Chapter 4

Question 1

1. Management assertion are
   a. stated as the footnotes to the financial statements
   b. implied or expressed representations about the accounts in the financial statements
   c. explicitly expressed representations about the financial statements
   d. provided to the auditor in the Assertion Letter, but are not disclosed on the financial statements

Question 2

2. The auditor uses assertions in assessing risks by considering the different types of potential misstatements that may occur, and thereby designing audit procedures that are responsive to the assessed risks. Assertions used by the auditor fall into the following categories:
   I. Assertions about classes of transactions and events for the period under audit.
   II. Assertions about account balances at the period end.
   III. Assertions about presentations and disclosure.
   a. I, II and III
   b. I and II only
   c. II and III only
   d. II only

Question 2

3. Assertions about classes of transactions and events for the period under audit least likely include
   a. Transactions and events that have been recorded have occurred and pertain to the entity
   b. All transactions and events that should have been recorded have been recorded.
   c. Transactions and events have been recorded in the correct accounting period.
   d. All assets, liabilities and equity interests that should have been recorded have been recorded.

Question 2

4. Assertion about account balances at period end which means assets, liabilities and equity interests are included in the financial statements at appropriate amount is
   a. Existence
   b. Completeness
   c. Rights and obligations
   d. Valuation and allocation

Question 3

5. Which statement is incorrect regarding inspection as an audit procedure?
   a. Inspection consists of examining records or documents or physical examination of assets
   b. Inspection of tangible assets may provide reliable audit evidences with respect to their existence and about the entity’s rights and obligations on the assets
   c. Inspection of individual inventory item ordinarily accompanies the observation of inventory counting
   d. Some documents represent direct audit evidence of the existence of an asset

Question 3

6. Which of the following statements is correct about observation procedure?
   a. It consists of looking at a process or procedures being performed by others
   b. It consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the party
   c. It is process of obtaining a representation of information or of an existing condition directly from a third party
   d. It is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.

Question 4

7. This consists of checking the mathematical accuracy of documents or records.
   a. Reperformance
   b. Confirmation
   c. Recalculation
   d. Inspection

Question 5

8. Which of the following statements is not correct?
   a. It would be a violation of the completeness assertion if management would record a sale that did not take place.
   b. The completeness assertion deals with matters opposite from those of the existence assertion.
   c. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included.
   d. The existence assertion is concerned with inclusion of amount that should not have been.

Question 6

9. Which of the following assertions does not relate to balances at period end?
   a. Existence
   b. Occurrence
   c. Valuation or Allocation
   d. Rights and Obligations

Question 7

10. Which of the following assertions does not relate to classes of transactions and events for the period?
    a. Completeness
    b. Valuation
    c. Cut-off
    d. Accuracy

Question 8

11. An assertion that transactions are recorded in the proper accounting period is:
    a. Classification
    b. Occurrence
    c. Accuracy
    d. Cut-off

Question 9

12. Which of the following statement is not correct?
    a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives.
    b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
    c. The cost of accumulating the evidence should be minimized.
    d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditors select.

Question 10

13. Which of the following is the correct order of steps in the audit process?
    A. Perform tests of control
    B. Develop an overall strategy for the expected conduct and scope of the audit
    C. Obtain client’s written representation
    D. Prepare engagement letter
    E. Perform substantive tests
    a. D, A, B, E, C
    b. D, B, A, E, C
    c. D, B, C, A, E
    d. D, B, E, A, C

Question 10

14. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement activities?
    a. Perform procedures regarding the continuance of the client relationship and the specific audit engagement
    b. Evaluate compliance with ethical requirements, including independence
    c. Establish an understanding of the terms of the engagement
    d. Obtain understanding of the legal and regulatory framework applicable to the entity

Question 11

15. Which of the following is not one of the reasons why auditor should perform preliminary engagement activities?
    a. To ensure that the auditor maintains the necessary independence and ability to perform the engagement
    b. To help ensure that there are no issues with management integrity that may affect the auditor’s willingness to continue the engagement
    c. To ensure that there is no misunderstanding with the client as to terms of the engagement
    d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion on the financial statement

