tbchap003

Chapter 03

Engagement Planning

Multiple Choice Questions

1. 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.

2. 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.

3. Which of the following statements is most accurate regarding sufficient and

appropriate documentation?

A. Accounting estimates are not considered sufficient and appropriate documentation.

B. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.

D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

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4. When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

A. Considering unaudited account balances and ratios to calculate what adjusted balances should be

B. Identifying reasonable explanations for unexpected differences before talking to client management

C. Considering the pattern of several unusual changes without trying to explain what caused them

D. Comparing client data with client-determined expected results to reduce detailed tests of account balances

5. Which of the following explanations best describes why an auditor may decide to

reduce tests of details for a particular audit objective?

A. The audit is being performed soon after the balance sheet date.

B. Audit staff are experienced in performing the planned procedures.

C. Analytical procedures have revealed no unusual or unexpected results.

D. There were many transactions posted to the account during the period.

6. Which of the following steps should an auditor perform first to determine the

existence of related parties?

A. Examine invoices, contracts, and purchasing orders.

B. Request a list of related parties from management.

C. Review the company's business structure.

D. Review proxy and other materials filed with the SEC.

7. Which of the following is a correct statement regarding the nature and timing of

communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

A. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

B. The firm must address all independence impairment issues on the date of the audit opinion.

C. Communications related to independence may occur in any form prior to issuance of the financial statements.

D. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.



8. Before accepting an engagement to audit a new client, a CPA is required to obtain

A. an assessment of fraud risk factors likely to cause material misstatements.

B. an understanding of the prospective client's industry and business.

C. the prospective client's signature to a written engagement letter.

D. the prospective client's consent to make inquiries of the predecessor, if any.

9. During a financial statement audit an internal auditor may provide direct assistance

to the independent CPA in performing.

A. Option A

B. Option B

C. Option C

D. Option D

10. When assessing internal auditors' objectivity, an independent auditor should

A. consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

B. review the internal auditors' reports to determine that their conclusions are consistent with the work performed.

C. verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment.

D. evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.



11. Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

A. Make inquiries of the client's lawyer concerning pending litigation.

B. Perform cutoff tests of cash receipts and disbursements.

C. Compare financial information with nonfinancial operating data.

D. Recalculate the prior year's accruals and deferrals.

12. Which of the following matters does an auditor usually include in the engagement

letter?

A. Arrangements regarding fees and billing

B. Analytical procedures that the auditor plans to perform

C. Indications of negative cash flows from operating activities

D. Identification of working capital deficiencies

13. Which of the following factors should an external auditor obtain updated information

about then assessing an internal auditor's competence?

A. The reporting status of the internal auditor within the organization.

B. The educational level and professional experiences of the internal auditor.

C. Whether policies prohibit the internal auditor from auditing areas where relatives are employed.

D. Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.

14. Which of the following would a successor auditor ask the predecessor auditor to

provide after accepting an audit engagement?

A. Disagreements between the predecessor auditor and management as to significant accounting policies and principles

B. The predecessor auditor's understanding of the reasons for the change of auditors

C. Facts known to the predecessor auditor that might bear on the integrity of management

D. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years



15. 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

16. 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.

17. 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.

18. 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



19. 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

20. 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.

21. 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

22. 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.



23. 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.

24. 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

25. 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.

26. 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.



27. 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

28. 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.

29. 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.

30. 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.



31. 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

32. 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.

33. 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

34. 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.



35. 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.

36. 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

37. 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

38. 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.



39. 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.

40. 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

41. 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

42. 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.



43. 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.

44. 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

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

A. physical observation.

B. confirmation.

C. inspection of documents.

D. scanning.

46. 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.



47. 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

48. 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

49. 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.

50. 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.



51. 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.

52. 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.

53. 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.

54. 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.



55. 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

56. 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.

57. 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.

58. 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.



59. 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.

60. 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

61. 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


B. rights and obligations.

C. presentation and disclosure.

D. valuation or allocation.



62. 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

63. 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.


D. existence or occurrence.

64. In auditing accrued liabilities, an auditor's procedures most likely would focus

primarily on management's assertion of


B. completeness.





65. 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


B. completeness.

C. existence or occurrence.

D. valuation.

66. 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.


