Deck 6: Audit planning and documentation

Question 1

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

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

Answer 1

C

Question 2

Why is it essential to plan an audit engagement with the goal of accumulating sufficient evidence?

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

Answer 2

A

Question 3

What are the three main reasons why the auditor should properly plan engagements?
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, 2, 3
B) 1, 2, 4
C) 1, 3, 4
D) 2, 3, 4

Answer 3

A

Question 4

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

Question 5

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

Question 6

Assessing acceptable audit risk and inherent risk is an important part of audit planning, because it helps to determine the:

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

Question 7

What is the purpose of planning an engagement in order to avoid misunderstandings with the client?

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

Question 8

Which factor would NOT be considered by an audit firm in deciding whether to accept a new client?

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

Question 9

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

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

Question 10

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

Question 11

Which two risks are assessed early in the planning stages of the audit?

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 12

What is featured in ASA 220?

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

Question 13

Which one of the following measures 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?

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

Question 14

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

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

Question 15

Assessing acceptable audit risk and inherent risk is an important part of audit planning because it helps to determine the:

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

Question 16

Auditors should plan engagements properly to:

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

Question 17

What is the last step in accepting an audit engagement within the initial planning phase?

A) identifying why the client wants an audit
B) obtaining background information
C) performing preliminary analytical procedures
D) developing the overall audit plan and programs

Question 18

What is required by auditors according to ASA 210?

A) Document their understanding of the engagement in working papers.
B) Communicate with the previous auditor.
C) Obtain knowledge of the business.
D) Use analytical procedures in the planning stage.

Question 19

What should an engagement letter include, according to ASA 210?

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

Question 20

Which one of the following is NOT a major reason why the auditor should properly plan engagements?

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

Question 21

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

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

Question 22

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

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

Question 23

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) ability to identify risk
C) philosophy and operating style
D) all of the above

Question 24

Which of the following is NOT indicative of a related-party transaction?

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

Question 25

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

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

Question 26

A tour of the client's facilities is helpful in obtaining a better understanding of the client's business operations because it may indicate

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

Question 27

How does the auditor usually obtain knowledge of the auditee's business?

A) from technical magazines
B) from textbooks
C) from Internet resources
D) all of the above

Question 28

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 the client is satisfied.
C) ensure confidentiality is not compromised.
D) ensure the audit staff is satisfied.

Question 29

The auditor should understand the client's business factors-such as information about related parties-because they may indicate

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

Question 30

What is the purpose of an engagement letter?

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

Question 31

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

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

Question 32

The engagement letter:

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

Question 33

Why do auditors assess a high level of inherent risk for related parties and related-party transactions?

A) lack of independence between the parties
B) the accounting disclosure requirement
C) both A and B
D) requirements of generally accepted accounting principles

Question 34

Under ASA 210, the engagement letter may state:

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

Question 35

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

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

Question 36

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) dependence on a small number of customers
D) accounts receivable collection in the consumer loan industry

Question 37

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

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

Question 38

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

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

Question 39

Why might an audit firm reject a potential client?

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

Question 40

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

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

Question 41

Permanent files contain all the data:

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

Question 42

Which is NOT a major type of supporting schedule working papers?

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

Question 43

A company's constitution does NOT usually include rules and procedures for:

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

Question 44

Transactions with related parties are important to auditors because:

A) they have high inherent risk.
B) of the financial statement disclosure requirements under Australian accounting standards.
C) 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.
D) all of the above

Question 45

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

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

Question 46

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

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

Question 47

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

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

Question 48

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

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

Question 49

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

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

Question 50

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

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

Question 51

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

A) recording notations directly on the working paper schedules to explain the work done
B) noting the client staff member responsible for the particular area under review
C) putting the preparer's initials on the audit working papers
D) writing a conclusion

Question 52

Notations on working papers are accomplished by the use of:

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

Question 53

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

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

Question 54

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) analyses of accounts such as long-term debt and shareholders' equity
B) organisation charts and internal control questionnaires
C) the audit program
D) the company's constitution

Question 55

A working trial balance is:

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

Question 56

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

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

Question 57

A related-party transaction is a:

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

Question 58

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

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

Question 59

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 60

The working papers are:

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

Question 61

ASA 300.05 requires the auditor to plan the audit so that the engagement will be performed in an effective manner.

Question 62

When an auditor decides on a higher acceptable audit risk, the auditor wants to be certain the accounts are not materially misstated.

Question 63

Material transactions between the client and the client's related parties must be disclosed in the client's financial statements and in the auditor's report.

Question 64

For prospective clients that have previously been audited by another firm, the new auditor is required to communicate with the previous auditor.

Question 65

The primary purpose of an engagement letter is to establish a clear understanding of the terms of the engagement between the client and the auditor.

Question 66

One hundred percent acceptable audit risk means that the auditor wants complete certainty that the financial statements are not materially misstated.

Question 67

What is a feature of ACL, a commercial audit software program?

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

Question 68

When an auditor decides there is higher inherent risk for an account, one potential effect is that less audit evidence will be required for that account.

Question 69

As inherent risk decreases, audit expertise should normally increase.

Question 70

An example of a reclassification entry would be an entry to:

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

Question 71

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

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

Question 72

The engagement letter may also include an agreement to provide other services such as tax returns or
management consulting.

Question 73

Reclassification entries are recorded in the:

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

Question 74

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

Question 75

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

A) account analyses
B) lead schedules
C) control accounts
D) supporting schedules

Question 76

Two major factors that affect acceptable audit risk are inherent risk and control risk.

Question 77

When a successor (new)auditor contacts a company's previous auditor, the predecessor (old)auditor is required to respond to the request for information.

Question 78

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

A) past years' analytical working papers
B) systems documentation
C) related-party details
D) the name of the predecessor auditor

Question 79

Public accounting firms must accept every audit engagement.

Question 80

A predecessor (old)auditor who has been contacted by a successor (new)auditor for information about the client must obtain permission from the client before providing any confidential information to the successor auditor.