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Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 8 Audit Planning and Analytical Procedures

8.1 Learning Objective 8-1

1) A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued is
the
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
Answer: B
Terms: Acceptable audit risk
Diff: Easy
Objective: LO 8-1
AACSB: Reflective thinking

2) The first phase in planning an audit and designing an audit approach is to

A) accept the client and perform initial audit planning.
B) set the preliminary judgment of materiality.
C) understand the client's business and industry.
D) perform preliminary audit procedures.
Answer: A
Terms: Steps in planning an audit and designing an audit approach
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

3) _______ is the risk that the financial statements contain a material misstatement due to fraud
or error prior to the audit.
A) Inherent risk
B) Client business risk
C) Acceptable audit risk
D) Risk of material misstatement
Answer: D
Terms: Risk of material misstatements
Diff: Easy
Objective: LO 8-1
AACSB: Reflective thinking

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4) In what order should the following steps occur?
A. Set preliminary judgment of materiality and performance materiality.
B. Understand the clients business and industry.
C. Perform preliminary analytical procedures.
D. Accept the client and perform initial audit planning.
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A
Answer: A
Terms: Steps in planning an audit and designing an audit approach
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

5) The auditor uses knowledge gained from the understanding of the client's business and
industry to assess
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
Answer: A
Terms: Client business risk
Diff: Challenging
Objective: LO 8-1
AACSB: Analytic thinking

6) There are three main reasons why an auditor should properly plan audit engagements. Discuss
each of these reasons.
Answer: Three reasons why an auditor should properly plan audit engagements are:
• To enable the auditor to obtain sufficient competent evidence for the circumstances. This is
essential for minimizing legal liability and maintaining a good reputation in the business
community.
• To help keep audit costs reasonable. Given the competitive auditing environment, keeping
costs reasonable helps the firm obtain and retain clients.
• To avoid misunderstandings with the client. This is important for good client relations.
Terms: Reasons auditor should properly plan audit engagement
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

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7) When an auditor sets a low acceptable audit risk, it means that he wants to be more certain
that the financial statements are not materially misstated.
Answer: TRUE
Terms: Acceptable audit risk
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

8) As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
Answer: TRUE
Terms: Acceptable audit risk
Diff: Challenging
Objective: LO 8-1
AACSB: Reflective thinking

9) Assessing acceptable audit risk, client business risk, and risk of material misstatement helps
determine the audit procedures that will be needed.
Answer: TRUE
Terms: Assessing risk and planning audit procedures
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

10) A 100 % audit risk is complete certainty.

Answer: FALSE
Terms: Acceptable audit risk
Diff: Moderate
Objective: LO 8-1
AACSB: Reflective thinking

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8.2 Learning Objective 8-2

1) One of the purposes of an engagement letter is to avoid misunderstandings with the client.
This is important for
A)
Engagement objectives Engagement limitations
Yes Yes

B)
Engagement objectives Engagement limitations
No No

C)
Engagement objectives Engagement limitations
Yes No

D)
Engagement objectives Engagement limitations
No Yes

Answer: A
Terms: Engagement letter
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

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2) The auditor is likely to accumulate more evidence when the audit is for a company
A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes

B)
Which has large amounts of debt Which is to be sold in the near future
No No

C)
Which has large amounts of debt Which is to be sold in the near future
Yes No

D)
Which has large amounts of debt Which is to be sold in the near future
No Yes

Answer: A
Terms: Reasons for an audit and audit evidence
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

3) Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client's reason for the audit.
Answer: B
Terms: Initial audit planning
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

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4) Smith, CPA, has requested permission to communicate with the predecessor auditor in order
to review certain workpapers for high risk accounts for a new audit client. The new audit client's
refusal to allow this communication to occur would impact Smith's decision concerning
A) the auditor's ability to design audit tests.
B) possible scope exception due to lack of access.
C) the desirability of accepting the prospective engagement.
D) violation of the GAAP rules concerning consistency and comparability of financial
information.
Answer: C
Terms: New audit clients refusal to allow communication between predecessor and successor
auditors
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

5) A successor auditor may perform which of the following for a new audit client?
A)
Speak to local attorneys, banks and other
businesses regarding the company's Speak to the predecessor auditors about
reputation disagreements they had with management
Yes Yes

B)
Speak to local attorneys, banks and other
businesses regarding the company's Speak to the predecessor auditors about
reputation disagreements they had with management
No No

C)
Speak to local attorneys, banks and other
businesses regarding the company's Speak to the predecessor auditors about
reputation disagreements they had with management
Yes No

D)
Speak to local attorneys, banks and other
businesses regarding the company's Speak to the predecessor auditors about
reputation disagreements they had with management
No Yes

