Chapter 4 Engagement Planning: Multiple Choice Questions

Chapter 4 Engagement Planning
Multiple Choice Questions
1. Which of the following auditor concerns most likely could be so serious that the
auditor concludes that a financial statement audit cannot be conducted?
A) The entity has no formal written code of conduct.
B) The integrity of entity's management is suspect.
C) Procedures requiring segregation of duties are subject to management override.
D) Management fails to modify prescribed controls for changes in conditions.
Answer: B Source: AICPA Difficulty: Medium
2. Before accepting an engagement to audit a new client, an auditor is required to

A) make inquiries of the predecessor auditor after obtaining the consent of the
prospective client.
B) obtain the prospective client's signature to the engagement letter.
C) Prepare a memorandum setting forth the staffing requirements and documenting
the preliminary audit plan.
D) Discuss the management representation letter with the prospective client's audit
committee.
Answer: A Source: AICPA Difficulty: Easy
3. Which of the following factors most likely would cause and auditor not to accept a
new audit engagement?
A) An inadequate understanding of the entity's internal control structure.
B) The close proximity to the end of the entity's fiscal year.
C) Concluding that the entity's management probably lacks integrity.
D) An inability to perform preliminary analytical procedures before assessing control
risk.
Answer: C Source: AICPA Difficulty: Easy
4. The successor auditor is not required to ask the predecessor auditor about
A) facts that might bear on the integrity of management.
B) disagreements the predecessor may have had with management about accounting
principles and audit procedures.
C) the fees charged for the previous audit.
D) the predecessor's understanding about the reasons for the change of auditors.
Answer: C Source: Original Difficulty: Medium
40
5. Audit documentation does not normally include the

A) specific assertions under audit.
B) industry accounting guides.
C) record of the procedures performed.
D) decisions made in the course of the audit.
Answer: B Source: Original Difficulty: Medium
6. Hill, CPA, has been retained to audit the financial statements of Monday Co.
Monday's predecessor auditor was Post, CPA, who has been notified by Monday that
Post's services have been terminated. Under these circumstances, which party should
initiate the communications between Hill and Post?
A) Hill, the successor auditor.
B) Post, the predecessor auditor.
C) Monday's controller or CFO.
D) The chairman of Monday's board of directors.
Answer: A Source: AICPA Difficulty: Medium
7. To obtain an understanding of a continuing client's business in planning an audit, an

auditor most likely would
A) perform tests of details of transactions and balances.
B) review prior year workpapers and the permanent file for the client.
C) read specialized industry journals.
D) reevaluate the client's internal control environment.
8. Generally accepted auditing standards states that analytical procedures:

A) should be applied in the planning and final review stages of the audit and as a
substantive test during the audit.
B) should be applied in the planning and final review stages of the audit and can be
used as a substantive test during the audit.
C) should be applied in the planning stage and can be applied as a substantive test and
in the final review stage.
D) should be applied in the final review stage, and can be applied as a substantive test
and in the planning stage.
41
9. The preengagement activities of a public accounting audit engagement does not

include
A) investigating new and existing clients.
B) obtaining predecessor audit documentation.
C) obtaining an engagement letter.
D) ensuring that there are sufficient firm resources to complete the engagement on a
timely basis.
Answer: B Source: Original Difficulty: Hard
10. In the planning stage, analytical procedures are used to

A) identify potential problem areas.
B) provide direct evidence about the balances in accounts.
C) determine the mathematical correctness of the financial statements.
D) all of the above.
Answer: A Source: Original Difficulty: Easy
11. Assume that application of analytical procedures revealed significant unexplained

