LESSON 1 - FA#1

24. Engagement letters are widely used in practice for: a. Professional engagements of all types b. Assurance engagements only c. Related services only d. Audits only

a

Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, and to assess the risks of material misstatements at the financial statement and assertion levels. a. Risk assessment procedures b. Tests of control c. Substantive procedures d. Analytical procedures

a

Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent to the client. a. Before the commencement of the engagement b. Before the auditor report is issued c. After the audit report is issued d. At the end of the fieldwork

a

If the auditor determines that there are misstatements that remain uncorrected by the client, then the materiality of these misstatements Wil determine the choice of the proper audit opinion. The choice could be a. Either a qualified opinion or an adverse opinion b. Either a qualified opinion or disclaimer of opinion c. Either an adverse opinion or disclaimer of opinion d. Either an unqualified opinion or an adverse opinion

a

Ultimately, the decision about whether or not an auditor is independent must be made by a. Auditor b. Public c. Client's management d. Audit committee

a

Which of the following statements is/are correct? Statement 1: On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of engagement. Statement 2: The auditor should send a new engagement letter each year to an established client. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect

a

With regard to independence, which of the following statements is correct? a. Audit engagements provide assurance to a wide range of potential users; consequently, both independence in mind and independence in appearance are of particular importance. b. Only the engagement partner is required by the Code of Ethics to be independent from their assurance clients. c. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the firm but not network firms to be independent of the client d. In case of audits of financial statements, the Code of Ethics requires the auditor to be independent from their assurance team from the start of performing procedures required by the engagement up to the issuance of the report

a

Acts to be performed in order to obtain audit evidence. a. Audit standards b. Audit procedures c. Audit program d. Audit strategy

b

Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the assertion level. a. Risk assessment procedures b. Tests of control c. Substantive procedures d. Analytical procedures

b

Before accepting an audit engagement. a successor auditor should make specific inquiries of the predecessor auditor regarding: a. The predecessor's evaluation of matters of continuing accounting significance b. Disagreement which the predecessor had with the client concerning auditing procedures and accounting principles c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel d. The predecessor's assessment of inherent risk and judgments about materiality

b

If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should: a. Keep silent of the denial b. Disclose the fact that the permission to disclosure is denied by the client c. Disclose adequately to proposed auditor all noncompliance made by the client d. Seek legal advice before responding to the proposed auditor

b

If the auditor believes that the scope of the audit examination has resulted in the auditor being unable to acquire sufficient appropriate evidence with respect to an item included in the financial statements, then the materiality of the item will determine the choice of the proper audit opinion. The choice could be a. Either a qualified opinion or an adverse opinion b. Either a qualified opinion or disclaimer of opinion c. Either an adverse opinion or disclaimer of opinion d. Either an unqualified opinion or an adverse opinion

b

If the auditor concludes that there is reasonable that there is a reasonable justification for the change in engagement, the report to be issued would a. Include reference to the original engagement b. Be that appropriate for the revised terms of the engagement c. Include reference to any procedures that may have been performed in the original engagement d. Not include reference to any procedures that may have been performed, particularly when the new engagement is to undertake agreed-upon procedures

b

Set the following phases in proper order: i. Pre-Engagement ii. Internal Controls iii. Evidence-Gathering iv. Planning v. Post-Audit Responsibilities vi. Reporting a. i, ii, iii, iv, v, vi b. i, iv, ii, iii, vi, v c. i, iv, iii, ii, v, vi d. i, iv, ii, iii, v, vi

b

The form and content of the audit engagement letters may vary for each client. but they would generally include reference to except: a. Management's responsibility for all the financial statements. b. The scope of the audit, excluding reference to applicable legislation regulations, or pronouncements of professional bodies to which the auditor adheres. c. The form of any reports or any communication of results of engagement d. Unrestricted access to whatever records, documentation and other information requested in connection with the audit.

b

When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether a. The company rotates auditors b. The engagement should be accepted c. The predecessor's work should be used d. In the predecessor's opinion, control risk is less than high

b

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a(n) a. Memo placed in the permanent section of the working papers b. Client representation letter c. Engagement letter d. Comfort letter

c

An audit engagement letter least likely include: a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements may remain undiscovered b. Description of any letters or reports that the auditor expects to submit to the client c. Identification of specific audit procedures that the auditor needs to undertake d. Basis on which fees are computed and any billing arrangements

c

An engagement letter is best described as a. A letter from the company to the auditors specifying management's expectations for completion of the audit on a timely basis and the fees. b. A letter from the auditors to company management specifying that management is responsible for the financial statements, and the auditors will issue an opinion on the financial statements. c. A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion. d. A letter from the Board of Directors' audit committee to the auditor that indicates the auditor has been engaged to perform the audit and the fees to be paid.

