Assignment for Chapter 7-8

I. Multiple Choice
REQUIRED: Indicate the best answer choice for each of the following.
1. The first phase of an audit involves the accept/reject decision for the client in question.
The Generally Accepted Auditing Standards that apply to this phase of the audit include:
B
a. the field work standards only.
b. the general and the field work standards.
c. the general and the reporting standards.
d. the general standards only.
e. all of the ten standards.
2.
A

3.
B

4.
D

5.

The third phase of the audit involves performing audit tests. The Generally Accepted
Auditing Standards that apply to this phase of the audit include:
a.
b.
c.
d.
e.

the field work standards only.

the general and the field work standards.
the general and the reporting standards.
the general standards only.
all of the ten standards.

The fourth phase of the audit involves reporting. The Generally Accepted Auditing
Standards that apply to this phase of the audit include:
a. the reporting standards only.
b. the reporting and the field work standards.
c. the general and the reporting standards.
d. the general standards only.
e. all of the ten standards.
In accepting an engagement, an auditor takes on professional responsibilities to:
a. the public.
b. the client.
c. other members of the public accounting profession.
d. the public, the client, and other members of the public accounting profession.
e. the client and the public.
In the communication with the predecessor auditor, the potential successor should make
specific and reasonable inquiries regarding matters that may affect the decision to accept
the engagement. Which of the following items is least likely to be included in the
inquiries?

a.
b.
c.
d.
e.

the integrity of management

disagreements with management about accounting matters
specific areas of audit difficulty and cost
the predecessors understanding of the reasons for a change in auditors
disagreements with management about auditing matters

6. In the investigation of a potential new client, besides inquiring of the predecessor auditor,
the successor auditor should make inquires of other third parties. Which of the following
is least likely to be included in this inquiry?
D
a. attorneys
b. bankers
c. the chamber of commerce
d. customers
e. the better business bureau
7. When considering whether to accept an engagement, the auditor should consider the
implications for accepting the engagement if:
D
a. management welcomes visits to all locations that the auditor considers material.
b. management does not restrict contacts with customers.
c. the auditor is not engaged after year-end.
d. the predecessor auditors workpapers are not available for review.
e. management does not restrict contacts with suppliers.
8. The quality control element (s) most directly related to the auditors assessment of her
competence to perform the audit is (are):
A
a. assigning personnel to the engagement and consultation.
b. assigning personnel to the engagement.
c. consultation.
d. independence.
e. supervision.
9. Which one of the following is not an example of a specialist as defined by SAS 73?
D
a. engineers
b. appraisers
c. actuaries
d. internal auditors
e. attorneys
10. The main purpose of the engagement letter is to:

a.
b.
c.
d.
e.

11.

The susceptibility of an assertion to a material misstatement, assuming that there are no

controls, is:
a. audit risk.
b. control risk.
c. analytical procedures risk.
d. inherent risk.
e. tests of details risk.

12.
E

13.
D

avoid litigation.
indicate the likely opinion to be issued.
confirm the terms of the engagement.
clearly delineate managements responsibility for the conduct of the audit.
clearly delineate the auditors responsibility for the conduct of the audit.

When setting the level of materiality on a particular engagement, the auditor is required to
consider:
a. the unique circumstances pertaining to the entity.
b. the information needs of the users.
c. neither the unique circumstances pertaining to the entity nor the information needs of
the users.
d. the information needs of the client.
e. both the unique circumstances pertaining to the entity and the information needs of
the users.
In planning the audit, the auditor should assess materiality at two levels:
a. the preliminary level and the final level.
b. the company level and the divisional level.
c. the account balance level and the detailed item level.
d. the financial statement level and the account balance level.
e. the account balance level and the transaction level.

14. In making a preliminary judgment about materiality, the auditor initially determines the
aggregate (overall) level of materiality for each statement. For planning purposes, the
auditor should use the:
E
a. levels separately.
b. level he or she judges to be the more reliable.
c. average of these levels.
d. largest aggregate level.
e. smallest aggregate level.

15. Professional standards recognize that a misstatement that is quantitatively immaterial may
be qualitatively material. In regard to these items, professional standards require the
auditor to:
C
a. plan the audit to search for them.
b. design explicit procedures to detect them.
c. be on the alert for them.
d. report them to the audit committee.
e. report them directly to client management.
16. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion
on financial statements that are materially misstated is:
E
a. analytical procedures risk.
b. control risk.
c. tests of details risk.
d. inherent risk.
e. audit risk.
17. In allocating financial statement materiality to the various accounts, the auditor should
consider:
D
a. the likelihood of misstatements in the account.
b. the probable cost of verifying the account.
c. neither the likelihood of misstatements in the account nor the probable cost of
verifying the account.
d. both the likelihood of misstatements in the account and the probable cost of
verifying the account.
e. the likelihood of misstatements in a transaction.
18. All else being equal, as the level of materiality decreases, the amount of evidence required
will:
B
a. remain the same.
b. increase.
c. decrease.
d. change in an unpredictable fashion.
e. fluctuate randomly.
19. The risk that a material misstatement that could occur in an assertion will not be prevented
or detected on a timely basis by the entitys internal controls is:
A
a. control risk.

b.
c.
d.
e.

audit risk.
inherent risk.
rejection risk.
detection risk.

20. The assessment of inherent risk requires consideration of matters that have a pervasive
effect on assertions for all or many accounts and matters that may pertain only to
assertions for specific accounts. Which of the following is an example of a specific
account matter?
D
a. going concern problems such as lack of sufficient working capital
b. profitability of the entity relative to the industry
c. sensitivity of operating results to economic factors
d. complexity of calculations
e. management turnover, reputation, and accounting skills

II. Matching 7-1

(10 minutes)

Within the Accepting the Audit phase of the audit, there are six identifiable steps:
A.

evaluating integrity of management

B.

identifying special circumstances and unusual risks

C.

assessing competence to perform audit

D.

evaluating independence

E.

determining ability to use due care

F.

preparing engagement letter

REQUIRED: For each of the following firm policies or actions taken during the accept/reject phase of
the audit, indicate, using the above letters, the step to which it relates.
E

1. National office approval is required for any new audit engagement that cannot
commence until after the balance sheet data.

2. Obtain the clients approval to communicate with the predecessor auditor.

3. For new clients, determine that acceptance would not result in any conflicts of
interest with that of other clients.

4. Written contracts are required on all professional engagements.

5. Plan to review and test all work performed for the audit team by client personnel.

6. Identify the intended users of the audited financial statements.

7. Audit teams must contain a partner, at least one manager and at least one senior.

8. Formally document the nature of the engagement and the auditors

responsibilities.
B
E

9. Assess the prospective clients legal and financial stability.

10. Before accepting a new engagement, assess the probable impact on the firms
overall work schedule and ability to service existing clients.

11. For potential new SEC clients, review the report filed with the SEC concerning
change in auditors.

12. Assess the general condition and availability of the more important accounting
records.

13. Circulate the name of all prospective clients to the professional staff to identify
any prohibited financial or business relationships.

14. Consider the need for the use of a specialist on the engagement.

15. For continuing clients, all top management changes require partner-in-charge
review.

III
1.
2.
3.