Answer: A
Terms: Successor auditor may perform communication for new audit client
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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6) When dealing with audit risk,
A) audit risk should not be a factor when determining if a new client should be accepted.
B) audits with a low acceptable audit risk generally result in lower audit fees.
C) if management of a company has a reputation of integrity, but is also known to take
aggressive financial risks, the auditor should not accept the company as a new client.
D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the
auditor may still accept the engagement but increase the fee proposed to the client.
Answer: D
Terms: Lower acceptable audit risk
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

7) A written understanding detailing what the auditor expects from the client in performing an
audit will normally be expressed in the
A) management letter requested by the auditor.
B) engagement letter.
C) audit Plan.
D) audit Strategy for the client.
Answer: B
Terms: Written understanding detailing what auditor will do and what auditor expects from
client in performing audit
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

8) For public companies, the ________ is responsible for hiring the auditor as required by the
Sarbanes-Oxley Act.
A) client's management
B) client's chief executive officer
C) client's chief financial officer
D) client's audit committee
Answer: D
Terms: Responsibility for agreeing nonaudit services for a public company audit client
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking
Topic: SOX

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9) Which of the following statements is true regarding communications between predecessor and
successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) The predecessor auditor of a public company does not need permission from the client before
communicating with the successor auditor.
Answer: B
Terms: Communications between predecessor and successor auditors
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

10) The purpose of an engagement letter is to

A) document the CPA firm's responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
D) emphasize management's responsibility for approving the audit program.
Answer: B
Terms: Purpose of engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

11) The written communication stating the auditor cannot guarantee that all acts of fraud will be
discovered is found in the
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter.
Answer: A
Terms: Reasons for an audit and audit evidence
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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12) Which of the following normally signs the engagement letter for an audit of a private
company?
A) management
B) board of directors representative
C) audit committee representative
D) corporate treasurer
Answer: A
Terms: Normally signs engagement letter for audit of private company
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

13) The two major factors affecting acceptable audit risk are
A) inherent risk and the intended uses of the financial statements.
B) control risk and the intended uses of the financial statements.
C) the likely statement users and their intended uses of the statements.
D) the audit firm and the intended uses of the statements
Answer: C
Terms: Audit risk
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

14) An engagement letter sent to a publicly held audit client usually would not include a(n)
A) reference to the auditor's responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management's responsibility for the financial statements.
Answer: C
Terms: Engagement letter sent to publicly held client
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

15) The preliminary audit strategy

A) is set before the auditor understands the client's reasons for the audit.
B) guides the development of the audit plan.
C) is determined after the engagement staffing is set.
D) is the detailed steps to be followed for the substantive audit tests.
Answer: B
Terms: Audit strategy
Diff: Moderate
Objective: LO 8-2
AACSB: Analytic thinking

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16) The purpose of the requirement in having communication between the predecessor and
successor auditors is to
A) allow the predecessor to disclose information which would otherwise be confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
Answer: B
Terms: Purpose of having communication between predecessor and successor audit
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

17) The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided when
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor's work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity.
Answer: C
Terms: Predecessor auditor respond to request of successor auditor for information
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

18) Which of the following best expresses the understanding of the terms of the engagement that
exist between the client and the CPA firm?
A) Management asserts there are no errors, material or immaterial, in the general ledger.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to
provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management asserts that they will provide the auditor with a risk assessment as to material
misstatements due to errors or fraud in the company's financial statements.
Answer: C
Terms: Understand responsibilities of the auditor and company for the audit
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

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19) When selecting staff for the audit engagement
A) only staff members who are CPAs should be assigned to the audit.
B) only managers and above need to have appropriate competence and capabilities to perform
the audit.
C) continuity of staff members from year to year should not be a factor.
D) staff assigned to the audit must be knowledgeable about the client's industry.
Answer: D
Terms: Selection of audit staff for engagement
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

20) When developing the overall strategy for the audit, the auditor will
A) decide whether to accept a new client.
B) determine if any audit specialists will be required.
C) identify why the auditor needs an audit.
D) obtain an engagement letter.
Answer: B
Terms: Overall strategy for the audit
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

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21) Which is usually included in an engagement letter?
A)
Estimate of hours required to Dollar estimate of fees to be billed to
complete audit the client
Yes Yes

B)
Estimate of hours required to Dollar estimate of fees to be billed to
complete audit the client
No No

C)
Estimate of hours required to Dollar estimate of fees to be billed to
complete audit the client
Yes No

D)
Estimate of hours required to Dollar estimate of fees to be billed to
complete audit the client
No Yes

Answer: D
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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22) Which is usually included in an engagement letter?
A)
Identification of the financial
The objectives of the reporting framework used by
engagement management
Yes Yes

B)
Identification of the financial
The objectives of the reporting framework used by
engagement management
No No