differences between recorded amounts and the expectations (estimates) developed by
the auditor. If management is unable to provide an acceptable explanation, the auditor
should
A) consider the matter a scope limitation.
B) perform additional audit procedures to investigate the matter further.
C) intensify the audit with the expectation of detecting management fraud.
D) withdraw from the engagement.
12. For audits of financial statements made in accordance with generally accepted auditing
standards, the use of analytical procedures is required to some extent
A) As a substantive test: Yes; In the final review stage: Yes
B) As a substantive test: Yes; In the final review stage: No
C) As a substantive test: No; In the final review stage: Yes
D) As a substantive test: No; In the final review stage: No
Answer: C Source: Original Difficulty: Easy
42
13. Which of the following would not likely be found in the minutes of the board of
directors?
A) Amount of dividends declared.
B) Approval to pledge assets as security for debts.
C) Authorization of officers' salaries.
D) Approval of a new computer for the controller.
Answer: D Source: Original Difficulty: Easy
14. Public records from which of these sources could be used to find the owner of an
office building?
A) U.S. Department of State export/import license files.
B) Federal Aviation Administration records.
C) City and county tax assessor-collector files.
D) Securities and Exchange Commission filings.
15. Horizontal analysis refers to

A) the trend of income from year to year of persons suspected of fraud.
B) changes of financial statement numbers and ratios across several years.
C) financial statement amounts expressed each year as a proportion of a base amount.
D) the change in a suspect's net worth from the beginning to the end of a period.
Answer: B Source: Original Difficulty: Easy
16. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
A) Inquiring of the client's legal counsel concerning pending litigation.
B) Comparing the financial statements to anticipated results.
C) Examining computer generated exception reports to verify the effectiveness of
internal controls.
D) Searching for unauthorized transactions that may aid in detecting unrecorded
liabilities.
43
17. Analytical procedures used in planning an audit should focus on

A) reducing the scope of tests of controls and substantive tests.
B) providing assurance that potential material misstatements will be identified.
C) enhancing the auditor's understanding of the client's business.
D) assessing the adequacy of the available evidential matter.
Answer: C Source: AICPA Difficulty: Hard
18. Sources of financial and nonfinancial data in do not include

A) financial account information for comparable prior periods.
B) nonfinancial information such as physical production statistics.
C) company budgets and forecasts.
D) Bureau of Labor statistics.
Answer: D Source: Original Difficulty: Easy
19. The type of financial analysis that expresses balance sheet accounts as percentages of
total assets is known as:
A) Horizontal analysis.
B) Vertical analysis.
C) Net worth analysis.
D) Expenditure analysis.
Answer: A Source: Original Difficulty: Medium
20. During the course of an audit, Carlos, CPA required additional research and
consultation with others. This additional research and consultation is considered to be
A) An appropriate part of the professional conduct of the engagement.
B) A responsibility of the management, not the auditor.
C) A failure on the part of the Adams to comply with GAAS because of a lack of
competence.
D) An unusual practice indicating that the CPA should not have accepted the
engagement.
44
21. This year, Blakeney Enterprises engaged a new auditor. The successor auditor must
A) Attempt to communicate with the predecessor auditor before accepting the
engagement.
B) Review the predecessor's workpapers if the audit is to be in accordance with
GAAS.
C) Seek the SEC's permission to accept the engagement if Blakeney is publicly
owned.
D) Reject the engagement if the change in auditors resulted from a dispute with the
predecessor.
22. Which of the following accounts tends to be most predictable for purposes of
analytical procedures?
A) Accounts receivable.
B) Travel and entertainment expense.
C) Interest expense.
D) Income taxes payable.
Answer: C Source: Original Difficulty: Hard
23. An engagement letter is used primarily to

