AUDITING THEORY
PRACTICE EXAM 35
QUESTIONS
Question 1: Which set contains all �ve basic elements of an assurance engagement?
Choices:
1) Three-party relationship, appropriate subject matter, suitable criteria, su�cient appropriate evidence, written assurance report 2) Two-party relationship, �nancial statements, accounting standards, sampling, oral report 3) Management assertion, audit plan, internal control, materiality, management letter 4) Practitioner, client contract, audit risk, analytical procedures, modi�ed opinion Correct Answer: Three-party relationship, appropriate subject matter, suitable criteria, su�cient appropriate evidence, written assurance report Explanation: An assurance engagement has a three-party relationship, an appropriate subject matter, suitable criteria, su�cient appropriate evidence, and a written assurance report. These elements allow the practitioner to evaluate or measure the subject matter and communicate a conclusion.Page 1
Question 2: A practitioner performs a review of historical �nancial statements under the applicable review standard. Compared with an audit, what level of assurance is ordinarily provided?
Choices:
1) Absolute assurance supported by exhaustive testing 2) Limited assurance supported mainly by inquiry and analytical procedures 3) Reasonable assurance expressed through a positive-form opinion 4) No assurance because a review is a related service Correct Answer: Limited assurance supported mainly by inquiry and analytical procedures Explanation: A review is an assurance engagement that provides limited assurance, which is lower than the reasonable assurance obtained in an audit. The conclusion is ordinarily expressed in a negative form after procedures centered on inquiry and analytical review.Question 3: Which engagement is best classi�ed as an operational audit?
Choices:
1) Determining whether �nancial statements are fairly presented under the applicable �nancial reporting framework 2) Determining whether payroll tax �lings comply with statutory requirements 3) Evaluating whether a production department uses labor and equipment e�ciently while meeting performance objectives 4) Examining whether a borrower complied with a loan covenant Correct Answer: Evaluating whether a production department uses labor and equipment e�ciently while meeting performance objectives Explanation: An operational audit focuses on the economy, e�ciency, and e�ectiveness of operations. Financial statement audits address fair presentation, while compliance audits focus on adherence to laws, regulations, or contractual requirements.Page 2
Question 4: Why does an independent �nancial statement audit provide reasonable assurance rather than absolute assurance?
Choices:
1) Because auditors are permitted to ignore immaterial fraud 2) Because management, rather than the auditor, selects the �nancial reporting framework 3) Because an audit opinion covers only transactions selected by management 4) Because inherent limitations such as judgment, sampling, and the nature of audit evidence prevent elimination of audit risk Correct Answer: Because inherent limitations such as judgment, sampling, and the nature of audit evidence prevent elimination of audit risk Explanation: Audits have inherent limitations arising from judgment, sampling, persuasive rather than conclusive evidence, and the possibility of sophisticated collusion or management override. Therefore, audit risk can be reduced to an acceptably low level but not eliminated.Question 5: Before accepting an audit engagement for a new client, the successor auditor wants to communicate with the predecessor auditor. What should the successor auditor do �rst?
Choices:
1) Obtain the prospective client's permission to communicate with the predecessor auditor 2) Ask the predecessor auditor to send working papers without informing the client 3) Notify the securities regulator that the predecessor auditor will be contacted 4) Issue an engagement letter and then request permission after �eldwork begins Correct Answer: Obtain the prospective client's permission to communicate with the predecessor auditor Explanation: Professional communication with a predecessor auditor generally requires the prospective client's permission because relevant client information is con�dential. The communication helps the successor evaluate matters bearing on acceptance.Page 3