Chapter 02: Process of Assurance – Obtaining an Engagement 40 True/False Questions

 

40 True/False Questions

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1–10: True/False Questions on Engagement Letters

1. The engagement letter must be issued before the audit begins.
   Answer: True
   Explanation: The engagement letter formalizes the agreement and sets the scope before starting the audit.
2. An engagement letter should include the auditor’s liability limitations.
   Answer: False
   Explanation: Liability limitations are only included when legally permitted and agreed upon with the client.
3. Engagement letters must specify the form of the audit report.
   Answer: True
   Explanation: The engagement letter outlines the format and content of the audit report.
4. An engagement letter is only required for first-time engagements.
   Answer: False
   Explanation: Engagement letters are required for all clients and must be reissued if terms change.
5. The auditor can begin the audit without a signed engagement letter.
   Answer: False
   Explanation: A signed engagement letter is required to formalize the terms of the engagement.
6. The client’s acknowledgment of its responsibilities is included in the engagement letter.
   Answer: True
   Explanation: Management’s responsibilities, such as preparing financial statements, must be outlined.
7. Engagement letters are optional for recurring audits with the same client.
   Answer: False
   Explanation: Engagement letters should be issued for recurring audits to address any changes in terms.
8. Engagement letters help reduce disputes by clarifying terms.
   Answer: True
   Explanation: Clear terms in the engagement letter minimize misunderstandings and disputes.
9. The engagement letter is sent after substantive audit procedures begin.
   Answer: False
   Explanation: The engagement letter must be sent and agreed upon before the audit begins.
10. A reference to applicable financial reporting frameworks must be included in the engagement letter.
    Answer: True
    Explanation: This ensures the audit aligns with the relevant standards.

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11–20: True/False Questions on Client Acceptance

11. The auditor must perform client due diligence before accepting a new client.
    Answer: True
    Explanation: Due diligence ensures the auditor understands potential risks and complies with legal requirements.
12. Refusal to contact the previous auditor is a valid reason to decline an engagement.
    Answer: True
    Explanation: Lack of communication with the previous auditor may indicate underlying issues.
13. Client acceptance involves assessing the integrity of management.
    Answer: True
    Explanation: Management’s integrity is a critical factor in determining the risk of the engagement.
14. The client’s financial profitability is the most important factor in engagement acceptance.
    Answer: False
    Explanation: Ethical and legal compliance, not profitability, is the primary focus.
15. The auditor must accept all engagements if legally permitted.
    Answer: False
    Explanation: The auditor must assess risks, ethical concerns, and resource availability before acceptance.
16. The auditor should evaluate the adequacy of resources before accepting an engagement.
    Answer: True
    Explanation: Adequate resources, such as staff and expertise, are essential for effective audit execution.
17. Refusing client identification verification is grounds to decline the engagement.
    Answer: True
    Explanation: Verification is required for compliance with anti-money laundering regulations.
18. Communication with the previous auditor is mandatory for all engagements.
    Answer: False
    Explanation: It is required only if the client has previous auditors, and client permission must be obtained.
19. The auditor is required to ensure the client has strong internal controls before acceptance.
    Answer: False
    Explanation: The auditor evaluates risks but is not responsible for ensuring internal control strength.
20. High-risk engagements should always be declined.
    Answer: False
    Explanation: High-risk engagements can be accepted if risks are mitigated through expertise and additional procedures.

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21–30: True/False Questions on Ethical Considerations

21. Independence is a fundamental requirement for auditors when accepting engagements.
    Answer: True
    Explanation: Independence ensures the objectivity and credibility of the auditor’s work.
22. Familiarity with the client over a long period enhances independence.
    Answer: False
    Explanation: Long-term familiarity can impair independence and lead to biases.
23. Conflicts of interest must be disclosed to the client and addressed before engagement.
    Answer: True
    Explanation: Transparency in handling conflicts ensures compliance with ethical standards.
24. The auditor may accept engagements even if the client has unresolved disputes with regulators.
    Answer: False
    Explanation: Such disputes may pose ethical and legal risks and should be carefully evaluated.
25. Ethical concerns are secondary to financial profitability when accepting engagements.
    Answer: False
    Explanation: Ethical considerations take precedence over financial aspects.
26. Auditors can guarantee the accuracy of financial statements.
    Answer: False
    Explanation: Auditors provide reasonable assurance, not guarantees.
27. Auditors must assess their competence before accepting specialized engagements.
    Answer: True
    Explanation: Competence ensures the auditor can handle the engagement effectively.
28. Auditors can prepare financial statements for the client and conduct the audit.
    Answer: False
    Explanation: Preparing financial statements impairs independence and is a conflict of interest.
29. The auditor must ensure compliance with professional ethics during engagement acceptance.
    Answer: True
    Explanation: Ethical compliance is a critical aspect of the engagement acceptance process.
30. The auditor should refuse engagements where ethical threats cannot be mitigated.
    Answer: True
    Explanation: Ethical threats that cannot be addressed require the auditor to decline the engagement.

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31–40: True/False Questions on Risk Assessment and Engagement Processes

31. Risk assessment is optional during engagement acceptance.
    Answer: False
    Explanation: Risk assessment is critical to identifying potential challenges and deciding on acceptance.
32. Clients with dominant management personalities may pose higher risks.
    Answer: True
    Explanation: Dominant personalities increase the risk of bias and control overrides.
33. The engagement letter reduces the auditor’s liability entirely.
    Answer: False
    Explanation: While it helps manage liability, it does not eliminate it.
34. The auditor should assess both the client’s industry risks and internal risks.
    Answer: True
    Explanation: A thorough risk assessment includes external and internal factors.
35. Weak internal controls always result in a modified audit opinion.
    Answer: False
    Explanation: Weak controls require enhanced audit procedures, not necessarily a modified opinion.
36. The engagement letter must be updated annually for recurring clients.
    Answer: False
    Explanation: It is updated only when significant changes occur.
37. Refusal to allow access to records is grounds for declining the engagement.
    Answer: True
    Explanation: Access to records is essential for obtaining sufficient appropriate evidence.
38. High-risk engagements should involve additional planning and expertise.
    Answer: True
    Explanation: High-risk clients require enhanced procedures and experienced personnel.
39. The engagement letter should include the auditor’s responsibilities for fraud detection.
    Answer: False
    Explanation: The engagement letter clarifies that the auditor’s responsibility is to provide reasonable assurance, not to detect all fraud.
40. Money laundering risks must be addressed before accepting the engagement.
    Answer: True
    Explanation: Anti-money laundering compliance is a key requirement during client acceptance.