Chapter 8 Auditing TheoryMultiple-Choice Questions

1.easy

Which of the following is not one of the three main reasons why the auditor should properly plan engagements?

a a. To enable proper on-the-job training of employees.b. To enable the auditor to obtain sufficient appropriate evidence.c. To avoid misunderstandings with the client.d. To help keep audit costs reasonable.

2. Avoiding misunderstandings with the client is important for:easya Good client relations Facilitating high-quality work at a reasonable cost

a.b.c.d.

YesNoYesNo

YesNoNoYes

3.easy

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:

b a. inherent risk.b. acceptable audit risk.c. statistical risk.d. financial risk.

4.easy

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:

d a. control risk.b. acceptable audit risk.c. statistical risk.d. inherent risk.

5. When inherent risk is high, there will need to be:Easy

d A lower assessment of audit risk More evidence accumulated by the auditora.b.c.d.

YesNoYesNo

YesNoNoYes

6. The auditor is likely to accumulate more evidence when the audit is for a company:easya Which has large amounts of debt Which is to be sold in the near future

a.b.c.d.

YesNoYesNo

YesNoNoYes

7. Which of the following is not typically included in initial audit planning?easy a. Client acceptance/continuation decisions.d b. Determination of the purpose of the audit.

c. Obtain an understanding with the client.d. Perform analytical procedures as substantive tests.

8. Initial audit planning involves four matters. Which of the following is not one of these?

easy a. Develop an overall audit strategy.b b. Request that bank balances be confirmed.

c. Schedule engagement staff and audit specialists.d. Identify the client’s reason for the audit.

9.easy

Most auditors assess inherent risk as high for related parties and related-party transactions because:

b a. of the unique classification of related-party transactions required on the balance sheet.b. of the lack of independence between the parties.c. of the unique classification of related-party transactions required on the income statement.d. it is required by generally accepted accounting principles.

10.easy

Which of the following is not correct regarding the communications between successor and predecessor auditors?

a a. The burden of initiating the communication rests with the predecessor auditor.b. The burden of initiating the communication rests with the successor auditor.c. The predecessor auditor must receive their former client’s permission prior to divulging

information to the successor auditord. The predecessor auditor may choose to provide a limited response to a successor auditor.

11. A successor auditor may perform which of the following for a new audit client?easya Speak to local attorneys, banks

and other businesses regarding the company’s reputation

Speak to the predecessor auditors about disagreements they had with management

a. Yes Yesb. No Noc. Yes Nod. No Yes

12.medium

Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is appropriate?

b a. More evidence is accumulated.b. Less evidence is accumulated.c. Special care is required in assigning experienced staff.d. Review of audit documentation is performed by personnel not assigned to the engagement.

13.medium

It is easier and more common to implement increased evidence accumulation for inherent risk than for acceptable audit risk because:

a a. inherent risk can usually be isolated to specific accounts.b. inherent risk applies to the entire audit.c. acceptable audit risk and sample sizes are set statistically.d. acceptable audit risk does not impact on the amount of evidence which must be

accumulated.

14. (SOX)medium

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?

d a. The client’s management.b. The client’s chief executive officer.c. The client’s chief financial officer.d. The client’s audit committee.

15.medium

Which of the following statements is true regarding communications between predecessor and successor auditors?

b 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. There must be communication between the predecessor and successor if the successor is to

accept the engagement.

16.medium

Investigating new clients with a focus on assessing the auditor’s potential relationship with that new client is a critical element in determining:

b a. inherent risk.b. acceptable audit risk.c. statistical risk.d. financial risk.

17. The purpose of an engagement letter is to:mediumb

a. document the CPA firm’s responsibility to external users of the audited financial statements.

b. document the terms of the engagement in writing to minimize misunderstandings.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.

18.medium

One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is the:

a a. engagement letter.b. representation letter.c. responsibility letter.d. client letter.

