Exam 1
Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because:
They generally see a potential conflict of interest between company managers who want to get loans
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They typically use financial and nonfinancial data aggregated at a high level.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They usually use financial and nonfinancial data aggregated at a high level.
The Niblock accounting firm audited JFK, Inc., a public company. Niblock also provided tax services to JFK, receiving as its fee 20% of any tax savings JFK enjoyed because of Niblock's advice. Which of the following is true?
This tax advice impairs independence because it was provided on a contingent fee basis.
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
a system of quality control
The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from:
acting in a managerial decision-making role for an audit client, auditing the firm's own work on an audit client, providing tax consulting to an audit client without audit committee approval
A material weakness is a situation in which
It is reasonably possible that a material misstatement would not be detected on a timely basis.
Assign management responsibilities in such a manner that commercial considerations do not override the quality of work performed.
Leadership responsibilities for quality within the firm
Devote sufficient resources to develop, communicate, and support the firm's quality control procedures.
Leadership responsibilities for quality within the firm
An audit plan contains:
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
An audit strategy memorandum contains:
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
Which of the following best describes the general contents of the first paragraph of the "Basis for Opinion" section of the auditors' report?
Statements identifying the responsibility of auditors and management in the financial reporting process.
Refers to the quantity of evidence, which is the number of transactions or components of an account balance of class of transactions examined by the audit team.
Sufficiency
Review engagement documentation, reports, and the client's financial statements.
monitoring
Considering whether a scope limitation precludes sufficient evidence to allow an opinion to be expressed on the entity's financial statements.
reporting
Auditing standards ______ analytical procedures at the planning and concluding stages of the audit.
require
Evaluating the audit firm personnel's independence with respect to a prospective client.
responsibilites
Possessing the appropriate competence and capabilities to perform the audit.
responsibilites
Evaluating the potential relationships between the auditor and family who are employed by the entity.
responsibilities
Exercising an appropriate level of professional skepticism.
responsibilities
When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion?
rights and obligations
________assessment procedures are performed when obtaining an understanding of the client.
risk
The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about:
valuation and allocation specifically the valuation part, the higher the credit rating the more likely the customer is to pay
The significance of accounts should be considered ______ regard to internal control.
without
Tests of controls are performed to determine whether key controls operate __________.
effectively
Often, analytical procedures are considered the most ____ procedures for a strong understanding of the client and its business.
efficient
The auditor's report is the ________ of an audit.
end product
Establish policies and procedures for resolving differences of opinion among firm personnel that arise during professional engagements.
engagement performance
Retain engagement documentation for a sufficient period of time to satisfy the needs of the firm, professional standards, laws, and regulations.
engagement performance
Unintentional omissions of amounts or disclosures is considered a(n) ________.
error
Mistakes in data processing can easily result in _______.
errors
Accounting ______ involve management's judgment or assumptions.
estimates
During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion?
existence
When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management's assertion regarding:
existence
When auditing the accounts receivable account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of:
existence
customer purchase order
external-internal document
insurance policy
external-internal document
utility bill
external-internal documents
An unmodified opinion indicates that the financial statements are presented
fairly
Financial statements can be misstated due to errors, ______, or noncompliance with laws or regulations.
fraud
In _______, the financial statements are intentionally misleading.
fraud
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
There will be a client-imposed scope limitation.
Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
detection
The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:
Detection risk.
Approves all standards for issuers.
SEC
The acceptable level of detection risk is inversely related to the
Assurance provided by substantive tests.
Which of the following is a preventive control?
Separation of duties between the payroll and personnel departments.
evidence obtained from internal sources
3rd hiearchy
An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor
Should assess the risk that the actuary's objectivity might be impaired.
Prior to accepting a new audit engagement, a public accounting firm should:
Attempt to contact the predecessor auditors, Evaluate the integrity of management, Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement.
The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to:
determine the nature, timing, and extent of further audit tests to be performed.
Which of the following would be considered an assurance engagement?
-Giving an opinion on a Prize -Giving an opinion on the conformity -Giving an opinion on the fair presentation
It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that?
A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.
Evidence by the auditor
1st hiearchy
evidence obtained from external sources
2nd hiearchy
Audit engagements are subject to peer review evaluations.
AICPA
Responsible for setting standards for the audits of non-issuers.
AICPA
Standards are issued for non-issuers through Statements on Auditing Standards.
AICPA
Apply to the audit of issuers.
