Multiple Choice REQUIRED: Indicate the best answer choice for each of the following. 1.

The first phase of an audit involves the accept/reject decision for the client in question. The Generally Accepted Auditing Standards that apply to this phase of the audit include: a. the field work standards only. b. the general and the field work standards. c. the general and the reporting standards. d. the general standards only. e. all of the ten standards. The second phase of the audit involves planning. The Generally Accepted Auditing Standards that apply to this phase of the audit include: a. the field work standards only. b. the general and the field work standards. c. the general and the reporting standards. d. the general standards only. e. all of the ten standards. 6. Auditor changes result from a variety of factors except: a. mergers between CPA firms. b. mergers between corporations with different independent auditors. c. satisfaction with a firm. d. a desire to reduce the audit fee. e. the need for expanded professional services. In accepting an engagement, an auditor takes on professional responsibilities to: a. the public. b. the client. c. other members of the public accounting profession. d. the public, the client, and other members of the public accounting profession. e. the client and the public. The importance of the accept/reject decision for a particular client is reflected in the inclusion of acceptance and continuation of clients as: a. the subject of Statement of Financial Accounting Standards 96. b. the subject of Statement on Auditing Standards 7. c. a separate rule in the AICPA Code of Conduct. d. an explicit part of the General Standards. e. one of the quality control elements for CPA firms.

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The third phase of the audit involves performing audit tests. The Generally Accepted Auditing Standards that apply to this phase of the audit include: a. the field work standards only. b. the general and the field work standards. c. the general and the reporting standards. d. the general standards only. e. all of the ten standards. The third phase of the audit involves performing audit tests. The primary purpose of this step is to obtain evidence about: a. the integrity of management. b. the effectiveness of management. c. the effectiveness of the internal control structure. d. the effectiveness and the integrity of management. e. the effectiveness of the internal control structure and the fairness of the financial statements. The fourth phase of the audit involves reporting. The Generally Accepted Auditing Standards that apply to this phase of the audit include: a. the reporting standards only. b. the reporting and the field work standards. c. the general and the reporting standards. d. the general standards only. e. all of the ten standards.

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In the communication with the predecessor auditor, the potential successor should make specific and reasonable inquiries regarding matters that may affect the decision to accept the engagement. Which of the following items is least likely to be included in the inquiries? a. the integrity of management b. disagreements with management about accounting matters c. specific areas of audit difficulty and cost d. the predecessors understanding of the reasons for a change in auditors e. disagreements with management about auditing matters In the investigation of a potential new client, if the client refuses to give permission to inquire of the predecessor auditor, or if the predecessor does not respond fully, the successor a. consider the implications in making the accept/reject decision. b. not accept the engagement. c. request an AICPA-sanctioned peer review of the predecessor. d. request assistance from the SEC. e. immediately inform the appropriate state board of accountancy. In the investigation of a potential new client, besides inquiring of the predecessor auditor,

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the successor auditor should make inquires of other third parties. Which of the following is least likely to be included in this inquiry? a. attorneys b. bankers c. the chamber of commerce d. customers e. the better business bureau 12.

of her competence to perform the audit is (are): a. assigning personnel to the engagement and consultation. b. assigning personnel to the engagement. c. consultation. d. independence. e. supervision.

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16. The typical audit team consists of: Assessing a prospective clients legal and financial stability is a necessary part of a. one or more juniors, who perform the most distasteful tasks and procedures. the accept/reject decision. Which of the following situations would be b. a partner, who has both overall and final responsibility for the engagement. of most concern to the auditor? c. staff assistants, who perform many of the required audit procedures. a. Two outside board members are being investigated by the SEC for insider trading. d. one or more managers, who usually have significant expertise in the industry and b. A sporting goods manufacturer has a number of product liability suits who coordinate and supervise the execution of the audit program. outstanding. e. one or more seniors, who may have responsibility for planning the audit, executing c. A small computer chip manufacturer is being sued by a major competitor over parts of the audit program and for supervising and reviewing the work of patent infringements involving the major product. staff assistants. d. Due to a heavy debt load, a financial services company was forced to raise needed capital through a stock issue. 17. Which one of the following is not an example of a specialist as defined by SAS 73? e. An appliance manufacturer recently issued junk bonds in order to raise a. engineers some quick capital. b. appraisers c. actuaries When considering whether to accept an engagement, the auditor should consider d. internal auditors the implications for accepting the engagement if: e. attorneys a. management welcomes visits to all locations that the auditor considers material. b. management does not restrict contacts with customers. 18. The auditor is most likely to reject the use of a specialist who: c. the auditor is not engaged after year-end. a. does not have the highest level of certification for their profession. d. the predecessor auditors workpapers are not available for review. b. received his formal training at a nonaccredited institution. e. management does not restrict contacts with suppliers. c. is not a member of the national professional organization. d. is an attorney who barely passed the state bar examination. e. has served in the past as a consultant to the client. The main purpose of the engagement letter is to: a. avoid litigation. Before accepting an engagement, the auditor should assess the auditability b. indicate the likely opinion to be issued. of the prospective client. Which of the following conditions would most likely cause the auditor to questionconfirm the terms of the engagement. c. the auditability of the client? d. clearly delineate managements responsibility for the conduct of the audit. a. Since a voucher system is employed, no subsidiary accounts payable ledger exists. e. clearly delineate the auditors responsibility for the conduct of the audit. b. Although the subsidiary records and the specialized journals are computerized, the general ledger and general journal are still maintained manually. c. Due to limited personnel, a small retailer has failed to implement many of the 20. Which of the following is not normally found in the engagement letter? controls that are standard in the industry. a. a disclaimer on detecting all material irregularities d. The clients controller reconciles the bank statements each month. b. the use of binding arbitration in the case of a dispute e. Because many of its major customers are foreign corporations, c. the objective or purpose of the audit the client will not allow the auditor to confirm accounts receivable. d. an indication of the fee, or method of determining the fee e. a space for the clients approving signature The quality control element (s) most directly related to the auditors assessment 19.