19. Which of the following normally signs the engagement letter for an audit of a public company?medium a. Corporate treasurer.d b. Chief financial officer.

c. Chairman of the board of directors.d. Audit committee.

20. Which of the following normally signs the engagement letter for an audit of a private company?medium a. Management.a b. Board of directors representative.

c. Audit committee representative.d. Corporate treasurer.

21.mediumd

An understanding of a client’s business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained:a. from the predecessor auditor.b. from the Securities and Exchange Commission.c. from the permanent file.d. at the client’s premises.

22. The least effective method of identifying related parties for a public company would be a(n):medium a. inquiry of management.c b. review of SEC filings.

c. distribution of the engagement letter to all stockholders.d. examination of stockholders’ listings to identify principal stockholders.

23.medium

An official record of meetings of the board of directors and stockholders is included in the corporate:

c a. bylaws.b. charter.c. minutes.d. license.

24. Which of the following is not likely to be a related party?medium a. Affiliated companies.

c b. A major stockholder of the company.c. A warehouse employee.d. The chief executive officer.

25. Which of the following is most likely to occur at the beginning of an initial audit engagement?medium a. Prepare a rough draft of the financial statements and of the auditor’s report.c b. Study and evaluate the system of internal administrative control.

c. Determine the client’s reason for an audit.d. Consult with and review the work of the predecessor auditor prior to discussing the

engagement with the client management.

26. An auditor should examine minutes of the board of directors’ meetings:medium a. through the date of the financial statements.b b. through the date of the audit report.

c. only at the beginning of the audit.d. on a test basis.

27.medium

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:

a a. early appointment of the auditor is advantageous to the auditor and the client.b. acceptance of an audit engagement after the close of the client’s fiscal year is generally not

permissible.c. appointment of the auditor subsequent to the physical count of inventories requires a

disclaimer of opinion.d. performance of substantial parts of the examination is necessary at interim dates.

28.medium

The corporate minutes are the official record of the meetings of the board of directors and stockholders. The minutes typically include authorizations related to:

dThe CPA’s use of outside specialists Management compensation

a.b.c.d.

YesNoYesNo

YesNoNoYes

29. An engagement letter sent to an audit client usually would not include a(n):medium a. reference to the auditor’s responsibility for the detection of errors or irregularities.c 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.

30. Which of the following is correct with respect to a company’s corporate charter?mediumc

a. The corporate charter is granted by the federal government and is required to recognize the corporation as a separate entity.

b. The corporate charter includes the rules and procedures used to operate a corporation.c. The corporate charter includes the exact name of the corporation, the date of

incorporation, and the types of business the corporation is authorized to conduct.d. The corporate charter must be annually reviewed by the PCAOB.

31. Corporate bylaws include:Mediumd The types and amounts of capital stock

the corporation is authorized to issueThe rules and procedures used to

operate the corporationa.b.c.d.

YesNoYesNo

YesNoNoYes

32. In what order should the following steps occur?

mediumb

A. Assess client business riskB. Understand the client’s business and industryC. Perform preliminary analytical proceduresD. Assess acceptable audit risk

a. D, B, C, A.b. B, A, D, C.c. B, D, A, C.d. D, C, B, A.

33. Which of the following statements is not correct with respect to analytical procedures?medium a. Auditing standards emphasize the need for auditors to develop and use expectations.b b. Analytical procedures must be performed throughout the audit.

c. Analytical procedures may be performed at any time during the audit.d. Analytical procedures use comparisons and relationships to assess whether account

balances appear reasonable.

34. The most widely used profitability ratio is the:medium a. quick ratio.d b. profit margin.

c. return on assets.d. earnings per share.

35.challenging

The purpose of the requirement in SAS No. 84 of having communication between the predecessor and successor auditor is to:

b 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.

36.challenging

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:

c 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.

