Audit Exam 2

Clara, a CPA, has been engaged by Baxter Manufacturing Co., a nonissuer, to perform a financial statement audit. during the audit, Clara noticed that the company had a small number of employees. She also observed that Employee A's job responsibilities included handling wire transfers, posting journal entries, and reconciling bank accounts. Employee A's manager performs a supervisory review of all posted journal entries and bank reconciliations. Employee A's manager is performing this review because: 1. It is compensating control that can limit the severity of a control deficiency, and may prevent it from being identified as a significant deficiency or weakness. 2. By not having appropriate segregation of duties, Employee A has a better opportunity to commit fraud. a. 1 and 2 b. 2 only c. neither 1 or 2 d. 1 only

a. 1 and 2 a compensating control is a control that limits the severity of a control deficiency, and may prevent it from being identified as a significant deficiency or weakness. because the company has a small number of employees and does not have appropriate segregation of duties, the compensating control has been implemented to limit an employee's opportunity to commit fraud.

Ann Able, CPA, is considering forming a partnership with Ben Brown for the purpose of practicing public accounting. Which of the following is true? a. Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs b. if Brown is not a CPA, he may not participate in the management of the partnership c. if Brown is not a CPA, he need not conform to the AICPA Code of Professional Conduct d. the AICPA's Code of Professional Conduct requires Brown to be a CPA

a. Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs the partnership may be created and public accounting services may be performed if the form of organization if permitted by law or regulation, provided that its characteristics conform to resolutions of the AICPA Council. moreover, the firm may designate itself as "members of the AICPA" of all CPA-owners are members. however, the partnership is not permitted to represent itself as a partnership of CPAs

Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct? a. Paul Fall, CPA, Endorsed by AICPA b. Paul Fall, CPA, Free Consultation c. Paul Fall, CPA, Fluency in Spanish and French d. Paul Fall, CPA, JD from Evans Law School 2012

a. Paul Fall, CPA, Endorsed by AICPA Solicitation may not be false, misleading, or deceptive. Thus, a CPA may not claim to be endorsed by the Institute. The AICPA does not make endorsements. A member, however, may state that they are a member.

Which of the following violates the AICPA's Code of Professional Conduct? a. a member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually b. a partner in a CPA firm is elected to public office. after her withdrawal from the firm, the remaining partners continue to use a firm name that includes her name c. a member contracts with a service entity to maintain a client's computer hardware and charges the client a higher servicing fee than that charged to the member by the service provider d. a member not in public practice is a bank controller who is designated as a CPA on bank stationary and in bank advertisements listing officers of the bank

a. a member shares offices with another member. their joint letterhead implies that a partnership exists when each member is in fact practicing individually two CPA's who are in fact not in partnership should not use a letterhead showing both names. furthermore, some courts have held that such an arrangement may be a de facto partnership, and the individual CPAs may be liable for the obligations of the de facto partnership and of the de facto partners.

The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the... a. actual fee would be substantially higher b. fee was a competitive bid c. CPA would not be independent d. actual fee would be substantially lower than the fees charged by other CPAs for the comparable services

a. actual fee would be substantially higher the Code prohibits forms of solicitation that are false, misleading, or deceptive. A representation that specific services will be performed for a stated fee, when it is likely at the time that the actual fee will be substantially higher, is a prohibited form of solicitation

what is the definition of fraud in an audit of financial statements? a. an intentional act that results in a material misstatement in financial statements that are subject of an audit b. the unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure c. management's inability to design and implement programs and controls to prevent, deter, and detect material misstatements

a. an intentional act that results in a material misstatement in financial statements that are subject of an audit

The design or operation of a control may not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. this circumstance is a... a. control deficiency b. critical deficiency c. significant deficiency d. material weakness

a. control deficiency a control deficiency may arise either in the design or operation of a control. it is the lowest level of deficiency identified in the standards. a design deficiency results when 1) a necessary control is missing or 2) a control operating as designed does not meet the control objective. an operating deficiency results when 1) a properly designed control does not function as designed or 2) the person performing the control does not have the authority or competence to perform it effectively

Clara, a CPA, has been engaged by Teton Manufacturing Co., to perform an integrated audit. During the audit of internal control, Clara noted that Employee A's job responsibilities included being the cashier who has custody over cash and performing the reconcilitation of the accounts receivable subsiduary ledger to the general ledger. This control deficiency is best described as: a. control deficiency in design b. significant deficiency c. control deficiency in operation d. material weakness

a. control deficiency in design control deficiency in design occurs when a necessary control is missing or when an existing control does not achieve the desired objective. the fact that employee A has both the custody and recording functions is a lack of segregation of duties.

