Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
Answer(s): C
Choice "c" is correct. A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement. Choice "a" is incorrect. The auditor takes the availability of information into account when planning the audit, and would need to perform testing throughout the period, but this would not be cause for rejecting a potential audit engagement.Choice "b" is incorrect. The risk of management override is considered during planning and would not be cause for rejecting a potential audit engagement. Choice "d" is incorrect. Management may consult with several accounting firms, and this would not be cause for rejecting a potential audit engagement.
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
Answer(s): B
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. Choice "a" is incorrect. The CPA does not need to understand the internal auditor's techniques in order to accept a new audit engagement.Choice "c" is incorrect. Related party transactions (by definition) are not considered to be arm's- length transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance of new clients.Choice "d" is incorrect. Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.
Which of the following matters generally is included in an auditor's engagement letter?
Answer(s): A
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.Choice "b" is incorrect. Judgments about materiality are the auditor's responsibility and would not be included in an engagement letter.Choice "c" is incorrect. Management would not necessarily be responsible for illegal acts committed by employees.Choice "d" is incorrect. The auditor is not responsible for searching for significant internal control deficiencies.
Before accepting an engagement to audit a new client, a CPA is required to obtain:
Answer(s): D
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.Choice "a" is incorrect. Obtaining an understanding of the client's industry and business is a planning procedure performed after an engagement is accepted.Choice "b" is incorrect. A management representation letter is not obtained until the end of the audit.Choice "c" is incorrect. Obtaining a preliminary understanding of the client's control environment is an audit procedure (required by the second standard of fieldwork) that would be performed after an engagement is accepted.
In assessing the objectivity of internal auditors, an independent auditor should:
Choice "d" is correct. When assessing the internal auditors' objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors.Choice "a" is incorrect. A quality control program would impact the competence of the internal audit staff, not their objectivity.Choice "b" is incorrect. Examining documentary evidence produced by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.Choice "c" is incorrect. Testing a sample of transactions and balances examined by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.
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