Arens/Elder/Beasley

Chapter 8

Multiple-Choice Questions

1.
easy
Which of the following is not one of the three main reasons why the auditor should properly
plan engagements?
a a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.

2. Avoiding misunderstandings with the client is important for:
easy
a

Good client relations

Facilitating high-quality work at a reasonable cost
a.
b.
c.
d.
Yes
No
Yes
No
Yes
No
No
Yes

3.
easy
A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued is
the:
b a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

4.
easy
A measure of the auditors assessment of the likelihood that there are material misstatements in
an account before considering the effectiveness of the clients internal control is called:
d a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

5. When inherent risk is high, there will need to be:
Easy
d A lower assessment of audit risk More evidence accumulated by the auditor
a.
b.
c.
d.
Yes
No
Yes
No
Yes
No
No
Yes

6. The auditor is likely to accumulate more evidence when the audit is for a company:
easy
a Which has large amounts of debt Which is to be sold in the near future
a.
b.
c.
d.
Yes
No
Yes
No
Yes
No
No
Yes

7. Which of the following is not typically included in initial audit planning?
easy a. Client acceptance/continuation decisions.
d b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
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d. Perform analytical procedures as substantive tests.

8. Initial audit planning involves four matters. Which of the following is not one of these?
easy a. Develop an overall audit strategy.
b b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the clients reason for the audit.

9.
easy
Most auditors assess inherent risk as high for related parties and related-party transactions
because:
b a. of the unique classification of related-party transactions required on the balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.

10.
easy
Which of the following is not correct regarding the communications between successor and
predecessor auditors?
a a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the successor auditor.
c. The predecessor auditor must receive their former clients permission prior to divulging
information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a successor auditor.

11. A successor auditor may perform which of the following for a new audit client?
easy
a Speak to local attorneys, banks
and other businesses regarding
the companys reputation

Speak to the predecessor auditors about
disagreements they had with management
a. Yes Yes
b. No No
c. Yes No
d. No Yes


12.
medium
Which of the following is not a potential effect of an auditors decision that a lower acceptable
audit risk is appropriate?
b a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to the engagement.

13.
medium
It is easier and more common to implement increased evidence accumulation for inherent risk
than for acceptable audit risk because:
a a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.

14. (SOX)
medium
If an auditor is requested to perform nonaudit services for a public company audit client, who is
responsible for agreeing to those services with the audit firm?
d a. The clients management.
b. The clients chief executive officer.
c. The clients chief financial officer.
d. The clients audit committee.

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15.
medium
Which of the following statements is true regarding communications between predecessor and
successor auditors?
b a. The burden of initiating the communication rests with the predecessor.
b. The predecessors response can be limited to stating that no information will be provided.
c. The predecessor should communicate with the successor only if the client is public.
d. There must be communication between the predecessor and successor if the successor is to
accept the engagement.

16.
medium
Investigating new clients with a focus on assessing the auditors potential relationship with that
new client is a critical element in determining:
b a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

17. The purpose of an engagement letter is to:
medium
b
a. document the CPA firms responsibility to external users of the audited financial
statements.
b. document the terms of the engagement in writing to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. emphasize managements responsibility for approving the audit program.

18.
medium
One means of informing the client that the auditor is not responsible for the discovery of all acts
of fraud is the:
a a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.

19. Which of the following normally signs the engagement letter for an audit of a public company?
medium a. Corporate treasurer.
d b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.

20. Which of the following normally signs the engagement letter for an audit of a private company?
medium a. Management.
a b. Board of directors representative.
c. Audit committee representative.
d. Corporate treasurer.

21.
medium
d
An understanding of a clients business and industry and knowledge about operations are
essential for performing an adequate audit. For a new client, most of this information is
obtained:
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the clients premises.

22. The least effective method of identifying related parties for a public company would be a(n):
medium a. inquiry of management.
c b. review of SEC filings.
c. distribution of the engagement letter to all stockholders.
d. examination of stockholders listings to identify principal stockholders.

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23.
medium
An official record of meetings of the board of directors and stockholders is included in the
corporate:
c a. bylaws.
b. charter.
c. minutes.
d. license.

