• 1.

Engagement letter that documents and confirms the auditor’s acceptance of the
engagement would normally be sent to the client
A. at the end of fieldwork
B. after the audit report is issued
C. before the audit report is issued
D. before the commencement of the engagement
D
• 2. Which of the following matters is least likely to be discussed in an engagement
letter?
A. Timing of the performance of the examination
B. assistance to be provided by the client personnel
C. the fact that an auditor does not plan to detect material irregularities
D. the fact that the financial statements are the responsibility of the
management
C
• 3. Which of the following would be least likely to be included in the auditor’s
engagement letter?
A. forms of any report
B. type of opinion to be issued
C. objectives and scope of the audit
D. extent of his responsibilities to his client
B
• 4. An engagement letter would not normally include
A. billing arrangement
B. arrangement concerning client’s assistance
C. details of the procedures that will be performed
D. expectations of receiving a representation letter from management
C
• 5. Which of the following is not one of the principal contents of an engagement
letter?
A. limitations of the engagement
B. objectives of the financial statements
C. unrestricted access to records and documents
D. management’s responsibility for the financial statements
B
• 6. Arrangements concerning which of the following are least likely to be included
in engagement letter?
A. fees and billing
B. auditor’s responsibilities
C. CPA investment in client securities
D. Other forms of reports to be issued in addition to the audit report
B
• 7. In a continuing engagement, the continuing auditor would most likely send a new
engagement letter when
A. there is a recent change in the client’s board of directors
B. there is a change in the partner assigned in the engagement
C. there are expected minor change in the nature or size of the client’s business
D. there are new accounting pronouncements affecting the client’s financial
statements
A
• 8. In which of the following situations would the auditor be unlikely to send a new
engagement letter to a continuing client?
A. a change in terms of the engagement
B. a recent change of client’s management
C. a significant change in the nature or size of the client’s business
D. a recent change in the partner and or staff in the audit engagement
D
• 9. Which of the following would not be a valid justification for changing the nature of an
engagement?
A. there was a misunderstanding concerning the original engagement
B. there was a recent change in the client’s requirement for audited financial statement
C. there was a management imposed scope limitation that requires modification of audit
opinion
D. the cost of completing the audit is significant and the client no longer needs audited
financial statements
C
• 10. Which of the following is not a valid sequence of steps in the audit process?
A. choosing audit risk, assessing control risk, determining detection risk
B. choosing audit risk, performing certain analytical procedures, assessing inherent risk
C. performing certain analytical procedures, assessing inherent risk, assessing control risk
D. determining detection risk, assessing inherent risk, performing certain analytical
procedures
D
• 11. Which one of the following is among the three components of engagement
risk?
A. acceptance risk
B. control risk
C. occurrence risk
D. rejection risk
B
• 12. One of the major parts of audit planning is pre-planning. Which of the
following is not involved during the pre-planning phase?
A. obtaining an engagement letter
B. selecting staff for the engagement
C. deciding whether to accept or continue this client
D. obtaining information about client’s legal obligations
D
• 13. An extensive understanding of the client’s business and industry and knowledge about
the company’s operations are essential for doing an adequate audit. For a new client, most
of this information is obtained
A. at the client’s premises
B. from the permanent file
C. from the predecessor auditor
D. from the Securities and Exchange Commission
A
• 14. Which of the following is the most likely first step an auditor would perform at the
beginning of an initial audit engagement?
A. tour the client’s facilities and preview the general records
B. study and evaluate the system of internal administrative control
C. prepare a rough draft of the financial statements and of the auditor’s report
D. consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management
A
• 15. To obtain an understanding of a continuing business in planning an audit,
an auditor most likely would
A. read specialized industry journals
B. reevaluate client’s internal control environment
C. perform tests of details of transactions and balances
D. review prior-year working papers and the permanent file for the client
D
• 16. The audit risk model is useful
A. while doing test of controls
B. in planning an audit engagement
C. to determine the type of opinion to express
D. to evaluate the evidence which has been gathered
B
• 17. The audit risk model is
A. a planning, testing, and evaluation model
B. useful in evaluating results but of limited use in planning
C. useful in planning, but of limited value in evaluating results
D. useful when performing the tests of balances, but of little value in either
the planning or evaluations stages
C
• 18. A major limitation in the application of the audit risk model is
A. the difficulty in defining the terms of the model
B. the difficulty in measuring the components of the model
C. the failure of the AASC to accept it and incorporate it into the PSA’s
D. the difficulty in understanding the effect on other factors in the model
when one factor is changed
B
• 19. The risk that the auditor may unknowingly fail to appropriately modify his or her
opinion on financial statements that are materially misstated is
A. analytical procedures risk
B. audit risk
C. control risk
D. inherent risk
B
• 20. A measure of the auditor’s assessment of the likelihood that there are material
misstatement in an account before considering the effectiveness of the client’s
internal control is
A. audit risk
B. detection risk
C. inherent risk
D. statistical risk
C
• 21. The susceptibility of an assertion in material misstatements is called
A. audit risk
B. detection risk
C. sampling risk
D. inherent risk
C
• 22. Auditor begin their assessment of inherent risk during the planning phase.
