Before the audit begins, the auditor performs pre-engagement acceptance or continuance procedures.This includes:
- an independence assessment;
- a pre-engagement assessment; and
- communications with the previous auditor (if applicable).
Throughout this process, you can expect:
- a letter that communicates the auditor’s independence and compliance with relevant professional standards; and
- disclosure
of all relationships between the auditor and the entity and its related entities that may affect the auditor’s independence.
Once the pre-engagement assessment is complete, the auditor issues an Engagement Letter with:
- engagement objectives, scope and limitations;
- management's responsibilities;
- responsibility for adjustments;
- the auditor's responsibilities; and
- other matters, such as fees.
1
Which of the following factors most likely would cause an independent auditor to decide not to accept a new audit engagement?
A)
The auditor's lack of understanding of the prospective client’s internal audit function’s audit plan.
B)
Management's disregard of its responsibility to maintain an adequate internal control environment.
C)
The auditor's inability to determine whether related party transactions were consummated on terms equivalent to arm’s-length transactions.
D)
Management's refusal to permit the auditor to perform substantive tests before the year-end.
2
Which of the following statements is correct with regard to the predecessor- successor communications?
A)
The successor auditor has no responsibility to contact the predecessor auditor.
B)
The successor auditor should obtain permission from the entity before contacting the predecessor auditor.
C)
The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.
D)
The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.
3
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s
A)
Awareness of the consistency in the application of accounting principles between periods.
B)
Evaluation of all matters of continuing accounting significance.
C)
Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
D)
Understanding as to the reasons for the change of auditors.
4
The preliminary engagement activities include all of the following except:
A)
Determine the audit engagement team requirements.
B)
Ensure that the audit team is independent.
C)
Ensure that there is an independent audit committee.
D)
Ensure that the audit firm is independent.
5
When establishing an understanding with the entity regarding the terms of the engagement, all of the following should be discussed, except:
A)
The engagement letter.
B)
The internal audit function.
C)
The audit committee.
D)
The agreed upon limits on auditor liability for an improper audit.
6
Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?
A)
They provide documentation of management’s responsibility for the financial statements.
B)
They document the audit fees and deadlines that have been agreed upon.
C)
They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.
D)
They help to limit auditor liability in the event of misunderstandings.
7
A written understanding between the auditor and the entity concerning the auditor’s responsibility for the discovery of non-compliance with laws and regulations is usually set forth in a(n)
A)
Internal control letter.
B)
Letter of audit inquiry.
C)
Management letter.
D)
Engagement letter.
8
Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?
A)
The competence and objectivity of the internal audit function.
B)
The materiality or significance of the accounts examined by the internal audit function.
C)
The audit risk associated with the accounts examined by the internal auditors.
D)
The nature of the audit software documentation used by the internal auditors.
9
Which of the following would most likely indicate the existence of related parties?
A)
Failing to write down inventory to market value just before year-end.
B)
Depending on one or a few products for nearly all of a firm’s operating revenues.
C)
Borrowing money at an interest rate substantially below the prevailing market rate of interest.
D)
Selling goods to a major customer of your main competitor.
10
For which laws and regulations does the auditor have the same responsibility as that for errors and fraud?
A)
Laws and regulations that have an indirect effect on the determination of financial statement amounts.
B)
Laws and regulations that have a material but indirect effect on the determination of financial statement amounts.
C)
Laws and regulations that have a direct and material effect on the financial statements.
D)
Laws and regulations that have a direct and material effect on the financial statements as well as laws and regulations that have material but indirect effect on the determination of financial statement amounts.
11
During the initial planning phase of an audit, an independent auditor most likely would
A)
Identify specific internal control activities that are likely to prevent fraud.
B)
Evaluate the reasonableness of the entity’s accounting estimates.
C)
Discuss the timing of the audit procedures with the entity’s management.
D)
Inquire of the entity’s lawyer if it is probable that any unrecorded claims will be asserted.
12
When planning an audit, an auditor should
A)
Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.
B)
Determine overall materiality for audit purposes.
C)
Conclude whether changes in compliance with prescribed internal controls justify reliance on them.