D. rights and obligations.

67. 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.



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

A. Existence

B. Valuation

C. Allocation

D. Completeness

69. The confirmation of an accounts receivable balance provides primary evidence

regarding which management assertion?

A. Completeness

B. Valuation

C. Allocation

D. Existence

70. In testing the completeness assertion for a liability account, an auditor ordinarily

works from the


B. potentially unrecorded items to the financial statements.


D. trial balance to the subsidiary ledger.

71. An auditor's purpose in auditing the information contained in the pension footnote

most likely is to obtain evidence concerning management's assertion about


B. existence.


D. valuation.



Short Answer Questions

72. For each of the descriptions 1-6, match the correct word or phrase from A-H.

Essay Questions



73. Explain the bottom-up approach and the top-down approach to quantifying overall materiality.

74. Do the following regarding auditors' concepts of overall "materiality" considered at

the planning stage (i.e., "planning materiality").

a. Define or describe independent auditors' concept of "planning materiality."b. Name (but do not describe or explain) three common relationships or considerations used by auditors when assessing the dollar amount considered to be material.

75. What are the characteristics that distinguish computer processing from manual

processing?



76. What are the advantages and limitations derived from using computer-assisted audit techniques (CAATs) packages?

77. D. Jackson, CPA, audited Washington Company's financial statements for the year

ended December 31, 2007. On November 1, 2008, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2008, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2008.

Required:

What procedures concerning Jackson should Lincoln perform before accepting the engagement?

78. Identify the two types of audit plans and indicate the purpose of each.



Chapter 03 Engagement Planning Answer Key

Multiple Choice Questions

1. 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.

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Risk Analysis

Accessibility: Keyboard NavigationBlooms: Apply

Difficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake

before beginning an audit engagement.Source: AICPA

Topic: Pre-Engagement Activities

2. 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.

AACSB: AnalyticAICPA: BB Legal

AICPA: FN ResearchAccessibility: Keyboard Navigation

Blooms: RememberDifficulty: 1 Easy

Learning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.

Source: AICPATopic: Pre-Engagement Activities



3. Which of the following statements is most accurate regarding sufficient and appropriate documentation?

A. Accounting estimates are not considered sufficient and appropriate documentation.

B. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.

D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.



Blooms: RememberDifficulty: 2 Medium

Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: AICPA

Topic: Audit Procedures for Obtaining Audit Evidence

4. When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

A. Considering unaudited account balances and ratios to calculate what adjusted balances should be

B. Identifying reasonable explanations for unexpected differences before talking to client management

C. Considering the pattern of several unusual changes without trying to explain what caused them

D. Comparing client data with client-determined expected results to reduce detailed tests of account balances








5. Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

A. The audit is being performed soon after the balance sheet date.

B. Audit staff are experienced in performing the planned procedures.

C. Analytical procedures have revealed no unusual or unexpected results.

D. There were many transactions posted to the account during the period.






6. Which of the following steps should an auditor perform first to determine the existence of related parties?

A. Examine invoices, contracts, and purchasing orders.

B. Request a list of related parties from management.

C. Review the company's business structure.

D. Review proxy and other materials filed with the SEC.








7. Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

A. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

B. The firm must address all independence impairment issues on the date of the audit opinion.

C. Communications related to independence may occur in any form prior to issuance of the financial statements.

D. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.



Blooms: RememberDifficulty: 3 Hard



8. Before accepting an engagement to audit a new client, a CPA is required to obtain

A. an assessment of fraud risk factors likely to cause material misstatements.

B. an understanding of the prospective client's industry and business.

C. the prospective client's signature to a written engagement letter.

D. the prospective client's consent to make inquiries of the predecessor, if any.








9. During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing.

A. Option A

B. Option B

C. Option C

D. Option D


AICPA: FN ResearchBlooms: Remember

Difficulty: 3 HardLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted

in accordance with professional standards.Source: AICPA

Topic: Audit Plan

10. When assessing internal auditors' objectivity, an independent auditor should

A. consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

B. review the internal auditors' reports to determine that their conclusions are consistent with the work performed.

C. verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment.

D. evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.




Learning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.