C)
Identification of the financial
The objectives of the reporting framework used by
engagement management
Yes No

D)
Identification of the financial
The objectives of the reporting framework used by
engagement management
No Yes

Answer: A
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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23) Which is usually included in an engagement letter?
A)
The financial statements are
the responsibility of the Ratios to be used by the auditor in
company's management the planning phase
Yes Yes

B)
The financial statements are
the responsibility of the Ratios to be used by the auditor in
company's management the planning phase
No No

C)
The financial statements are
the responsibility of the Ratios to be used by the auditor in
company's management the planning phase
Yes No

D)
The financial statements are
the responsibility of the Ratios to be used by the auditor in
company's management the planning phase
No Yes

Answer: C
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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24) When may the auditor refer to a specialist in the audit report?
A)
Only if the specialist's report Only if the specialist assisted in the
results in a modification of the audit audit of an account material to the
opinion financial statements
Yes Yes

B)
Only if the specialist's report Only if the specialist assisted in the
results in a modification of the audit audit of an account material to the
opinion financial statements
No No

C)
Only if the specialist's report Only if the specialist assisted in the
results in a modification of the audit audit of an account material to the
opinion financial statements
Yes No

D)
Only if the specialist's report Only if the specialist assisted in the
results in a modification of the audit audit of an account material to the
opinion financial statements
No Yes

Answer: C
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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25) Which is usually included in the engagement letter?
A)
Name(s) of the client personnel
The projected type of opinion on the responsible for supplying the auditor with
financial statement to be audited information
Yes Yes

B)
Name(s) of the client personnel
The projected type of opinion on the responsible for supplying the auditor with
financial statement to be audited information
No No

C)
Name(s) of the client personnel
The projected type of opinion on the responsible for supplying the auditor with
financial statement to be audited information
Yes No

D)
Name(s) of the client personnel
The projected type of opinion on the responsible for supplying the auditor with
financial statement to be audited information
No Yes

Answer: B
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

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26) Which is usually included in the engagement letter?
A)
List of audit procedures to be used The auditors' assessment of audit
in inventory observation risk
Yes Yes

B)
List of audit procedures to be used The auditors' assessment of audit
in inventory observation risk
No No

C)
List of audit procedures to be used The auditors' assessment of audit
in inventory observation risk
Yes No

D)
List of audit procedures to be used The auditors' assessment of audit
in inventory observation risk
No Yes

Answer: B
Terms: Engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

27) Discuss the factors an auditor should consider before accepting a company as an audit client.
Answer: The auditor should investigate and consider the prospective client's standing in the
business community, financial stability, management's integrity, and relations with its bankers,
attorneys, and previous CPA firm. The auditor should also determine whether he or she
possesses the required competence and independence to do the audit.
Terms: Factors to consider before accepting audit client
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

28) Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?
Answer: The purpose of an audit engagement letter is to establish a clear understanding between
the auditor and the client regarding the terms of the engagement. An engagement is required for
both public and private company audits.
Terms: Reasons for an audit and audit evidence
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

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29) Discuss the essential activities involved in the initial planning of an audit.
Answer: There are four essential activities involved in the initial planning of an audit. These are:
1. Client acceptance or continuation. In the case of a new client, the auditor must determine
whether the client is one with which they wish to be associated with. In the case of a continuing
client, an auditor must determine whether continuing the relationship is appropriate and in the
firm's best interest.
2. The auditor should identify why the client wants or needs an audit. The auditor should
determine the reason for the audit as soon as practical. The remainder of the planning activities
may be impacted by the client's reason for requesting the audit.
3. Obtain an understanding with the client about the terms of the engagement. An
understanding with the client should be obtained to avoid misunderstandings. Auditors are
required to obtain an understanding with their clients. This understanding must be written.
4. Develop an overall audit strategy. The strategy should consider the reasons for the audit,
including engagement staffing and any required audit specialists. Setting a strategy helps the
auditor determine the resources required for the engagement.
Terms: Essential activities involved in initial planning of audit
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

30) Discuss the required communications between predecessor and successor auditors.
Answer: Auditing standards require a successor auditor to communicate with the predecessor
auditor whenever accepting a client that has been previously audited. The purpose of the
communication is to help the successor auditor evaluate whether to accept the engagement.
While the burden of initiating the communication rests on the successor auditor, the predecessor
auditor must respond to the request for information. However, because of the requirements
related to confidentiality, the predecessor must obtain the former client's permission prior to
providing information to the successor.
Terms: Required communications between predecessor and successor auditors
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

