Deck 6: Audit Planning and Documentation

Question 1

Which one of the following is NOT a document or record that should be examined early in the engagement?

A) Contracts
B) Management letter
C) Corporate constitution
D) Minutes of board of directors' and shareholders' meetings

Answer 1

B

Question 2

Under ASA 210, the engagement letter should state:

A) the responsibilities of the auditor and management.
B) the engagement's objectives.
C) the engagement's limitations.
D) all of the above.

Answer 2

D

Question 3

The official record of the meetings of the board of directors and shareholders is contained in the:

A) charter.
B) constitution.
C) bylaws.
D) minutes.

Answer 3

D

Question 4

Audit firms will refuse engagements because:

A) the risk of litigation.
B) client management lacks integrity.
C) the client operates in a high- risk industry.
D) all of the above

Question 5

ASA 210 requires auditors to:

A) communicate with the previous auditor.
B) obtain a knowledge of the business.
C) use analytical procedures in the planning stage.
D) document their understanding of the engagement in working papers.

Question 6

The purpose of requiring communication between the predecessor and successor auditor is:

A) to allow predecessor to disclose information which would otherwise be confidential.
B) to help the successor audit to evaluate whether to accept the engagement.
C) to help the client by facilitating the change of auditors.
D) to ensure that information which is provided to ASIC will be accurate.

Question 7

The auditor plans the engagement to keep costs reasonable. This is essential to:

A) minimise legal liability and maintain for the firm a good reputation in the business community.
B) help the firm remain competitive.
C) facilitate good client relations.
D) all of the above

Question 8

An auditor who accepts an audit engagement must gain an understanding of the client's industry and business. This includes knowledge of the:

A) business operations and processes.
B) industry and external environment.
C) management and governance.
D) all of the above

Question 9

Policy and procedures governing the acceptance and continuance of client relationships are contained primarily in:

A) ASA 210.
B) ASA 220.
C) ASA 315.
D) ASA 620.

Question 10

The auditor needs to understand the control environment (management and governance) because:

A) develop the overall audit plan.
B) management's ability to identify and respond to risk affects the risk of material misstatements in the financial report.
C) set materiality levels and assess acceptable audit risk.
D) all of the above

Question 11

The permanent section of the auditor's working papers generally should include:

A) a copy of key customer confirmations.
B) a copy of the engagement letter.
C) time and expense reports.
D) names and addresses of all audit staff personnel on the engagement.

Question 12

Reclassification entries are recorded in the:

A) sales journal.
B) financial statements but not in the general ledger.
C) general journal.
D) cash receipts journal.

Question 13

Which one of the following would NOT fit the description of a related- party transaction?

A) Sales of merchandise between a parent company and its subsidiary
B) Exchange of equipment between two companies owned by the same person
C) An unusually large sale of merchandise to the company's best and largest customer
D) Loans to corporate officers at market rates of interest with a regular repayment schedule

Question 14

Working papers can be viewed by different audit personnel simultaneously by using:

A) statistical sampling software programs.
B) Groupshare software programs.
C) ACL.
D) IDEA.

Question 15

Why should the auditor understand the client's business factors-such as information about related parties?

A) It may indicate areas of increased control risk.
B) It may indicate areas of increased client business risk.
C) It may indicate areas of increased audit risk.
D) It may indicate reasons not to accept the engagement.

Question 16

One means of informing the client that the auditor is NOT responsible for the discovery of all acts of fraud is the:

A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter.

Question 17

The auditor plans the engagement to obtain sufficient appropriate evidence. This is essential to:

A) minimise legal liability and maintain for the firm a good reputation in the business community.
B) help the firm remain competitive.
C) facilitate good client relations.
D) all of the above

Question 18

Assessing acceptable audit risk and inherent risk is an important part of audit planning, because:

A) it helps to determine the timing of audit procedures.
B) it helps to determine the fees to charge for the audit.
C) it helps to determine staff to be assigned to the engagement.
D) all of the above

Question 19

The engagement letter:

A) can be used to alter the auditor's responsibilities under Australian auditing standards.
B) is useful only if it is an audit engagement, but has no effect for review or compilation services.
C) can affect legal responsibilities to the client.
D) affects the audit firm's responsibility to external users of audited financial statements.

