CHAPTER 4: THE AUDIT PROCESS – ACCEPTING AN ENGAGEMENT

Assertions and Procedures

1. The objective of the ordinary audit of financial statements is the expression of an opinion on:
 The fairness of the financial statements in all material respects
2. The responsibility for the preparation of the financial statements and the accompanying footnotes
belongs to:
 The management
3. Auditor’s accumulate evidence to:
 Enable them to reach conclusions about the fairness of the financial statements.
4. Management representations that are embodied in the account balance, transaction class and
disclosure components of financial statements. They include existence or occurrence, completeness,
rights and obligations, valuations or allocations and presentation and disclosures
 Assertions
5. Management assertions are
 Directly related to the PFRS
6. Management assertions are
 Implied or expressed representations about classes of transactions and the related accounts in
the financial statements
7. Which of the following statements is true?
 The auditor’s objectives follow and are closely related to management assertions
8. Which of the following statements is true?
 The audit objectives remain the same from audit to audit, but the evidence varies, depending
on the circumstances
9. Substantive procedures are designed to obtain evidence based on the representations of client’s
management as embodied in the financial statement components, EXCEPT:
 Legality
10. Which of the following is not a management assertion?
 Net income reflects the earnings power of the enterprise
11. Which of the following is an example of an assertion made by management in an entity’s financial
statements?
 Reported inventory balances reflect all related transactions for the period
12. Which of the following is not one of the five broad categories of management assertions?
 General or specific transaction objectives
13. This assertion addresses whether all transactions that should be included in the financial statements
are fact included
 Completeness
14. Which of the following assertions does not relate to balances at period end?
 Occurrence
15. Which of the following statements is correct?
 Existence relates to whether the balances are valid.
16. Which of the following statement is not correct?
 Gathering evidence and minimizing costs are equally important considerations that affect the
approach the auditor selects.
17. Assertions are representations by management that are embodied in financial statement components.
An example of an assertion about existence is whether
 Raw materials in the statement of financial position are available for use in production.
18. “That investment in equity securities are stated at fair value” is a management assertion as to
 Valuation
19. “That the company has rights over all its property and equipment” is a management assertion as to
 Rights and obligations
20. In auditing intangible assets, an auditor most likely would review or re-compute amortization and
determine whether amortization period is reasonable in support management’s financial statement
assertion of
 Valuation
21. Which of the following most likely would give the most assurance concerning the valuation assertions
of accounts receivables?
 Assessing the allowance for credit losses account for reasonableness.
22. Which of the following statements is not correct?
 It would be a violation of the completeness assertion if management would record a sale that
did not take place
23. The financial statement assertions of existence and completeness emphasize opposite audit concerns
 Existence deals with potential overstatement and completeness deals with understatement.
24. Which of the following statements is not true?
  An example of a presentation/disclosure assertion would be that investment property is
reported at fair value.
25. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged
to support management’s financial statement assertion of
 Presentation and disclosure
26. Confirmation of accounts receivable is a procedure that would most likely obtain evidence concerning
management’s assertion of
 Existence or occurrence
27. In testing cut-off, the objective is to determine
 Whether transactions are recorded in the proper period
28. An auditor most likely would make inquiries of production and sales personnel concerning possible
obsolete or slow-moving inventory to support management’s financial statement assertion of
 Valuation or allocation
29. During an audit of an entity’s stockholders’ equity, the auditor determines whether there are
restrictions on retained earnings resulting from loan agreements. This audit procedure most likely is
intended to verify management’s assertion of
 Presentation and disclosure
30. Computation of receivable and inventory turnover satisfies the audit objective of
 Valuation or allocation
31. An auditor would most likely review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s assertion of
 Completeness
32. In determining whether transactions have been recorded, the direction of test would be from
 Source documents
33. In testing the existence assertion for an asset, an auditor ordinarily works from the
 Accounting records to supporting evidence
34. When the auditor examines the client’s documents and records to substantiate information on the
financial statements, it is commonly referred to as
 Vouching
35. When the auditor uses tracing an audit procedure for tests of transactions, the auditor is primarily
concerned with which audit objective?
 Completeness
36. When the auditor used the audit procedure vouching, the auditor is primarily concerned with which of
the following audit objectives when testing classes of transaction?
 Occurrence
37. Which of the following is an example of vouching?
 Trace inventory purchases from acquisition journal to supporting invoices
38. A document which the auditor receives from the client, but which was prepared by someone outside
the client’s organization, is a(n)
 External document
39. Confirmations are most likely to be used to verify
 Bank balances and accounts receivables
40. In performing your audit for a privately-held firm your inquiries have yielded that one of the company’s
owner’s primary motivations is to pay the least amount of income tax that is possible. Based on this
observation which audit objective for ending inventory would the auditor be most concerned about
ascertaining?
 Completeness
41. After the auditor has completed all audit procedures, it is necessary to combine the information
obtained to reach an overall conclusion as to whether the financial statements are fairly presented.
This is a highly subjective process that relies heavily on
 The auditor’s professional judgment
42. Which of the following audit procedures is used extensively throughout the audit and often is
complementary to performing other audit procedures?
 Observation
43. Which statement is incorrect about making inquiries as audit procedure?
 Inquiry alone is sufficient to test the operating effectiveness of controls.
44. Observation
 Consists of looking at a process or procedure being performed by others.
45. This consists of checking the mathematical accuracy of documents or records.
 Recalculation
46. Even with the most effectively designed internal control, the auditor must obtain audit evidence,
beyond testing the controls, for every:
 Material financial statement account
47. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
  Documentation of internal control, tests of controls, and substantive tests
48. An audit process is a well-defined methodology for organizing an audit to ensure that
 The evidence gathered is both sufficient and competent
 All appropriate audit objectives are specified
 All appropriate audit objectives are met
49. If the auditor were responsible for making certain that all the assertions of management in the
statements were correct.
 Audits would not be economically feasible