Which of the following would not be a topic of the planning phase that would
also help to assess inherent risk?
A. identifying related parties
B. touring the client’s plant and offices
C. obtaining client’s agreement on the engagement letter
D. obtaining knowledge about the client’s business and industry
C
• 23. Which of the following discoveries by the auditor would not raise the red flag of
increased inherent risk?
A. client is a parent company with a subsidiary
B. a bond indenture requires a current ratio of at least three to one
C. management bonuses are based on a percentage of net income
D. client makes extensive use of notes receivable and notes payable rather than
buying and selling on open accrual basis
D
• 24. Inherent risk is reduced when the likelihood of defalcations is low. This would be
true for an account such as
A. accounts receivable
B. cash
C. inventory
D. marketable securities
A
• 25. The expectation of misstatement after considering the effect of internal
control is most appropriately thought of as
A. inherent risk
B. control risk and acceptable audit risk
C. the combination of inherent risk and control risk
D. none of the above
C
• 26. Inherent risk is reduced when the likelihood of defalcations is low. This would
be true for an account such as
A. accounts receivable
B. cash
C. inventory
D. marketable securities
A
• 27. The risk that the auditor will not detect a material misstatement that exist in an assertion is
A. audit risk
B. detection risk
C. control risk
D. inherent risk
C
• 28. Detection risk is
A. the risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated
B. the risk that an auditor’s substantive procedures will not detect a misstatement that
exist in an account balance or class of transactions that could be material individually or when
aggregated
C. the susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated
D. the risk that a misstatement that could occur in an account balance or class of
transactions that will not be prevented or detected by the internal control system
B
• 29. Inherent and control risk differ from detection risk in that they
A. are functions of client and its environment
B. can be changed at the auditor’s discretion
C. arise from the misappropriation of auditing procedures
D. may be assessed in either quantitative or non quantitative terms
A
• 30. relationship between control risk and detection risk is ordinarily
A. direct
B. equal
C. inverse
D. parallel
C
• 31. Inherent risk is __________ related to detection risk and _________ related to the
amount of audit evidence
A. directly, directly
B. directly, inversely
C. inversely, directly
D. inversely, inversely
C
• 32. risk in auditing means that the auditor accepts some level of uncertainty in
performing the audit function. An effective auditor will
A. set the risk level between 5% and 10%
B. design audit procedures to achieve the desired level of audit risk
C. take any means available to reduce the risk to the lowest possible level
D. perform the audit procedures first and quantitatively set the risk level before
forming an opinion and writing the report
B
• 33. as the assessed level of control risk increases, the auditor may increase
A. extent of test of controls
B. level of detection risk
C. extent of substantive tests
D. preliminary judgement about audit risk
C
• 34. regardless of the assessed level of control risk, the auditor would perform some
A. substantive test to determine the effectiveness of internal control policies
B. substantive test to restrict detection risk for significant transaction classes
C. analytical review procedures to verify the design of internal control
procedures
D. dual-purpose test to evaluate both the risk of monetary misstatement and
preliminary control risk
B
• 35. As the acceptable level of detection risk decreases, the auditor may
A. use larger sample size for test of controls
B. design more effective substantive procedures
C. increase the level of inherent and control risks
D. perform tests of control at year-end rather than at interim
B
• 36. If planned detection risk is reduced, the amount of substantive evidence
the auditor accumulates will
A. be determined
B. decrease
C. increase
D. remained unchanged
C