ICAEW ARF · Chapter 2
Obtaining and accepting an engagement MCQs with Answers
8 multiple-choice questions on Obtaining and accepting an engagement for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under the Companies Act 2006, who normally appoints the auditor of a UK company on an ongoing basis?
- A) The board of directors
- B) The company secretary
- C) The shareholders (members)
- D) The audit committee of the audit firm
Show answer & explanation
Answer: C) The shareholders (members)
Auditors are normally appointed by the members, for example by ordinary resolution at a general meeting of a public company. Directors may appoint the first auditors or fill a casual vacancy, but the ongoing appointment rests with the members. This supports the auditor's independence from the directors on whose statements they report.
Question 2
A prospective auditor asks a potential new client for permission to contact the existing auditor. The client refuses. What should the prospective auditor do?
- A) Decline the appointment
- B) Accept the appointment but contact the existing auditor anyway
- C) Accept the appointment and perform extra substantive procedures to compensate
- D) Ask the Registrar of Companies whether there are any reasons not to accept
Show answer & explanation
Answer: A) Decline the appointment
Professional clearance requires the prospective auditor to seek the client's permission to communicate with the existing auditor. A refusal without good reason suggests the client may be hiding something, so the prospective auditor should decline. Contacting the existing auditor without permission would breach confidentiality, and extra testing cannot replace the information sought.
Question 3
What is the main purpose of an audit engagement letter?
- A) To confirm in writing the agreed terms of the engagement, including the responsibilities of the auditor and of management
- B) To report significant deficiencies in internal control to those charged with governance
- C) To set out the detailed audit procedures and sample sizes for the year
- D) To provide the auditor's opinion on the financial statements
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Answer: A) To confirm in writing the agreed terms of the engagement, including the responsibilities of the auditor and of management
The engagement letter records the agreed terms of the audit, such as its objective and scope, the respective responsibilities of auditor and management, the framework used and the form of reports expected. This reduces the risk of misunderstanding. Control deficiencies are reported separately, detailed procedures are in the audit plan, and the opinion is in the auditor's report.
Question 4
Which of the following would normally be included in an audit engagement letter?
- A) The auditor's assessment of materiality for the year
- B) Management's responsibility for preparing the financial statements and for internal control
- C) A list of the items to be selected for testing
- D) The internal control deficiencies the auditor expects to find
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Answer: B) Management's responsibility for preparing the financial statements and for internal control
Engagement letters set out the agreed terms, including management's acknowledgement of its responsibilities for the financial statements, internal control and giving access to information. Materiality and sample selections are planning judgements that are not shared in advance, otherwise the audit could become predictable. Deficiencies cannot be known before the audit work is performed.
Question 5
Which of the following is a precondition for an audit?
- A) The company has no history of material misstatements
- B) The auditor has already completed a full risk assessment
- C) The company's internal controls have been confirmed as effective
- D) Management agrees that it is responsible for giving the auditor access to all relevant information and people
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Answer: D) Management agrees that it is responsible for giving the auditor access to all relevant information and people
The preconditions for an audit are the use of an acceptable financial reporting framework and management's agreement to its responsibilities, including providing access to information. The auditor confirms these before accepting the engagement. A history of errors or weak controls affects risk assessment but does not prevent an audit, and the risk assessment happens after acceptance.
Question 6
Which of the following factors would most likely cause an audit firm to decline a new audit engagement?
- A) The client has been trading for only two years
- B) The client's year end is the same as many of the firm's other clients
- C) The client wants a fee estimate before the engagement is agreed
- D) The firm has no staff with experience of the client's specialised industry and cannot obtain such staff in time
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Answer: D) The firm has no staff with experience of the client's specialised industry and cannot obtain such staff in time
A firm should accept work only if it has the competence, capabilities and resources to perform it properly, so a lack of relevant expertise is a strong reason to decline. A young business, a busy year end or a request for a fee estimate are normal commercial matters that can be managed. Accepting work outside the firm's competence would breach the principle of professional competence and due care.
Question 7
Before accepting a new audit client, which of the following does the firm have to do under UK anti-money laundering requirements?
- A) Obtain a credit rating report to confirm the client can pay the audit fee
- B) Make a precautionary report about the client to the National Crime Agency
- C) Identify the client and verify its identity, including identifying its beneficial owners
- D) Obtain confirmations of all bank balances directly from the client's bank
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Answer: C) Identify the client and verify its identity, including identifying its beneficial owners
Customer due diligence requires firms to identify the client and verify its identity on reliable independent evidence, including who ultimately owns or controls it, before establishing the business relationship. Making a report without any suspicion is not required. Credit checks and bank confirmations may be useful but are not anti-money laundering requirements.
Question 8
A prospective auditor receives a reply from the existing auditor, with the client's permission, saying that the directors have previously given misleading information to the auditors. What should the prospective auditor do?
- A) Ignore it, since the existing auditor may simply be reluctant to lose the client
- B) Report the directors immediately to the police
- C) Accept the appointment but tell the directors what the existing auditor said
- D) Consider this information carefully when deciding whether to accept the appointment, as it raises doubts about management integrity
Show answer & explanation
Answer: D) Consider this information carefully when deciding whether to accept the appointment, as it raises doubts about management integrity
Professional clearance exists so that the prospective auditor learns of matters relevant to accepting the appointment. Concerns about management integrity increase the risk of the audit significantly and may lead the firm to decline. The information should not be dismissed, nor passed to the directors, and misleading the auditors is not by itself a matter for police reporting.