Pre-engagement Activities

50. Investigation of new clients and re-evaluation of existing ones is an essential part of deciding
 Whether to accept engagement
51. Which of the following is the correct order of steps in the audit process?
 Prepare an engagement letter
 Develop an overall strategy for the expected conduct and scope of the audit
 Perform tests of control
 Perform substantive tests
 Obtain client’s written representation
52. Which of the following would an auditor least likely perform as part of the auditor’s preliminary
engagement activities?
 Obtain understanding of the legal and regulatory framework applicable to the entity.
53. Which of the following is not one of the reasons why auditor should perform preliminary engagement
activities?
 To ensure that the auditor maintains the necessary independence and ability to perform the
engagement.
54. Which of the following is not normally performed in the preplanning or pre-engagement phase?
 Making a preliminary estimate of materiality
55. In making a decision to accept or continue with a client, the auditor should consider:
 Its competence
 Its independence
 Its ability to serve the client properly
 The integrity of client’s management
56. Before accepting an engagement to audit new client, a CPA is required to obtain
 A preliminary understanding of the prospective client’s industry and business.
57. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
 Determine the degree of knowledge and expertise required by the engagement.
58. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include
 Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management
59. Prior the acceptance of audit engagement with client who has terminated the services of the
predecessor auditor, the CPA should
 Advise the client of the intention to contact the predecessor auditor and request permission for
the contract.
60. The purpose of requirement in having communication between the predecessor and successor auditors
is to
 Help the successor auditor evaluate whether to accept engagement
61. Jem, CPA, has been retained to audit the financial statements of ZVP Co. ZVP’s predecessor audit was
Moshe, CPA, who has been notified by ZVP that Mosher’s services have been terminated. Under these
circumstances, which party should initiate the communication between Jem and Moshe?
 Jem, the successor auditor
62. In an audit, communication between the predecessor and the successor auditor should be
 Either written or oral
63. 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
 There are actual or potential legal problems between the client and the predecessor auditor.
64. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Jin corporation. Arnel plans to consult
Von and to review Von’s prior year working papers. Arnel may do so if
 Von and Jin consent
65. Upon discovering material misstatements in a client’s financial statements that the client would not
revise, the auditor withdrew from the engagement. If asked by the successor auditor about the
termination the engagement, the predecessor auditor should
 Suggest that the successor auditor obtain the client’s permission to discuss the reasons
 66. Before accepting an engagement to audit a new client, a CPA is required to obtain
 The prospective client’s consent to make inquiries of the predecessor auditor, if any.
67. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding
 Disagreements the predecessor auditor regarding auditing procedures and accounting policies
68. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
 Understanding as to the reasons for the change of auditors
69. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
 Disagreements with management as to auditing procedures.
70. Which of the following should an incoming auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
 Facts that might bear on the integrity of management.
71. What information should a successor auditor obtain during the inquiry of the predecessor auditor prior
to acceptance of audit?
 Facts that might bear on the integrity of management.
 Disagreement with management as to auditing procedures.
72. A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor’
 Working Paper
73. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
 Concluding that the entity’s management probably lacks integrity
74. Which of the following factors most likely would influence an auditor’s determination of the auditability
of the entity’s financial statements?
 The adequacy of the accounting records
75. In auditing the financial statements of Star Corp. Land is discovered information leading Land to
believe that Star’s prior year’s financial statements, which are audited by Jell, require substantial
revisions. Under these circumstances, Land should
 Request Star to arrange a meeting among the three parties to resolve the matter
76. Zion requested permission to communicate with the predecessor auditor and review certain portions of
the predecessor auditor’s work papers. The prospective client’s refusal to permit this will bear directly
on Hawkin’s decision concerning the
 Integrity of management
77. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working
paper analyses relating to
 Contingencies
 Statement of Financial Position Accounts
78. Which of the following is not correct regarding the communications between successor and
predecessor auditors?
 The burden of initiating the communication rests with the predecessor auditor
79. 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
 There are legal problems between client and predecessor

