MGMT Chapter 6 Test Bank
11. Which of the following factors most likely would cause a CPA to not accept a new audit
engagement?
A. The prospective client has fired its prior auditor.
B. The CPA lacks a thorough understanding of the prospective client's operations and industry.
C. The CPA is unable to review the predecessor auditor's working papers due to a major fire that
destroyed both hard and soft copy documentation.
D. The prospective client is unwilling to make financial records available to the CPA. - -D. The
prospective client is unwilling to make financial records available to the CPA.
-12. Which of the following factors most likely would heighten an auditor's concern about the
risk of fraudulent financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash.
B. Low growth and profitability as compared to other entity's in the same industry.
C. Financial management's participation in the initial selection of accounting principles.
D. An overly complex organizational structure involving unusual lines of authority. - -D. An
overly complex organizational structure involving unusual lines of authority.
-13. Which of the following factors would most likely cause a CPA to decide not to accept a new
audit engagement?
A. Lack of understanding of the potential client's internal auditors' computer-assisted audit
techniques.
B. Management's disregard for internal control.
C. The existence of related party transactions.
D. Management's attempt to meet earnings per share growth rate goals. - -B. Management's
disregard for internal control.
-14. Which of the following matters is generally included in an auditor's engagement letter?
A. Limitations of the engagement.
B. Factors to be considered in establishing preliminary judgments about materiality.
C. Management's liability for all illegal acts committed by its employees.
D. The auditor's responsibility to obtain negative assurance relating to non-compliance with laws
and regulations. - -A. Limitations of the engagement.
-15. Which of the following would heighten an auditor's concern about the risk of fraudulent
financial reporting?
A. Inability to generate positive cash flows from operations, while reporting large increases in
earnings.
B. Management's lack of interest in increasing the dividend paid on common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
, D. Inability to borrow necessary capital without obtaining waivers on debt covenants. - -A.
Inability to generate positive cash flows from operations, while reporting large increases in
earnings.
-16. To best test existence, an auditor would sample from the:
A. General ledger to source documents.
B. General ledger to the financial statements.
C. Source documents to the general ledger.
D. Source documents to journals. - -A. General ledger to source documents.
-17. The auditors' understanding established with a client should be established through a(an):
A. Oral communication with the client.
B. Written communication with the client.
C. Written or oral communication with the client.
D. Completely detailed audit plan. - -B. Written communication with the client.
-18. Which of the following would be least likely to be considered an audit planning procedure?
A. Use an engagement letter.
B. Develop the overall audit strategy.
C. Perform the risk assessment.
D. Develop the audit plan. - -C. Perform the risk assessment.
-19. While assessing the risks of material misstatement auditors identify risks, relate risk to what
could go wrong, consider the magnitude of risks and:
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels. - -C. Consider the likelihood that the risks could result in
material misstatements.
-20. Which of the following is correct concerning requirements about auditor communications
about fraud?
A. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
B. All fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the
auditor through use of an "emphasis of a matter" paragraph added to the audit report.
D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
- -A. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
-23. Which of the following factors most likely would lead a CPA to conclude that a potential
audit engagement should not be accepted?
A. There are significant related party transactions that management claims occurred in the
ordinary course of business.
11. Which of the following factors most likely would cause a CPA to not accept a new audit
engagement?
A. The prospective client has fired its prior auditor.
B. The CPA lacks a thorough understanding of the prospective client's operations and industry.
C. The CPA is unable to review the predecessor auditor's working papers due to a major fire that
destroyed both hard and soft copy documentation.
D. The prospective client is unwilling to make financial records available to the CPA. - -D. The
prospective client is unwilling to make financial records available to the CPA.
-12. Which of the following factors most likely would heighten an auditor's concern about the
risk of fraudulent financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash.
B. Low growth and profitability as compared to other entity's in the same industry.
C. Financial management's participation in the initial selection of accounting principles.
D. An overly complex organizational structure involving unusual lines of authority. - -D. An
overly complex organizational structure involving unusual lines of authority.
-13. Which of the following factors would most likely cause a CPA to decide not to accept a new
audit engagement?
A. Lack of understanding of the potential client's internal auditors' computer-assisted audit
techniques.
B. Management's disregard for internal control.
C. The existence of related party transactions.
D. Management's attempt to meet earnings per share growth rate goals. - -B. Management's
disregard for internal control.
-14. Which of the following matters is generally included in an auditor's engagement letter?
A. Limitations of the engagement.
B. Factors to be considered in establishing preliminary judgments about materiality.
C. Management's liability for all illegal acts committed by its employees.
D. The auditor's responsibility to obtain negative assurance relating to non-compliance with laws
and regulations. - -A. Limitations of the engagement.
-15. Which of the following would heighten an auditor's concern about the risk of fraudulent
financial reporting?
A. Inability to generate positive cash flows from operations, while reporting large increases in
earnings.
B. Management's lack of interest in increasing the dividend paid on common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
, D. Inability to borrow necessary capital without obtaining waivers on debt covenants. - -A.
Inability to generate positive cash flows from operations, while reporting large increases in
earnings.
-16. To best test existence, an auditor would sample from the:
A. General ledger to source documents.
B. General ledger to the financial statements.
C. Source documents to the general ledger.
D. Source documents to journals. - -A. General ledger to source documents.
-17. The auditors' understanding established with a client should be established through a(an):
A. Oral communication with the client.
B. Written communication with the client.
C. Written or oral communication with the client.
D. Completely detailed audit plan. - -B. Written communication with the client.
-18. Which of the following would be least likely to be considered an audit planning procedure?
A. Use an engagement letter.
B. Develop the overall audit strategy.
C. Perform the risk assessment.
D. Develop the audit plan. - -C. Perform the risk assessment.
-19. While assessing the risks of material misstatement auditors identify risks, relate risk to what
could go wrong, consider the magnitude of risks and:
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels. - -C. Consider the likelihood that the risks could result in
material misstatements.
-20. Which of the following is correct concerning requirements about auditor communications
about fraud?
A. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
B. All fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the
auditor through use of an "emphasis of a matter" paragraph added to the audit report.
D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
- -A. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
-23. Which of the following factors most likely would lead a CPA to conclude that a potential
audit engagement should not be accepted?
A. There are significant related party transactions that management claims occurred in the
ordinary course of business.
