Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 8 Audit Planning and Analytical Procedures
8.1 Learning Objective 8-1
1) 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
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
2) The first phase in planning an audit and designing an audit approach is to
A) accept the client and perform initial audit planning.
B) set the preliminary judgment of materiality.
C) understand the client’s business and industry.
D) perform preliminary audit procedures.
3) _______ is the risk that the financial statements contain a material misstatement due to fraud
or error prior to the audit.
A) Inherent risk
B) Client business risk
C) Acceptable audit risk
D) Risk of material misstatement
4) In what order should the following steps occur?
A. Set preliminary judgment of materiality and performance materiality.
B. Understand the clients business and industry.
C. Perform preliminary analytical procedures.
D. Accept the client and perform initial audit planning.
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A
5) The auditor uses knowledge gained from the understanding of the client’s business and
industry to assess
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
6) There are three main reasons why an auditor should properly plan audit engagements. Discuss
each of these reasons.
7) When an auditor sets a low acceptable audit risk, it means that he wants to be more certain
that the financial statements are not materially misstated.
8) As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
9) Assessing acceptable audit risk, client business risk, and risk of material misstatement helps
determine the audit procedures that will be needed.
10) A 100 % audit risk is complete certainty.
8.2 Learning Objective 8-2
1) One of the purposes of an engagement letter is to avoid misunderstandings with the client.
This is important for
A)
Engagement objectives
Engagement limitations
Yes
Yes
B)
Engagement objectives
Engagement limitations
No
No
C)
Engagement objectives
Engagement limitations
Yes
No
D)
Engagement objectives
Engagement limitations
No
Yes
2) The auditor is likely to accumulate more evidence when the audit is for a company
A)
Which has large amounts of debt
Which is to be sold in the near future
Yes
Yes
B)
Which has large amounts of debt
Which is to be sold in the near future
No
No
C)
Which has large amounts of debt
Which is to be sold in the near future
Yes
No
D)
Which has large amounts of debt
Which is to be sold in the near future
No
Yes
3) Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client’s reason for the audit.
4) Smith, CPA, has requested permission to communicate with the predecessor auditor in order
to review certain workpapers for high risk accounts for a new audit client. The new audit client’s
refusal to allow this communication to occur would impact Smith’s decision concerning
A) the auditor’s ability to design audit tests.
B) possible scope exception due to lack of access.
C) the desirability of accepting the prospective engagement.
D) violation of the GAAP rules concerning consistency and comparability of financial
information.
5) A successor auditor may perform which of the following for a new audit client?
A)
Speak to local attorneys, banks and other
businesses regarding the company’s
reputation
Speak to the predecessor auditors about
disagreements they had with management
Yes
Yes
B)
Speak to local attorneys, banks and other
businesses regarding the company’s
reputation
Speak to the predecessor auditors about
disagreements they had with management
No
No
C)
Speak to local attorneys, banks and other
businesses regarding the company’s
reputation
Speak to the predecessor auditors about
disagreements they had with management
Yes
No
D)
Speak to local attorneys, banks and other
businesses regarding the company’s
reputation
Speak to the predecessor auditors about
disagreements they had with management
No
Yes
6) When dealing with audit risk,
A) audit risk should not be a factor when determining if a new client should be accepted.
B) audits with a low acceptable audit risk generally result in lower audit fees.
C) if management of a company has a reputation of integrity, but is also known to take
aggressive financial risks, the auditor should not accept the company as a new client.
D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the
auditor may still accept the engagement but increase the fee proposed to the client.
7) A written understanding detailing what the auditor expects from the client in performing an
audit will normally be expressed in the
A) management letter requested by the auditor.
B) engagement letter.
C) audit Plan.
D) audit Strategy for the client.
8) For public companies, the ________ is responsible for hiring the auditor as required by the
Sarbanes-Oxley Act.
A) client’s management
B) client’s chief executive officer
C) client’s chief financial officer
D) client’s audit committee
9) Which of the following statements is true regarding communications between predecessor and
successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor’s 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) The predecessor auditor of a public company does not need permission from the client before
communicating with the successor auditor.
10) The purpose of an engagement letter is to
A) document the CPA firm’s responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
D) emphasize management’s responsibility for approving the audit program.
11) The written communication stating the auditor cannot guarantee that all acts of fraud will be
discovered is found in the
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter.
12) Which of the following normally signs the engagement letter for an audit of a private
company?
A) management
B) board of directors representative
C) audit committee representative
D) corporate treasurer
13) The two major factors affecting acceptable audit risk are
A) inherent risk and the intended uses of the financial statements.
B) control risk and the intended uses of the financial statements.
