Question 1

The first section of an engagement letter addresses the terms of the services and related report, including the auditor's performance of a(n) :

Accepted Answer

A)   integrated audit of the financial statements and ICFR.
B)   integrated audit of the financial statements and income tax returns.
C)   integrated audit of the information contained in each Form 10-Q filed during the year.
D)   review of the company's monthly financial information to be filed with the SECE) A) and D)
F) None of the above

Question 2

Which of the following best describes the role of an audit firm's quality control standards to provide guidance addressing client acceptance and continuance?

Accepted Answer

A)   A standard framework should provide important benchmarks to be used by client companies to evaluate their own risk factors.
B)   Representative legal cases should be documented whenever client company characteristics resemble fact patterns.
C)   Policies and procedures should be in place for determining whether to accept or continue to perform an audit engagement.
D)   A well-structured timeline and written communication plan should be in place for all proposal and decision processes.E) B) and D)
F) All of the above

Question 3

With respect to an integrated audit, describe the respective responsibilities of management and the auditor. Provide at least five responsibilities for each party that would be documented in an engagement letter.

Accepted Answer

Management has responsibility for the fo...

Question 4

An incoming auditor should protect its independence by avoiding communications with the predecessor auditor.

Accepted Answer

A) True 
 B)False

Question 5

Companies often change audit firms prior to an initial public offering (IPO).

Accepted Answer

A) True 
 B)False

Question 6

The engagement letter includes provisions for the electronic filing of the client company's financial reports with the SEC. These provisions include consents which will authorize the:

Accepted Answer

A)   use of the audit firm's logo on each page of the filing.
B)   use of the audit firm's name in the electronic submission.
C)   retention of audit evidence for a period of 10 years following the audit engagement.
D)   dissemination of the audit report to the auditor's other clients.E) A) and D)
F) A) and B)

Question 7

An engagement letter for an audit:

Accepted Answer

A)   provides recommendations to management about improvements in its system of ICFR.
B)   distinguishes management's responsibilities throughout the audit process from the auditor's.
C)   specifies the high risk areas that will be the focus of the audit engagement.
D)   specifies the type of audit opinion that will be issued.E) All of the above
F) B) and D)

Question 8

In which publicly-filed document is an auditor most likely to find information about a potential client's financial trends?

Accepted Answer

A)   Form 8K.
B)   Management discussion and analysis section of the Form 10K.
C)   Proxy statements.
D)   Engagement letter.E) A) and B)
F) A) and D)

Question 9

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is known for making recommendations to audit committees concerning:

Accepted Answer

A)   composition of the committee, communication requirements, and oversight responsibilities.
B)   qualifications of the committee, timing of their terms, and specific corrections in ICFR systems.
C)   SEC filing deadlines, stock exchange requirements, and qualifications of membership.
D)   liquidity of the capital markets, types of SEC affiliations and reporting forms, and compensation requirements.E) A) and B)
F) A) and C)

Question 10

Which of the following is used by auditors as a source of guidance on client acceptance and continuance decisions?

Accepted Answer

A)   COSO Enterprise Risk Management and Internal Control frameworks.
B)   Auditing standards on risk, fraud, and ICFR.
C)   The audit firm's quality control standards.
D)   All of the above.E) B) and C)
F) None of the above

Question 11

Which of the following is least likely to warrant further investigation of a potential client company?

Accepted Answer

A)   Several companies in the same industry are experiencing business failures.
B)   None of the audit committee members is a financial expert.
C)   The audit committee concurs with management's selection of accounting treatments.
D)   One of the directors was convicted of tax evasion.E) A) and C)
F) A) and B)

Question 12

A management representation letter is prepared for the purpose of:

Accepted Answer

A)   confirming management's acceptance of the audit fees.
B)   setting forth the terms of the audit engagement.
C)   confirming the honesty and validity of audit information provided by management.
D)   establishing management's responsibility for making the company's financial records available to the auditor.E) A) and B)
F) A) and C)

Question 13

When is an auditor considered a "rainmaker," and how is this label applicable to the client acceptance decision?

Accepted Answer

An auditor is labeled a "rainmaker" when...

Question 14

Which of the following is not an attribute of a financial expert?

Accepted Answer

A)   An understanding of internal controls and procedures for financial reporting.
B)   An affiliation with the company or its subsidiaries.
C)   Education and experience as a financial officer, accountant, or auditor.
D)   An understanding of GAAP.E) All of the above
F) B) and C)

Question 15

Which of the following items is not one of management's responsibilities for communicating with the auditors?