24. Which of the following is not likely to be a related party?
medium a. Affiliated companies.
c b. A major stockholder of the company.
c. A warehouse employee.
d. The chief executive officer.

25. Which of the following is most likely to occur at the beginning of an initial audit engagement?
medium a. Prepare a rough draft of the financial statements and of the auditors report.
c b. Study and evaluate the system of internal administrative control.
c. Determine the clients reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

26. An auditor should examine minutes of the board of directors meetings:
medium a. through the date of the financial statements.
b b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test basis.

27.
medium
The first standard of field work, which states that the work is to be adequately planned and that
assistants, if any, are to be properly supervised, recognizes that:
a a. early appointment of the auditor is advantageous to the auditor and the client.
b. acceptance of an audit engagement after the close of the clients fiscal year is generally not
permissible.
c. appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim dates.

28.
medium
The corporate minutes are the official record of the meetings of the board of directors and
stockholders. The minutes typically include authorizations related to:
d
The CPAs use of outside specialists Management compensation
a.
b.
c.
d.
Yes
No
Yes
No
Yes
No
No
Yes

29. An engagement letter sent to an audit client usually would not include a(n):
medium a. reference to the auditors responsibility for the detection of errors or irregularities.
c b. estimation of the time to be spent on the audit work by audit staff and management.
c. statement that management advisory services would be made available upon request.
d. reference to managements responsibility for the financial statements.

30. Which of the following is correct with respect to a companys corporate charter?
medium
c
a. The corporate charter is granted by the federal government and is required to recognize the
corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a corporation.
c. The corporate charter includes the exact name of the corporation, the date of
incorporation, and the types of business the corporation is authorized to conduct.
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d. The corporate charter must be annually reviewed by the PCAOB.

31. Corporate bylaws include:
Medium
d The types and amounts of capital stock
the corporation is authorized to issue
The rules and procedures used to
operate the corporation
a.
b.
c.
d.
Yes
No
Yes
No
Yes
No
No
Yes

32.
medium
b
In what order should the following steps occur?
A. Assess client business risk
B. Understand the clients business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.

33. Which of the following statements is not correct with respect to analytical procedures?
medium a. Auditing standards emphasize the need for auditors to develop and use expectations.
b b. Analytical procedures must be performed throughout the audit.
c. Analytical procedures may be performed at any time during the audit.
d. Analytical procedures use comparisons and relationships to assess whether account
balances appear reasonable.

34. The most widely used profitability ratio is the:
medium a. quick ratio.
d b. profit margin.
c. return on assets.
d. earnings per share.

35.
challenging
The purpose of the requirement in SAS No. 84 of having communication between the
predecessor and successor auditor is to:
b a. allow the predecessor to disclose information which would otherwise be confidential.
b. help the successor auditor to evaluate whether to accept the engagement.
c. help the client by facilitating the change of auditors.
d. ensure the predecessor collects all unpaid fees prior to a change in auditor.

36.
challenging
The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when:
c a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessors work.
c. there are actual or potential legal problems between the client and the predecessor.
d. the predecessor believes that the client lacks integrity.

37. Which of the following is correct with respect to the use of analytical procedures?
challenging
d
a. Analytical procedures may be used in evaluating balances in the testing phase as long as
the auditor also uses them in assessing the going concern assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily used to direct an
auditors attention so that the auditors understanding of the business is improved.
d. Analytical procedures are performed by studying plausible relationships between financial
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and nonfinancial data.

38.
challenging
Which of the following ratios is best used to assess a companys ability to meet its long-term
debt obligations?
c a. Quick ratio.
b. Return on common equity.
c. Debt to equity.
d. Current ratio.

39. Which of the following statements is not correct?
challenging
b
a. Analytical procedures used in the planning phase of the audit are primarily directed at
understanding the clients business and directing the auditors attention to areas that may
contain possible misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at assessing going
concern and secondarily aimed at directing the auditors attention to areas that may
contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases of the audit,
and are optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at directing the
auditors attention to areas that may contain possible misstatements and secondarily aimed
at assessing going concern.