C) the likely statement users and their intended uses of the statements.
D) the audit firm and the intended uses of the statements
14) An engagement letter sent to a publicly held audit client usually would not include a(n)
A) reference to the auditor’s responsibility for the detection of errors or irregularities.
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 management’s responsibility for the financial statements.
15) The preliminary audit strategy
A) is set before the auditor understands the client’s reasons for the audit.
B) guides the development of the audit plan.
C) is determined after the engagement staffing is set.
D) is the detailed steps to be followed for the substantive audit tests.
16) The purpose of the requirement in having communication between the predecessor and
successor auditors is to
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.
17) 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
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor’s work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity.
18) Which of the following best expresses the understanding of the terms of the engagement that
exist between the client and the CPA firm?
A) Management asserts there are no errors, material or immaterial, in the general ledger.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to
provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management asserts that they will provide the auditor with a risk assessment as to material
misstatements due to errors or fraud in the company’s financial statements.
19) When selecting staff for the audit engagement
A) only staff members who are CPAs should be assigned to the audit.
B) only managers and above need to have appropriate competence and capabilities to perform
the audit.
C) continuity of staff members from year to year should not be a factor.
D) staff assigned to the audit must be knowledgeable about the client’s industry.
20) When developing the overall strategy for the audit, the auditor will
A) decide whether to accept a new client.
B) determine if any audit specialists will be required.
C) identify why the auditor needs an audit.
D) obtain an engagement letter.
21) Which is usually included in an engagement letter?
A)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
Yes
Yes
B)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
No
No
C)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
Yes
No
D)
Estimate of hours required to
complete audit
Dollar estimate of fees to be billed to
the client
No
Yes
22) Which is usually included in an engagement letter?
A)
The objectives of the
engagement
Identification of the financial
reporting framework used by
management
Yes
Yes
B)
The objectives of the
engagement
Identification of the financial
reporting framework used by
management
No
No
C)
The objectives of the
engagement
Identification of the financial
reporting framework used by
management
Yes
No
D)
The objectives of the
engagement
Identification of the financial
reporting framework used by
management
No
Yes
23) Which is usually included in an engagement letter?
A)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in
the planning phase
Yes
Yes
B)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in
the planning phase
No
No
C)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in
the planning phase
Yes
No
D)
The financial statements are
the responsibility of the
company’s management
Ratios to be used by the auditor in
the planning phase
No
Yes
24) When may the auditor refer to a specialist in the audit report?
A)
Only if the specialist’s 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
Yes
Yes
B)
Only if the specialist’s 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
No
No
C)
Only if the specialist’s 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
Yes
No
D)
Only if the specialist’s 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
No
Yes
25) Which is usually included in the engagement letter?
A)
The projected type of opinion on the
financial statement to be audited
Name(s) of the client personnel
responsible for supplying the auditor with
information
Yes
Yes
B)
The projected type of opinion on the
financial statement to be audited
Name(s) of the client personnel
responsible for supplying the auditor with
information
No
No
C)
The projected type of opinion on the
financial statement to be audited
Name(s) of the client personnel
responsible for supplying the auditor with
information
Yes
No
D)
The projected type of opinion on the
financial statement to be audited
Name(s) of the client personnel
responsible for supplying the auditor with
information
No
Yes
26) Which is usually included in the engagement letter?
A)
List of audit procedures to be used
in inventory observation
The auditors’ assessment of audit
risk
Yes
Yes
B)
List of audit procedures to be used
in inventory observation
The auditors’ assessment of audit
risk
No
No
C)
List of audit procedures to be used
in inventory observation
The auditors’ assessment of audit
risk
Yes
No
D)
List of audit procedures to be used
in inventory observation
The auditors’ assessment of audit
risk
No
Yes
27) Discuss the factors an auditor should consider before accepting a company as an audit client.
28) Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?
29) Discuss the essential activities involved in the initial planning of an audit.
30) Discuss the required communications between predecessor and successor auditors.
31) Discuss several reasons why an auditor may not wish to continue a relationship with an
existing audit client.
32) Discuss four of the matters that should be specified in an engagement letter.
33) 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 parties–namely the company’s attorneys and bankers–during this investigation.
34) For prospective clients that have previously been audited by another CPA firm, the
predecessor auditor must initiate the communication with the successor auditor.
35) When a successor auditor contacts a company’s previous auditor, the predecessor auditor is
required to respond fully and without limit to the request for information.
36) 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.
37) An auditor must evaluate a specialist’s professional qualifications and understand the
objectives of the specialist’s work.
38) Because of audit risk, some CPA firms now refuse any new clients in certain high-risk
industries.