37. Which of the following is correct with respect to the use of analytical procedures?challengingd

a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption.

b. Analytical procedures must be used throughout the audit.c. Analytical procedures used in the testing phase of the audit are primarily used to direct an

auditor’s attention so that the auditor’s understanding of the business is improved.d. Analytical procedures are performed by studying plausible relationships between financial

and nonfinancial data.

38.challenging

Which of the following ratios is best used to assess a company’s ability to meet its long-term debt obligations?

c a. Quick ratio.b. Return on common equity.c. Debt to equity.d. Current ratio.

39. Which of the following statements is not correct?challengingb

a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client’s business and directing the auditor’s attention to areas that may contain possible misstatements.

b. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may

contain possible misstatements.c. Analytical procedures must be used in the planning and completion phases of the audit,

and are optional in the testing phase.d. Analytical procedures used in the completion phase are primarily aimed at directing the

auditor’s attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern.

40. Which of the following would not likely be classified as a related-party transaction?medium a. An advance of one week’s salary to an employee.a b. Sales of merchandise between affiliated companies.

c. Loans or credit sales to the principal owner of the client company.d. Exchanges of equipment between two companies owned by the same person.

41. Which of the following would not be found in the corporate charter?challenging a. The kinds and amount of capital stock authorized.d b. The date of incorporation.

c. The types of business activity that the corporation is allowed to conduct.d. The rules and procedures adopted by the stockholders.

42. Which of the following would not usually be included in the minutes of the board of directors?challenging a. The duties and powers of the corporate officers.a b. Declaration of dividends.

c. Authorization of long-term loans.d. Approval of executive bonuses.

43. When are auditors likely to encounter judgment problems in the use of analytical procedures?challengingd

a. Whenever the auditor places reliance on management’s explanations for unusual fluctuations in account balances without first developing independent expectations.

b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances.

c. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them.

d. The auditor is likely to encounter judgment problems in each of the above instances.

44. The major concern when using nonfinancial data in analytical procedures is the:challenging a. accuracy of the nonfinancial data.a b. source of the nonfinancial data.

c. type of nonfinancial data.d. presence of multiple sources of nonfinancial data.

45.challenging

An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because:

b a. the business structure may be deliberately designed to obscure related party transactions.b. this may reveal whether transactions would have taken place if the parties had been

unrelated.c. transactions may have been consummated on terms equivalent to arm’s-length

transactions.d. this may permit the audit of intercompany account balances to be performed as of

concurrent dates.

46.challenging

The first standard of fieldwork requires, in part, that audit work be properly planned. Proper planning as intended by the first standard of fieldwork would occur when the auditor:

a a. physically observes the movement of securities already counted to guard against the substitution of such securities for others that are not actually on hand.

b. uses negative accounts receivable confirmations instead of positive confirmations because the latter require mailing of second requests and review of subsequent cash collections.

c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff procedures.

d. eliminates the possibility of counting inventory items more than once by arranging to

make extensive test counts.

47. Early appointment of the independent auditor will enable:challenging a. a more thorough examination to be performed.d b. a proper study and evaluation of internal control to be performed.

c. sufficient competent evidential matter to be obtained.d. a more efficient examination to be planned.

48.medium

Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the two items below are concerns.

aAssessing whether the budgets were

realistic plansClient data may have been altered to conform

to the budgeta. A concern A concernb. Not a concern Not a concernc. A concern Not a concernd. Not a concern A concern

49.challenging

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

b a. engage financial experts familiar with the nature of the business entity.b. obtain a knowledge of matters that relate to the nature of the entity’s business.c. refer a substantial portion of the audit to another CPA who will act as the principal auditor.d. first inform management that an unqualified opinion cannot be issued.

50. Which is a liquidity activity ratio?medium a. Profit marginb b. Inventory turnover

c. Return on assetsd. Times interest earned

51. Which is usually included in an engagement letter?

mediumEstimate of hours required to

complete auditDollar estimate of fees to be billed to

the clientd a.

b.c.d.

