Which of the following will most likely indicate the existence of related parties?

MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS

8-23 (OBJECTIVES 8-1, 8-3, 8-4) The following questions concern the planning of the engagement. Select the best response.

a. Analytical procedures used in planning an audit should focus on identifying
(1) material weaknesses in internal control.
(2) the predictability of financial data from individual transactions.
(3) the various assertions that are embodied in the financial statements.
(4) areas that may represent specific risks relevant to the audit.

b. Which of the following will most likely indicate the existence of related parties?
(1) Writing down obsolete inventory prior to year end
(2) Failing to correct deficiencies in the client’s internal control
(3) An unexplained increase in gross margin
(4) Borrowing money at a rate significantly below the market rate

c. Which of the following is least likely to be included in the auditor’s engagement letter?
(1) Details about the preliminary audit strategy
(2) Overview of the objectives of the engagement
(3) Statement that management is responsible for the financial statements
(4) Description of the level of assurance obtained when conducting the audit
8-24 (OBJECTIVE 8-2) The following questions pertain to client acceptance. Choose the best
response.

a. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether
(1) the predecessor’s work should be used.
(2) the company follows the policy of rotating its auditors.
(3) in the predecessor’s opinion, internal control of the company has been satisfactory.
(4) the engagement should be accepted.

b. A successor would most likely 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.

c. Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement?
(1) Staff will need to be rescheduled to cover this new client.
(2) There will be a client-imposed scope limitation.
(3) The firm will have to hire a specialist in one audit area.
(4) The client’s financial reporting system has been in place for 10 years.

8-25 (OBJECTIVES 8-5, 8-6) The following questions deal with materiality. Choose the best response.

a. Which one of the following statements is correct concerning the concept of materiality?
(1) Materiality is determined by reference to guidelines established by the AICPA.
(2) Materiality depends only on the dollar amount of an item relative to other items
in the financial statements.
(3) Materiality depends on the nature of an item rather than the dollar amount.
(4) Materiality is a matter of professional judgment.

b. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity’s income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate
(1) $20,000.
(2) $15,000.
(3) $10,000.
(4) $30,000.

c. A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

(1) The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
(2) The financial statements do not conform with generally accepted accounting principles (GAAP).
(3) The financial statements contain unadjusted misstatements that should result in a qualified opinion.
(4) The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.