Chapter 3

27. When initiating communications with predecessor auditors, prospective auditors should expect
A. To take responsibility for obtaining the client's consent for the predecessor to give information
about prior audits
B. To conduct interviews with the partner and manager in charge of the predecessor public
accounting firm's engagement
C. To obtain copies of some or all of the predecessor auditors' audit documentation
D. All of the above

28. Generally accepted auditing standards require that auditors always prepare and use
A. A written planning memorandum explaining the auditor's understanding of the client's business
B. A written client consent to discuss audit matters with prospective auditors
C. A written audit plan
D. The written time budgets and schedules for performing each audit

29. When planning an audit, which of the following is NOT a factor that affects auditors' decisions about the
quantity, type, and content of audit documentation?
A. The auditors' need to document compliance with generally accepted auditing standards
B. The auditors' need to verify the existence of new sales contracts important for the client's
business
C. The auditors' judgment about their independence with regard to the client
D. The auditors' judgments about materiality

30. Audit documentation that shows the detailed evidence and procedures regarding the balance in the
accumulated depreciation account for the year under audit will be found in the
A. Current file audit documentation
B. Permanent file audit documentation
C. Administrative audit documentation in the current file
D. Planning memorandum

31. An auditor's permanent file audit documentation most likely will contain
A. Internal Control analysis
B. The most recent engagement letter
C. Memoranda of the conference with management
D. Excerpts of the corporate charter and bylaws

32. Which of the following is NOT a benefit claimed for the practice of determining materiality of the initial
planning stage of an audit?
A. Being able to fine-tune the audit work for effectiveness and efficiency
B. Avoiding the problem of doing more work than necessary (overauditing)
C. Being able to decide early what type of audit opinion to issue
D. Avoiding the problem of doing too little work (underauditing)

33. Spreadsheet software would be most useful for which of the following audit activities?
A. Testing internal controls over computerized accounting applications
B. Preparing an audit plan
C. Preparing a comparison of current-year expenses with those from the previous year
D. Drafting a planning memorandum
34. Which of the following is an advantage of computer-assisted audit techniques (CAATs)?
A. The CAATs programs are all written in one computer language
B. The software can be used for audits of clients that use different computer equipment file formats
C. The use of CAATs has reduced the need for the auditor to study input controls for computer-
related procedures
D. The use of CAATs can be substituted for a relatively large part of the required testing

35. A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables
the auditor to
A. Substantiate the accuracy of data through self-checking digits and hash totals
B. Utilize the speed and accuracy of the computer
C. Verify the performance of machine operations that leave visible evidence of occurrence
D. Gather and store large amounts of supportive audit evidence in machine-readable form

36. An audit engagement letter should normally include which of the following matters of agreement
between the auditor and the client?
A. Schedules and analyses to be prepared by the client's employees
B. Methods of statistical sampling the auditor will use
C. Specification of litigation in progress against the client
D. Client representations about availability of all minutes of meetings of the board of directors

37. When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the
company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in
jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to
Benes's work in the audit report?
A. Yes, the auditors' report should mention the fact that an audit specialist was used
B. The auditor's report should mention the use of the audit specialist only when the audit specialist's
finding affect the auditors' conclusions
C. The use of an audit specialist need not to be mentioned if the auditors decide not to take
responsibility for the audit specialist's findings
D. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit
specialist's findings

38. Which of the following engagement planning procedures would most likely assist the auditor in
identifying related-parties transactions before the balance-sheet date?
A. Interviewing internal auditors about their reporting responsibilities
B. Reviewing accounting records for recurring transactions occurring near year-end
C. Inspecting communications with the client's legal counsel regarding recorded contingent
liabilities
D. Scanning the minutes for significant transactions with members of the board of directors

39. Which of the following communications is most likely to be written before the balance sheet date?
A. A report to the audit committee on the results of testing of internal control over cash receipts
B. Confirmation letters to vendors confirming the amounts they owe to the client
C. An attorney's letter regarding contingent liabilities
D. An engagement letter

40. Which of the following procedures would most likely be performed during planning?
A. Surprise counts of the client's petty cash fund
B. Reporting internal control deficiencies to the audit committee
C. Performing a search for unrecorded liabilities
D. Identifying related parties
41. Prior to accepting a new audit engagement, a public accounting firm should
A. Attempt to contact the predecessor auditors
B. Evaluate the integrity of management
C. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the
engagement
D. All of the above

42. An audit plan contains

A. Specifications of audit standards relevant to the financial statements being audited
B. Specifications of procedures the auditors believe appropriate for the financial statements
C. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached
D. Reconciliation of the account balances in the financial statements with the account balances in
the client's general ledger

43. The revenue cycle of a company generally includes which accounts?

A. Inventory, accounts payable, and general expenses
B. Inventory, general expenses, and payroll
C. Cash, accounts receivable, and sales
D. Cash, notes payable, and capital stock

44. When auditing the existence assertion for an asset, auditors proceed from the
A. Financial statement amounts back to the potentially unrecorded items
B. Potentially unrecorded items forward to the financial statement amounts
C. General ledger back to the supporting original transaction documents
D. Supporting original transaction documents to the general ledger

45. Confirmations of accounts receivable provide evidence primarily about which two assertions?
A. Completeness and valuation
B. Valuation and rights and obligations
C. Existence and rights and obligations
D. Existence and completeness

46. With respect to the concept of materiality, which of the following statements is correct?
A. Materiality depends only on the dollar amount of an item relative to other items in the financial
statements
B. Materiality depends of the nature of a transaction rather than the dollar amount of the transaction
C. Materiality is determined by reference to AICPA guidelines
D. Materiality is a matter of professional judgment

47. When evaluating whether accounting estimates made by management are reasonable, the audit team
would be most interested in which of the following?
A. Key factors that are consistent with prior periods
B. Assumptions that are similar to industry guidelines
C. Measurements that are objective and not susceptible to bias
D. Evidence of a conservative systematic bias

48. Which of the following would be considered an analytical procedure?

A. Testing purchasing, shipping, and receiving cutoff activities
B. Comparing inventory balances to recent sales activities
C. Projecting the deviation rate of a statistical sample to the population
D. Reconciling physical counts to perpetual records and general ledger balances
49. Which of the following procedures would a CPA most likely perform in planning 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-years' accruals and deferrals

50. Which of the following statements is correct concerning analytical procedures used in planning an audit
engagement?
A. They often replace the tests of controls that are performed to assess control risk
B. They typically use financial and nonfinancial data aggregated at a high level
C. They usually involve the comparison of assertions developed by management to ratios calculated
by an auditor
D. They are often used to develop an auditor's preliminary judgment about materiality

51. The company being audited has an internal auditor who is both competent and objective. The
independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances,
the independent auditor may
A. Allow the internal auditor to perform tests of internal controls
B. Allow the internal auditor to audit a major subsidiary of the company
C. Not assign any task to the internal auditor because of the internal auditor's lack of independence
D. Allow the internal auditor to perform analytical procedures but not be involved with any tests of
details

52. Which of the following conditions most likely would pose the greatest risk in accepting a new audit
engagement?
A. Staff will need to be rescheduled to cover this new client
B. There will be a client-imposed scope limitation
C. The firm will have to hire a specialist in one audit area
D. The client's financial reporting system has been in place for 10 years