Chapter 3 quiz

The engagement partner and manager review the work of engagement team members to evaluate which three items/actions?

- The work was performed and documented. - The objectives of the procedures were achieved. - The results of the work support the conclusions reached.

Engagement letters include all of the following except: - A list of adjusting journal entries - Information about the audit fee - Arrangements involving the use of specialists - A list of additional services that will be provided

A list of adjusting journal entries

Which of these statements concerning illegal acts by clients is correct?

An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:

Audit working papers.

When planning an audit, an auditor should:

Determine overall materiality for audit purposes.

During the initial planning phase of an audit, a CPA most likely would:

Discuss the timing of the audit procedures with the entity's management.

A written understanding between the auditor and the entity concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n):

Engagement letter.

Which of the following is NOT a qualitative factor that may affect an auditor's establishment of materiality? - Potential for fraud. - The company is close to violating loan covenants. - Firm policy sets materiality at 4 percent of pretax income. - A small misstatement would interrupt an earnings trend.

Firm policy sets materiality at 4 percent of pretax income.

Tolerable misstatement is:

Materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

As generally conceived, the audit committee of a publicly held company should be made up of:

Members of the board of directors who are not officers or employees.

Miller Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to the audit committee. In planning to use the internal auditors to help in performing the audit, the independent auditor most likely will:

Place limited reliance on the work performed by the internal auditors.

Which of the following would NOT necessarily be a related party transaction? - Loan from the corporation to a major stockholder - Sale of land to the corporation by the spouse of a director - Purchases from another corporation that is controlled by the corporation's chief stockholder - Sales to another corporation with a similar name

Sales to another corporation with a similar name

An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes:

The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.

All of the following refer to an internal auditor's competence except: - The party in the entity to which the internal auditor reports - Professional certification - The quality of internal audit documents and reports - Supervision and review of internal audit activities

The party in the entity to which the internal auditor reports

An auditor obtains knowledge about a new client's business and its industry in order to:

Understand the events and transactions that may have an effect on the client's financial statements.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

Understanding as to the reasons for the change of auditors.