filed during the year.
D) review of the company's monthly financial information to be filed with the SEC

Accepted Answer

The first section of an engagement letter typically addresses the terms and scope of the audit, and an integrated audit of the financial statements and internal control over financial reporting (ICFR) is a common type of audit engagement. Choice B is incorrect because preparing income tax returns is not typically part of an audit engagement. Choice C is incorrect because the auditors do not perform audits of Form 10-Q filings; rather, they may review these filings or perform procedures related to certain disclosures contained within them. Choice D is incorrect because the engagement letter typically does not outline a review of monthly financial information unrelated to the financial statements.

Question 3

Which of the following matters would not be included in the terms of an engagement letter?
A) Audit fees and billing arrangements.
B) Involvement of internal auditors and/or a predecessor auditor.
C) Additional services to be provided in connection with the engagement.
D) Conditions under which the auditor's independence requirement may be waived.

Accepted Answer

The auditor's independence cannot be waived as it is a fundamental principle for the integrity and objectivity of an audit. Engagement letters typically include details such as audit fees, involvement of other auditors, and additional services, but not conditions for waiving independence requirements.

Question 4

Auditors of public companies are required by SOX to communicate certain matters to the client company's audit committee, including:
A) significant audit findings and adjustments made to the financial statements.
B) identification of the auditor who will sign the SOX 302 certification.
C) identification of the auditor who will sign the management representation letter.
D) an explanation about whether the auditor chose to follow PCAOB or AICPA standards during the engagement.

Accepted Answer

SOX requires auditors to communicate significant audit findings and adjustments made to the financial statements to the client company's audit committee. The other options listed (B, C, and D) are not specifically required by SOX.

Question 5

Which of the following items is not important with regard to an auditor's responsibilities for communicating with the audit committee?
A) Disagreements with management.
B) Difficulties encountered in the performance of audit testing.
C) Significant deficiencies and material weaknesses in ICFR.
D) New staff members included on the audit team.

Accepted Answer

The inclusion of new staff members on the audit team is not relevant to the auditor's responsibilities for communicating with the audit committee. The other options are important matters that the auditor should communicate to the audit committee in order to fulfill their responsibilities.

Question 6

The absence of sufficiently documented evidence to support management's assessment of the operating effectiveness of ICFR is a(n):
A) material weakness that would require the auditor to withdraw from the audit engagement.
B) internal control deficiency that could preclude the issuance of an unqualified audit report.
C) matter of concern only to the company's audit committee, predecessor auditors, and internal auditors.
D) example of the effective operation of the company's document retention policy.

Accepted Answer

The absence of sufficiently documented evidence to support management's assessment of the operating effectiveness of ICFR is an internal control deficiency, as it shows a lack of proper documentation and processes to ensure the effectiveness of internal controls. This deficiency could potentially prevent the issuance of an unqualified audit report, as it raises concerns about the reliability of the financial statements.

Question 7

The engagement letter includes provisions for the electronic filing of the client company's financial reports with the SEC. These provisions include consents which will authorize the:
A) use of the audit firm's logo on each page of the filing.
B) use of the audit firm's name in the electronic submission.
C) retention of audit evidence for a period of 10 years following the audit engagement.
D) dissemination of the audit report to the auditor's other clients.

Accepted Answer

The provisions in the engagement letter for electronic filing with the SEC typically include authorizations for the use of the audit firm's name in the submission. This is necessary to comply with SEC rules on the identification of the auditor in financial filings. The use of the audit firm's logo or dissemination of the audit report to other clients is not relevant to SEC electronic filings. Retention of audit evidence is a requirement of generally accepted auditing standards, but it is not specific to SEC filings.

Question 8

Which of the following is not a responsibility of an audit committee?
A) Hiring, compensating, and overseeing the company's independent auditor relationship.
B) Receiving and addressing complaints about accounting, internal control, and auditing matters.
C) Resolving disagreements between management and the auditor regarding financial reporting.
D) Preparing the disclosures that accompany the financial statements in the company's annual report.

Accepted Answer

The preparation of disclosures in the annual report is the responsibility of management and not the audit committee. The other three options listed are typical responsibilities of an audit committee.

Question 9

An audit engagement letter:
A) is prepared by the client company and signed by a representative of the audit firm.
B) provides a guarantee that the auditor will express an opinion as a result of the audit.
C) is signed by management at the conclusion of the audit engagement.
D) specifies that management is responsible for establishing and maintaining effective ICFR.