YesNoYesNo

YesNoNoYes

52. Which is usually included in an engagement letter?mediuma A reference to GAAP A reference to GAAS

a. Yesb. Noc. Yesd. No

YesNoNoYes

53. Which is usually included in an engagement letter?mediumc The financial statements are

the responsibility of the company’s management

Ratios to be used by the auditor in the planning phase

a.b.c.d

YesNoYesNo

YesNoNoYes

54. When may the auditor refer to a specialist in the audit report?mediumc

Only if the specialist’s report results in a modification of the audit

opinionOnly if the specialist assisted in the audit of an

account material to the financial statementsa.b.c.d

YesNoYesNo

YesNoNoYes

55. Which is usually included in the engagement letter?mediumb 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

a.b.c.d

YesNoYesNo

YesNoNoYes

56. Which is usually included in the engagement letter?mediumb List of audit procedures to be used

in inventory observation The auditors’ assessment of Audit Riska.b.c.d

YesNoYesNo

YesNoNoYes

Essay Questions

57.easy

Discuss the factors an auditor should consider before accepting a company as an audit client.

Answer:The auditor should investigate and consider the prospective client’s standing in the business community, financial stability, management’s integrity, and relations with its bankers, attorneys, and previous CPA firm. The auditor should also determine whether he or she possesses the required competence and independence to do the audit.

58.easy

Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?

Answer:The purpose of an audit engagement letter is to establish a clear understanding between

the auditor and the client regarding the terms of the engagement. An engagement is required for both public and private company audits.

59.easy

Define the term “related party” and discuss why an auditor should identify the client’s related parties early in the audit.

Answer:A related party is an affiliated company, principal owner of the client company, or any

other party with which the client deals where one of the parties can influence the management or operating policies of the other. Auditors need to be aware of who the client’s related parties are early in the audit to enable the auditor to identify related-party transactions, especially those that have not been disclosed.

60.medium

There are three main reasons why an auditor should properly plan audit engagements. Discuss each of these reasons.

Answer:Three reasons why an auditor should properly plan audit engagements are:

To enable the auditor to obtain sufficient competent evidence for the circumstances. This is essential for minimizing legal liability and maintaining a good profession reputation.

To help keep audit costs reasonable. Given the competitive auditing environment, keeping costs reasonable helps the firm obtain and retain clients.

To avoid misunderstandings with the client. This is important for good client relations.

61.medium

Discuss the essential activities involved in the initial planning of an audit.

Answer:There are four essential activities involved in the initial planning of an audit. These

are:1. Client acceptance or continuation. In the case of a new client, the auditor must

determine whether the client is one with which (s)he wishes to be associated. In the case of a continuing client, an auditor must determine whether continuing the relationship is appropriate and in the firm’s best interest.

2. Determine reason for the audit. The auditor should determine the reason for the audit as soon as practical. The remainder of the planning activities may be impacted by the client’s reason for requesting the audit.

3. Obtain an understanding with the client. An understanding with the client should be obtained to avoid misunderstandings. Auditors are required to obtain an understanding with their clients. This understanding must be written.

4. Develop an overall audit strategy. The strategy should consider the reasons for the audit, including areas where there is greater risk of significant misstatements. Setting a strategy helps the auditor determine the resources required for the engagement.

62.medium

Discuss the required communications between predecessor and successor auditors as outlined by SAS No. 84.

Answer:Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the burden of initiating the communication rests on the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information to the successor.

63.medium

Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.

Answer:There are a number of reasons an auditor may choose not to continue a relationship with an existing client. Examples include:

1. Previous conflicts over accounting issues, scope of the audit, type of opinion, or fees.2. Management integrity may be deemed to be insufficient.3. Legal action initiated by either the auditor or client related to prior audit services.4. If fees remain unpaid for services performed more than one year prior to the date of

the current year’s audit report.5. The presence of excessive risk.

64.medium

Discuss four of the matters that should be specified in an engagement letter.