D)
Prepare a preliminary draft of the management representation letter.
13
Which of these statements concerning non-compliance with laws and regulations by clients is correct?
A)
An auditor’s responsibility to detect non-compliance with laws and regulations that have a direct and material effect on the financial statements is the same as that for errors and fraud.
B)
An audit in accordance with the international standards on auditing normally includes audit procedures specifically designed to detect non-compliance with laws and regulations that have an indirect but material effect on the financial statements.
C)
An auditor considers non-compliance with laws and regulations from the perspective of the reliability of management’s representations rather than their relation to audit objectives derived from financial statement assertions.
D)
An auditor has no responsibility to detect non-compliance with laws and regulations by clients that have an indirect effect on the financial statements.
14
The engagement partner reviews the work of engagement team members to evaluate which of the following?
A)
The work was performed and documented.
B)
The objectives of the procedures were achieved.
C)
The results of the work support the conclusions reached.
D)
All of the above are correct.
15
Which of the following would NOT be a typical supervisory activity for an audit?
A)
Perform detailed testing of the accounts payable account.
B)
Inform engagement team of the nature, timing, and extent of audit procedures.
C)
Review the work of other engagement team members.
D)
Evaluate the results of the work and whether it supports the conclusions reached.
16
Tests of controls include all of the following except:
A)
Inspection of documents, files, etc.
B)
Analytical procedures.
C)
Walk-throughs.
D)
Observation.
17
A dual-purpose test is
A)
A procedure that provides evidence about two different account balances at the same time.
B)
A procedure that serves as both a test of control and a substantive test of transactions.
C)
A procedure that provides evidence about two different accounting periods at the same time.
D)
A procedure that serves as both a substantive test of transactions and a substantive test of balances.
18
The concept of materiality as it applies to a financial statement audit
A)
Relates primarily to the audit fees involved.
B)
Generally involves less professional judgement for public companies.
C)
Is determined, in part, based on how financial statement users may be influenced in making decisions.
D)
Relates primarily to the quantity of audit procedures performed.
19
According to the text, the first step in applying materiality to an audit is
A)
To determine performance materiality for each account balance.
B)
To determine a materiality level for the overall financial statements.
C)
To aggregate the misstatements found in each account and determine their overall affect on the financial statements.
D)
To ask management what constitutes a material amount in their business.
20
Which of the following is not a qualitative factor that may affect an auditor’s establishment of materiality?
A)
Potential for fraud.
B)
The company is close to violating loan covenants.
C)
Firm policy sets materiality at four per cent of profit before tax.
D)
A small misstatement would interrupt an earnings trend.
21
Performance materiality is
A)
The amount of misstatement that management is willing to accept in the financial statements.
B)
Materiality for the balance sheet as a whole.
C)
Materiality for the income statement as a whole.
D)
Materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.
22
When misstatements are greater than overall materiality, the auditor should
A)
Require that the auditee adjust the financial statements.
B)
Issue an unqualified opinion.
C)
Modify the opinion if the auditee will not adjust the financial statements.
D)
Both A) and C).
Which is the first step in the audit engagement?
Step 1: Define Audit Objectives
Prior to the audit, AMAS conducts a preliminary planning and information gathering phase. The assigned auditor defines the audit objectives and likely scope of the audit. The auditor starts to develop the audit program to define the audit testing procedures.
What are the steps in audit engagement?
Although every audit process is unique, the audit process is similar for most engagements and normally consists of four stages: Planning (sometimes called Survey or Preliminary Review), Fieldwork, Audit Report and Follow-up Review.
When an auditor accepts an audit engagement?
When an auditor accepts an audit engagement but does not possess the industry expertise of the business entity involved, the auditor should: Refer a substantial portion of the audit to another CPA who will act as the principal auditor. Obtain a knowledge of matters that relate to the nature of the entity's business.
What factors should an auditor consider prior to accepting an engagement letter?
Client acceptance evaluation should include General Considerations, Management Integrity, Management Commitment to GAAP, Management Internal Control Consciousness, Financial Strength of the Client, and Other Risk Factors.