QUIZ ON AUDIT ENGAGEMENT AND PLANNING

Instruction: Choose the letter of the best answer on separate yellow sheets of paper. Use ball pen
only. No erasures in any form.

1. Client strategy templates provide a means for an auditor to

a. Acquire, evaluate, and document evidence.
b. Focus on transactions likely to affect audit risk.
c. Compile the strategies and characteristics of an entity.
d. Distinguish between engagement risk and audit risk.

2. It is the process deigned and effected by those charged with governance, management, and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives.
a. Internal control.
b. Internal auditing.
c. Business strategy.
d. Accounting process.

3. Balanced scorecards provide a means for an auditor to

a. Evaluate an entity’s profitability, liquidity, and solvency.
b. Compile data about an entity’s financial, customer, business, and learning perspectives.
c. Identify financial ratios most relevant to an entity.
d. Establish trends.

4. The internal business perspective of a balanced scorecard measures all of the following except
a. Product development.
b. Productivity.
c. Core competencies.
d. Quality.

5. Prior to the acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstance leading to the termination with the understanding that all information
disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor
to violate the confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the
contact.

6. Early appointment of the auditor enables preliminary work to be performed by the auditor, which
benefits the client in that it permits the examination to be performed in
a. A more efficient manner.
b. A more thorough manner.
c. Accordance with quality control standards.
d. Accordance with generally accepted auditing standards.
7. Which of the following should an auditor obtain from the predecessor auditor prior to accepting
an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.

8. A difference of opinion over accounting and auditing matters relative to a particular phase of the
audit arises between an assistant auditor and the auditor responsible for the engagement. After
appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the
matter. The working papers would probably be
a. Silent on the matter since it is an internal matter of the firm.
b. Expanded to note that the assistant auditor is completely disassociated from responsibility for the
auditor's opinion.
c. Expanded to document the additional work required since all disagreements of this type will
require expanded substantive testing.
d. Expanded to document the assistant auditor's position and how the difference of opinion was
resolved.

9. Which of the following situations would most likely require special audit planning by the
auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Assets costing less than $500 are expensed even though the expected life exceeds one year.
d. Inventory comprises precious stones.

10. What is the responsibility of a successor auditor to communicate with the predecessor auditor in
connection with a prospective new client?
a. The successor auditor has no responsibility to contact the predecessor auditor.
b. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor.
c. The successor auditor should contact the predecessor auditor if the client authorizes contact.
d. The successor auditor need not contact the predecessor if the successor is aware of all available
relevant facts.

11. The auditor will not ordinarily initiate discussion with the audit committee concerning the
a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company's organization will influence the scope of the
examination.
c. Details of potential problems the auditor believes might cause a qualified opinion.
d. Details of the procedures the auditor intends to apply.

12. With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures that will be
performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
13. In planning an audit engagement, which of the following affects the independent auditor's
judgment as to the quantity, type, and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluations based on substantive testing.
c. The content of the client's representation letter.
d. The anticipated nature of the auditor's report.

14. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not
likely to
a. Make inquiries of the proposed client's legal counsel.
b. Review financial statements of the proposed client.
c. Make inquiries of previous auditors.
d. Review the personnel practices of the proposed client.

15. The independent auditor's plan for an audit in accordance with generally accepted auditing
standards is influenced by the possibility of material errors. The auditor will therefore conduct
the examination with an attitude of
a. Professional skepticism.
b. Subjective mistrust.
c. Objective indifference.
d. Professional responsiveness.

16. In using the work of a specialist, an understanding should exist among the auditor, the client, and
the specialist as to the nature of the work to be performed by the specialist. Preferably, the
understanding should be documented and would include all of the following except
a. The objectives and scope of the specialist's work.
b. The specialist's representations as to her or his relationship, if any, to the client.
c. The specialist's understanding of the auditor's corroborative use of the specialist's findings in
relation to the representations in the financial statements.
d. A statement that the methods or assumptions to be used are not inconsistent with those used by
the client.

17. According to PSA 300, it involves establishing the overall audit strategy for the engagement and
developing an audit plan in order to reduce audit risk to an acceptably low level.
a. Reporting.
b. Planning.
c. Field work.
d. Organizing.