According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested? a. the CPA's working papers consisting of analyses and schedules prepared by the client at the CPA's request b. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid c. Client-provided records requested for a second time because the client misplaced the first set of records d. Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to completion of the engagement

b. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid Under the Acts Discredible Rule, clinet-provided records must be returned after a client request without exception even if fees are due. Cleint-provided records are the client's accounting or other records, including hardcopy and electronic reproductions, that were rpovided to the member by, or for, the client.

Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation? a. there are no prohibitions regarding the manner in which members may solicit new business b. a member may advertise in any manner that is not false, misleading, or deceptive c. all forms of advertising and solicitation are prohibited d. a member may only solicit new clients through mass mailings

b. a member may advertise in any manner that is not false, misleading, or deceptive According to the Advertising and Other Forms of Solicitation Rule in the AICPA Code of Professional Conduct, a member in public practice may not advertise in a manner that is false, misleading, or deceptive. furthermore, a member may not solicit clients through coercion, overreaching, or harassing conduct

Each of the following statements is correct regarding the likely sources of potential misstatements in an integrate audit except: a. the controls that mgmt has implemented to address potential sources of misstatements should be identified b. an evaluation of the entity's information technology risk and controls should be performed separately from the top-down approach c. an understanding of how transactions are initiated, authorized, processed, and recorded should be achieved d. walkthroughs are frequently the most effective way of understanding sources of potential misstatements

b. an evaluation of the entity's information technology risk and controls should be performed separately from the top-down approach the auditor begins an integrated audit at the statement level by understanding overall risks to internal control over financial reporting. they then focus on entity-level controls and work down to significant classes of transactions, account balances, disclosures, and their relevant assertions. examples of entity level controls: 1. the control environment 2. controls over mgmt override 3. monitoring the results of operations 4. controls over the period-end financial reporting process 5. monitoring of other controls and 6. the risk assessment process

Clara, a CPA, has been engaged by Baxter Manufacturing Co. to perform a financial statement audit. No misstatements were identified during the audit. Which of the following may exist even though no misstatements were identified? a. significant deficiencies b. both significant deficiencies and material weaknesses c. neither significant deficencies nor materal weaknesses can exist if no misstatements were identified d. material weaknesses

b. both significant deficiencies and material weaknesses

What advertising activity by an AICPA member is considered false, misleading, or deceptive? a. a statement of professional attainments b. creation of unjustified expectations of favorable results c. self-laudatory advertising d. in-person solicitation

b. creation of unjustified expectations of favorable results According to the Advertising and Other Forms of Solicitation Rule, advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest and AICPA members in public practice shall not seek to obtain clients in such a manner. Creating false or unjustified expectations of favorable results is misleading.

According to SEC independence regulations, a. no partner may sell nonaudit services to the client during the audit b. preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit c. the issuer must diclose only those fees paid to the accountant for audit work d. all audit partners must rotate every 5 years

b. preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit Audit committees ordinarily must preapprove the services performed by accountants (permissible nonaudit services and all audit, review, and attest engagements). approval must be either explicit or in accordance with detaled policies and procedures. if approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed d. is wrong bc only lead partners must rotate every 5 years, secondary must rotate every 7

Which of the following controls is least likely to be used to safeguard cash? a. segregation of duties b. receiving reports c. lock box

b. receiving reports receiving reports may help to prevent the theft of inventory, but will generally not control the theft of cash

Which of the following is not correct regarding the interrelationship between a financial statement audit and an audit of internal control during an integrated audit? a. the auditor should consider the results of tests of controls from the audit of internal control when performing the financial statement audit b. the auditor should only consider material weaknesses found during the audit of internal control when determining the nature, timing, and extent of substantive tests in the financial statement audit c. the auditor should consider whether misstatements noted during the financial statement audit indicate that controls are not functioning effectively d. when forming an opinion on internal control, the auditor should consider the results of tests of controls performed during the financial statement audit

b. the auditor should only consider material weaknesses found during the audit of internal control when determining the nature, timing, and extent of substantive tests in the financial statement audit if, during the audit of internal control, a deficiency is noted, the auditor should consider any deficiency in determining the nature, timing, and extent of substantive tests in the financial statement audit

Which of the following is the relevant authoritative literature for an audit on internal control of a nonissue (private co)? a. AICPA Statements on Standards for Accounting and Review Services b. PCAOB Auditing Standards c. AICPA Statements on Auditing Standards d. PCAOB Attestation Standards

c. AICPA Statements on Auditing Standards SAS's is the appropriate authoritative literature for both an audit of internal control and a financial statement audit of a nonissuer

a bank cutoff statement is least likely to detect: a. an error corrected by the bank soon after year-end b. omission of checks that were written prior to year end from the outstanding check list on the bank reconciliation c. application of cash receipts from one customer to another custoemr's account (lapping) d. inclusion of a nonexistent deposit in transit on the bank reconciliation

c. application of cash receipts from one customer to another custoemr's account (lapping) lapping is detected through confirmation of accounts receivable and comparing information on remittance advices and deposit slips with the cash receipts journal