Establishing the Terms of Engagement

80. The purpose of an engagement letter is to

 Document the terms of the engagement
81. Before performing any audit procedures. The auditor and the client should agree on the
 Terms of engagement
82. Engagement letter
 Must be written
83. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed
terms would need to be recorded in a(n)
 Engagement letter
84. The auditor should document the understanding established with a client through a(n)
 Written communication with the client
85. Which of the following could be a valid reason for sending an engagement letter?
 To avoid misunderstanding with respect to engagement
 To confirm the auditor’s acceptance of the appointment
 To document the objective and scope of the audit
86. The auditor’s responsibility for the detection of fraud can be found in the
 Engagement letter
87. If an auditor believes that an understanding with the client has not been established, he or she should
ordinarily
 Decline to accept or perform the audit
88. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.
 Before the commencement of the engagement
89. An engagement letter should ordinarily include information on the objectives of the engagement and
 CPA’s responsibilities
 Client’s responsibilities
 Limitation of the engagement
90. Which of the following matters is generally included in the engagement letter?
 Management’s responsibility for the entity’s compliance with laws and regulations
91. Which of the following would be least likely to be included in the auditor’s engagement letter?
 Type of opinion to be issued
92. Which of the following is not one of the principal contents of an engagement letter?
 Objective of the financial statement
93. An engagement letter would not normally include
 Details of the procedure that will be performed
94. The audit engagement letter should generally include a reference to each of the following except
 A description of the auditor’s method of sample selection
95. After preliminary audit, arrangements have been made, an engagement confirmation letter should be
sent to the client. The letter usually would not include
 A statement that management advisory services would be made available upon request
96. Arrangements concerning which of the following are least likely to be included in engagement letter?
 CPA investment in client securities
97. The use of an engagement letter is the best method of documenting
 The description of any letter or reports that the auditor expects to issue.
 Notification of any changes in the original arrangements of the audit.
98. In which of the following situations would the auditor be unlikely to send a new engagement letter to a
continuing client?
 A recent change in the partner and/or staff in the audit engagement
99. In a continuing engagement, the continuing auditor would most likely send a new engagement letter
when
 There is a recent change in client’s management
100. When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component); which of the following factors would least likely influence the auditor’s decision to send
separate letter to a component of a parent entity?
 Geographical location of the component
101. The purpose of an engagement letter is to
 Document the terms of engagement to writing in order to minimize misunderstandings.
102. One means of informing the client that the auditor is not responsible for the discovery of all
acts of fraud is the
 Engagement letter