The strategy should consider the reasons for the audit

Auditing and Assurance Services, 15e (Arens)
Chapter 8 Audit Planning and Analytical Procedures

Learning Objective 8-1

Answer: B
Terms: Measure of how willing auditor is to accept that the financial statements may be materially misstated after audit is completed
Diff: Easy
Objective: LO 8-1
AACSB: Reflective thinking skills

2) A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called: A) control risk.

3) When inherent risk is high, there will need to be: A)

A lower assessment of audit risk	More evidence accumulated by the auditor
Yes	Yes

A lower assessment of audit risk	More evidence accumulated by the auditor
Yes	No

4) In what order should the following steps occur?

A. Assess client business risk
B. Understand the client's business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A
Answer: B
Terms: Steps in planning an audit
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking skills

D) audit risk.

Answer: A
Terms: First standard of fieldwork; Proper planning Diff: Challenging
Objective: LO 8-1
AACSB: Analytic skills

Terms: Reasons auditor should properly plan audit engagement Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking skills

7) When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.

9) Obtaining sufficient appropriate evidence is essential if the CPA firm is to minimize legal liability.

A) True
B) False
Answer: A
Terms: Acceptable audit risk
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking skills

1) One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for:
A)

Good client relations	Facilitating high-quality work at a reasonable cost
Yes	Yes

Good client relations
Yes	No

D)

Which has large amounts of debt	Which is to be sold in the near future
Yes	Yes

C)

Which has large amounts of debt	Which is to be sold in the near future
Yes	No

D)

Answer: B
Terms: Initial audit planning
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking skills

Answer: C
Terms: New audit clients refusal to allow communication between predecessor and successor auditors
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking skills

5) A successor auditor may perform which of the following for a new audit client? A)

Speak to local attorneys, banks and other businesses regarding the company's reputation	Speak to the predecessor auditors about disagreements they had with management
Yes	Yes

Speak to local attorneys, banks and other businesses regarding the company's reputation	Speak to the predecessor auditors about disagreements they had with management
Yes	No

6) When dealing with audit risk:
A) audit risk should not be a factor when determining if a new client should be accepted. B) audits with a low acceptable audit risk generally result in lower audit fees.

B) engagement letter.

C) Audit Plan.

9) Which of the following statements is true regarding communications between predecessor and successor auditors?

10) 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.

C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.

C) responsibility letter.

D) client letter.

B) control risk and the intended uses of the financial statements. C) the likely statement users and the intended uses of the statements.

D) the audit firm and the intended uses of the statements Answer: C
Terms: Audit risk
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking skills

D) is the detailed steps to be followed for the substantive audit tests.

Answer: B
Terms: Audit strategy
Diff: Moderate
Objective: LO 8-2
AACSB: Analytic skills

17) The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:
A) the predecessor auditor has poor relations with the successor auditor.

A) Management asserts there are no errors, material or immaterial, in the general ledger. B) Auditors assert that the primary audit goal is audit efficiency.

C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

D) staff assigned to the audit must be knowledgeable about the client's industry.

Answer: D
Terms: Selection of audit staff for engagement
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking skills

Answer: B
Terms: Auditor accepts audit engagement and does not possess industry expertise Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking skills

21) Which is usually included in an engagement letter? A)

	Dollar estimate of fees to be billed to the client
Yes	Yes

Estimate of hours required to complete audit	Dollar estimate of fees to be billed to the client
Yes	No

D)

A reference to standards acceptable in the United States of America	A reference to GAAS
Yes	Yes

B)

	A reference to GAAS
Yes	No

Answer: A
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking skills


Yes	Yes

B)


Yes	No

D)

Only if the specialist's report results in a modification of the audit opinion	Only if the specialist assisted in the audit of an account material to the financial statements
Yes	Yes

B)

C)

Only if the specialist's report results in a modification of the audit opinion	Only if the specialist assisted in the audit of an account material to the financial statements
Yes	No

The projected type of opinion on the financials statement to be audited	Name(s) of the client personnel responsible for supplying the auditor with information
Yes	Yes

B)

	Name(s) of the client personnel responsible for supplying the auditor with information
Yes	No

Answer: B
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking skills

List of audit procedures to be used in inventory observation
Yes	Yes

C)

List of audit procedures to be used in inventory observation
Yes	No

27) Discuss the factors an auditor should consider before accepting a company as an audit client.

Answer: The auditor should investigate and consider the prospective client's standing in the business community, financial stability, management's integrity, and relations with its bankers, attorneys, and previous CPA firm. The auditor should also determine whether he or she possesses the required competence and independence to do the audit.

29) Discuss the essential activities involved in the initial planning of an audit.

Answer: 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 they wish to be associated with. In the case of a continuing client, an auditor must determine whether continuing the relationship is appropriate and in the firm's best interest.

Terms: Essential activities involved in initial planning of audit Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking skills

30) Discuss the required communications between predecessor and successor auditors.

3. Legal action initiated by either the auditor or client related to prior audit services.

4. The presence of excessive risk which could result in financial failure of the client or lawsuits against the audit firm.

• the responsibilities of the auditor and management.

• identification of the financial reporting framework used by management• reference to the expected form and content of the audit report
• the engagement's limitation
• an agreement as to any other services to be provided.

A) True
B) False
Answer: B
Terms: Communications between predecessor and successor auditors Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking skills

37) An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work.

A) True
B) False
Answer: A
Terms: Auditor evaluate specialist's work
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking skills