AS
Become effective upon approval by the Securities and Exchange Commission.
AS
Issued by the Public Company Accounting Oversight Board.
AS
Which of the following topics is not addressed in the auditors' report for an issuer?
Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP.
Identify whether the firm possesses the competency, capability, and resources to appropriately serve a specific client.
Acceptance and continuance of client relationships and specific engagements
Analytical procedures used when planning an audit should concentrate on:
Accounts and relationships that can represent specific potential problems and risks in the financial statements.
Breaux & Co. CPAs require that all audit documentation indicates the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
Adequate planning and supervision
Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP?
Adverse opinion.
The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:
Allow the internal auditor to perform certain tests of internal controls.
A transaction-level internal control activity is best described as
An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.
Relates to others' perceptions of the auditors' independence.
Appearance
The auditors' firm provides extensive consulting services to the client; these services provide revenues to the firm that exceed revenues received from the audit engagement.
Appearance
Refers to the extent to which the audit team can trust the evidence.
Appropriateness - Reliability
Affected by the information the evidence provides to the audit team.
Appropriateness - relevance
Analytical procedures can be used in which of the following ways?
As a means of overall review near the end of the audit, As "attention-directing" methods when planning an audit at the beginning, As substantive audit procedures to obtain evidence during an audit.
It is acceptable under generally accepted auditing standards for an audit team to:
Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.
What is the primary objective of the fraud brainstorming session?
Assess the potential for material misstatement due to fraud.
Which of the following statements is not true with respect to the performance principle?
Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.
Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?
Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.
Address quality control standards developed within the accounting firm.
B
Require auditors to gather sufficient, appropriate evidence to support their opinion.
B
The spouse of the partner in charge of the audit engagement occupies an executive-level position within the client.
B
Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?
Being able to decide early what type of audit opinion to issue.
When completing the audit of internal controls for an issuer, AS 2201 requires auditors to test:
Both operating and design effectiveness.
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:
Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure.
During the course of an audit, the auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
Communicate the matter to those charged with governance.
An audit committee is:
Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.
To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for:
Confirmation of balances.
Which of the following best demonstrates the concept of professional skepticism?
Critically assessing verbal evidence received from the entity's management.
Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the:
Current file audit documentation.
Audit planning memorandum
Current year file
Bank confirmations
Current year file
Engagement letter
Current year file
Schedule for current year depreciation calculation
Current year file
A company backdates its executive stock options to lower the exercise price.
D
A company fails to fund its pension plan in accordance with ERISA.
D
A manufacturer inflates expenses on its corporate tax return.
D
A military contractor inflates the overhead applied to a combat vehicle.
D
An insurance company fails to maintain required reserves for losses.
D
In obtaining an understanding of an entity's internal control structure policies and procedures that are relevant to audit planning, an auditor is required to obtain knowledge about the
Design of the policies and procedures pertaining to the internal control structure elements.
According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to
Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
The evidence considered most appropriate by auditors is best described as:
Direct personal knowledge obtained through physical observation and mathematical recalculation.
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?
Disclaimer of opinion—significant deficiencies exist.
According to the AICPA, the purpose of an audit of financial statements is to:
Enhance the degree of confidence that intended users can place in the financial statements
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the
Estimate of the total likely misstatement is less than a material amount.
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:
Evaluate the effect of the noncompliance on the financial statements.
Once the auditor detects a control deficiency, which of the following steps must he or she take first?
Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.
Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee (or otherwise those charged with governance)?
Evidence of a lack of objectivity by those responsible for accounting decisions.
An auditor's permanent file audit documentation most likely will contain:
Excerpts of the corporate charter and bylaws.
Reflects an unbiased and impartial perspective with respect to the financial statement audit.
Fact
Relates to the auditors' "state of mind."
Fact
When completing the audit of internal controls for an issuer, the PCAOB requires the audit team to audit internal controls over:
Financial reporting.
Control risk should be assessed in terms of
Financial statement assertions.
When auditing the existence assertion for an asset, auditors proceed from the:
General ledger back to the supporting original transaction documents.
The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the
Government Accountability Office (GAO)
A coal mining company fails to place proper ventilation in its mines.
I
A retailer pays men more than women for performing the same job.
I
An exporter pays a bribe to a foreign government official so that government will buy its products.
I
Auditors perform analytical procedures in the planning stage of an audit for the purpose of:
Identifying unusual conditions that deserve more auditing effort.