40. Which of the following would not likely be classified as a related-party transaction?
medium a. An advance of one weeks salary to an employee.
a b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of the client company.
d. Exchanges of equipment between two companies owned by the same person.

41. Which of the following would not be found in the corporate charter?
challenging a. The kinds and amount of capital stock authorized.
d b. The date of incorporation.
c. The types of business activity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stockholders.

42. Which of the following would not usually be included in the minutes of the board of directors?
challenging a. The duties and powers of the corporate officers.
a b. Declaration of dividends.
c. Authorization of long-term loans.
d. Approval of executive bonuses.

43. When are auditors likely to encounter judgment problems in the use of analytical procedures?
challenging
d
a. Whenever the auditor places reliance on managements explanations for unusual
fluctuations in account balances without first developing independent expectations.
b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations
of current balances.
c. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations
when trying to explain what caused them.
d. The auditor is likely to encounter judgment problems in each of the above instances.

44. The major concern when using nonfinancial data in analytical procedures is the:
challenging a. accuracy of the nonfinancial data.
a b. source of the nonfinancial data.
c. type of nonfinancial data.
d. presence of multiple sources of nonfinancial data.

45. An auditor searching for related party transactions should obtain an understanding of each
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challenging subsidiarys relationship to the total entity because:
b a. the business structure may be deliberately designed to obscure related party transactions.
b. this may reveal whether transactions would have taken place if the parties had been
unrelated.
c. transactions may have been consummated on terms equivalent to arms-length
transactions.
d. this may permit the audit of intercompany account balances to be performed as of
concurrent dates.

46.
challenging
The first standard of fieldwork requires, in part, that audit work be properly planned. Proper
planning as intended by the first standard of fieldwork would occur when the auditor:
a a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative accounts receivable confirmations instead of positive confirmations because
the latter require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to
make extensive test counts.

47. Early appointment of the independent auditor will enable:
challenging a. a more thorough examination to be performed.
d b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

48.
medium
Whenever an auditor compares client data to client-prepared budgets, there are two special
concerns. Indicate if the two items below are concerns.
a
Assessing whether the budgets were
realistic plans
Client data may have been altered to conform
to the budget
a. A concern A concern
b. Not a concern Not a concern
c. A concern Not a concern
d. Not a concern A concern

49.
challenging
An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should:
b a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entitys business.
c. refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. first inform management that an unqualified opinion cannot be issued.

50. Which is a liquidity activity ratio?
medium a. Profit margin
b b. Inventory turnover
c. Return on assets
d. Times interest earned

51. Which is usually included in an engagement letter?


medium
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
d a.
b.
c.
Yes
No
Yes
Yes
No
No
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d. No Yes

52. Which is usually included in an engagement letter?
medium
a A reference to GAAP A reference to GAAS
a. Yes
b. No
c. Yes
d. No
Yes
No
No
Yes

53. Which is usually included in an engagement letter?
medium
c The financial statements are
the responsibility of the
companys management

Ratios to be used by the auditor in the planning
phase
a.
b.
c.
d
Yes
No
Yes
No
Yes
No
No
Yes

54. When may the auditor refer to a specialist in the audit report?
medium
c
Only if the specialists report
results in a modification of the audit
opinion


Only if the specialist assisted in the audit of an
account material to the financial statements
a.
b.
c.
d
Yes
No
Yes
No
Yes
No
No
Yes

55. Which is usually included in the engagement letter?
medium
b The projected type of opinion on
the financials statement to be
audited

Name(s) of the client personnel responsible for
supplying the auditor with information
a.
b.
c.
d
Yes
No
Yes
No
Yes
No
No
Yes

56. Which is usually included in the engagement letter?
medium
b List of audit procedures to be used
in inventory observation

The auditors assessment of Audit Risk
a.
b.
c.
d
Yes
No
Yes
No
Yes
No
No
Yes



Essay Questions

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57.
easy
Discuss the factors an auditor should consider before accepting a company as an audit client.

Answer:
The auditor should investigate and consider the prospective clients standing in the
business community, financial stability, managements integrity, and relations with its
bankers, attorneys, and previous CPA firm. The auditor should also determine whether he
or she possesses the required competence and independence to do the audit.


58.
easy
Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?