Answer:Matters that should be specified in the engagement letter include: Whether the auditor will perform an audit, a review, or a compilation, plus any other

services such as tax returns or management advisory services. Any restrictions to be imposed on the auditor’s work. Deadlines for completing the audit. Assistance to be provided by the client’s personnel in obtaining records and

documents, and schedules to be prepared for the auditor. Agreement on fees. The letter should state that the auditor is not responsible for the discovery of all acts

of fraud.

65.medium

What documents do auditors routinely obtain to aid in their understanding of a client’s governance system? Briefly discuss each of these documents.

Answer:Auditors commonly obtain the client’s corporate charter, bylaws, and minutes of meetings of the board of directors and shareholders. The corporate charter is issued by the state in which the company is incorporated and specifies the exact name of the corporation along with the date of incorporation, the kinds and amounts of stock the corporation is authorized to issue, and the types of business that the corporation is authorized to conduct. The bylaws include the rules and procedures adopted by the stockholders of the corporation. They specify the duties and powers of corporate officers, the method of voting for directors, and

the frequency of stockholder meetings. The corporate minutes are the official record of

the meetings of the board of directors and stockholders. They include summaries of the most important topics discussed and decisions made at the board meetings.

66.medium

What are three factors that have increased the importance of obtaining an understanding of a client’s business and industry? How can an auditor obtain this understanding?

Answer:Factors that have increased the importance of obtaining an understanding of a client’s business and industry include: Advances in information technology have increased connectivity among companies,

customers, and vendors. Auditors must understand the risks associated with this increased connectivity.

Companies have expanded operations to have global reaches, often through joint ventures and strategic alliances.

Information technology affects internal control processes, improving the quality and timeliness of accounting information.

The increased importance of human capital and other intangible assets has increased accounting complexity and the importance of management judgments and estimates.

Auditors need a better understanding of the client’s business and industry to provide additional value-added services.

The auditor can obtain a sound understanding of the client’s business and industry through several means, including discussions with previous auditors and by reviewing the permanent files for the client; conferences with the client’s personnel; studying AICPA industry audit guides, textbooks, technical magazines, and specialized journals; and by participating in industry associations and training programs.

67.medium

There are three primary reasons for obtaining a thorough understanding of the client’s industry and external environment. What are these reasons?Answer:

The three reasons are: Risks associated with specific industries may affect the auditor’s assessment of client

business risk and acceptable audit risk. Certain inherent risks are typically common to all clients in certain industries.

Familiarity with those risks aids the auditor in assessing their relevance to the client. Many industries have unique accounting requirements that the auditor must

understand to evaluate whether the client’s financial statements are in accordance GAAP.

68.medium

Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit.

Answer:The four primary purposes of preliminary analytical procedures are: to help the auditor understand the client’s industry and business, to help the auditor assess the going concern assumption, to indicate areas of possible misstatements, and to reduce the extent of detailed tests.

69.challenging

Define business risk. List several factors that may impact the auditor’s assessment of business risk.

Answer:Business risk is the risk that a company will fail to achieve its objectives.

Factors that may impact business risk include: General economic conditions, Extent of competition within an industry, Changing regulatory requirements, Competence of management, Ability to maintain sufficient cash flows and secure financing, and Successful implementation of business strategies.

70.challenging

Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit. Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.

Answer: Planning – The primary purposes are to understand the client’s business and industry

and indicate areas of possible misstatements. The secondary purposes are to assess going concern and reduce the extent of detailed tests.

Testing – The primary purpose is to reduce the extent of detailed tests, while the secondary purpose is to indicate areas of possible misstatements.

Completion –The primary purpose is to indicate areas of possible misstatements, while the secondary purpose is to assess going concern.

71.challenging

Three types of legal documents and records that auditors examine in the planning phase of an audit are the corporate charter and bylaws, corporate minutes of meetings of the board of directors and stockholders, and contracts. Discuss the audit-relevant information contained in each of these three types of documents that an auditor should be aware of early in the audit.