Accepted Answer

An audit engagement letter is a formal document that outlines the responsibilities of both parties involved in the audit. One key aspect it covers is the acknowledgment by the client's management of their responsibility for establishing and maintaining internal controls over financial reporting (ICFR). This is crucial for ensuring the integrity of the financial information that will be audited. The letter does not guarantee an opinion, is not prepared by the client nor signed at the conclusion of the audit.

Question 10

An engagement letter states that a company should maintain documentation sufficient to support its assessment of ICFR for a period of:
A) ten years from the date of the audit report.
B) seven years from the date of the audit report.
C) five years from the date of the financial statements.
D) three years from the date of the financial statements.

Accepted Answer

The PCAOB's Auditing Standard No. 5 requires auditors to retain documentation for seven years from the date of the audit report. This includes documentation related to the company's assessment of ICFR.

Question 11

Which of the following is not an attribute of a financial expert?
A) An understanding of internal controls and procedures for financial reporting.
B) An affiliation with the company or its subsidiaries.
C) Education and experience as a financial officer, accountant, or auditor.
D) An understanding of GAAP.

Accepted Answer

An affiliation with the company or its subsidiaries can create a conflict of interest and compromise the objectivity of a financial expert. Therefore, it is not considered an attribute of a financial expert.

Question 12

The limitations of an audit which are documented in an engagement letter pertain to each of the following except:
A) material errors or illegal activities having a direct and material financial statement impact may not be detected because of the judgmental nature of many audit areas and the fact that detailed tests are not performed for all types of transactions.
B) fraudulent activities having a direct and material financial statement impact may not be detected because of the nature of fraud, including the possibility of the perpetrator's concealment efforts and/or management's override of controls.
C) internal controls may change or deteriorate such that they may not be effective in the prevention or detection of future material misstatements in the financial statements.
D) under the standards established by the PCAOB, the auditor's responsibilities for communicating internal control weaknesses are limited to notification to the company's shareholders regarding material weaknesses.

Accepted Answer

The limitations of an audit which are documented in an engagement letter pertain to all of the choices except for D. The PCAOB requires the auditor to communicate internal control weaknesses to management and those charged with governance, not just to shareholders.

Question 13

The engagement letter states that auditors are responsible for informing the client's audit committee about certain matters related to the conduct of the audit, including any:
A) serious difficulties encountered in performing the audit.
B) disagreements among audit team members pertaining to conclusions reached during the audit.
C) revisions made in the nature of audit tests performed as a result of information discovered during the course of the audit.
D) changes in the company's operational procedures during the year.

Accepted Answer

Auditors are responsible for communicating significant issues encountered during the audit, such as serious difficulties, to the client's audit committee.

Question 14

An audit engagement letter sets forth the auditor's responsibility for confirming its responsibility to provide written communications to the client company for each of the following items except: $\begin{array}{|l|l|l|}
\hline&\text { Communication }\
&\text { provided to: }&\text { Subject matter: } \
\hline \text { (a) } & \begin{array}{l}
\text { Management and }\
\text { the shareholders }
\end{array} & \begin{array}{l}
\text { All internal control deficiencies identified during }\
\text { the audit and not previously communicated. }
\end{array} \
\hline \text { (b) } & \text { Shareholders } & \begin{array}{l}
\text { All adjustments required to correct the financial } \
\text { statements }
\end{array} \
\hline \text { (c) } & \begin{array}{l}
\text { Management and } \
\text { the audit committee }
\end{array} & \begin{array}{l}
\text { All significant deficiencies and material } \
\text { weaknesses in ICFR identified during the audit. }
\end{array} \
\hline \text { (d) } & \text { Board of directors } & \begin{array}{l}
\text { The auditor's overall conclusions concerning the } \
\text { effectiveness of financial oversight and ICFR. }
\end{array} \
\hline
\end{array}$

Accepted Answer

The answer of An audit engagement letter sets forth the...

Question 15

A management representation letter is prepared for the purpose of:
A) confirming management's acceptance of the audit fees.
B) setting forth the terms of the audit engagement.
C) confirming the honesty and validity of audit information provided by management.
D) establishing management's responsibility for making the company's financial records available to the auditor.

Accepted Answer

A management representation letter is prepared by management to provide written confirmation to the auditor about various aspects of the entity's financial statements, including the honesty and validity of audit information provided by management. This letter helps the auditor to reduce the risk of material misstatement in the financial statements. Therefore, choice C is correct, while choices A, B, and D are incorrect.