c

Audit procedures to detect material misstatements at the assertion level. a. Risk assessment procedures b. Tests of control c. Substantive procedures d. Analytical procedures

c

If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the successor should: a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management b. Accept the engagement but only after an equitable increase in the professional fee c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant scope limitation

c

The primary purpose of the engagement letter is to: a. Satisfy the requirements of the CPA's liability insurance policy b. Remind management that the primary responsibility for the financial statements rests with management c. Provide a written record of the agreement with the client as to the services to be provided d. Provide a starting point for the auditor's preparation of the preliminary audit program

c

When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division (component), which of the following factors need not be considered in deciding whether to send a separation engagement letter to the component? a. Who appoints the auditor of the component b. Legal requirements c. Number of reports to be prepared during the peak audit season d. Whether a separate audit report is to be issued on the component

c

Which of the following helps prevent misunderstandings during audit planning? a. Auditor involvement in the preparation of the client's financial records b. Client involvement in determining specific audit planning issues. c. A preliminary meeting conference with the client to discuss fees timing, client assistance and related issues. d. Involvement of the client's internal auditors in setting materiality levels and determining the scope of audit tests.

c

Which of the following matters is generally included in an auditor's engagement letter? a. The factors to be considered in setting preliminary judgments about materiality b. Management's vicarious liability for illegal acts committed by its employees c. Management's responsibility for the entity's compliance with laws and regulations d. The auditor's responsibility to search for significant internal control deficiencies

c

Which of the following statements is/are correct? Statement 1: The auditor and the client should agree on the terms of the engagement. Such an agreement may be in the form of audit engagement letter or other suitable form of contract. Statement 2: Even in those countries where the scope of the audit is established by law, an engagement letter may be informative for the client. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect

c

Which of the following statements is/are correct? Statement 1: Where the terms of the engagement are changed, the auditor and the client should agree on the new terms. Statement 2: The auditor should not agree to a change of engagement when there is no reasonable justification for doing so. Statement 3: If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, the auditor should withdraw and consider whether there is any obligation, either contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal. a. Only one statement is correct b. Only two statements are correct c. All statements are correct d. All statements are incorrect

c

A client's insistence that the audited results are reported quickly after the fiscal year end is of concern to auditors because: a. Many uncertainties inherent in the financial statements cannot be resolved until several months after the year-end closing of the books. b. The financial statements are less reliable because the period covered by the review for subsequent events is shortened c. Many clients have December 31 year ends and it is difficult to complete the audit when many of the client's personnel are on holidays. d. Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the performance of audit procedures.

d

A firm has obtained information that would have caused it to decline an engagement had the information been available earlier. Actions available to the auditor would include the following, except: a. Reporting the information and its implications to the person/s who appointed the CPA b. Withdraw from the client relationship c. Withdraw from the engagement d. Issue a disclaimer of opinion

d

An engagement letter is prepared with the interest(s) of a. The auditor only b. The client only c. The public d. Both the client and the auditor

d

Arrangements concerning with which of the following are least likely to be included in the engagement letter? a. Fees and billing b. A predecessor auditor c. CPA investment in client securities d. Other services to be provided in addition to the audit

d

If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should: a. Withdraw from the engagement. b. Qualify the report on the original engagement. c. Continue with the revised engagement, but make explicit reference about the original engagement. d. Refuse to agree to management's request on the change of engagement and continue with the original engagement

d

If a company's external auditor expresses an unqualified opinion as a result of the audit of the company's financial statements, readers of the audit report can assume that a. The company is financially sound and the financial statements are accurate b. The external auditor found no fraud c. Internal control is effective d. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.

d

Management's integrity affects all of the following risks except: a. Business risk b. Financial Reporting risk c. Audit risk d. All of these risks are affected

d

On recurring audit engagements, the auditor may decide not to send a new engagement letter each period. In which of the following situations will there be no need to send a new letter? a. Revisions or special terms of the engagement b. Significant change in nature or size of the client's business c. Indications of misunderstanding of the objective and scope of the audit d. Recent change of middle management and rank and file organizational structure

d

One of the first things that the auditor will do after accepting a new client is a. Contact the client's attorney to discover legal obligations. b. Communicate with the predecessor auditor. c. Study the client's internal control structure. d. Tour the client's facilities.

d

Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstances leading to the termination of the engagement with an understanding that all information disclosed will be kept confidential. b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination. c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the confidential relationship between an auditor and the client. d. Advise the client of the intention to contact the predecessor auditor and request a permission for the contact.

d

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? a. The operating effectiveness of control procedures b. The existence of related-party transactions c. The complexity of the accounting system d. The adequacy of the accounting records

d

Which of the following statements would least likely appear in an auditor's engagement letter? a. Fees for our services are based on regular per diem rates, plus travel and other out-of-pocket expenses. b. During the course of our audit, we may observe opportunities for economy in, or improved controls over your operations. c. Our engagement is subject to the risk that material misstatements of fraud, if they exist, will not be detected. d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

d

Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client? a. The client's financial ability. b. The client's relations with its previous CPA firm. c. The client's standing in the business community. d. The client's probability of achieving an unqualified opinion.

d