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ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

1. The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditors? A. The auditors will be able to plan the audit work so that it may be done expeditiously. B. The auditors will be able to complete substantive procedures prior to year-end. C. The auditors will be able to better plan for the observation of the physical inventories. D. The auditors will be able to perform the examination more efficiently and will be finished at an early date after the year-end. 2. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in: A. A memorandum to be placed in the permanent section of the auditing working papers. B. An engagement letter. C. A client representation letter. D. A confirmation letter attached to the constructive services letter. 3. The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered? A. Client manuals of accounts and charts of accounts. B. AICPA Industry Audit Guides. C. Prior-year working papers of the predecessor auditors. D. Latest annual and interim financial statements issued by the client. 4. The auditors will not ordinarily initiate discussion with the audit committee concerning the: A. Extent to which the work of internal auditors will influence the scope of the examination. B. Extent to which change in the company's organization will influence the scope of the examination. C. Details of potential problems which the auditors believe might cause a qualified opinion. D. Details of the procedures which the auditors intend to apply. 5. Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client? A. The successor auditors have no responsibility to contact the predecessor auditors. B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors. C. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact. D. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts. Page 1

ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

6. Which of the following situations would most likely require special audit planning by the auditors? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones. 7. When planning an audit, an auditor should: A. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire. B. Make preliminary judgments about materiality levels for audit purposes. C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. D. Prepare a preliminary draft of the management representation letter. 8. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should: A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued. 9. With respect to the auditor's planning of a year-end audit, which of the following statements is always true? A. An engagement should not be accepted after the fiscal year-end. B. An inventory count must be observed at the balance sheet date. C. The client's audit committee should not be told of any specific audit procedures which will be performed. D. It is an acceptable practice to carry out parts of the examination at interim dates. 10. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management. 11. The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: A. Substantive tests. B. Tests of controls. C. Internal control. D. Statistical analysis. Page 2

ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

12. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of: A. Tests of transactions and balances. B. An assessment of internal control. C. Specialized audit programs. D. Analytical procedures. 13. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: A. Awareness of the consistency in the application of generally accepted accounting principles between accounting periods. B. Evaluation of all matters of continuing accounting significance. C. Opinion of any subsequent events occurring since the predecessor's audit report was issued. D. Understanding as to the reasons for the change of auditors. 14. Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? A. Are all financial reporting operations at one location? B. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks? D. Has it reported to the audit committee the nature of the company's internal control? 15. To test for unsupported entries in the ledger, the direction of audit testing should be from the: A. Ledger entries. B. Journal entries. C. Externally generated documents. D. Original source documents. 16. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of: A. Accuracy. B. Completeness. C. Control. D. Existence.

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ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

17. Individuals who commit fraud are ordinarily able to rationalize the act and also have an:

A. Item A B. Item B C. Item C D. Item D 18. Engagement letters are used by most auditors in performing professional services. a. Describe the purpose of an engagement letter. b. List four items that are normally included in an engagement letter.

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ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

19. As a part of the planning process, the auditors often prepare an audit plan, an audit program, and a time budget. a. Describe an audit plan and explain its purpose. b. Describe an audit program and explain its purpose. c. Describe a time budget and explain its purpose.

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ACC 460: Principles of Auditing Chapters 6 Questions

Name ______________________________________

20. Auditors perform various tasks in planning an audit engagement. Provide an overall description of how each task is performed and its purpose. a. Obtain an understanding of the client's business. b. Assess audit risk and materiality for the engagement. c. Assess fraud risk. d. Assess the risk of material misstatement of assertions about financial statement accounts and classes of transactions.

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