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1. The most widely used profitability ratio is the: a.     quick ratio. b.    profit margin. c.     return on assets. d.    earnings per share.
d.            earnings per share.
2. It is easier and more common to implement increased evidence        accumulation for inherent risk than for acceptable audit risk because: a.     inherent risk can usually be isolated to one or two accounts. b.    inherent risk applies to the entire audit. c.     acceptable audit risk and sample sizes are set statistically. d.    acceptable audit risk does not impact on the amount of evidence which must be accumulated.
a.            inherent risk can usually be isolated to one or two accounts.
3. Which of the following statements is true regarding communications        between predecessor and successor auditors? a.     The burden of initiating the communication rests with the predecessor. b.    The predecessor should attempt to respond fully and truthfully to the        successor’s inquiries. c.     The predecessor should communicate with the successor only if the client        is public. d.    There is no requirement that the predecessor and successor communicate.
b.            The predecessor should attempt to respond fully and truthfully to the             successor’s inquiries.
4. The purpose of an engagement letter is to: a.     document the CPA firm’s responsibility to external users of the audited financial statements. b.    document the terms of the engagement in writing to minimize misunderstandings. c.     notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. d.    all of the above.
document the terms of the engagement in writing to minimize misunderstandings.
5. An understanding of a client’s business and industry and knowledge about        operations are essential for doing an adequate audit. For a new client, most        of this information is obtained: a.     from the predecessor auditor. b.    from the Securities and Exchange Commission. c.     from the permanent file. d.    at the client’s premises.
d.            at the client’s premises

6. The least effective method of identifying related parties for a public        company would be a(n): a.     inquiry of management. b.    review of SEC filings. c.     review of the purchases and sales journals for the period under audit. d.    examination of stockholders’ listings to identify principal stockholders.
c.            review of the purchases and sales journals for the period under audit.
7. A tour of the client’s facilities is helpful in obtaining an understanding of        the operations because: a.     the auditor will be able to assess the physical safeguards over assets. b.    the auditor may be better able to assess certain inherent risks. c.     the auditor obtains a broader perspective about the company as a whole. d.    all of the above.
d.            all of the above.
8. Corporate bylaws include: a.     the corporation’s exact name. b.    the rules and procedures used to operation the corporation. c.     the kinds and amounts of capital stock the corporation is authorized to issue. d.    all of the above.
b.    the rules and procedures used to operation the corporation.
9. The purpose of the requirement in SAS No. 84 of having communication        between the predecessor and successor auditor is to: a.     allow the predecessor to disclose information which would otherwise be confidential. b.    help the successor auditor to evaluate whether to accept the engagement. c.     help the client by facilitating the change of auditors. d.    ensure the predecessor collects all unpaid fees prior to a change in auditor.
b.    help the successor auditor to evaluate whether to accept the engagement.
10.  Which of the following is correct with respect to the use of analytical        procedures? a.     Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. b.    Analytical procedures must be used throughout the audit. c.     Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s attention so that the auditor’s understanding of the business is improved. d.    None of the above is correct.
d.    None of the above is correct.
Discuss the essential activities involved in the initial planning of an audit.
There are four essential activities involved in the initial planning of an audit. These are:
  1. Client acceptance or continuation. In the case of a new client, the auditor must determine whether the client is one with which (s)he wishes to be associated. In the case of a continuing client, an auditor must determine whether continuing the relationship is appropriate and in the firm’s best interest.
  2. Determine reason for the audit. The auditor should determine the reason for the audit as soon as practical. The remainder of the planning activities may be impacted by the client’s reason for requesting the audit.
  3. Obtain an understanding with the client. An understanding with the client should be obtained to avoid misunderstandings.  Auditors are required to obtain an understanding with their clients. This understanding must be written.
  4. Develop an overall audit strategy. The strategy should consider the reasons for the audit, including areas where there is greater risk of significant misstatements. Setting a strategy helps the auditor determine the resources required for the engagement.
Discuss the four primary purposes of analytical procedures performed during the             planning phase of an audit.
The four primary purposes of preliminary analytical procedures are:
  • to help the auditor understand the client’s industry and business,
  • to help the auditor assess the going concern assumption,
  • to indicate areas of possible misstatements, and
  • to reduce the extent of detailed tests.
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?
I. Financial statement accounts likely to contain a misstatement.
II. Conditions that require extension of audit tests.
a.I only.
b.II only.
c.Both I and II.Neither I nor II.
b.Both I and II.
Hill, CPA, has
been retained
to audit the

financial

statements of

Monday Co.
Monday's

predecessor

auditor was

Post, CPA,

who has been

notified by

Monday that

Post's services

have been

terminated.

Under these

circumstances,

which party

should initiate

the

communications

between Hill

and Post?

a. Hill, the

successor

auditor.

b. Post, the

predecessor

auditor.

c. Monday's

controller or

CFO.

d. The

chairman of

Monday's

board of

directors.  
a. Hill, the

successor

auditor.
Q) A successor auditor is required to attempt communication with the predecessor auditor prior to: a. Performing test of controls. b. Testing beginning balances for the current year. c. Making a proposal for the audit engagement. d. Accepting the engagement.
d. Accepting the engagement.
To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would: a. Perform tests of details of transactions and balances. b. Review prior-year audit documentation and the permanent file for the client. c. Read specialized industry journals. d. Reevaluate the client's internal control environment.
Review prior-year audit documentation and the permanent file for the client.
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