Answer:
The purpose of an audit engagement letter is to establish a clear understanding between
the auditor and the client regarding the terms of the engagement. An engagement is required for
both public and private company audits.


59.
easy
Define the term related party and discuss why an auditor should identify the clients related
parties early in the audit.

Answer:
A related party is an affiliated company, principal owner of the client company, or any
other party with which the client deals where one of the parties can influence the management
or operating policies of the other. Auditors need to be aware of who the clients related parties
are early in the audit to enable the auditor to identify related-party transactions, especially those
that have not been disclosed.


60.
medium
There are three main reasons why an auditor should properly plan audit engagements. Discuss
each of these reasons.

Answer:
Three reasons why an auditor should properly plan audit engagements are:
To enable the auditor to obtain sufficient competent evidence for the circumstances.
This is essential for minimizing legal liability and maintaining a good profession
reputation.
To help keep audit costs reasonable. Given the competitive auditing environment,
keeping costs reasonable helps the firm obtain and retain clients.
To avoid misunderstandings with the client. This is important for good client
relations.


61.
medium
Discuss the essential activities involved in the initial planning of an audit.

Answer:
There are four essential activities involved in the initial planning of an audit. These
are:
1. Client acceptance or continuation. In the case of a new client, the auditor must
determine whether the client is one with which (s)he wishes to be associated. In the
case of a continuing client, an auditor must determine whether continuing the
relationship is appropriate and in the firms best interest.
2. Determine reason for the audit. The auditor should determine the reason for the audit
as soon as practical. The remainder of the planning activities may be impacted by the
clients reason for requesting the audit.
3. Obtain an understanding with the client. An understanding with the client should be
obtained to avoid misunderstandings. Auditors are required to obtain an understanding
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with their clients. This understanding must be written.
4. Develop an overall audit strategy. The strategy should consider the reasons for the
audit, including areas where there is greater risk of significant misstatements. Setting a
strategy helps the auditor determine the resources required for the engagement.

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62.
medium
Discuss the required communications between predecessor and successor auditors as outlined
by SAS No. 84.

Answer:
Auditing standards require a successor auditor to communicate with the predecessor
auditor whenever accepting a client that has been previously audited. The purpose of the
communication is to help the successor auditor evaluate whether to accept the
engagement. While the burden of initiating the communication rests on the successor
auditor, the predecessor auditor must respond to the request for information. However,
because of the requirements related to confidentiality, the predecessor must obtain the
former clients permission prior to providing information to the successor.


63.
medium
Discuss several reasons why an auditor may not wish to continue a relationship with an existing
audit client.

Answer:
There are a number of reasons an auditor may choose not to continue a relationship with
an existing client. Examples include:

1. Previous conflicts over accounting issues, scope of the audit, type of opinion, or fees.
2. Management integrity may be deemed to be insufficient.
3. Legal action initiated by either the auditor or client related to prior audit services.
4. If fees remain unpaid for services performed more than one year prior to the date of
the current years audit report.
5. The presence of excessive risk.


64.
medium
Discuss four of the matters that should be specified in an engagement letter.

Answer:
Matters that should be specified in the engagement letter include:
Whether the auditor will perform an audit, a review, or a compilation, plus any other
services such as tax returns or management advisory services.
Any restrictions to be imposed on the auditors work.
Deadlines for completing the audit.
Assistance to be provided by the clients personnel in obtaining records and
documents, and schedules to be prepared for the auditor.
Agreement on fees.
The letter should state that the auditor is not responsible for the discovery of all acts
of fraud.


65.
medium
What documents do auditors routinely obtain to aid in their understanding of a clients
governance system? Briefly discuss each of these documents.

Answer:
Auditors commonly obtain the clients corporate charter, bylaws, and minutes of meetings
of the board of directors and shareholders. The corporate charter is issued by the state in
which the company is incorporated and specifies the exact name of the corporation along
with the date of incorporation, the kinds and amounts of stock the corporation is
authorized to issue, and the types of business that the corporation is authorized to conduct.
The bylaws include the rules and procedures adopted by the stockholders of the
corporation. They specify the duties and powers of corporate officers, the method of
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voting for directors, and


the frequency of stockholder meetings. The corporate minutes are the official record of
the meetings of the board of directors and stockholders. They include summaries of the
most important topics discussed and decisions made at the board meetings.


