Question

1. Consider the following statements:

        I. Per auditing standards, the successor [new] audit firm is required to initiate communication

            with the predecessor [old] audit firm.

       II. The predecessor auditor might communicate, to the successor auditor, information related to

            client management’s integrity.

      a. I is true;   II is true

      b. I is true;   II is false

      c. I is false; II is true

      d. I is false; II is false

2. “A letter that formalizes the contract between the auditor and the entity and outlines the

      responsibilities of both parties” is referred to as a(n):

      a audit letter.

      b. contact letter.

      c. engagement letter.

      d. management letter.

3. Certain accounts and transactions affect both the Income Statement and the Balance Sheet. If

      $25,000 is considered to be material to the income statement, but $30,000 is material to the

      balance sheet, the auditor should set overall materiality at which of the following dollar amounts?

      a. $25,000

      b.    30,000

     c.    55,000

      d.    None of the above. The answer is _____

4. Which of the following best describes the amount of misstatement an auditor is willing to accept and

       still not say the account balance is materially misstated?

      a. Tolerable misstatement.

      b. Overall financial statement materiality

      c. A clearly trivial amount

      d. Significant materiality

Answer 1

Given under are the answers to the Questions asked

1.Option b,

As per AU section 315, Communications between Predecessor and Sucessor Auditors,the sucessor auditor is bound by generally accepted audit Practices to initiate the communication towards Predecessor Auditor which makes Statement I true.While Predecessor Auditor is bound by the principle of Confidentiality making Statement II false.

2.Option c,

As per AU-C Section 210 Terms of Engagement.

3.Option a,

As per AS 2105 Consideration of Materiality in Planning and Performing an Audit.

4.Option a,

As per AS 2105 Consideration of Materiality in Planning and Performing an Audit.