A) Ensure a clear contractual understanding of the services to be provided by the
CPA.
B) Express an opinion on the financial statements.
C) Provide management representations to be included in the audit evidence.
D) Disclaim liability.
24. Banta, Brown, and Burgess, CPAs require that all workpapers contain the initials of
the preparer and the reviewer in the top right-hand corner. This procedure provides
evidence of professional concern regarding which generally accepted auditing
standard?
A) Independence.
B) Adequate technical training and proficiency.
C) Adequate planning and supervision.
D) Gathering sufficient competent evidence.
Answer: C Source: AICPA Difficulty: Medium
45
25. During the initial planning phase of an audit, a CPA most likely would
A) Test specific internal control activities that are likely to prevent fraud.
B) Evaluate the reasonableness of the client's accounting estimates of inventory
obsolescence.
C) Discuss the timing of the audit procedures with the client's management.
D) Inquire of the client's attorney as to whether any unrecorded claims are probable
of assertion.
Answer: C Source: AICPA Difficulty: Hard
26. Prior to beginning the fieldwork on a new audit engagement in which she does not
possess expertise in the industry in which the client operates, Duhon, CPA should
A) Reduce audit risk by lowering the preliminary levels of materiality.
B) Design special substantive tests to compensate for the lack of industry expertise.
C) Engage financial experts familiar with the nature of the industry.
D) Obtain knowledge of matters that relate to the nature of the entity's business.
Answer: D Source: AICPA Difficulty: Medium
27. The independent auditors' audit program prepared prior to the start of fieldwork is
appropriately considered documentation of
A) planning.
B) supervision.
C) information evaluation.
D) quality assurance.
28. Analytical procedures are audit methods of evaluating financial statement accounts by
studying and comparing relationships among financial and nonfinancial data. The
primary purpose of analytical procedures is to
A) Identify the appropriate schedules to be prepared by the client.
B) Identify the types of errors or frauds that can occur in transactions.
C) Identify unusual conditions that deserve additional audit effort.
D) Determine the existence of unrecorded liabilities or overstated assets.
46
29. For goods purchased using computers, an entity is likely to use which of the following
methods for payment?
A) Check.
B) Electronic funds transfer.
C) Cash.
D) Optical scanners.
30. Computers linked at one location are commonly referred to as a

A) local area network.
B) value added network.
C) wide area network.
D) real time system.
31. Which of the following types of transactions would typically be computerized?

A) Capital stock sales and repurchases.
B) Credit sales and billings.
C) Income tax expense and liability.
D) Bank loan transactions.
32. Errors in data processed in a batch computer system may not be detected immediately
because
A) transaction trails in a batch system are available only for a limited period of time.
B) there are time delays in processing transactions in a batch system.
C) errors in some transactions cause rejection of other transactions in the batch.
D) random errors are more likely in a batch system than in an online system.
Answer: B Source: AICPA Difficulty: Easy
33. Management's responsibility in a computer system would not include

A) ensuring the documentation of the system is complete and up to date.
B) maintaining a system of transaction processing that includes an audit trail.
C) assessment of the control risk.
D) making computer resources and knowledgeable personnel available.
47
34. The characteristics that distinguish computer processing from manual processing
would not include
A) a decrease of management supervision of operations.
B) automatic initiation and execution of transactions.
C) control procedures may be concentrated.
D) greater potential to gain unauthorized access to data.
35. Which of the following is not a category of audit workpapers?

A) temporary file papers.
B) permanent file papers.
C) audit administrative papers.
D) audit evidence papers.
Answer: A Source: Original Difficulty: Medium
36. The essential advantages of a computer assisted audit tools and techniques (CAATTs)
package would not include:
A) same software can be used in various clients' computer systems.
B) large number of CAATTs packages are currently available.
C) software packages are inexpensive.
D) ability to control and modify program to auditors' need.
37. Computer assisted audit tools and techniques (CAATTs) could not be used for which
of the following audit task?
A) test calculations and to make computations.
B) evaluate control risk assessment.
C) summarize, resequence, and reformat data.
D) compare audit evidence from manual audit procedures to company needs.
48
38. Comparing data on separate files can be accomplished by computer assisted audit
tools and techniques (CAATTs) to determine whether compatible information is in
agreement. Examples of such comparisons would not include
A) payroll details with personnel records.
B) current and prior inventory to details of purchases and sales.
C) paid vouchers to disbursements.
D) observation of inventory accounts.
Answer: D Source: Original Difficulty: Medium
39. The basic auditing application of the personal computer as an audit tool would not
include
A) spreadsheet analysis of workpapers.
B) sample planning, selection, and evaluation.
C) continuous monitoring.
D) analytical review.
40. Word processing software would most likely be used by an auditor for what purpose?
A) Analytical procedures.
B) Trial balance preparation.
C) Audit program preparation.
D) Sample selection.
41. Which of the following use of computer assisted audit tools and techniques (CAATTs)
would most likely be considered a search for fraudulent activities?
A) Selecting customers' accounts receivable for confirmation.
B) Recalculation of inventory extensions.
C) Scanning accounts receivable balances for amounts over the credit limit.
D) Comparing a list of vendor addresses to employee address files.
Answer: D Source: Original Difficulty: Medium
42. An auditor would least likely use computer software to