66.
medium
What are three factors that have increased the importance of obtaining an understanding of a
clients business and industry? How can an auditor obtain this understanding?

Answer:
Factors that have increased the importance of obtaining an understanding of a clients
business and industry include:
Advances in information technology have increased connectivity among companies,
customers, and vendors. Auditors must understand the risks associated with this
increased connectivity.
Companies have expanded operations to have global reaches, often through joint
ventures and strategic alliances.
Information technology affects internal control processes, improving the quality and
timeliness of accounting information.
The increased importance of human capital and other intangible assets has increased
accounting complexity and the importance of management judgments and estimates.
Auditors need a better understanding of the clients business and industry to provide
additional value-added services.

The auditor can obtain a sound understanding of the clients business and industry through
several means, including discussions with previous auditors and by reviewing the
permanent files for the client; conferences with the clients personnel; studying AICPA
industry audit guides, textbooks, technical magazines, and specialized journals; and by
participating in industry associations and training programs.


67.
medium
There are three primary reasons for obtaining a thorough understanding of the clients industry
and external environment. What are these reasons?
Answer:
The three reasons are:
Risks associated with specific industries may affect the auditors assessment of client
business risk and acceptable audit risk.
Certain inherent risks are typically common to all clients in certain industries.
Familiarity with those risks aids the auditor in assessing their relevance to the client.
Many industries have unique accounting requirements that the auditor must
understand to evaluate whether the clients financial statements are in accordance
GAAP.


68.
medium
Discuss the four primary purposes of analytical procedures performed during the planning phase
of an audit.

Answer:
The four primary purposes of preliminary analytical procedures are:
to help the auditor understand the clients industry and business,
to help the auditor assess the going concern assumption,
to indicate areas of possible misstatements, and
to reduce the extent of detailed tests.
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69.
challenging
Define business risk. List several factors that may impact the auditors assessment of business
risk.

Answer:
Business risk is the risk that a company will fail to achieve its objectives.
Factors that may impact business risk include:
General economic conditions,
Extent of competition within an industry,
Changing regulatory requirements,
Competence of management,
Ability to maintain sufficient cash flows and secure financing, and
Successful implementation of business strategies.

70.
challenging
Auditors routinely conduct analytical procedures in the planning, testing, and completion phases
of the audit. Identify the primary and secondary purposes of performing analytical procedures
in each phase of the audit.

Answer:
Planning The primary purposes are to understand the clients business and industry
and indicate areas of possible misstatements. The secondary purposes are to assess
going concern and reduce the extent of detailed tests.
Testing The primary purpose is to reduce the extent of detailed tests, while the
secondary purpose is to indicate areas of possible misstatements.
Completion The primary purpose is to indicate areas of possible misstatements,
while the secondary purpose is to assess going concern.

71.
challenging
Three types of legal documents and records that auditors examine in the planning phase of an
audit are the corporate charter and bylaws, corporate minutes of meetings of the board of
directors and stockholders, and contracts. Discuss the audit-relevant information contained in
each of these three types of documents that an auditor should be aware of early in the audit.

Answer:
Corporate charter and bylaws. This includes the amounts of capital stock the corporation
is authorized to issue, its par or stated value, preferences and conditions for dividends, and
information concerning voting rights of each class of stock. The bylaws specify such
things as the fiscal year of the corporation, the frequency of stockholder meetings, the
method of voting for directors, and the duties and powers of the corporate officers.
Minutes of meetings. There are two categories of audit-relevant information contained in
the minutes: authorizations and discussions by the board of directors affecting inherent
risk. Common authorizations in the minutes include compensation of officers, new
contacts and agreements, acquisitions of property, loans, and dividend payments.
Contracts. The auditor should examine contracts early in the engagement to gain a better
perspective of the organization and to become familiar with potential problem areas.
Contracts will also be examined during the tests of individual audit areas.



