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Cards In This Set
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What are the steps to preplanning
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Continue the engagement
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Which of the following factors most likely would cause a CPA to decide not to accept a new audit
engagement? a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. b. Management's disregard of its responsibility to maintain an adequate internal control environment. c. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. d. Management's refusal to permit the CPA to perform substantive tests before the year-end. |
Choice "b" is correct. The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that an audit
should not be conducted. |
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Which of the following matters generally is included in an auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations. b. The factors to be considered in setting preliminary judgments about materiality. c. Management's vicarious liability for illegal acts committed by its employees. d. The auditor's responsibility to search for significant internal control deficiencies. |
Choice "a" is correct. An understanding with the client should be established regarding management's
responsibilities, which include identifying and ensuring that the entity complies with applicable laws and regulations. The understanding should be documented through a written communication, such as an engagement letter. |
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Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. An understanding of the prospective client's industry and business. b. The prospective client's signature to the representation letter. c. A preliminary understanding of the prospective client's control environment. d. The prospective client's consent to make inquiries of the predecessor auditor, if any. |
Choice "d" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure. However,
consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor. |
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Which of the following auditor concerns most likely could be so serious that the auditor concludes that a
financial statement audit cannot be conducted? a. The entity has no formal written code of conduct. b. The integrity of the entity's management is suspect. c. Procedures requiring segregation of duties are subject to management override. d. Management fails to modify prescribed controls for changes in conditions. |
Choice "b" is correct. Serious concerns about the integrity of management may indicate a risk of
management misrepresentation in the financial statements that is so great that an audit cannot be conducted. If the integrity of management is suspect, there would be a presumption of dishonesty. The auditor would then need to question the genuineness of all records and documents obtained from the client and would require conclusive rather than persuasive evidence to corroborate all management representations. An audit conducted on these terms would be unreasonably costly and impractical. |