A) access client data files.
B) prepare spreadsheets.
C) assess IS control risk.
D) construct parallel simulations.
49
43. A primary advantage of using computer assisted audit tools and techniques (CAATTs)
packages to audit the financial statements of a client that uses an IS system is that the
auditor may
A) access information stored on computer files while having a limited understanding
of the client's hardware and software features.
B) consider increasing the use of substantive tests of transactions in place of
analytical procedures.
C) substantiate the accuracy of data through self-checking digits and hash totals.
D) reduce the level of required tests of controls to a relatively small amount.
44. For which of the following judgments may an independent auditor share responsibility
with an entity's internal auditor who is assessed to be both competent and objective?
A) Assessment of inherent risk: Yes; Assessment of control risk: Yes
B) Assessment of inherent risk: Yes; Assessment of control risk: No
C) Assessment of inherent risk: No; Assessment of control risk: Yes
D) Assessment of inherent risk: No; Assessment of control risk: No
Answer: D Source: AICPA Difficulty: Medium
50
Essay Questions
45. Jackson, CPA, audited Washington Company's financial statements for the year ended
December 31, 2005. On November 1, 2006, Washington notified Jackson that it was
changing auditors and that Jackson's services were being terminated. On November 5,
2006, Washington invited Lincoln, CPA, to make a proposal for an engagement to
audit its financial statements for the year ended December 31, 2006.
Required:
What procedures concerning Jackson should Lincoln perform before accepting the
engagement?
Source: AICPA adapted Difficulty: Medium

Answer:
The procedures Lincoln should perform before accepting the engagement include the
following:
1. Lincoln should explain to Washington the need to make an inquiry of Jackson and
should request permission to do so.
2. Lincoln should ask Washington to authorize Jackson to respond fully to Lincoln's
inquiries.
3. If Washington refuses to permit Jackson to respond or limits Jackson's response,
Lincoln should inquire as to the reasons and consider the implications in deciding
whether to accept the engagement.
4. Lincoln should make specific and reasonable inquiries of Jackson regarding
matters Lincoln believes will assist in determining whether to accept the
engagement, including specific questions regarding:
a. Facts that might bear on the integrity of management;
b. Disagreements with management as to accounting principles, audit procedures,
or other similarly significant matters.
c. Communications Jackson made to management about fraud, illegal acts, or
internal control recommendations.
d. Jackson understands as to the reasons for the change of auditors.
5. If Lincoln receives a limited response, Lincoln should consider its implications in
deciding whether to accept the engagement.
51
46. What are the characteristics that distinguish computer processing from manual
processing?
Source: Original Difficulty: Easy

Answer:
Characteristics that distinguish computer processing from manual processing include:
a. Computer system transaction trails may exist for only a short time.
b. Computers process like transactions uniformly.
c. Functions are more concentrated in a computer system.
d. Greater potential for errors and irregularities exist in computer systems.
e. Certain transactions can be initiated or executed automatically in a computer
system.
47. What are the advantages and limitations derived from using computer assisted audit
tools and techniques (CAATTs) packages?

