Chapter 8 Audit Test Bank

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: - correct answer acceptable audit risk. A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called: - correct answer inherent risk. When inherent risk is high, there will need to be: - correct answer A lower assessment of audit risk: No More evidence accumulated by the auditor: Yes In what order should the following steps occur? A. assess client business risk B. understand the client's business and industry C. perform preliminary analytical procedures D. assess acceptable audit risk - correct answer B, A, D, C The auditor uses knowledge gained from the understanding of the client's business and industry to assess: - correct answer client business risk. One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for: - correct answer Good client relations: Yes Facilitating high-quality work at a reasonable cost: Yes The auditor is likely to accumulate more evidence when the audit is for a company: - correct answer Which has large amounts of debt: Yes Which is to be sold in the near future: Yes Initial audit planning involves four matters. Which of the following is not one of these? - correct answer Request that bank balances be confirmed. Rodgers CPA has requested permission to communicate with predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow this communication to occur would impact Rodgers decision concerning: - correct answer integrity of management concerning possible accounting misstatements A successor auditor may perform which of the following for a new audit client? - correct answer Speak to local attorneys, banks and other businesses regarding the company's reputation: Yes Speak to the predecessor auditors about disagreements they had with management:Yes Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate? - correct answer Less evidence is accumulated A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the: - correct answer engagement letter. If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm? - correct answer the client's audit committee Which of the following statements is true regarding communications between predecessor and successor auditors? - correct answer The predecessor's response can be limited to stating that no information will be provided. The purpose of an engagement letter is to: - correct answer document the terms of the engagement Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in: - correct answer engagement letter. Which of the following normally signs the engagement letter for an audit of a private company? - correct answer Management. The first standard of field work, which states that the work is to be adequately planned and that assistants, if any, are to be properly supervised, recognizes that: - correct answer early appointment of the auditor is advantageous to the auditor and the client. An engagement letter sent to a publicly held audit client usually would not include a: - correct answer statement that management advisory services would be made available upon request. Jennings and Company has repositioned the firm's business strategy from the basis of competing on costs to competing on product differentiation. All the following will increase, except: - correct answer Audit risk. The purpose of the requirement in having communication between the predecessor and successor auditors is to: - correct answer help the successor auditor to evaluate whether to accept the engagement 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: - correct answer there are actual or potential legal problems between the client and the predecessor. Which of the following best expresses the requirement to establish with the client an understanding of the responsibilities the auditor and company is taking for the audit engagement? - correct answer 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. Early appointment of the independent auditor will enable: - correct answer a more efficient examination to be planned. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should: - correct answer obtain a knowledge of matters that relate to the nature of the entity's business. Which is usually included in an engagement letter? Hours/Dollar - correct answer Estimate of hours required to complete audit: No Dollar estimate of fees to be billed to the client: Yes Which is usually included in an engagement letter? Reference to GAAP and GAAS - correct answer A reference to GAAP: Yes A reference to GAAS: Yes Which is usually included in an engagement letter? The financial statements are the responsibility of the company's management Ratios to be used by the auditor in the planning phase - correct answer The financial statements are the responsibility of the company's management: Yes Ratios to be used by the auditor in the planning phase: No When may the auditor refer to a specialist in the audit report? 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 - correct answer Only if the specialist's report results in a modification of the audit opinion: Yes Only if the specialist assisted in the audit of an account material to the financial statements: No Which is usually included in the engagement letter? The projected type of opinion on the financials statement to be audited Name(s) of the client personnel responsible for supplying the auditor with information - correct answer The projected type of opinion on the financials statement to be audited: No Name(s) of the client personnel responsible for supplying the auditor with information: No Which is usually included in the engagement letter? List of audit procedures to be used in inventory observation