Which of the following represents an insufficient control over cash receipts for a large company? a. a lockbox is used for customer payments b. the accounts receivable department matches the details from the bank deposit ticket with the details from the remittance advices c. checks received are endorsed by the cashier and deposited by the mail custodian on a daily basis d. a triplicate detail listing of cash receipts is sent to the cashier (along with cash receipts), accounting department, and accounts receivable department

c. checks received are endorsed by the cashier and deposited by the mail custodian on a daily basis the cashier is responsible for preparation and making of the bank deposit on a daily basis. because cash collections must be restrictively endorsed and deposited by the cashier, allowing the mail custodian to make the deposits, which have already been endorsed, is an internal control weakness over cash receipts

an auditor is in the process of designing substantive analytical procedures for a client audit. all of the following would be considered an analytical procedure except for: a. comparing the current year's net sales and net earnings to the client's budget b. examining the relationship between the reported net accounts receivable balance and the client's historical receivable delinquency rates c. determining the accuracy of the client's reported year-end cash and cash equivalents balance d. comparing the inventory balance of this year versus the prior year

c. determining the accuracy of the client's reported year-end cash and cash equivalents balance designing a procedure to determine the accuracy of the client's reported year-end account balance would be a test of details not an analytical procedure. in contrast, analytical procedures focus on the relationships between financial, ratio, and nonfinancial data

a service organization processes payroll data having a material effect on the financial statements of an audit client. the client has established certain internal controls over input and output data. if the user auditor intends to rely on the operating effectiveness of the service organization's controls, which of the following statements is false? a. the user auditor may need to perform tests of service org IC to provide a basis for relying on the controls b. if certain relevant controls exist only at the service organization, the user auditor must evaluate the operating effectiveness of those controls to place reliance on the controls c. if certain relevant controls exist only at the service organization and a service auditor issues a report only on the design of the controls, the user auditor may use the report as a basis for reliance on the controls d. the user auditor will want to rely on a Type II SOC 1 report

c. if certain relevant controls exist only at the service organization and a service auditor issues a report only on the design of the controls, the user auditor may use the report as a basis for reliance on the controls The evaluation of operating effectiveness should be based on 1) the user auditors test of controls at the service org, 2) the work of another auditor that tests the controls on the user auditors behalf 3) an appropriate type 2 service auditors report the service auditor may provide 2 types of reports: a type 1 report expresses an opinion on the fair presentation of mgmt's description of the system that was designed and implemented and whether the controls are suitably designed. a type 2 report expresses type 1 opinions but also an opinion on whether the controls are operating effectively (meeting the control objectives). mgmt must give the service auditor a written assertion about everything needed for type 1 and 2 reports. the system description and the opinion on it addresses the period covered by the tests of operating effectiveness (type 2). accordingly, a type 1 service auditor's report is not a basis for the user auditor's reliance on the effectiveness of the service orgs controls

A public accounting firm was performing an integrated audit for Lenon Co. The audit team noted the following control deficiencies during the audit. Which of these control deficiencies would be least likely ot be considered a material weakness? a. fraud committed by senior management b. audit team identification of a material misstatement that Lenon Co.'s controls would not have detected c. inadequate design of an IT control

c. inadequate design of an IT control this is an example of a deficiency in the design but not necessarily a material weakness

When performing an integrated audit, auditors are not responsible for... a. determining the effect of any identified control deviations on the assessment of risk associated with the control b. obtaining more evidence for controls that are subject to a greater risk of failure c. obtaining sufficient evidence to support an opinion about the effectiveness of each individual control d. incorporating an element of unpredictability into the testing

c. obtaining sufficient evidence to support an opinion about the effectiveness of each individual control auditors are responsible for obtaining sufficient evidence to support an opinion about the effectiveness of the entity's internal control overall. it is not necessary to obtain evidence regarding each individual control

Which of the following would not be considered an entity-level control? a. period-end financial reporting controls b. biannual distribution of the code of conduct via intranet c. periodic comparison of actual assets with amounts shown in the accounting records d. risk assessment process controls

c. periodic comparison of actual assets with amounts shown in the accounting records periodic comparison of actual assets with amounts shown in the accounting records is a control activity related to the existence of specific assets. It is not an entity-level control. The rest are considered entity-level controls, as they have a pervasive effect on a company's internal control