Answer:
The advantages of computer assisted audit tools and techniques (CAATTs) packages:
c. original programming is not required.
d. the required programming is easy.
e. training time to use the programming is short.
The limitations of computer assisted audit tools and techniques (CAATTs) packages:
a. the computer cannot observe and count physical things.
b. the computer cannot examine external and internal documentation.
c. the computer cannot conduct inquiry procedures.
52
48. Analytical procedures consist of evaluations of financial information made by a study

of plausible relationships among both financial and nonfinancial data. They range
from simple comparisons to the use of complex models involving many relationships
and elements of data. They involve comparisons of recorded amounts, or ratios
developed from recorded amounts, to expectations developed by auditors.
Required:
a. Describe the broad purposes of analytical procedures.
b. Identify the sources of information from which an auditor develops expectations.
Source: AICPA adapted Difficulty: Medium

Answer:
a. Analytical procedures are used for these broad purposes:
 To assist the auditor in planning the nature, timing, and extent of other
audit procedures.
 As a substantive test to obtain evidential matter about particular assertions
related to account balances or classes of transactions.
 As an overall review of the financial information in the final review stage
of the audit.
b. An auditor's expectations are developed from the following sources of

information:
 Financial information for comparable prior periods considering known
changes.
 Anticipated results for example, budgets, forecasts, and extrapolations.
 Relationships among elements of financial information within the period.
 Information regarding the industry in which the client operates.
 Relationships of financial information with relevant nonfinancial
information.
53
49. Analytical procedures are one type of evidence gathering procedure. According to
auditing standards, there are five general forms of analytical procedures. Auditing
standards also provide examples of five sources of information for analytical
procedures.
Required:
Describe three of the five general forms of analytical procedures. For each form,
describe a typical source of the information for the form. For each source, include any
questions or concerns an auditor would have about the reliability or relevancy of the
source.

Answer:
The five general forms of analytical procedures:
1. Comparison of current year account balances of one or more comparable
periods.
2. Comparison of the current year account balances to anticipated results
found in the company's budgets and forecasts.
3. Evaluation of the relationships of current year account balances to other
current year balances and conformity with predictable patterns based on the
company's experience.
4. Comparison of current year account balances and financial relationships
(e.g., ratios) with similar information for the industry in which the company
operates.
5. Study of the relationships of current year account balances with relevant
nonfinancial information (e.g., physical production statistics).
The five sources of information for analytical procedures:

1. Financial account information for comparable prior period(s).
2. Company budgets and forecasts.
3. Financial relationships among accounts in the current period.
4. Industry statistics.
5. Nonfinancial information, such as physical production statistics.
Considerations about relevance and reliability of sources of information: (Note to

instructor: These considerations are not explicitly discussed in the chapter with regard
to analytical procedures. Additional considerations are possible.)
1. Has the financial information from prior period(s) been audited?
2. Are company budgets or forecasts generally accurate? What processes does the
client go through to develop these?
3. Are the industry statistics from a reliable source? Are the industry statistics
specific enough to the client or the particular segment or division of the client
being examined?
54
4. Has the nonfinancial information been audited? Have the controls over the
production of the nonfinancial information been tested?
55
50. This question tests your ability to perceive the place(s) where various potential
problems may exist and the type of problem (overstatement or understatement) that
may exist. It asks that you supply the words or descriptions that complete the analyses
begun by applying analytical procedures.
Required:
For each of the items below, identify the account(s) that need(s) to be audited carefully
and the reason (i.e., potential overstatement or understatement of _______).
a. If the current year accounts receivable are larger than last year but
the allowance for doubtful accounts is the same.
b. If the current year inventory is larger than last year and the
current year gross margin (profit) is larger.
c. If current year long-term liabilities are larger than last year and
the interest expense is the same.
d. If current year fixed assets are larger and current depreciation
expense is the same as last year.
Source: Original Difficulty: Medium

Answer:
a. The collectibility of accounts receivable is of concern. The allowance for doubtful
accounts may be understated. The bad debt expense may be understated.
b. The existence of the inventory account is of concern. Inventory may be overstated.
Cost of goods sold may be understated.
c. The amount of accrued interest is of concern. Interest expense may be understated.
Less likely, long-term liabilities could be overstated.
d. Depreciation expense and accumulated depreciation may be understated. It may
also be possible that fixed assets are overstated.
56
51. Analytical procedures are evaluations of financial information made by a study of

plausible relationships among financial and nonfinancial data. Understanding and
evaluating such relationships are essential to the audit process.
The following financial statements were prepared by ABC Manufacturing Co. for the
year ended December 31, 2005. Also presented are various financial statement ratios
for Holiday as calculated from the prior year's financial statements. Sales represent net
credit sales. The total assets and the receivables and inventory balances at December
31, 2005, were the same as at December 31, 2004.
A B C M a n u fa c tu r in g C o .
B a la n c e S h e e t
D ecem ber 31, 2005
A s s e ts L ia b ilitie s a n d C a p ita l
C ash $ 2 4 0 ,0 0 0 A c c o u n ts p a y a b le $ 1 6 0 ,0 0 0
R e c e iv a b le s 4 0 0 ,0 0 0 N o te s p a y a b le 1 0 0 ,0 0 0
In v e n to ry 6 0 0 ,0 0 0 O th e r c u rre n t lia b ilitie s 1 4 0 ,0 0 0
T o ta l c u rre n t a s s e ts $ 1 ,2 4 0 ,0 0 0 T o ta l c u rre n t lia b ilitie s $ 4 0 0 ,0 0 0
P la n t a n d e q u ip m e n t— n e t 7 6 0 ,0 0 0 L o n g -te rm d e b t 3 5 0 ,0 0 0
C o m m o n s to c k 7 5 0 ,0 0 0
R e ta in e d e a rn in g s 5 0 0 ,0 0 0
T o ta l a s s e ts $ 2 ,0 0 0 ,0 0 0 T o ta l lia b ilitie s a n d c a p ita l $ 2 ,0 0 0 ,0 0 0
A B C M a n u fa c tu r in g C o .
In c o m e S ta te m e n t
Year E nded D ecem ber 31, 2005
S a le s $ 3 ,0 0 0 ,0 0 0
C o s t o f g o o d s s o ld
M a te ria l $ 8 0 0 ,0 0 0
L abor 7 0 0 ,0 0 0
O v e rh e a d 3 0 0 ,0 0 0 1 ,8 0 0 ,0 0 0
G ro s s m a rg in $ 1 ,2 0 0 ,0 0 0
S e llin g e x p e n s e s $ 2 4 0 ,0 0 0
G e n e ra l a n d a d m in is tra tiv e
expenses 3 0 0 ,0 0 0 540 ,0 0 0
O p e ra tin g in c o m e $ 660 ,0 0 0
L e s s in te re s t e x p e n s e 40 ,0 0 0
In c o m e b e fo re ta x e s $ 620 ,0 0 0
L e s s fe d e ra l in c o m e ta x e s 220 ,0 0 0
N e t in c o m e $ 400 ,0 0 0
57
Required:
Items 1 through 9 below represent financial ratios that the auditor calculated during
the prior year's audit. For each ratio, calculate the current year's ratio from the
financial statements presented above.
R a tio C a lc u la tio n s
1 2 /3 1 /9 5 1 2 /3 1 /9 4
1. C u rre n t ra tio 2 .5
2. Q u ic k ra tio 1 .3
3. A c c o u n ts re c e iv a b le tu rn o v e r 5 .5
4. In v e n to ry tu rn o v e r 2 .5
5. T o ta l a s s e t tu rn o v e r 1 .2
6. G ro s s m a rg in p e rc e n ta g e 35%
7. N e t o p e ra tin g m a rg in p e rc e n ta g e 25%
8. T im e s in te re s t e a rn e d 1 0 .3
9. T o ta l d e b t to e q u ity p e rc e n ta g e 50%
Source: AICPA adapted Difficulty: Hard
Answer:
R a tio 1 2 /3 1 /9 5 1 2 /3 1 /9 4
1 . C u rre n t ra tio C u r r e n t A s s e ts /C u r r e n t L ia b ilitie s (H ) 3 .1 2 .5

1 ,2 4 0 ,0 0 0 /4 0 0 ,0 0 0
2 . Q u ic k ra tio C u r r e n t A s s e t - I n v e n to r y ) /C u r r e n t (E ) 1 .6 1 .3
L ia b ilitie s
6 4 0 ,0 0 0 /4 0 0 ,0 0 0
3 . A c c o u n ts re c e iv a b le tu rn o v e r S a le s /A /R (K ) 7 .5 5 .5
3 ,0 0 0 ,0 0 0 /4 0 0 ,0 0 0
4 . In v e n to ry tu rn o v e r C O G S /I n v e n to r y (G ) 3 .0 2 .5
1 ,8 0 0 ,0 0 0 /6 0 0 ,0 0 0
5 . T o ta l a s s e t tu rn o v e r T o ta l A s s e ts / S a le s (D ) 1 .5 1 .2
3 ,0 0 0 ,0 0 0 /2 ,0 0 0 ,0 0 0
6 . G ro s s m a rg in p e rc e n ta g e G r o s s M a r g in / S a le s (T ) 4 0 % 35%
1 ,2 0 0 ,0 0 0 /3 ,0 0 0 ,0 0 0
7 . N e t o p e ra tin g m a rg in p e rc e n ta g e O p e r a tin g I n c o m e / S a le s (P ) 2 2 % 25%
6 6 0 ,0 0 0 /3 ,0 0 0 ,0 0 0
8 . T im e s in te re s t e a rn e d (O p e r a tin g I n c o m e )/ I n te r e s t E x p e n s e (N ) 1 6 .5 1 0 .3
6 6 0 ,0 0 0 /4 0 ,0 0 0
9 . T o ta l d e b t to e q u ity p e rc e n ta g e T o ta l D e b t/ E q u ity (U ) 6 0 % 50%
7 5 0 ,0 0 0 /1 ,2 5 0 ,0 0 0
58
52. Items 1 through 6 represent an auditor's observed changes in certain financial

statement ratios or amounts from the prior year's ratios or amounts. For each observed
change, select the most likely explanation or explanations from the list of explanations
provided. Answers on the list may be selected once, more than once, or not at all.
Auditor's observed changes (independent of each other).
1. Inventory turnover increased substantially from the prior year. (Select 3

explanations)
2. Accounts receivable turnover decreased substantially from the prior year. (Select 3
explanations)
3. Allowance for doubtful accounts increased from the prior year, but allowance for
doubtful accounts as a percentage of accounts receivable decreased from the prior
year. (Select 3 explanations)
4. Long term debt increased from the prior year, but interest expense increased a
larger than proportionate amount than long term debt. (Select I explanation)
5. Operating income increased from the prior year although the entity was less
profitable than in the prior year. (Select 2 explanations)
6. Gross margin percentage was unchanged from the prior year although gross
margin increased from the prior year. (Select 1 explanation)
Explanations
(A) Items shipped on consignment during the last month of the year were
recorded as sales.
(B) A significant number of credit memos for returned merchandise that were
issued during the last month of the year were not recorded.
(C) Yearend purchases of inventory were overstated by incorrectly including
items received in the first month of the subsequent year.
(D) Yearend purchases of inventory were understated by incorrectly excluding
items received before the year-end.
(E) A larger percentage of sales occurred during the last month of the year, as
compared to the prior year.
(F) A smaller percentage of sales occurred during the last month of the year, as
(G) The same percentage of sales occurred during the last month of the year, as
(H) Sales increased at the same percentage as cost of goods sold, as compared
to the prior year.
(I) Sales increased at a greater percentage than cost of goods sold increased, as
(J) Sales increased at a lower percentage than cost of goods sold increased, as
(K) Interest expense decreased, as compared to the prior year.
59
(L) The effective income tax rate increased, as compared to the prior year.
(M) The effective income tax rate decreased, as compared to the prior year.
(N) Short term borrowing was refinanced on a long-term basis at the same
interest rate.
(O) Short term borrowing was refinanced on a long-term basis at lower interest
rates.
(P) Short term borrowing was refinanced on a long-term basis at higher interest
rates.
Source: AICPA Difficulty: Hard

Answer:
60

Chapter 4 Engagement Planning: Multiple Choice Questions

Uploaded by

Copyright:

Available Formats

You might also like

Chapter 4 Engagement Planning: Multiple Choice Questions

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 4 Engagement Planning: Multiple Choice Questions

Uploaded by

Copyright:

Available Formats

Chapter 4 Engagement Planning

Multiple Choice Questions

Answer: B Source: AICPA Difficulty: Medium

2. Before accepting an engagement to audit a new client, an auditor is required to

Answer: A Source: AICPA Difficulty: Easy

Answer: C Source: AICPA Difficulty: Easy

Answer: C Source: Original Difficulty: Medium

5. Audit documentation does not normally include the

Answer: B Source: Original Difficulty: Medium

Answer: A Source: AICPA Difficulty: Medium

7. To obtain an understanding of a continuing client's business in planning an audit, an

Answer: B Source: AICPA Difficulty: Medium

8. Generally accepted auditing standards states that analytical procedures:

Answer: B Source: Original Difficulty: Medium

9. The preengagement activities of a public accounting audit engagement does not

Answer: B Source: Original Difficulty: Hard

10. In the planning stage, analytical procedures are used to

Answer: A Source: Original Difficulty: Easy

11. Assume that application of analytical procedures revealed significant unexplained

Answer: B Source: Original Difficulty: Medium

Answer: C Source: Original Difficulty: Easy

Answer: D Source: Original Difficulty: Easy

Answer: C Source: Original Difficulty: Easy

15. Horizontal analysis refers to

Answer: B Source: Original Difficulty: Easy

Answer: B Source: AICPA Difficulty: Medium

17. Analytical procedures used in planning an audit should focus on

Answer: C Source: AICPA Difficulty: Hard

18. Sources of financial and nonfinancial data in do not include

Answer: D Source: Original Difficulty: Easy

Answer: A Source: Original Difficulty: Medium

Answer: A Source: AICPA Difficulty: Medium

Answer: A Source: AICPA Difficulty: Medium

Answer: C Source: Original Difficulty: Hard

23. An engagement letter is used primarily to

Answer: A Source: AICPA Difficulty: Easy

Answer: C Source: AICPA Difficulty: Medium

Answer: C Source: AICPA Difficulty: Hard

Answer: D Source: AICPA Difficulty: Medium

Answer: A Source: AICPA Difficulty: Easy

Answer: C Source: AICPA Difficulty: Medium

Answer: B Source: Original Difficulty: Easy

30. Computers linked at one location are commonly referred to as a

Answer: A Source: Original Difficulty: Easy

31. Which of the following types of transactions would typically be computerized?

Answer: B Source: Original Difficulty: Easy

Answer: B Source: AICPA Difficulty: Easy

33. Management's responsibility in a computer system would not include

Answer: C Source: Original Difficulty: Easy

Answer: A Source: Original Difficulty: Easy

35. Which of the following is not a category of audit workpapers?

Answer: A Source: Original Difficulty: Medium

Answer: C Source: Original Difficulty: Easy

Answer: B Source: Original Difficulty: Medium

Answer: D Source: Original Difficulty: Medium

Answer: C Source: Original Difficulty: Easy

Answer: C Source: Original Difficulty: Easy