Auditing Test 2 with Answers

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[pic]Accounting 408Test 2 Review

1.An auditor obtains knowledge about a new client's business and its industry to a.Make constructive suggestions concerning improvements in the client's internal control structure. b.Develop an attitude of professional skepticism concerning management's financial statement assertions. c.Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. d.Understand the events and transactions that may have an effect on the client's financial statements.

2.Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the 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 a knowledge of matters that relate to the nature of the entity's business.

3.Which of the following factors most likely would cause an 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.

4.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.

5.An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following is the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered? a.Textbooks and periodicals related to the industry. b.AICPA Audit and Accounting Guides.

c.Financial statements of other entities in the industry. d.Results of performing substantive tests.

6.Which of the following procedures is an auditor least likely to perform in planning a financial statement audit? a.Coordinating the assistance of entity personnel in data preparation. b.Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. c.Selecting a sample of vendors' invoices for comparison with receiving reports. d.Reading the current year's interim financial statements.

7.Which of the following is the correct order of performing the steps A through C below?

A=Test of controls
B=Preparation of a flowchart documenting the understanding of the client's internal control structure
C=Substantive tests

a.ABC.
b.ACB.
c.BAC.
d.BCA.

8.The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account-balance or class-of-transactions level. The first risk is inherent risk. The second risk is that material errors or irregularities will not be prevented or detected by the internal control structure. The third risk is that a.The...
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