Chapter 5

Which of the following statements regarding client acceptance/continuance decisions is false? a. It would not be appropriate for audit firms to perform background checks on management of a potential client. b. An audit firm's client portfolio is impacted by both audit firm decisions and client decisions. c. Auditors should assess the background and experience of accounting personnel of a potential client. d. Auditors are not required to perform audits for any organization that asks for an audit.

a. It would not be appropriate for audit firms to perform background checks on management of a potential client.

According to the PCAOB General Auditing standards, an ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. a. True b. False

a. True

An audit program details the audit procedures to be completed before providing the audit opinion(s). a. True b. False

a. True

Only voluntary departures from a firm's portfolio impact the portfolio of client changes. a. True b. False

b. False

Which statement is false? a. Assessing control risk as high means the auditor does not have confidence that internal controls will prevent or detect material misstatements; assessing control risk as low has the opposite implication. b. If control risk is assessed as low, the auditor cannot plan on relying on the controls to increase substantive procedures for account balances. c. The auditor will not perform tests of controls; instead, the auditor must plan for substantive procedures, without relying on the client's internal controls. d. Based on obtaining an understanding through risk assessment procedures, the auditor assesses control risk ranging from high (weak controls) to low (strong controls).

b. If control risk is assessed as low, the auditor cannot plan on relying on the controls to increase substantive procedures for account balances.

Which of the following procedures is least likely to be performed during Phase V of the audit opinion formulation process? a. Assessment of misstatements detected during the performance of substantive procedures and tests of controls. b. Performance of preliminary analytical review procedures. c. Performance of an engagement quality review. d. Determination of the appropriate audit opinion(s) to issue.

b. Performance of preliminary analytical review procedures.

Which of these statements is true about the audit opinion formulation process presented in this chapter? a. The audit opinion formulation process is different for the financial statement only audit and the integrated audit. b. The audit opinion formulation process is based on the premise that management has responsibility to prepare the financial statements and maintain internal control over financial reporting. c. The audit opinion formulation process is comprised of seven phases. d. All of these are true statements regarding the audit opinion formulation process.

b. The audit opinion formulation process is based on the premise that management has responsibility to prepare the financial statements and maintain internal control over financial reporting.

Assume that an organization asserts that it has $35 million in net accounts receivable. For which of the following is management correctly asserting with respect to net accounts receivable? a. There are no management assertions that the organization owns the receivables and that they have not been sold, pledged, etc. b. The recorded accounts receivable exist at the balance sheet date and relate to valid sales. c. There are no presentation and disclosure assertions. d. There are no valuation or allocation assertions.

b. The recorded accounts receivable exist at the balance sheet date and relate to valid sales.

Which of the following accounts would not be included in the Acquisition and Payment for Long-Lived Assets Cycle? a. Equipment. b. Gain on disposal. c. Revenue. d. Depreciation expense.

c. Revenue.

Which of these relates to the PCAOB standards? a. Standards apply to audits in countries for which international standards are required. b. Standards apply to audits of most U.S. nonpublic entities. c. Standards apply to audits of U.S. public companies. d. All of these relate to the PCAOB.

c. Standards apply to audits of U.S. public companies.

In a financial statement audit, what controls will an auditor test? a. The risk of material misstatement. b. Both entity-wide and transaction controls for testing. c. Risks associated with significant accounts, disclosures, and relevant assertions. d. All of these are controls an auditor will test.

d. All of these are controls an auditor will test.

Which of the following represent possible audit documentation? a. The record of audit procedures performed (example: analyses prepared by the client or auditor). b. A memorandum of understanding (example: summary of findings). c. Correspondence (including email) concerning significant findings or issues (example: checklists). d. All of these are examples of audit documentation.

d. All of these are examples of audit documentation.

Which of the following information should be included in audit documentation? a. Procedures performed. b. Audit evidence examined. c. Conclusions reached with respect to relevant financial statement assertions. d. All of this information should be included.

d. All of this information should be included.

Which of these correctly represents Phase I of the audit opinion formulation process? a. Obtaining substantive evidence about accounts, disclosures, and assertions. b. Obtaining evidence about internal control operating effectiveness, if applicable. c. Completing the audit and making reporting decisions. d. Making client acceptance and continuance decisions.

d. Making client acceptance and continuance decisions.

Which of these is not a procedure an audit firm performs in making a decision to accept a potential client? a. Review regulatory filings and inquire of management about any internal control deficiencies. b. Analyze client and industry financial statements to assess the possibility of business failure. c. Inquire of client and audit firm personnel whether there are any potential independence-impairing relationships. d. Assess the background and experience of the potential client's accounting personnel. e. All of these are procedures an audit firm performs in making a decision to accept a potential client?

e. All of these are procedures an audit firm performs in making a decision to accept a potential client?