Multiple Choice

6. Auditor changes result from a variety of factors except:

REQUIRED: Indicate the best answer choice for each of the following. a. mergers between CPA firms.
b. mergers between corporations with different independent auditors.
1. The first phase of an audit involves the accept/reject decision for the client in question. c. satisfaction with a firm.
The Generally Accepted Auditing Standards that apply to this phase of the audit d. a desire to reduce the audit fee.
include: e. the need for expanded professional services.
a. the field work standards only.
b. the general and the field work standards. 7. In accepting an engagement, an auditor takes on professional responsibilities to:
c. the general and the reporting standards. a. the public.
d. the general standards only. b. the client.
e. all of the ten standards. c. other members of the public accounting profession.
d. the public, the client, and other members of the public accounting profession.
2. The second phase of the audit involves planning. The Generally Accepted Auditing e. the client and the public.
Standards that apply to this phase of the audit include:
a. the field work standards only. 8. The importance of the accept/reject decision for a particular client is reflected in the
b. the general and the field work standards. inclusion of “acceptance and continuation of clients” as:
c. the general and the reporting standards. a. the subject of Statement of Financial Accounting Standards 96.
d. the general standards only. b. the subject of Statement on Auditing Standards 7.
e. all of the ten standards. 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.
3. 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. 9. 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
4. The third phase of the audit involves performing audit tests. The primary purpose of the engagement. Which of the following items is least likely to be included in the inquiries?
this step is to obtain evidence about: a. the integrity of management
a. the integrity of management. b. disagreements with management about accounting matters
b. the effectiveness of management. c. specific areas of audit difficulty and cost
c. the effectiveness of the internal control structure. d. the predecessor’s understanding of the reasons for a change in auditors
d. the effectiveness and the integrity of management. e. disagreements with management about auditing matters
e. the effectiveness of the internal control structure and the fairness of the financial
statements. 10. 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
5. The fourth phase of the audit involves reporting. The Generally Accepted Auditing a. consider the implications in making the accept/reject decision.
Standards that apply to this phase of the audit include: b. not accept the engagement.
a. the reporting standards only. c. request an AICPA-sanctioned peer review of the predecessor.
b. the reporting and the field work standards. d. request assistance from the SEC.
c. the general and the reporting standards. e. immediately inform the appropriate state board of accountancy.
d. the general standards only.
e. all of the ten standards. 11. In the investigation of a potential new client, besides inquiring of the predecessor auditor,
 the successor auditor should make inquires of other third parties. Which of of her competence to perform the audit is (are):
the following is least likely to be included in this inquiry? a. assigning personnel to the engagement and consultation.
a. attorneys b. assigning personnel to the engagement.
b. bankers c. consultation.
c. the chamber of commerce d. independence.
d. customers e. supervision.
e. the better business bureau
16. The typical audit team consists of:
12. Assessing a prospective client’s 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
13. 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 auditor’s 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.

19. The main purpose of the engagement letter is to:

a. avoid litigation.
14. 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 question
c. confirm the terms of the engagement.
the auditability of the client? d. clearly delineate management’s responsibility for the conduct of the audit.
a. Since a voucher system is employed, no subsidiary accounts payable ledger exists. e. clearly delineate the auditor’s 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 client’s 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 client’s approving signature
15. The quality control element (s) most directly related to the auditor’s assessment
21. A typical engagement letter should contain the following comment: Because of the an understanding of the client’s 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
27. fraud-audit
A tour of the operating facilities is least likely to provide the auditor familiarity with the:
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.
22. 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 client’s 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 department’s clerical staff
23. 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 auditor’s responsibilities concerning
e. Obtain an understanding of the client’s external controls. related parties?
a. investigate those transactions encountered during the audit
24. 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 entity’s operating and financing decisions. c. obtain a list of all board members and place in the working papers
b. management, management’s 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 entity’s products and services, markets, customers, and competition.
e. the entity’s core processes and operating cycle. 30. Professional standards require the use of analytical procedures in the:
a. planning and testing phases.
25. 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.
26. Which of the following is not a likely source of information for the auditor in obtaining
32. In performing analytical procedures, the auditor is most likely to use more than two d. industry accounting journals.
years of data when using: e. published sources such as Dun & Bradstreet.
a. vertical analysis.
b. horizontal analysis.
c. absolute data comparisons.
d. ratio analysis.
e. trend analysis. Appendix

33. Which one of the following involves simply comparing a current amount with 38. Which one of the following items would be included in calculating the current ratio,
an expected or predicted amount? but excluded in calculating the quick ratio?
a. common-size financial statements a. overdue accounts receivable
b. ratio analysis b. temporary investments
c. absolute data comparisons c. inventory
d. trend analysis d. certificates of deposit
e. relationships of financial information with relevant nonfinancial information e. current notes receivable

34. An auditor is performing analytical procedures in the planning phase of 39. Which one of the following ratios, divided by 365, gives the length of the collection period?
a multidivisional manufacturing company’s audit. The most likely source of the data for this analysisa.wouldasset turnover
be the: b. accounts receivable turnover
a. company-wide general ledger. c. current ratio
b. various divisional general ledgers. d. quick ratio
c. company-wide subsidiary ledgers. e. times interest earned
d. various divisional subsidiary ledgers.
e. various divisional income statements. 40. Which one of the following is considered a measure of liquidity?
a. quick ratio
35. A basic premise underlying the use of analytical procedures in auditing is b. debt to equity
that relationships among data may be expected to: c. accounts receivable turnover
a. vary randomly. d. return on net worth
b. vary in a linear fashion. e. times interest earned
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.

36. 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.

37. 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.