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21.     An understanding of a client’s external environment includes
medium     a.     general economic conditions.
     b.     the extent of competition within the industry.
     c.     regulatory requirements.
     d.     all of the above.
22.     Which of the following does SAS 45 not identify as a related party?
medium     a.     Affiliated companies.
     b.     Principal owners of the company.
     c.     Line employees of the company.
     d.     Members of company management.
23.     Related parties are commonly identified in which of the following ways?
medium     a.     Review of SEC filings.
     b.     Examination of stockholder listings.
     c.     Inquiry of management.
     d.     All of the above.
medium     A tour of the client’s facilities is helpful in obtaining an understanding of the client’s operations because
     a.     the auditor will be able to assess the physical safeguards over assets.
     b.     the auditor may be better able to assess certain inherent risks.
     c.     the auditor obtains a broader perspective about the company as a whole.
     d.     all of the above.
medium     Which of the following is the most likely first step an auditor would perform at the beginning of an initial audit engagement?
     a.     Prepare a rough draft of the financial statements and of the auditor’s report.
     b.     Study and evaluate the system of internal administrative control.
     c.     Tour the client’s facilities and review the general records.
     d.     Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.
26.     An auditor should examine minutes of the board of directors’ meetings
medium     a.     through the date of the financial statements.
     b.     through the date of the audit report.
     c.     only at the beginning of the audit.
     d.     on a test (sample) basis.
medium     The corporate minutes are the official record of the meetings of the board of directors and stockholders. The minutes typically include authorizations related to which of the following?
     a.     Significant acquisitions of property, plant and equipment.
     b.     Dividend payments.
     c.     Corporate officer compensation.
     d.     All of the above.
28.     Which of the following is correct with respect to a company’s corporate charter?
     a.     The corporate charter is granted by the federal government and is required to recognize the corporation as a separate entity.
     b.     The corporate charter includes the rules and procedures used to operate a corporation.
     c.     The corporate charter includes the exact name of the corporation, the date of incorporation, and the types of business the corporation is authorized to conduct.
     d.     None of the above is correct.
29.     Which of the following is true with respect to a company’s performance measurement system?
     a.     The risk of financial misstatements may be reduced if a company has some flexibility in its performance measurement system.
     b.     Performance measurement is focused on internal measures, not external measures (i.e., competitor performance measures).
     c.     A performance measurement system should include measures that aid the company in assessing progress towards its objectives.
     d.     All of the above are correct.
     In what order should the following steps occur?
     A. Assess client business risk
     B. Understand the client’s business and industry
     C. Perform preliminary analytical procedures
     D. Assess risk of material misstatements
     a.     D, B, C, A.
     b.     B, A, D, C.
     c.     B, D, A, C.
     d.     D, C, B, A.
31.     Which of the following steps would be least likely to occur in assessing a client’s business risk?
medium     a.     Evaluating management controls.
     b.     Obtaining an understanding of the client’s industry.
     c.     Assess risks of material misstatements.
     d.     All of the above are equally likely to occur.
32.     Which of the following statements is not correct with respect to analytical procedures?
medium     a.     SAS 56 emphasizes expectations developed by the auditor.
     b.     Analytical procedures should be performed in every phase of the audit.
     c.     Analytical procedures may be performed at any time during the audit.
     d.     Analytical procedures use comparison and relationships to assess whether account balances appear to be reasonable.
challenging     The purpose of the requirement in SAS No. 84 of having communication between the predecessor and successor auditor is
     a.     to allow predecessor to disclose information which would otherwise be confidential.
     b.     to help the successor auditor to evaluate whether to accept the engagement.
     c.     to help the client by facilitating the change of auditors.
     d.     to ensure that information which is provided to the SEC on Form 8-K will be accurate.
     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.     predecessor auditor has poor relations with successor auditor.
     b.     client is dissatisfied with predecessor’s work.
     c.     there are legal problems between client and predecessor.
     d.     predecessor believes that client lacks integrity.
35.     The engagement letter
challenging     a.     affects the CPA firm’s responsibility to external users of audited financial statements.
     b.     can be used to alter the auditor’s responsibilities under generally accepted auditing standards.
     c.     can affect legal responsibilities to the client.
     d.     is useful only if it is an audit engagement, but has no effect for review or compilation services.
36.     Which of the following is correct with respect to the use of analytical procedures?
     a.     Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption in the completion phase of the audit.
     b.     Analytical procedures must be used in the planning, testing, and completion phases of the audit.
     c.     When analytical procedures are used in the testing phase of the audit, their primary purpose is to indicate possible misstatements.
     d.     None of the above is correct.
37.     Which of the following statements is not correct?
     a.     Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client’s business and directing the auditor’s attention to areas that may contain possible misstatements.
     b.     Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may contain possible misstatements.
     c.     Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase.
     d.     Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern.
     Transactions with related parties are important to the auditors because they will be disclosed in the financial statements if material. Generally accepted accounting principles would not require disclosure of
     a.     the nature of the related-party relationship.
     b.     a description of transactions, including dollar amounts.
     c.     the amounts due from and to related parties.
     d.     Loans to officers during the year which had been repaid before the balance sheet date.

39.     Which of the following would not be classified as a related-party transaction?
challenging     a.     An advance of one week’s salary to an employee.
     b.     Sales of merchandise between affiliated companies.
     c.     Loans or credit sales to the principal owner or client.
     d.     Exchanges of equipment between two companies owned by the same person.
40.     Which of the following would not be found in the corporate charter?
challenging     a.     The kinds and amount of capital stock authorized.
     b.     The date of incorporation.
     c.     The types of business activity that the corporation is allowed to conduct.
     d.     The rules and procedures adopted by the stockholders.

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