Question 20

Transactions with related parties are important to auditors because:

A) there is a risk that they weren't valued at the same amount as they would have been if the transactions had been with an independent third party.
B) they result in assessment of inherent risk as high.
C) of the financial statement disclosure requirements under Australian accounting standards.
D) all of the above

Question 21

A clear understanding of the terms of the engagement should exist between the client and the public accounting firm as documented in the engagement letter required by:

A) ASA 620.
B) ASA 220.
C) ASA 210.
D) APES 110.

Question 22

The minutes of meetings of the board of directors and/or shareholders include:

A) declaration of dividends.
B) appointment and retirement of directors.
C) allotment and issue of shares.
D) all of the above

Question 23

An example of a reclassification entry would be an entry:

A) to reduce inventory when client failed to write down its obsolete raw materials.
B) to increase the income tax liability account when it was discovered that the tax rate would be higher than originally estimated.
C) to change material credit balances in accounts receivable accounts to accounts payable accounts.
D) to increase the allowance for doubtful accounts when it was discovered that a customer had filed for bankruptcy.

Question 24

Which of the following eliminates voluminous details from the auditor's working trial balance by classifying and summarising similar or related items?

A) Supporting schedules
B) Control accounts
C) Lead schedules
D) Account analyses

Question 25

The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:

A) the client is dissatisfied with predecessor's work.
B) the predecessor believes the client lacks integrity.
C) there are legal problems between the client and predecessor.
D) the predecessor auditor has poor relations with successor auditor.

Question 26

Assessing acceptable audit risk and inherent risk is an important part of audit planning, because:

A) it helps to determine the timing of audit procedures.
B) it helps to determine the fees to charge for the audit.
C) it helps to determine the amount of evidence that will need to be accumulated.
D) all of the above

Question 27

Which one of the following would you NOT expect to find in a company's constitution? Rules and procedures for:

A) implementing internal control systems.
B) issuing shares.
C) calling general meetings.
D) appointment and retirement of directors.

Question 28

Which of the following is NOT one of the three main reasons why the auditor should properly plan engagements?

A) To enable proper on- the- job training of employees
B) To avoid misunderstandings with the client
C) To help keep audit costs reasonable
D) To enable the auditor to obtain sufficient competent evidence

Question 29

Because company policies are reflected in the financial statements, it is important that auditors:

A) carefully evaluate basic policy decisions.
B) periodically review information on accounting policies to determine if there has been a change.
C) include the primary accounting policies in the permanent file.
D) all of the above

Question 30

When a company changes auditors, the Code of Ethics for Professional Accountants requires communication between the predecessor and successor auditors. The burden of initiating the communication rests with the:

A) client.
B) predecessor.
C) successor.
D) ASIC.

Question 31

There are three main reasons why the auditor should properly plan engagements. Which are the three? 1. to enable the auditor to obtain sufficient appropriate evidence
2) to help keep audit costs reasonable
3) to avoid misunderstandings with the client
4) to earn audit fees for the firm.

A) 1, 3, 4
B) 2, 3, 4
C) 1, 2, 3
D) 1, 2, 4

Question 32

A related party transaction is:

A) non arm's- length transaction.
B) transaction with the auditor.
C) transaction at an undervalue.
D) all of the above

Question 33

Which of the following would NOT be classified as a related- party transaction?

A) Sales of merchandise between affiliated companies
B) Exchanges of equipment between two companies owned by the same person
C) An advance of one week's salary to an employee
D) Loans or credit sales to the principal owner or client

Question 34

Permanent files contain all the data:

A) of a historical or continuing nature about the client.
B) of a historical or continuing nature pertinent to the current audit.
C) about the current audit and financial statements.
D) about the most recent audits.

Question 35

Which of the following would NOT be a consideration of an audit firm in deciding whether to accept a new client?

A) Client's relation with its previous audit firm
B) Client's standing in the business community
C) Client's financial stability
D) Client's probability of achieving an unqualified opinion

Question 36

Knowledge of the auditee's business can be obtained in a variety of ways. Which one of the following is NOT usually one of those ways?

A) From Internet resources
B) From textbooks
C) From technical magazines
D) All of the above are usual sources.

Question 37

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

A) acceptable audit risk.
B) inherent risk.
C) statistical risk.
D) control risk.

Question 38

The auditor plans the engagement to avoid misunderstandings with the client. This is essential to:

A) minimise legal liability and maintain for the firm a good reputation in the business community.
B) help the firm remain competitive.
C) facilitate good client relations.
D) all of the above

Question 39

A working trial balance is:

A) a listing of the general ledger accounts and their year- end balances.
B) a summary of the effect of the auditor's reclassification entries.
C) the set of lead schedules.
D) a list of the opening subsidiary ledger account balances.

Question 40

The development of the audit program is the final stage in:

A) documenting independence.
B) audit planning.
C) the engagement letter.
D) the client acceptance decision.

Question 41

Which of the following characteristics of the client's management affects the risk of material misstatements in the financial report?

A) Ability to respond to risk
B) Philosophy and operating style
C) Ability to identify risk
D) All three of the above

Question 42

The current audit files include all audit documentation applicable to the year under audit, including:

A) the audit program.
B) supporting schedules.
C) working trial balance.
D) all of the above

Question 43

The most likely uses of the financial statements can be determined from:

A) previous experience with the auditee and discussions with management.
B) inquiries with ASIC and the ASX.
C) reviewing the terms of the engagement as set out in the engagement letter.
D) reviewing the minutes of meetings.

Question 44

The working papers are:

A) the property of client.
B) the primary means of documenting that an adequate audit was conducted in accordance with auditing standards.
C) property of the auditor although prepared by client.
D) used primarily as a basis for the partners to review and reward the work of the managers, seniors and staff.

Question 45

Good working papers should have common characteristics. Which one of the following is NOT one of those characteristics?

A) Inclusion of a written statement in the form of a conclusion
B) Notations directly on the working paper schedules, explaining the work done
C) Initialling the preparer's initials on the audit working papers
D) Noting the client staff member responsible for the particular area under review

Question 46

The last step in accepting an audit engagement and initial planning is to:

A) perform preliminary analytical procedures.
B) obtain background information.
C) develop the overall audit plan and programs
D) identify why the client wants an audit.

Question 47

ASA 220 contains:

A) guidance regarding planning of an audit.
B) quality control for an audit.
C) audit evidence.
D) analytical procedures to be undertaken in an audit.

Question 48

During the course of an audit engagement, an auditor prepares and accumulates audit working papers. The audit working papers should then be kept:

A) until the end of seven years after the date of the audit report.
B) until the client ceases to exist.
C) for a period not exceeding three years.
D) forever.

Question 49

An extensive understanding of the client's business and industry and knowledge about the company's operations are essential because:

A) there is a risk the business may impact the environment.
B) the increased importance of intangible assets has increased accounting complexity.
C) the increased importance of human resources has increased accounting complexity.
D) all of the above

Question 50

The current file of the auditor's working papers generally should include:

A) a flowchart of the internal controls.
B) organisation charts.
C) a copy of the financial statements.
D) copies of bond and note indentures.

Question 51

Much of the early planning of audits deals with obtaining information to help auditors assess two risks:

A) acceptable audit risk and business risk.
B) business risk and inherent risk.
C) acceptable audit risk and inherent risk.
D) none of the above

Question 52

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is called:

A) statistical risk.
B) inherent risk.
C) acceptable audit risk.
D) financial risk.

Question 53

Why is a tour of the client's facilities helpful in obtaining a better understanding of the client's business operations?

A) It may indicate areas of increased inherent risk.
B) It may indicate areas of increased client business risk.
C) It may indicate areas of increased audit risk.
D) It may indicate reasons not to accept the engagement.