Question 16

An audit engagement letter specifies that management of the client company is responsible for all of the following except:
A) preparing the financial statements.
B) maintaining effective ICFR.
C) providing the company's financial records for the auditor.
D) performing the audit in accordance with PCAOB standards.

Accepted Answer

The responsibility of performing the audit in accordance with PCAOB (Public Company Accounting Oversight Board) standards lies with the auditor, not management of the client company. Management is responsible for preparing the financial statements, maintaining effective ICFR (Internal Control over Financial Reporting), and providing the company's financial records for the auditor.

Question 17

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is known for making recommendations to audit committees concerning:
A) composition of the committee, communication requirements, and oversight responsibilities.
B) qualifications of the committee, timing of their terms, and specific corrections in ICFR systems.
C) SEC filing deadlines, stock exchange requirements, and qualifications of membership.
D) liquidity of the capital markets, types of SEC affiliations and reporting forms, and compensation requirements.

Accepted Answer

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is focused on making recommendations to audit committees regarding their composition, communication requirements, and oversight responsibilities. This includes ensuring that audit committees are made up of qualified individuals, that they are communicating effectively with management and external auditors, and that they are fulfilling their responsibilities for oversight of financial reporting and internal control over financial reporting. The other answer choices are not relevant to the focus and recommendations of this committee.

Question 18

Which of the following items is not one of management's responsibilities for communicating with the auditors?
A) Suspected fraudulent activities within the company.
B) Deficiencies in the design or operating effectiveness of ICFR.
C) Key accounts and transactions to be selected for testing.
D) Violations of regulations applicable to the company's activities.

Accepted Answer

Management is responsible for selecting and identifying key accounts and transactions to be sampled by the auditors, but communicating this information to the auditors is not explicitly listed as one of their responsibilities. The other options (suspected fraud, deficiencies in ICFR, violations of regulations) are all specific items that management should communicate to the auditors.

Question 19

The New York Stock Exchange requirements regarding composition of the audit committee include each of the following except:
A) the audit committee must have at least three members who are financially sophisticated, and one of those members must be independent.
B) the audit committee must have at least three members who are independent, and one of those members must be financially sophisticated.
C) each member of the audit committee must not have participated in the preparation of the financial statements of the issuer at any time during the past three years.
D) each member of the audit committee must have the ability to read and understand fundamental financial statements.

Accepted Answer

The correct requirement is that the audit committee must have at least three members who are independent, and at least one of those members must be financially sophisticated, not the other way around.

Question 20

The engagement letter states that an auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the following type of evidential matter:
A) results of audit testing.
B) responses to auditor inquiry.
C) management representation letter.
D) All of the above.

Accepted Answer

The engagement letter states that the auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the results of audit testing, responses to auditor inquiry, and management representation letter. Therefore, all of these types of evidential matter are necessary for the auditor to form an opinion, making D the correct answer.

Quiz 5: Client Acceptance and Continuance and Preliminary Engagement Procedures

Items documented in an engagement letter about which the auditor and client establish an understanding include:

The first section of an engagement letter addresses the terms of the services and related report, including the auditor's performance of a(n) :

Which of the following matters would not be included in the terms of an engagement letter?

Auditors of public companies are required by SOX to communicate certain matters to the client company's audit committee, including:

Which of the following items is not important with regard to an auditor's responsibilities for communicating with the audit committee?

The absence of sufficiently documented evidence to support management's assessment of the operating effectiveness of ICFR is a(n) :

The engagement letter includes provisions for the electronic filing of the client company's financial reports with the SEC. These provisions include consents which will authorize the:

Which of the following is not a responsibility of an audit committee?

An audit engagement letter:

An engagement letter states that a company should maintain documentation sufficient to support its assessment of ICFR for a period of:

Which of the following is not an attribute of a financial expert?

The limitations of an audit which are documented in an engagement letter pertain to each of the following except:

The engagement letter states that auditors are responsible for informing the client's audit committee about certain matters related to the conduct of the audit, including any:

A management representation letter is prepared for the purpose of:

An audit engagement letter specifies that management of the client company is responsible for all of the following except:

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is known for making recommendations to audit committees concerning:

Which of the following items is not one of management's responsibilities for communicating with the auditors?

The New York Stock Exchange requirements regarding composition of the audit committee include each of the following except:

The engagement letter states that an auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the following type of evidential matter: