Chapter 8

Multiple-Choice Questions

1. Which of the following is not one of the three main reasons why the
easy 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:

easy
a Good client relations Facilitating high-quality work at a
reasonable cost
a. Yes Yes
b. No No
c. Yes No
d. No Yes

3. A measure of how willing the auditor is to accept that the financial

easy 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. A measure of the auditor’s assessment of the likelihood that there are

easy 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 More evidence accumulated by the
audit risk auditor
a. Yes Yes
b. No No
c. Yes No
d. No Yes

6. The auditor is likely to accumulate more evidence when the audit is for a

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 company:
easy
a Which has large Which is to be sold in the
amounts of debt near future
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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. Most auditors assess inherent risk as high for related parties and
easy 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. Which of the following is not correct regarding the communications

easy 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 auditor
d. 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?
easy
a Speak to local

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 attorneys, banks and Speak to the predecessor auditors
other businesses about disagreements they had with
regarding the management
company’s reputation
a. Yes Yes
b. No No
c. Yes No
d. No Yes

12. Which of the following is not a potential effect of an auditor’s decision

medium 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. It is easier and more common to implement increased evidence

medium 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) If an auditor is requested to perform nonaudit services for a public

medium 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. Which of the following statements is true regarding communications

medium 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. Investigating new clients with a focus on assessing the auditor’s

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medium 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:

medium a. document the CPA firm’s responsibility to external users of the
b 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. One means of informing the client that the auditor is not responsible for
medium 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. An understanding of a client’s business and industry and knowledge

medium about operations are essential for performing an adequate audit. For a
d 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.

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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. An official record of meetings of the board of directors and stockholders

medium 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. The first standard of field work, which states that the work is to be
medium 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

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 interim dates.

28. The corporate minutes are the official record of the meetings of the
medium board of directors and stockholders. The minutes typically include
authorizations related to:
d
The CPA’s use of outside Management compensation
specialists
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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?
medium a. The corporate charter is granted by the federal government and is
c 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:

Medium
d The types and amounts of The rules and procedures
capital stock the corporation used to operate the
is authorized to issue corporation
a. Yes Yes
b. No No
c. Yes No
d. No Yes

32. In what order should the following steps occur?

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medium A. Assess client business risk
b B. Understand the client’s business and industry
C. Perform preliminary analytical procedures
D. 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. The purpose of the requirement in SAS No. 84 of having communication

challenging 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. The predecessor auditor is required to respond to the request of the

challenging 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

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 procedures?
challenging a. Analytical procedures may be used in evaluating balances in the
d 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. Which of the following ratios is best used to assess a company’s ability
challenging 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?

challenging a. Analytical procedures used in the planning phase of the audit are
b 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.

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 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?
challenging a. Whenever the auditor places reliance on management’s
d 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. An auditor searching for related party transactions should obtain an

challenging 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. The first standard of fieldwork requires, in part, that audit work be
challenging 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

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 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. Whenever an auditor compares client data to client-prepared budgets,

medium there are two special concerns. Indicate if the two items below are
concerns.
a
Assessing whether the Client data may have been altered
budgets were realistic plans to conform to the budget
a. A concern A concern
b. Not a concern Not a concern
c. A concern Not a concern
d. Not a concern A concern

49. An auditor who accepts an audit engagement and does not possess the
challenging 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 margin
b b. Inventory turnover
c. Return on assets
d. Times interest earned

51. Which is usually included in an engagement letter?

Estimate of hours Dollar estimate of fees to be

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medium required to complete billed to the client
audit
d a. Yes Yes
b. No No
c. Yes No
d. No Yes

52. Which is usually included in an engagement letter?

medium
a A reference to A reference to GAAS
GAAP
a. Yes Yes
b. No No
c. Yes No
d. No Yes

53. Which is usually included in an engagement letter?

medium
c The financial
statements are the Ratios to be used by the auditor in
responsibility of the the planning phase
company’s
management
a. Yes Yes
b. No No
c. Yes No
d No Yes

54. When may the auditor refer to a specialist in the audit report?
medium
c
Only if the specialist’s
report results in a Only if the specialist assisted in the
modification of the audit audit of an account material to the
opinion financial statements
a. Yes Yes
b. No No
c. Yes No
d No Yes

55. Which is usually included in the engagement letter?

medium
b The projected type of
opinion on the financials Name(s) of the client personnel
statement to be audited responsible for supplying the auditor
with information

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 a. Yes Yes
b. No No
c. Yes No
d No Yes

56. Which is usually included in the engagement letter?

medium
b List of audit procedures to
be used in inventory The auditors’ assessment of Audit
observation Risk
a. Yes Yes
b. No No
c. Yes No
d No Yes

Essay Questions

57. Discuss the factors an auditor should consider before accepting a

easy 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. Discuss the primary purpose of an audit engagement letter. Is an

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

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

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 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. There are three main reasons why an auditor should properly plan audit
medium 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. Discuss the essential activities involved in the initial planning of an audit.
medium
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.

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62. Discuss the required communications between predecessor and
medium 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. Discuss several reasons why an auditor may not wish to continue a
medium 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. Discuss four of the matters that should be specified in an engagement

medium 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

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 auditor.
 Agreement on fees.
 The letter should state that the auditor is not responsible for the
discovery of all acts of fraud.

65. What documents do auditors routinely obtain to aid in their

medium 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. What are three factors that have increased the importance of obtaining
medium 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.

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  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. There are three primary reasons for obtaining a thorough understanding
medium 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. Discuss the four primary purposes of analytical procedures performed

medium 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. Define business risk. List several factors that may impact the auditor’s
challenging 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:

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  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. Auditors routinely conduct analytical procedures in the planning, testing,

challenging 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. Three types of legal documents and records that auditors examine in the
challenging 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

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 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.

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Other Objective Answer Format Questions

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

73. As acceptable audit risk is decreased, the likely cost of conducting an

easy audit increases.
a a. True
b. False

74. Before accepting a new client, most CPA firms investigate the company
easy to determine its acceptability. However, AICPA confidentiality
b requirements prohibit CPA firms from contacting certain parties—namely
the company’s attorneys and bankers—during this investigation.
a. True
b. False

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

76. When a successor auditor contacts a company’s previous auditor, the

easy predecessor auditor is required to respond fully and without limit to the
b request for information.
a. True
b. False

77. A predecessor auditor who has been contacted by a successor auditor

easy for information about the client does not have to obtain permission from
b the former client before providing any confidential information to the
successor auditor because the confidentiality requirement does not
extend to former clients.
a. True
b. False

78. Auditors should obtain copies of the client’s articles of incorporation,

easy bylaws, and minutes of the meetings of the board of directors to aid in
a their understanding of the company’s management and governance
structure.
a. True
b. False

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79. An auditor must evaluate a specialist’s professional qualifications and
easy understand the objectives of the specialist’s work.
a a. True
b. False

80. To evaluate a specialist’s work the auditor must himself/herself be

medium considered a specialist.
b a. True
b. False

81. An engagement letter establishes a clear understanding of the terms of

medium the engagement between the client and the auditor, but it is optional for
a private companies.
a. True
b. False

Arens/Elder/Beasley 
82. Because of the requirements of Rule 201 of the AICPA’s Code of
easy Professional Conduct which state that auditors should “undertake only
b 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. True
b. False

83. Acceptable audit risk is a measure of the auditor’s willingness to accept

medium that the financial statements do not contain material misstatements after
b the audit is completed and a qualified audit report has been issued.
a. True
b. False

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

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

86. A major consideration in assigning staff to an audit engagement is the

medium experience levels required for the work, while a less important
b consideration is maintaining staff continuity on the engagement.
a. True
b. False

87. Inherent risks typically vary across industries.

medium a. True
b b. False

88. Transactions with related parties must be disclosed in the financial

medium statements if they are deemed to be material.
a a. True
b. False

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

Arens/Elder/Beasley 
 b. False

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

91. The corporate charter typically establishes the company’s fiscal year
medium and frequency of stockholder meetings.
b a. True
b. False

Arens/Elder/Beasley 
92. Ordinarily, the auditor should review and abstract copies of contracts
medium during the later stages of an audit.
b a. True
b. False

93. When a successor auditor requests information from a company’s

medium previous auditor, and there are legal problems or disputes between the
a 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. True
b. False

94. One purpose of performing preliminary analytical procedures in the

medium planning phase of an audit is to help the auditor make a preliminary
b assessment of control risk.
a. True
b. False

95. Material transactions between the client and the client’s related parties
medium must be disclosed in the auditor’s report.
b a. True
b. False

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

97. Two categories of audit-relevant information found in corporate charters

challenging and bylaws are authorizations and discussions of matters affecting
b inherent risk.
a. True
b. False

Arens/Elder/Beasley