Question 54

ACL is commercial audit software which can:

A) prepare a trial balance.
B) perform ratio analysis.
C) prepare lead schedules.
D) all of the above

Question 55

Notations on working papers are accomplished by the use of:

A) tick marks.
B) cross reference numbers.
C) sticky notes.
D) the auditor's initials.

Question 56

Investigation of new clients and re- evaluation of existing ones is an essential part of deciding:

A) financial risk.
B) statistical risk.
C) inherent risk.
D) acceptable audit risk.

Question 57

Which one of the following is an inherent risk that is common to all clients in certain industries?

A) Brand loyalty in the cosmetics industry
B) Sales between a parent company and subsidiary company
C) Accounts receivable collection in the consumer loan industry
D) Dependence on a small number of customers

Question 58

When considering the desirability of staff continuity on an engagement, an audit partner must always:

A) be satisfied that the team has the appropriate competence and capabilities.
B) ensure confidentiality is not compromised.
C) ensure the audit staff is satisfied.
D) ensure the client is satisfied.

Question 59

Most auditors assess inherent risk as high for related parties and related- party transactions because:

A) of the lack of independence between the parties.
B) of the accounting disclosure requirement.
C) both A and B
D) it is required by generally accepted accounting principles.

Question 60

Which one of the following is NOT one of the major types of supporting schedule working papers?

A) A reconciliation
B) Outside documentation
C) An audit program
D) A test of reasonableness schedule

Question 61

Public accounting firms must accept every audit engagement.

Question 62

The purpose of an engagement letter is to:

A) satisfy the Trade Practices Act which requires that contracts for professional services must be in writing to be enforceable.
B) record the terms of the engagement in writing in order to minimise misunderstandings.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
D) reduce the audit firm's responsibility to external users of the audited financial statements.

Question 63

Copies of the client's constitution and organisation chart are normally included in the permanent file of the auditor's working papers.

Question 64

Client business risk is the risk that the audit client will fail to achieve its objectives.

Question 65

Which one of the following items would NOT normally be included, in whole or in part, in the auditor's permanent file on a client?

A) The company's constitution
B) Organisation charts and internal control questionnaires
C) The audit program
D) Analyses of accounts such as long- term debt and shareholders' equity

Question 66

There are three main reasons why an auditor should properly plan audit engagements. Please discuss each of these reasons.

Question 67

Which one of the following would ordinarily NOT be found in the permanent file?

A) The name of the predecessor auditor
B) Systems documentation
C) Past years' analytical working papers
D) Related party details

Question 68

A common example of a related- party transaction is any transaction between a parent company and its
subsidiary.

Question 69

List the steps in planning an audit.

Question 70

What procedures should the auditor use to identify a related- party transaction?

Question 71

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Question 72

Auditors should plan engagements properly to:

A) gain a clear understanding of the client.
B) ensure a cost- effective audit.
C) avoid client misunderstandings.
D) all of the above

Question 73

Under ASA 210, the engagement letter may state:

A) an agreement on fees.
B) an agreement to provide other services.
C) An understanding as to the availability of reports on the Internet.
D) all of the above

Question 74

Discuss each of the five steps involved in accepting an audit engagement and initial planning.

Question 75

One of the first things that the auditor will do after accepting a new client is:

A) contact the client's solicitor to discover legal obligations.
B) study the client's internal controls.
C) communicate with the client's predecessor auditor.
D) tour the client's facilities.

Question 76

Identify the three factors an auditor should evaluate before relying on the work of an outside specialist.

Question 77

Discuss the purpose of an audit engagement letter.

Question 78

The largest portion of the auditor's working papers is the:

A) supporting schedules.
B) adjusting and reclassification entries.
C) working trial balance.
D) lead schedules.

Question 79

When a successor (new) auditor requests information from a company's previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor's response to the new auditor can be limited to stating that no information will be provided.

Question 80

Discuss the purposes of audit working papers.