Source: AICPATopic: Audit Plan



11. Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

A. Make inquiries of the client's lawyer concerning pending litigation.

B. Perform cutoff tests of cash receipts and disbursements.

C. Compare financial information with nonfinancial operating data.

D. Recalculate the prior year's accruals and deferrals.






12. Which of the following matters does an auditor usually include in the engagement letter?

A. Arrangements regarding fees and billing

B. Analytical procedures that the auditor plans to perform

C. Indications of negative cash flows from operating activities

D. Identification of working capital deficiencies








13. Which of the following factors should an external auditor obtain updated information about then assessing an internal auditor's competence?

A. The reporting status of the internal auditor within the organization.

B. The educational level and professional experiences of the internal auditor.

C. Whether policies prohibit the internal auditor from auditing areas where relatives are employed.

D. Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.






14. Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

A. Disagreements between the predecessor auditor and management as to significant accounting policies and principles

B. The predecessor auditor's understanding of the reasons for the change of auditors

C. Facts known to the predecessor auditor that might bear on the integrity of management

D. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years








15. 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



Blooms: ApplyDifficulty: 2 Medium



16. 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.

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Risk Analysis

Accessibility: Keyboard NavigationBlooms: RememberDifficulty: 2 Medium


Source: OriginalTopic: Pre-Engagement Activities



17. 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.



Blooms: UnderstandDifficulty: 2 Medium

Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: Original

Topic: Audit Documentation

18. 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








19. 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






20. 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.





Source: OriginalTopic: Pre-Engagement Activities



21. 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






22. 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.








23. 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.






24. 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




Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: AICPA




25. 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.



Blooms: ApplyDifficulty: 3 Hard



26. 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.








27. 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

AACSB: Technology

AICPA: BB Leveraging TechnologyAICPA: FN Leveraging Technology


Difficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit

process.Source: Original

Topic: Planning in a Computerized Environment

28. 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.

AACSB: Technology




process.Source: AICPA




29. 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.

AACSB: Technology


Accessibility: Keyboard NavigationBlooms: Remember




30. 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.

AACSB: Technology


Accessibility: Keyboard NavigationBlooms: Remember






31. 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




Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: Original


32. 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.

AACSB: Technology


Accessibility: Keyboard NavigationBlooms: Understand






33. 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

AACSB: Technology



Difficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit



34. 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.

AACSB: Technology



Difficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit





35. 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.

AACSB: Technology






36. 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

AACSB: Technology








37. 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

AACSB: Technology



Learning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit



38. 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.

AACSB: Technology








39. 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.

AACSB: Technology






40. 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


AICPA: FN Risk AnalysisAccessibility: Keyboard Navigation

Blooms: ApplyDifficulty: 3 Hard





41. 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





Source: OriginalTopic: Audit Plan

42. 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.




Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: Original




43. 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.






44. 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






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

A. physical observation.

B. confirmation.

C. inspection of documents.

D. scanning.

AACSB: Analytic



AICPA: BB LegalAICPA: FN Research


Difficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.

Source: OriginalTopic: Audit Procedures for Obtaining Audit Evidence

46. 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.


AICPA: FN MeasurementAccessibility: Keyboard Navigation


Learning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: Original

Topic: Materiality

47. 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





Topic: Materiality



48. 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






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


B. potentially unrecorded items to the financial statement.


D. supporting evidence to the accounting records.








50. 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.






51. 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.








52. 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.






53. 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.




Learning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: AICPA

Topic: Materiality



54. 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.






55. 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








56. 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.






57. 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.








58. 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.






59. 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


B. completeness.

C. valuation or allocation.

D. presentation and disclosure.








60. 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






61. 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


B. rights and obligations.










62. 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






63. 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


B. completeness.


D. existence or occurrence.








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


B. completeness.








65. 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


B. completeness.


D. valuation.








66. 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.


D. rights and obligations.






67. 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.








