Chapter 8

Multiple-Choice Questions

1. Which of the following is not one of the three main reasons why the auditor
easy 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
company:
easy
a Which has large amounts Which is to be sold in the near
of debt future
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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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 related-
easy 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 between
easy 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
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 that a
medium 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.

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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 company
medium 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 potential
medium 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 audited
b 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 the
medium 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.
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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 about

medium operations are essential for performing an adequate audit. For a new client,
d 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.

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 is

medium 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.

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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
interim dates.

28. The corporate minutes are the official record of the meetings of the board of
medium 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 is used to operate the
authorized to issue corporation
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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32. In what order should the following steps occur?
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
procedures?
challenging a. Analytical procedures may be used in evaluating balances in the testing
d 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.

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38. Which of the following ratios is best used to assess a company’s ability to
challenging 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.
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 explanations
d 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.

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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 properly
challenging 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
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, there

medium 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.
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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

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 the
responsibility of 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 modification of Only if the specialist assisted in the
the audit opinion audit of an account material to the
financial statements
a. Yes Yes
b. No No
c. Yes No
d No Yes

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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
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

Arens/Elder/Beasley
Essay Questions

57. Discuss the factors an auditor should consider before accepting a company
easy 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 identify
easy the client’s related parties early in the audit.

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

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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.

62. Discuss the required communications between predecessor and successor

medium 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.

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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
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 understanding of

medium 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.

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

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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:
• 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
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, one
easy potential effect is that more audit evidence will be required for that account.
a a. True
b. False

73. As acceptable audit risk is decreased, the likely cost of conducting an audit
easy increases.
a a. True
b. False

74. Before accepting a new client, most CPA firms investigate the company to
easy determine its acceptability. However, AICPA confidentiality requirements
b 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 CPA
easy firm, the predecessor auditor is required to communicate with the successor
b 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 for
easy information about the client does not have to obtain permission from the
b 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 their
a understanding of the company’s management and governance structure.
a. True
b. False

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

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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 the

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

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 that
medium the financial statements do not contain material misstatements after the
b 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 auditor
medium will typically rely solely on the representations about the client by the
b predecessor auditor.
a. True
b. False

85. Two major factors that affect acceptable audit risk are the likely users of the
medium 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 consideration
b 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

Arens/Elder/Beasley
89. All known related parties must be identified and included in the auditor’s
medium permanent files related to the client.
a a. True
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 and
medium frequency of stockholder meetings.
b a. True
b. False

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

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

medium auditor, and there are legal problems or disputes between the client and the
a 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 must
medium 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 the
challenging client, but does not affect responsibility to external users of audited financial
a 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 inherent
b risk.
a. True
b. False

Arens/Elder/Beasley