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A typical engagement letter should contain the following comment: Because of the an understanding of the clients business and industry? concept of reasonable assurance and because we will not perform a detailed a. trade and industry publications examination of all transactions, there is a risk that: b. reading continuing contracts a. we will detect only material errors. c. minutes of directors and stockholders meetings b. we cannot detect such acts that arise from collusion or direct actions on the part of upper d. SEC Industry Audit Guides management. e. articles of incorporation and bylaws c. material errors, fraud, or other illegal acts, may exist and not be detected by us. d. we cannot be relied upon to detect these items. We will, however, be available for special fraud-auditof the operating facilities is least likely to provide the auditor familiarity with the: 27. A tour engagements. a. location of computing facilities. e. we will probably detect all material irregularities. b. plant layout. c. potential trouble spots such as obsolete materials. Concerning such matters as the integrity of management, errors, and illegal acts, d. storage facilities. the auditor should plan the audit with an attitude of: e. manufacturing process. a. cautious mistrust. b. professional skepticism. 28. The audit committee of the board of directors may provide the auditor with special c. seasoned pessimism. insights into the clients business and industry. d. adversarial pursuit. Which of the following is least likely to be information obtained from the audit committee? e. sarcastic suspicion. a. significant recent developments in the reorganization of client management b. recent changes in the accounting departments clerical staff Which one of the following is not a key step in planning the audit? c. strengths and weaknesses in divisional internal controls a. Perform analytical procedures. d. a recently acquired subsidiary b. Consider audit risk. e. a newly implemented EDP systems application c. Make preliminary judgments about materiality levels. d. Develop preliminary audit strategies for significant assertions. 29. Which of the following best describes the auditors responsibilities concerning e. Obtain an understanding of the clients external controls. related parties? a. investigate those transactions encountered during the audit There are several critical aspects of the business cycle that are important for b. as related parties are discovered during the course of the audit, the auditor to understand. These include all of the following except: their existence should be noted in the working papers a. an entitys operating and financing decisions. c. obtain a list of all board members and place in the working papers b. management, managements goals and organizational resources. d. investigate the background of all related parties c. how core processes result in growth, profits, cash flows and value. e. determine, in the planning stage, the existence of related parties d. the entitys products and services, markets, customers, and competition. e. the entitys core processes and operating cycle. 30. Professional standards require the use of analytical procedures in the: a. planning and testing phases. Which one of the following is not a category of organizational resources? b. testing phase and at the conclusion of the audit. a. information resources c. planning phase and at the conclusion of the audit. b. financial resources d. planning and testing phases, and at the conclusion of the audit. c. human resources e. fieldwork phase and at the conclusion of the audit. d. tangible resources e. asset based resources 31. Common-size financial statements are also known as: a. horizontal analysis. b. vertical analysis. c. transactional analysis. d. percentage analysis. e. financial analysis. Which of the following is not a likely source of information for the auditor in obtaining

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In performing analytical procedures, the auditor is most likely to use more than two years of data when using: a. vertical analysis. b. horizontal analysis. c. absolute data comparisons. d. ratio analysis. e. trend analysis. Which one of the following involves simply comparing a current amount with an expected or predicted amount? a. common-size financial statements b. ratio analysis c. absolute data comparisons d. trend analysis e. relationships of financial information with relevant nonfinancial information

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industry accounting journals. published sources such as Dun & Bradstreet.

Appendix 38. Which one of the following items would be included in calculating the current ratio, but excluded in calculating the quick ratio? a. overdue accounts receivable b. temporary investments c. inventory d. certificates of deposit e. current notes receivable

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39. Which one of the following ratios, divided by 365, gives the length of the collection period? An auditor is performing analytical procedures in the planning phase of asset turnover a multidivisional manufacturing companys audit. The most likely source of the data for this analysisa. would b. accounts receivable turnover be the: c. current ratio a. company-wide general ledger. d. quick ratio b. various divisional general ledgers. e. times interest earned c. company-wide subsidiary ledgers. d. various divisional subsidiary ledgers. 40. Which one of the following is considered a measure of liquidity? e. various divisional income statements. a. quick ratio b. debt to equity A basic premise underlying the use of analytical procedures in auditing is c. accounts receivable turnover that relationships among data may be expected to: d. return on net worth a. vary randomly. e. times interest earned b. vary in a linear fashion. c. vary in a predictable and orderly fashion. d. continue in the absence of known conditions to the contrary. e. contain valuable information about current operating results. In using data to develop expectations for later comparison, reliability and suitability must be considered for: a. client budget data. b. industry data. c. prior years financial data. d. all sources of data. e. data in actual dollars only. Industry data may be valuable in performing analytical procedures in the planning phase of the audit. In general, the best source of this data would be: a. industry audit guides. b. that compiled by the CPA firm through direct experience in the industry. c. industry trade associations.

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