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

A. Existence

B. Valuation

C. Allocation

D. Completeness






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

A. Completeness

B. Valuation

C. Allocation

D. Existence








70. In testing the completeness assertion for a liability account, an auditor ordinarily works from the


B. potentially unrecorded items to the financial statements.


D. trial balance to the subsidiary ledger.






71. An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about


B. existence.


D. valuation.






Short Answer Questions



72. For each of the descriptions 1-6, match the correct word or phrase from A-H.

1. F; 2. C; 3. H; 4. A; 5. B; 6. G

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Decision Making




Essay Questions

73. Explain the bottom-up approach and the top-down approach to quantifying overall materiality.

In the bottom-up approach to judging materiality, amounts in each account are judged separately and then combined to determine the overall effect. In the top-down approach to judging materiality, an overall material amount is determined for the financial statements and then allocated to each particular account.


AICPA: FN Research





Topic: Materiality

74. Do the following regarding auditors' concepts of overall "materiality" considered at the planning stage (i.e., "planning materiality").

a. Define or describe independent auditors' concept of "planning materiality."b. Name (but do not describe or explain) three common relationships or considerations used by auditors when assessing the dollar amount considered to be material.

a. Planning materiality is the largest amount of uncorrected dollar misstatement the auditors believe could exist in published financial statements without causing them to be considered materially misleading.b. Absolute size, relative size, nature of the item or issue, circumstances, uncertainty, cumulative effects.


AICPA: FN ResearchBlooms: RememberDifficulty: 2 Medium


Topic: Materiality

75. What are the characteristics that distinguish computer processing from manual processing?

Characteristics that distinguish computer processing from manual processing include:

a. Computer system transaction trails may exist for only a short time.b. Computers process similar transactions uniformly.c. Functions are more concentrated in a computer system.d. Increased potential for errors and irregularities exist in computer systems.e. Certain transactions can be initiated or executed automatically in a computer system.

AACSB: Technology








76. What are the advantages and limitations derived from using computer-assisted audit techniques (CAATs) packages?

The advantages of computer-assisted audit techniques (CAATs) packages:

a. Original programming is not required.b. The required programming is easy.c. Training time to use the programming is short.

The limitations of computer-assisted audit techniques (CAATs) packages:

a. The computer cannot observe and count physical things.b. The computer cannot examine external and internal documentation.c. The computer cannot conduct inquiry procedures.

AACSB: Technology








77. D. Jackson, CPA, audited Washington Company's financial statements for the year ended December 31, 2007. On November 1, 2008, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2008, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2008.

Required:

What procedures concerning Jackson should Lincoln perform before accepting the engagement?

a. Lincoln should explain to Washington the need to make an inquiry of Jackson and should request permission to do so.

b. Lincoln should ask Washington to authorize Jackson to respond fully to Lincoln's inquiries.

c. If Washington refuses to permit Jackson to respond or limits Jackson's response, Lincoln should inquire as to the reasons and consider the implications in deciding whether to accept the engagement.

d. Lincoln should make specific and reasonable inquiries of Jackson regarding matters Lincoln believes will assist in determining whether to accept the engagement, including specific questions regarding.

(1) Facts that might bear on the integrity of management.(2) Disagreements with management as to accounting principles, audit procedures, or other similarly significant matters.(3) Communications Jackson made to management about fraud, illegal acts, or internal control recommendations.(4) Jackson's understanding as to the reasons for the change of auditors.

e. If Lincoln receives a limited response, Lincoln should consider its implications in deciding whether to accept the engagement.

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Decision Making


Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: AICPA adapted




78. Identify the two types of audit plans and indicate the purpose of each.

The two types of audit plans are (1) the internal control program and (2) the substantive audit plan. The internal control program contains the specification of procedures for obtaining an understanding of the entity's business and environment, including its internal control, and for assessing the inherent risk and the control risk related to the financial account balances. The substantive audit plan contains the specification of substantive tests for gathering direct evidence on the assertions about dollar amounts in the account balances.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN Decision Making

Blooms: AnalyzeDifficulty: 1 Easy


Source: OriginalTopic: Audit Plan



tbchap003

Documents

audit documentation

initial audit

audit staff

client management c

issuers audit committee

financial statement

preliminary audit plan

particular audit objective