Answer:Corporate charter and bylaws. This includes the amounts of capital stock the corporation is authorized to issue, its par or stated value, preferences and conditions for dividends, and information concerning voting rights of each class of stock. The bylaws specify such things as the fiscal year of the corporation, the frequency of stockholder meetings, the method of voting for directors, and the duties and powers of the corporate officers.

Minutes of meetings. There are two categories of audit-relevant information contained in the minutes: authorizations and discussions by the board of directors affecting inherent risk. Common authorizations in the minutes include compensation of officers, new contacts and agreements, acquisitions of property, loans, and dividend payments.

Contracts. The auditor should examine contracts early in the engagement to gain a better perspective of the organization and to become familiar with potential problem areas. Contracts will also be examined during the tests of individual audit areas.

Other Objective Answer Format Questions

72.easya

When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.a. Trueb. False

73.easya

As acceptable audit risk is decreased, the likely cost of conducting an audit increases.a. Trueb. False

74.easyb

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.a. Trueb. False

75.easyb

For prospective clients that have previously been audited by another CPA firm, the predecessor auditor is required to communicate with the successor auditor.a. Trueb. False

76.easyb

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.a. Trueb. False

77.easyb

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.a. Trueb. False

78.easya

Auditors should obtain copies of the client’s articles of incorporation, bylaws, and minutes of the meetings of the board of directors to aid in their understanding of the company’s management and governance structure.a. Trueb. False

79.easya

An auditor must evaluate a specialist’s professional qualifications and understand the objectives of the specialist’s work.a. Trueb. False

80.mediumb

To evaluate a specialist’s work the auditor must himself/herself be considered a specialist.a. Trueb. False

81.mediuma

An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.a. Trueb. False

82.easyb

Because of the requirements of Rule 201 of the AICPA’s Code of Professional Conduct which state that auditors should “undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence,” auditors are not normally permitted to consult with, or rely on the work of, outside specialists during an audit engagement.a. Trueb. False

83.mediumb

Acceptable audit risk is a measure of the auditor’s willingness to accept that the financial statements do not contain material misstatements after the audit is completed and a qualified audit report has been issued.a. Trueb. False

84.mediumb

If a prospective client has been audited in the past, the successor auditor will typically rely solely on the representations about the client by the predecessor auditor.a. Trueb. False

85.mediumb

Two major factors that affect acceptable audit risk are the likely users of the financial statements and the likelihood of issuing an unqualified audit opinion.a. Trueb. False

86.mediumb

A major consideration in assigning staff to an audit engagement is the experience levels required for the work, while a less important consideration is maintaining staff continuity on the engagement.a. Trueb. False

87.mediumb

Inherent risks typically vary across industries.a. Trueb. False

88.mediuma

Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.a. Trueb. False

89.mediuma

All known related parties must be identified and included in the auditor’s permanent files related to the client.a. Trueb. False

90.mediumb

Generally, auditors assess inherent risk as moderate for related party transactions because they expect clients to be aware of their scrutiny of such transactions.a. Trueb. False

91.mediumb

The corporate charter typically establishes the company’s fiscal year and frequency of stockholder meetings.a. Trueb. False

92.mediumb

Ordinarily, the auditor should review and abstract copies of contracts during the later stages of an audit.a. Trueb. False

93.mediuma

When a successor auditor requests information from a company’s previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor’s response to the new auditor may be limited to stating that no information will be provided.a. Trueb. False

94.mediumb

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.a. Trueb. False

95.mediumb

Material transactions between the client and the client’s related parties must be disclosed in the auditor’s report.a. Trueb. False

96.challenginga

An engagement letter can affect the CPA firm’s legal responsibilities to the client, but does not affect responsibility to external users of audited financial statements.a. Trueb. False

97.challengingb

Two categories of audit-relevant information found in corporate charters and bylaws are authorizations and discussions of matters affecting inherent risk.a. Trueb. False