According to the PCAOB, an accounting firm is most likely to be independent of its audit client if: a. the firm's audit professional is responsible for internal control over financial reporting b. the firm's audit professional implemented the client's internal control over financial reporting c. the firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed d. a reasonable investor would conclude that it is not objective and impartial

c. the firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed a firm is not independent of its audit client if, during the audit engagement period, it provides any nonaudit service related to marketing, planning, or expressing an opinion in favor of the tax treatment of aggressive tax-position transactions for the purpose of tax avoidance. However, this rule does not apply if the tax treatment is at least more likely than not to be allowable by tax law

Richard, CPA, performs compilation services for Norton Corporation, a nonpublic entity. The compilation reports issued by Richard disclose lack of independence and are not used by third parties. Richard has accepted a commission from a software company for recommending its products to Norton. The commission agreement was disclosed to Norton. Richard also refers Norton to Cruz, CPA, who is more competent with respect to engagements involving the industry in which Norton operates. Cruz performs an audit of Norton's financial statements and subsequently remits to Richard a portion of the fee collected. The referral fee agreement was likewise disclosed to Norton. Richard accepts the fee. Who, if anyone, has violated the Code of Professional Conduct? a. only Cruz b. only Richard c. Both Richard and Cruz d. Neither Richard nor Cruz

d. Neither Richard nor Cruz A commission is "compensation, except a referral fee, for recommending or referring any product or service to be supplied by another person" (FTC Order dated Aug 3, 1990). Receipt of a disclosed commission is prohibited only if the CPA performs for the client an audit, a review, a compilation when the report will be used by third parties and the report does not disclose the CPA's independence, or an examination of prospective financial information. A referral fee is "compensation for recommending or referring any service of a CPA to any person" (same FTC order). Referral fees are allowed if they are disclosed to the client. Consequently, Richard has not violated the Code by accepting either the disclosed commission or the disclosed referral fee. Cruz has not violated the Code by paying the disclosed referral fee.

Which of the following functions represents a weakness in internal control related to cash disbursements? a. the Treaasurer receives the unpaid voucher packages and then prepares, signs, and mails the checks b. the general accounting department posts the payments to the general ledger afterreceiving the paid vouchers c. voucher packages are prepared and approved by the accounts payable department and then forwarded to the Treasurer for payment d. after the checks are mailed, the Treasurer returns the voucher packages to the account payable department for cancellation of the voucher and filing of the documents

d. after the checks are mailed, the Treasurer returns the voucher packages to the account payable department for cancellation of the voucher and filing of the documents The accounts payable department is responsible for preparing and verifying the accuracy of supporting documents and approving the unpaid voucher. the voucher package is then forwarded to the Treasurer, who reviews the documentation, and signs and mails the checks to the vendors. the Treasurer is responsible for cancelling the voucher packages and maintaining them in a cancelled voucher package file. to have the account payable department cancel the voucher packages would be a weakness in internal control, as voucher packages could be resent to the Treasurer again for payment at a later date.

Which of the following is considered a fraudulent activity? a. a mistake in the application of accounting principles relating to amount, classfication, manner of presentation, or disclosure b. a mistake in gathering or processing accounting data from which financial statements are prepared c. an incorrect accounting estimate arising from oversight or misinterpretation of facts d. misappropriation of assets

d. misappropriation of assets Fraud is an intentional act involving the use of deception that results in misstatement of the financial statements. Two types of fraud that are relevant to the auditor are 1) misstatements arising from fraudulent financial reporting and 2) misstatements arising from misappropriation of assets

on receiving a client's bank cutoff statement, an auditor most likely will trace: a. deposits recorded in the cash receipts journal after year end to the cutoff statement b. deposits in transit listed in the cut-off statement to the year-end bank reconciliation c. checks dated after year-end listed in the cut-off statement to the year-end outstanding checklist d. prior-year checks listed in the cutoff statement to the year-end outstanding checklist

d. prior-year checks listed in the cutoff statement to the year-end outstanding checklist a cutoff bank statement should be used to test reconciling items on the year-end bank reconciliation (deposits in transit and outstanding checks). analysis of a cutoff bank statement is a procedure that entails consideration of a bank statement for part of a month that includes canceled checks and other credit/debit memos. the cutoff bank statement covers at least 7 business days following the client's year end, thus permitting the auditor to verify that deposits in transit and checks outstanding listed on the client's year end bank reconciliation have been recorded by the bank. tracing prior-year checks listed in the cutoff statement to the year-end outstanding checklist in the bank reconciliation helps the auditor to detect outstanding but unrecorded checks at year end (an overestatement of cash)

Which of the following is not required of an auditor during the integrated audit of an entity that uses a service organization? a. obtain evidence that controls are operating effectively b. obtain the service auditor's report c. perform additional procedures if the date specified in mgmt's assessment is significantly beyond the time period covered by the service auditor's report d. visit the service organization facility

d. visit the service organization facility an auditor may visit the service org facility, but that is not required when an entity uses a service org as part of internal control