Question 12

16. Which of the following is not normally performed in the preplanning or pre-engagement phase?
    a. Deciding whether to accept or reject an audit engagement
    b. Inquiring from predecessor auditor
    c. Preparing an engagement letter
    d. Making a preliminary estimate of materiality

Question 13

17. Before accepting an engagement to audit a new client, a CPA is required to obtain
    a. A preliminary understanding of the prospective client’s industry and business
    b. The prospective client’s signature to the engagement letter
    c. An understanding of the prospective client’s control environment
    d. A representation letter from the prospective client

Question 14

18. Preliminary knowledge about the client’s business and industry must be obtained prior to the acceptance of the engagement primarily to
    a. Determine the degree of knowledge and expertise required by the engagement
    b. Determine the integrity of management
    c. Determine whether the firm is independent with the client
    d. Gather evidence about the fairness of the financial statements

Question 15

19. A CPA 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 predecessor auditor and the prospective client were resolved satisfactorily
    b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion
    c. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding the prospective client and its management
    d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests

Question 16

20. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
    predecessor auditor, the CPA should
    a. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstance leading to the termination with the understanding that all information disclosed will be kept confidential
    b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination
    c. Not communicate with the predecessor auditor because would in effect be asking the auditor to violate the confidential relationship between the auditor and client
    d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact

Question 17

21. When a CPA is approached to perform an audit for the first time, the CPA should make inquires of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the incoming auditor with information that will assist the incoming auditor in determining.
    a. Whether the predecessor’s work should be utilized
    b. Whether the company follows the policy of rotating its auditors
    c. Whether in the predecessor’s opinion internal control of the company has been satisfactory
    d. Whether the engagement should be accepted

Question 18

22. Hill, CPA, has been retained t audit the financial statements of Monday Co. Monday’s predecessor auditor was Post, CPA, who has been notified by Monday that Post’s services have been terminated. Under these circumstances, which party should initiate the communication between Hill and Post?
    a. Hill, the incoming auditor
    b. Post, the predecessor auditor
    c. Monday’s controller of CFO
    d. The chairman of Monday’s board of directors

Question 19

23. In an audit, communication between the predecessor and incoming auditor should be
    a. authorized in an engagement letter
    b. acknowledged in a representation letter
    c. either written or oral
    d. written and included in the working papers

Question 20

24. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar Corporation. Arnel plans to consult Von and to review Von’s prior year working papers. Arnel may do so if
    a. Von and Almar consent
    b. Almar consents
    c. Von consents
    d. Von and Arnel consent

Question 21

25. Upon discovering material misstatements in a client’s financial statements that the client would not revise, the auditor withdrew from the engagement. If asked by the incoming auditor about the termination the engagement, the predecessor auditor should a. State that he found material misstatements that the client would not revise b. Suggest that the incoming auditor ask the client c. Suggest that the incoming auditor obtain the client’s permissions to discuss the reasons d. Indicate that a misunderstanding occurred

Question 22

26. Before accepting an audit engagement, an incoming auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued b. Understanding as to the reasons for the change of auditors c. Awareness of the consistency in the application of GAAP between periods d. Evaluation of all matters of continuing accounting significance

Question 23

27. An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding a. Specialized accounting principles of the client’s industry b. The competency of the client’s internal audit staff c. The uncertainty inherent in applying sampling procedures d. Disagreements with management as to auditing procedures

Question 24

28. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement a. Analysis of balance sheet accounts b. Analysis of income statement accounts c. All matters of continuing accounting significance d. Facts that might bear on the integrity of management

Question 25

29. What information should an incoming auditor obtain during the inquiry of the predecessor auditor prior to acceptance of the audit? I. Facts that bear on the integrity of management II. Whether statistical or non-statistical sampling was used to gather evidence III. Disagreement with management concerning auditing procedures IV. The effect of the client’s internal audit function on the scope of the independent auditor’s examination a. I and II b. I and III c. I and IV d. III and IV