Accepted Answer

A)   Suspected fraudulent activities within the company.
B)   Deficiencies in the design or operating effectiveness of ICFR.
C)   Key accounts and transactions to be selected for testing.
D)   Violations of regulations applicable to the company's activities.E) All of the above
F) B) and C)

Question 16

An audit firm should immediately decline to propose on a public company's audit if the company's CFO was recently a partner in the audit firm.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not a responsibility of an audit committee?

Accepted Answer

A)   Hiring, compensating, and overseeing the company's independent auditor relationship.
B)   Receiving and addressing complaints about accounting, internal control, and auditing matters.
C)   Resolving disagreements between management and the auditor regarding financial reporting.
D)   Preparing the disclosures that accompany the financial statements in the company's annual report.E) A) and B)
F) C) and D)

Question 18

Which of the following would be least likely to preclude an audit firm from proposing on a potential client due to independence concerns?

Accepted Answer

A)   A recently-promoted partner in the audit firm holds a financial interest in the potential client company.
B)   Someone who resigned from the audit firm three years ago is now the Chief Accounting Officer at the potential client company.
C)   The audit firm provides internal audit outsourcing and certain nonaudit services to the client company.
D)   The audit firm's pension plan holds securities of the potential client company.E) None of the above
F) B) and C)

Question 19

An audit firm's business risk is affected by:

Accepted Answer

A)   the client's business risk.
B)   its ability to make profits from the work it performs.
C)   the integrity of client's management.
D)   All of the above.E) B) and D)
F) None of the above

Question 20

Which of the following factors pertaining to a client's accounting function is most significant in the client acceptance or continuance decision?

Accepted Answer

A)   Effectiveness of internal controls.
B)   Use of a commercial accounting software program.
C)   Frequency of performance evaluations for accounting personnel.
D)   Frequency of updating the general ledger.E) B) and C)
F) A) and D)

Exam 5: Client Acceptance and Continuance and Preliminary Engagement Procedures

When is an auditor considered a "rainmaker," and how is this label applicable to the client acceptance decision?

Correct AnswerverifiedAn auditor is labeled a "rainmaker" when...View AnswerShow Answer

An incoming auditor should protect its independence by avoiding communications with the predecessor auditor.

Correct AnswerverifiedShow Answer

An engagement letter for an audit:

Correct AnswerverifiedShow Answer

Which of the following items is not one of management's responsibilities for communicating with the auditors?

Correct AnswerverifiedShow Answer

Which of the following is used by auditors as a source of guidance on client acceptance and continuance decisions?

Correct AnswerverifiedShow Answer

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is known for making recommendations to audit committees concerning:

Correct AnswerverifiedShow Answer

Companies often change audit firms prior to an initial public offering (IPO).

Correct AnswerverifiedShow Answer

Which of the following best describes the role of an audit firm's quality control standards to provide guidance addressing client acceptance and continuance?

Correct AnswerverifiedShow Answer

An audit firm's business risk is affected by:

Correct AnswerverifiedShow Answer

Which of the following is not a responsibility of an audit committee?

Correct AnswerverifiedShow Answer

The first section of an engagement letter addresses the terms of the services and related report, including the auditor's performance of a(n) :

Correct AnswerverifiedShow Answer

An audit firm should immediately decline to propose on a public company's audit if the company's CFO was recently a partner in the audit firm.

Correct AnswerverifiedShow Answer

In which publicly-filed document is an auditor most likely to find information about a potential client's financial trends?

Correct AnswerverifiedShow Answer

With respect to an integrated audit, describe the respective responsibilities of management and the auditor. Provide at least five responsibilities for each party that would be documented in an engagement letter.

Correct AnswerverifiedManagement has responsibility for the fo...View AnswerShow Answer

The engagement letter includes provisions for the electronic filing of the client company's financial reports with the SEC. These provisions include consents which will authorize the:

Correct AnswerverifiedShow Answer

Which of the following is not an attribute of a financial expert?

Correct AnswerverifiedShow Answer

Which of the following factors pertaining to a client's accounting function is most significant in the client acceptance or continuance decision?

Correct AnswerverifiedShow Answer

A management representation letter is prepared for the purpose of:

Correct AnswerverifiedShow Answer

Which of the following is least likely to warrant further investigation of a potential client company?

Correct AnswerverifiedShow Answer

Which of the following would be least likely to preclude an audit firm from proposing on a potential client due to independence concerns?

Correct AnswerverifiedShow Answer

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Management has responsibility for the fo...
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