Lorma College

LORMA 101

1)Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should

1. 1. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstance leading to the termination with the understanding that all information disclosed will be kept confidential.
   2. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination.
   3. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the confidential relationship between auditor and client.
   4. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

 

2. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
   1. Analysis of balance sheet accounts
   2. Analysis of income statement accounts
   3. All matters of continuing accounting significance
   4. Facts that might bear on the integrity of management

 

3. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best documented in
   1. Independent auditor’s report               c. Client’s representation letter
   2. Audit engagement letter                        d. Audit program

 

4. Which of the following least likely requires the auditor to send a new engagement letter?
   1. An indication that the client misunderstands the objective and scope of the audit.
   2. Any revised or special terms of the engagement.
   3. A recent change in the audit firm’s management.
   4. Legal requirements and other government agencies’ pronouncements.

 

5. Which of the following is appropriately included in an audit engagement letter?

1. Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.
2. The audit will be made with the objective of expressing an opinion on the financial statements.
3. An audit also includes assessing the accounting procedures used and significant estimates made by management.

 

1. 1. I and II           c. II and III
   2. I and III         d. I, II and III

 

6. When an independent auditor expresses an unqualified opinion he asserts that:

1. He performed the audit in accordance with generally accepted auditing standards.
2. The company is a profitable and viable entity.
3. The financial statements examined are in conformity with GAAP.
4. The financial statements are accurate and free of errors.

 

1. All of the above statements are true.
2. Only statements (1) and (3) are true.
3. Only statements (2) and (4) are true.
4. All of the above statements are false.

 

7. When management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor’s report has not been released to the entity, the auditor should express
   1. Qualified or adverse opinion
   2. Qualified or disclaimer of opinion
   3. Unqualified opinion with explanatory paragraph
   4. Unqualified opinion.

 

8. The most common type of audit report contains a(n):
   1. Adverse opinion.               c. Disclaimer of opinion
   2. Qualified opinion.              d. Unqualified

 

9. If the auditor concludes that the fraud or error has a material effect on the financial statements and has not been properly corrected in the financial statements, the auditor should issue a:
   1. Unqualified opinion with explanatory paragraph.
   2. Qualified or adverse opinion.
   3. Qualified or disclaimer of opinion.
   4. Adverse or disclaimer of opinion.

 

10. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error that may be material to the financial statements has, or is likely to have, occurred, the auditor should issue a (n):
    1. Unqualified opinion with explanatory paragraph.
    2. Qualified or adverse opinion.
    3. Qualified or disclaimer of opinion.
    4. Adverse or disclaimer of opinion.

 

11. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
    1. Reflects management’s philosophy and operating style.
    2. Affects management’s financial statement assertions.
    3. Provides adequate safeguards over access to assets.
    4. Enhances management’s decision-making processes.

 

12. The primary responsibility for establishing and maintaining an internal control rests with
    1. The external auditors
    2. The internal auditors
    3. Management and those charged with governance
    4. The controller or the treasurer

 

13. Which of the following assertions does not relate to balances at period end?
    1. Existence
    2. Occurrence
    3. Valuation or allocation
    4. Rights and obligations
14. Which of the following assertions does not relate to classes of transactions and events for the period?
    1. Completeness
    2. Valuation
    3. Cut-off
    4. Accuracy

 

15. An assertion that transactions are recorded in the proper accounting period is:
    1. Classification
    2. Occurrence
    3. Accuracy
    4. Cut-off

 

16. Before accepting an engagement to audit a new client, a CPA is required to obtain
    1. A preliminary understanding of the prospective client’s industry and business
    2. The prospective client’s signature to the engagement letter
    3. An understanding of the prospective client’s control environment
    4. A representation letter from the prospective client

 

17. Preliminary knowledge about the client’s business and industry must be obtained prior to the acceptance of the engagement primarily to
    1. Determine the degree of knowledge and expertise required by the engagement
    2. Determine the integrity of management
    3. Determine whether the firm is independent with the client
    4. Gather evidence about the fairness of the financial statements

 

18. In an audit, communication between the predecessor and incoming auditor should be
    1. Authorized in an engagement letter
    2. Acknowledged in a representation letter
    3. Either written or oral

 

18. 4. Written and included in the working pap
19. Which of the following would be least likely to be included in the auditor’s engagement letter
    1. Forms of the report
    2. Extent of his responsibilities
    3. Objectives and scope of the audit
    4. Type of opinion to be issued

 

20. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a(n)
    1. Memorandum to be placed in the permanent section of the auditing working papers
    2. Engagement letter
    3. Client representation letter
    4. Comfort letter

 

21. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
    1. An inadequate understanding of the entity’s interval control structure
    2. The close proximity to the end of the entity’s fiscal year
    3. Concluding that the entity’s management probably lacks integrity
    4. An inability to perform preliminary analytical procedures before assessing control risk

 

22. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement
    1. Analysis of balance short accounts
    2. Analysis of income statements accounts
    3. All matters of continuing accounting significance
    4. Facts that might bear on the integrity of management

 

23. An incoming 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

 

 

24. This consists of checking the mathematical accuracy of documents of records.
    1. Reperformance
    2. Confirmation
    3. Recalculation
    4. Inspection