18. Adequate planning of the audit work helps to ensure that

A B C D
 Appropriate attention is devoted to important Yes No Yes No
areas of the audit
 Potential problems are identified Yes Yes Yes No
 The work is completed expeditiously No Yes Yes No

19. The auditor should plan the audit work so that the audit will be performed in an effective
manner. The extent of planning will very according to the:
A B C D
  Size of the entity Yes Yes No No
 Complexity of the audit Yes No Yes No
 Auditor’s experience with the Yes Yes Yes No
entity and knowledge of the business

20. Obtaining knowledge of the entity’s business is an important part of planning the audit work. The
auditor’s knowledge of the entity’s business assists in the identification of events, transactions
and practices which may have a material effect on the financial statements
a. Both statements are true.
b. Both statements are false.
c. True; False.
d. False; True.

21. According to PSA 300, the auditor may discuss elements of planning with those charged with
governance and the entity’s management. The audit plan sets the scope, timing and direction of
the audit guides the development of the more detailed overall audit strategy. The overall audit
strategy is more detailed than the audit plan and includes the nature, timing and extent of the
audit procedures to be performed by the engagement team members to obtain sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level.
a. False; False; True.
b. True; True; False.
c. True; False; False.
d. False; True; False.

22. Which of the following matters should be considered by the auditor in developing the overall
audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the data of the prior audit.
b. Conditions requiring special attention, such as existence of related parties.
c. The setting of materiality levels for audit purposes.
d. All of the above.

23. Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct?
a. Detection risk is a function of the efficiency of an auditing procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a
greater inherent risk.
c. The risk that material misstatements will not be prevented or detected on a
timely basis by internal control can be reduced to zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk.

24. Which of the following audit risk components may be assessed in quantitative terms?
Inherent Risk Control Risk Detection Risk
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes

25. Some account balances, such as those retirement benefits and finance lease, are the result of
complex calculations. The susceptibility to material misstatements in this type of accounts is
referred to as
 a. Audit Risk.
b. Detection Risk.
c. Inherent Risk.
d. Control Risk.

26. There is an inverse relationship that exists between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatements.
b. Assurance provided by substantive tests.
c. Preliminary judgments about materiality levels.
d. Risk of misapplying audit procedures.

27. Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

28. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs
of a reasonable person who will rely on the financial statements.

29. Which of the following is a function of the risks of material misstatement and detection risk?
a. Internal control c. Quality control
b. Corroborating evidence d. Audit risk

30. Which of the following is correct concerning performance materiality on an audit?

a. It will ordinarily be less than financial statement materiality.
b. It should be established at the beginning of an audit and not ne revised thereafter.
c. It should be established at separate amounts for the various financial statements.
d. It need not be documented in the working papers.

31. Which if the following would an auditor most likely used in determining the auditor’s
preliminary judgment about materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

32.Holding other planning considerations equal, a decrease in the amount of misstatement in a class
in the amount of misstatement in a class of transactions that an auditor could tolerate most likely
would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
 d. Decrease the extent of auditing procedures to be applied to the class of transactions.

33. When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied
that the
a. Amount of known misstatement is documented in the management representation letter.
b. Estimate of the total likely misstatement is less than a material amount.
c. Amount of known misstatement is acknowledged and recorded by the client.
d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the
client.

34. 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 risk assessment.
d. Develop the audit plan.

35. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?
a. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted
audit techniques.
b. Management’s disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA’s inability to determine whether related-party transactions were consummated on terms
equivalent to arm’s-length transactions.
d. Management’s refusal to permit the CPA to perform substantive tests before the year-end.

36. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

37. An auditor should design the audit plan so that

a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either test of controls or tests of transactions.

38. The audit plan generally is modified when

a. Results of tests of control differ from expectations.
b. An engagement letter has been signed by the auditor and the client.
c. A significant deficiency has been communicated to the audit committee of the board of directors.
d. The search for unrecorded liabilities has been performed and obtained results as had been expected
during the planning of the audit.

39. Audit plans should be designed so that

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditor’s conclusions.
40. In designing written plans, an auditor should establish specific audit objectives that relate primarily to
the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.