Evaluating a potential client requires which of the following steps?

Question 21 options:

1)	Communicate with the predecessor auditor.

2)	Preplan the audit.

3)	Establish the terms of the engagement.

4)	None of these.

Question 22 (3 points)

What factor would most likely would cause a CPA not to accept a new audit engagement?

Question 22 options:

1)	the prospective client's unwillingness to permit inquiry of its legal counsel

2)	the inability to review the predecessor auditor's documentation

3)	the CPA's lack of understanding of the prospective client's operations and industry

4)	indications that management has not investigated employees in key positions before hiring them

Question 23 (3 points)

An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes

Question 23 options:

1)	management's responsibility to guarantee that there are no material misstatements due to fraud.

2)	the auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.

3)	management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

4)	the auditor's responsibility for the fairness of the financial statements.

Question 24 (3 points)

What is an example of a related party transaction?

Question 24 options:

1)	An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A.

2)	A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor.

3)	A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A.

4)	A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.

Question 25 (3 points)

What would an auditor most likely use in determining the auditor's overall materiality?

Question 25 options:

1)	the anticipated sample size for planned substantive procedures

2)	the entity's annualized interim (i.e. quarterly) financial statements

3)	the results of the internal control questionnaire

4)	the contents of the management representation letter

Question 26 (3 points)

What is not a qualitative factor that may affect an auditor's establishment of materiality?

Question 26 options:

1)	potential for fraud

2)	The company is close to violating loan covenants.

3)	Firm policy sets materiality at 4% of pretax income.

4)	A small misstatement would interrupt an earnings trend.

Question 27 (3 points)

A dual-purpose test

Question 27 options:

1)	simultaneously tests debits and credits.

2)	is a procedure completed by both the internal and external auditors.

3)	is useful to both the entity and the auditor.

4)	is both a substantive test of transactions and a test of controls.

Question 28 (3 points)

Which of the options below is a general audit test?

Question 28 options:

1)	fee assessment procedures

2)	tests of controls

3)	preparation of corporate tax return

4)	active testing procedures

Question 29 (3 points)

What is the most important qualitative factor that auditors should consider when making materiality judgments?

Question 29 options:

1)	A misstatement exceeded five percent of net income.

2)	The auditor also provides consulting services to the audit client.

3)	The misstatement will cause the client to fail to meet an earnings forecast.

4)	The audit committee is not well-educated about the accounting principle in question.

Question 30 (3 points)

Which of the following statements is not correct about materiality?

Question 30 options:

1)	The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

2)	An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

3)	Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

4)	An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.