18
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31) Discuss several reasons why an auditor may not wish to continue a relationship with an
existing audit client.
Answer: There are a number of reasons an auditor may choose not to continue a relationship
with an existing client. Examples include:
1. previous conflicts over the appropriate scope of the audit, the type of opinion to issue, unpaid
fees, or other matters
2. management integrity may be deemed to be insufficient
3. legal action initiated by either the auditor or client related to prior audit services
4. the presence of excessive risk which could result in financial failure of the client or lawsuits
against the audit firm
Terms: Reasons auditor may not wish to continue relationship with existing audit client
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

32) Discuss four of the matters that should be specified in an engagement letter.
Answer: Matters that should be specified in the engagement letter include:
• the objectives of the engagement
• the responsibilities of the auditor and management
• identification of the financial reporting framework used by management
• reference to the expected form and content of the audit report
• the engagement's limitation
• an agreement as to any other services to be provided
• restrictions to be imposed on the auditor's work
• deadlines for completing the audit
• assistance to be provided by the client's personnel in obtaining records and documents and
schedules to be prepared for the auditor
• agreement on fees
• auditor cannot guarantee that all acts of fraud will be discovered
Terms: Items included in engagement letter
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

33) Before accepting a new client, most CPA firms investigate the company to determine its
acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting
certain parties–namely the company's attorneys and bankers–during this investigation.
Answer: FALSE
Terms: Acceptance of new client
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

19
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34) For prospective clients that have previously been audited by another CPA firm, the
predecessor auditor must initiate the communication with the successor auditor.
Answer: FALSE
Terms: Communications between predecessor and successor auditors
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

35) When a successor auditor contacts a company's previous auditor, the predecessor auditor is
required to respond fully and without limit to the request for information.
Answer: FALSE
Terms: Communications between predecessor and successor auditors
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

36) A predecessor auditor who has been contacted by a successor auditor for information about
the client does not have to obtain permission from the former client before providing any
confidential information to the successor auditor because the confidentiality requirement does
not extend to former clients.
Answer: FALSE
Terms: Communications between predecessor and successor auditors
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

37) An auditor must evaluate a specialist's professional qualifications and understand the
objectives of the specialist's work.
Answer: TRUE
Terms: Auditor evaluates specialist's work
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

38) Because of audit risk, some CPA firms now refuse any new clients in certain high-risk
industries.
Answer: TRUE
Terms: Audit risk
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

20
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39) An engagement letter establishes a clear understanding of the terms of the engagement
between the client and the auditor.
Answer: TRUE
Terms: Engagement letter
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

40) Because auditors are responsible for having appropriate competence and capabilities to
perform an audit, auditors are not normally permitted to consult with outside specialists during
an audit engagement.
Answer: FALSE
Terms: Use of outside specialists during audit engagement
Diff: Easy
Objective: LO 8-2
AACSB: Reflective thinking

41) If a prospective client has been audited in the past, the successor auditor will typically rely
solely on the representations about the client by the predecessor auditor.
Answer: FALSE
Terms: Communications between predecessor and successor auditors
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

42) A major consideration in audit staffing is the need for continuity from year to year.
Answer: TRUE
Terms: Consideration in assigning staff to audit engagement
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

43) When a successor auditor requests information from a company's previous auditor, and there
are legal problems or disputes between the client and the predecessor auditor, the predecessor
auditor's response to the new auditor may be limited to stating that no information will be
provided.
Answer: TRUE
Terms: Communications between predecessor and successor auditors
Diff: Moderate
Objective: LO 8-2
AACSB: Reflective thinking

21
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44) Staff assigned to an audit engagement must be knowledgeable about the client's industry.
Answer: TRUE
Terms: Selection of audit staff for engagement
Diff: Challenging
Objective: LO 8-2
AACSB: Reflective thinking

8.3 Learning Objective 8-3

1) In order to obtain an understanding of the client's business, the audit firm will consider
A) inherent and control risk of the client.
B) audit risk to the CPA firm.
C) the client's business risk and the risk of material misstatements in the financial statements.
D) the CPA firm's potential ongoing revenue from the audit client.
Answer: C
Terms: Understanding the client's business and industry
Diff: Moderate
Objective: LO 8-3
AACSB: Reflective thinking

2) Most auditors assess the risk of material misstatement as high for related parties and related-
party transactions because
A) of the unique classification of related-party transactions required on the balance sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement.
D) it is required by generally accepted accounting principles.
Answer: B
Terms: Risk of material misstatement assessed high for related party transactions
Diff: Easy
Objective: LO 8-3
AACSB: Reflective thinking

3) A tour of the client's facilities provides the auditor an opportunity to

A) meet key personnel.
B) observe operations.
C) assess physical safeguards over assets.
D) all of the above
Answer: D
Terms: Understand responsibilities of the auditor and company for the audit
Diff: Moderate
Objective: LO 8-3
AACSB: Reflective thinking

22
Copyright © 2017 Pearson Education, Inc.
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