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Other Objective Answer Format Questions

72.
easy
a
When an auditor decides there is higher inherent risk for an account, one potential effect is that
more audit evidence will be required for that account.
a. True
b. False

73.
easy
a
As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
a. True
b. False

74.
easy
b
Before accepting a new client, most CPA firms investigate the company to determine its
acceptability. However, AICPA confidentiality requirements prohibit CPA firms from
contacting certain partiesnamely the companys attorneys and bankersduring this
investigation.
a. True
b. False

75.
easy
b
For prospective clients that have previously been audited by another CPA firm, the predecessor
auditor is required to communicate with the successor auditor.
a. True
b. False

76.
easy
b
When a successor auditor contacts a companys previous auditor, the predecessor auditor is
required to respond fully and without limit to the request for information.
a. True
b. False

77.
easy
b
A predecessor auditor who has been contacted by a successor auditor for information about the
client does not have to obtain permission from the former client before providing any
confidential information to the successor auditor because the confidentiality requirement does
not extend to former clients.
a. True
b. False

78.
easy
a
Auditors should obtain copies of the clients articles of incorporation, bylaws, and minutes of
the meetings of the board of directors to aid in their understanding of the companys
management and governance structure.
a. True
b. False

79.
easy
a
An auditor must evaluate a specialists professional qualifications and understand the objectives
of the specialists work.
a. True
b. False

80.
medium
b

To evaluate a specialists work the auditor must himself/herself be considered a specialist.
a. True
b. False

81.
medium
a
An engagement letter establishes a clear understanding of the terms of the engagement between
the client and the auditor, but it is optional for private companies.
a. True
b. False

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82.
easy
b
Because of the requirements of Rule 201 of the AICPAs Code of Professional Conduct which
state that auditors should undertake only those professional services that the member or the
members firm can reasonably expect to be completed with professional competence, auditors
are not normally permitted to consult with, or rely on the work of, outside specialists during an
audit engagement.
a. True
b. False

83.
medium
b
Acceptable audit risk is a measure of the auditors willingness to accept that the financial
statements do not contain material misstatements after the audit is completed and a qualified
audit report has been issued.
a. True
b. False

84.
medium
b
If a prospective client has been audited in the past, the successor auditor will typically rely
solely on the representations about the client by the predecessor auditor.
a. True
b. False

85.
medium
b
Two major factors that affect acceptable audit risk are the likely users of the financial
statements and the likelihood of issuing an unqualified audit opinion.
a. True
b. False

86.
medium
b
A major consideration in assigning staff to an audit engagement is the experience levels
required for the work, while a less important consideration is maintaining staff continuity on the
engagement.
a. True
b. False

87.
medium
b
Inherent risks typically vary across industries.
a. True
b. False

88.
medium
a
Transactions with related parties must be disclosed in the financial statements if they are
deemed to be material.
a. True
b. False

89.
medium
a
All known related parties must be identified and included in the auditors permanent files
related to the client.
a. True
b. False

90.
medium
b
Generally, auditors assess inherent risk as moderate for related party transactions because they
expect clients to be aware of their scrutiny of such transactions.
a. True
b. False

91.
medium
b
The corporate charter typically establishes the companys fiscal year and frequency of
stockholder meetings.
a. True
b. False


Arens/Elder/Beasley

92.
medium
b
Ordinarily, the auditor should review and abstract copies of contracts during the later stages of
an audit.
a. True
b. False

93.
medium
a
When a successor auditor requests information from a companys previous auditor, and there
are legal problems or disputes between the client and the predecessor auditor, the predecessor
auditors response to the new auditor may be limited to stating that no information will be
provided.
a. True
b. False

94.
medium
b
One purpose of performing preliminary analytical procedures in the planning phase of an audit
is to help the auditor make a preliminary assessment of control risk.
a. True
b. False

95.
medium
b
Material transactions between the client and the clients related parties must be disclosed in the
auditors report.
a. True
b. False

96.
challenging
a
An engagement letter can affect the CPA firms legal responsibilities to the client, but does not
affect responsibility to external users of audited financial statements.
a. True
b. False

97.
challenging
b
Two categories of audit-relevant information found in corporate charters and bylaws are
authorizations and discussions of matters affecting inherent risk.
a. True
b. False