Question 26

30. An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s Engagement Letter Working Paper a. Yes Yes b. Yes No c. No Yes d. No No

Question 27

31. 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 control structure b. The close proximity to the end of the entity’s fiscal year c. Concluding that the entity’s management probably lacks integrity d. An inability to perform preliminary analytical procedures before assessing control risk

Question 28

32. Which of the following factors most likely would influence an auditor’s determination of the auditability of the entity’s financial statements a. The complexity of the accounting system b. The existence of related transactions c. The adequacy of the accounting records d. The operating effectiveness of control procedures

Question 28

33. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s work papers. The prospective client refusal to permit this will bear directly on Hawkins decision concerning the: a. Adequacy of the preplanned concerning audit program b. Ability to establish consistency in application of accounting principles between years c. Apparent scope limitations d. Integrity of management

Question 28

34. Before performing any audit procedures. The auditor and the client should agree on the Type of opinion be expressed Terms of the Engagement a. Yes Yes b. No Yes c. No Yes d. Yes Yes

Question 29

35. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a(n) a. memorandum to be placed in the permanent section of the auditing working papers b. engagement letter c. client representation letter d. comfort letter

Question 29

36. If an auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increased professional scepticism b. Decline to accept or perform the audit c. Assess the control risk at the maximum level and perform a primarily substantive audit d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud

Question 30

37. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would normally be sent to the client a. before the audit report is issued b. after the audit report is issued c. at the end of the fieldwork d. before the commencement of the engagement

Question 31

38. An engagement letter should include information on the objectives of the engagement and CPA’s Responsibilities Client’s Responsibilities Limitation of Engagement a. Yes Yes Yes b. Yes No Yes c. Yes No No d. No No No

Question 32

39. Which of the following would be least likely to be included in the auditor’s engagement letter a. Forms of the report b. Extent of his responsibilities to his client c. Objectives and scope of the audit d. Type of opinion to be issued

Question 32

40. Which of the following is not one of the principal contents of an engagement letter? a. objective of the financial statements b. unrestricted access to records and documents c. limitations of the engagement d. management’s responsibility for the financial statements

Question 32

42. The audit engagement letter should generally include a reference to each of the following except a. The expectation of receiving a written management representation letter b. A request for the client to confirm the terms of the engagement c. A description of the auditor’s method of sample selection d. The risk that material misstatements may remain undiscovered

Question 32

41. An engagement letter would not normally include a. billing arrangement b. arrangement concerning client’s assistance c. details of the procedure that will be performed d. expectation of receiving a representation letter from management

Question 32

43. After preliminary audit, arrangements have been made, an engagement confirmation letter should be sent to the client. The letter usually would not include a. A reference to the auditor’s responsibility for the detection of errors or irregularities b. An estimate of the time to be spent on the audit work by audit staff and management c. A statement that management advisory services would be made available upon request d. A statement that a management letter will be issued outlining comments and suggestions as to any procedures requiring client’s attention

Question 32

44. Arrangements concerning which of the following are least likely to be included in engagement letter? a. auditor’s responsibilities b. Fees and billing c. CPA investment in client securities d. Other forms of reports to be issued in addition to the audit report

Question 33

45. The use of engagement letter is the best method of documenting I. The required communication of significant deficiencies in internal control structure II. Significantly lower materiality levels than those used in the prior audit III. The description of any letters or reports that the auditor expects to issue IV. Notification of any changes in the original arrangements of the audit a. I and II b. I and IV c. II and III d. III and IV

Question 34

46. In which of the following situations would the auditor be unlikely to send a new engagement letter to a continuing client? a. a change in terms of the engagement b. a significant change in the nature or size of the client’s business c. a recent change of the client’s management d. a recent change in the partner and/or staff in the audit engagement