AUD Sample CPA Exam Questions

Weekly Review Quiz #382 – AUD: Pre-Engagement Planning Issues

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Question 1

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

  1. Management’s responsibility for errors and the illegal activities of employees that may cause material misstatement.
  2. The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor’s attention.
  3. Management’s responsibility for providing the auditor with an assessment of control risk associated with the entity’s financial statements.
  4. The auditor’s responsibility for determining preliminary judgments about materiality and audit risk factors.

The correct answer is: B.

A. Incorrect… The understanding requires that management take responsibility for correcting material misstatements and for “identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.” Management is not required to take responsibility for errors and illegal activities of employees.

B. Correct! Professional standards require that the auditor establish an understanding with the client regarding the services to be performed. The understanding would generally include:

  1. the objective of the audit;
  2. management’s responsibilities with regard to the financial statements, internal control, compliance with laws and regulations, availability of records, and the management representation letter;
  3. the auditor’s responsibilities for GAAS and reportable conditions;
  4. a description of an audit; and
  5. management’s responsibilities regarding correction of material misstatements and evaluation of immaterial adjustments.

C. Incorrect… It is the auditor’s responsibility to assess control risk associated with the entity’s financial statements .  It is not management’s responsibility.

D. Incorrect… Although it is the auditor’s responsibility to make preliminary judgments about materiality and audit risk factors, this topic would not appear in the understanding. It is a matter of auditor judgment that does not require consultation with, or notification to, the client.

Question 2

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?

  1. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.
  2. The CPA firm is responsible for ensuring that the client complies with applicable laws.
  3. The CPA firm will involve information technology specialists in the performance of the audit.
  4. The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

The correct answer is: C.

A. Incorrect… Auditors provide “reasonable assurance,” not “absolute assurance.”

B. Incorrect… Management is responsible for an entity’s compliance with applicable laws and regulations, among other management responsibilities.

C. Correct! Although the determination of matters to be addressed in the engagement letter involves professional judgment, it would be appropriate to document in an engagement letter any planned audit involvement of “specialists” regarding information technology or other matters.

D. Incorrect… The financial statements are the representation of management, and management is responsible for making appropriate adjustments to the entity’s financial statements even when the auditor identifies misstatements for management’s consideration.

Question 3

Which of the following matters does an auditor usually include in the engagement letter?

  1. Arrangements regarding fees and billing.
  2. Analytical procedures that the auditor plans to perform.
  3. Indications of negative cash flows from operating activities.
  4. Identification of working capital deficiencies.

The correct answer is: A.

A. Correct! The engagement letter identifies the respective responsibilities of the entity and the auditor, and essentially constitutes the contract between the parties. It is customary for the engagement letter to address fee-related issues.

B. Incorrect… The engagement letter would not specify particular audit procedures that the auditor plans to perform, such as substantive analytical procedures.

C. Incorrect… The engagement letter would not comment on observable characteristics of the financial statements to be audited, such as indications of negative cash flows from operating activities.

D. Incorrect… The engagement letter would not comment on observable characteristics of the financial statements to be audited, such as working capital deficiencies.

Question 4

Before accepting an engagement to audit a new client, a CPA is required to obtain

  1. An assessment of fraud risk factors likely to cause material misstatements.
  2. An understanding of the prospective client’s industry and business.
  3. The prospective client’s signature to a written engagement letter.
  4. The prospective client’s consent to make inquiries of the predecessor, if any.

The correct answer is: D.

A. Incorrect… An auditor should assess fraud risk, but that is not a precondition to accepting an audit engagement.

B. Incorrect… An auditor should obtain an appropriate understanding of the entity’s entity and business, but that understanding can be obtained after accepting the engagement.

C. Incorrect… AICPA standards require the auditor to obtain an engagement letter with the client and there is an expectation that the engagement letter will be obtained at the beginning of the audit engagement. However, the standards do not specifically state that the engagement letter must be obtained before the engagement can be accepted, whereas the standards do state that the successor-predecessor communication must be evaluated before accepting the audit engagement.

D. Correct! AICPA standards addressing required communications between successor and predecessor auditors state that an auditor should not accept an engagement until the successor auditor’s required communications with the predecessor auditor have been evaluated.

Question 5

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding

  1. Specialized accounting principles of the client’s industry.
  2. The competency of the client’s internal audit staff.
  3. The uncertainty inherent in applying sampling procedures.
  4. Disagreements with management as to auditing procedures.

The correct answer is: D.

A. Incorrect… Specialized accounting principles is a topic that might be discussed but is not a required communication between the predecessor auditor and the successor auditor. As a result, it would not be “most likely” to be the subject of inquiry.

B. Incorrect… The competency of the client’s internal audit staff is a topic that might be discussed but is not a required communication between the predecessor auditor and the successor auditor. As a result, it would not be “most likely” to be the subject of inquiry.

C. Incorrect… The uncertainty relating to sampling procedures is not a topic that is generally discussed outside of the classroom. It definitely would not be a topic of discussion between the predecessor and successor auditors.

D. Correct! Auditors are required by professional standards to make inquiries pertaining to the integrity of management, disagreements with management regarding accounting principles and auditing procedures, and the predecessor’s understanding of the reason for the change in auditors.

End of Quiz

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