Inherent risk and control risk differ from detection risk in which of the following ways?
Inherent risk and control risk exist independently of the audit.
The risk of material misstatement is composed of which audit risk components?
Inherent risk and control risk.
In planning an audit of certain accounts, an auditor may conclude that specific procedures used to obtain an understanding of an entity's internal control structure need not be included because of the auditor's judgments about materiality and assessments of
Inherent risk.
Which of the following is not a component of internal control?
Inherent risk.
_________ is (are) responsible for the financial statements.
Management
An auditor's engagement letter most likely would include
Management's acknowledgment of its responsibility for maintaining effective internal control.
With respect to the concept of materiality, which of the following statements is correct?
Materiality is a matter of professional judgment.
A distant relative of a partner within the firm occupies an entry-level position within the client of the firm. (The audit is conducted by another office of the firm with which the partner has infrequent contact).
N
A staff member within the firm owns shares of stock of one of that firm's clients. (She is not a member of the engagement team serving that client.)
N
Provide guidance for services lesser in scope than an audit engagement.
N
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must
Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.
Tests of controls in a GAAS audit are required for
Obtaining evidence about the operating effectiveness of client control activities.
Audit engagements are subject to evaluation, referred to as an "inspection."
PCAOB
Responsible for setting standards for the audits of issuers.
PCAOB
Standards are issued for issuers through Auditing Standards.
PCAOB
Which of the following is true with respect to PCAOB inspections of accounting firms?
PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.
Which of the following categories of principles is most closely related to gathering audit evidence?
Performance
Effectiveness of audit procedures would be reduced by
Performing procedures during the interim period as opposed to at the fiscal year-end date.
Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions?
Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.
Client organizational chart
Permanent file
Prior years' financial statements and audit reports
Permanent file
Royalty agreements
Permanent file
In an attestation engagement, a CPA practitioner is engaged to
Prepare a written report containing a conclusion about the reliability of a management assertion
Ordinarily, what source of evidence should least affect audit conclusions?
inquiry of management
Analytical procedures are generally used to produce evidence from:
Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.
Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?
Relevant ethical requirements.
Issuing a qualified opinion on the financial statements because of a material, yet not pervasive, departure from GAAP.
Reporting
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as:
Risk of material misstatement.
Apply to the audit of non-issuers.
SAS
Issued by the American Institute of Certified Public Accountants.
SAS
The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including
The auditor's testing of controls for the audit of internal control on an issuer, Misstatements detected during the financial statement audit, Any control deficiencies identified during the audit.
Which of the following is most closely related to the responsibilities principle?
The auditors' compliance with relevant ethical requirements of independence and due care.
Which of the following circumstances would most likely cause an audit team to perform extended procedures?
The client made several large adjustments at or near year-end.
Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?
The degree to which information technology is used in the accounting function.
Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into significant derivative transactions as hedges.
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
The entity's annualized interim financial statements.
Which of the following auditor concerns could most likely be so serious that the auditor concludes that a financial statement audit cannot be conducted?
The integrity of the entity's management is suspect.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
The prospective client is unwilling to make all financial records available to the CPA.
Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following:
The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.
After determining significance, the financial statement _______ come into determination.
assertions
The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?
bookkeeping services, internal auditing services, valuation services
An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of:
completeness
In auditing the accrued liabilities account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of:
completeness
Analytical procedures at the end of the audit help confirm the ______ reached.
conclusions
The PCAOB identifies each of the following as a financial statement assertion to be addressed by the auditor except for
cutoff
When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?
cutoff
______is another term for misappropriation of assets.
defalcation
Develop effective performance evaluation, compensation, and advancement procedures.
human resources
Develop policies and procedures to ensure that professionals are provided appropriate professional development opportunities.
human resources
The risk to investors that a company's financial statements may be materially misleading is called:
information risk
_______risk is the risk of material misstatement of an assertion without considering internal control.
inherent
copies of sales invoices
internal document
departmental budget
internal document
receiving report
internal document
remittance advice
internal document
Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard:
is not considered a sufficient basis for Jones to conclude that all expenses have been recorded
The final step of an audit is issuing the audit ________.
report
Considering the susceptibility of the account balance to misstatement to assess the risk of material misstatement.
performance
Establishing materiality levels for use in determining the amount of evidence to be gathered.
performance
Gathering sufficient, appropriate evidence.
performance
Planning the audit to provide reasonable assurance that the financial statements are free of material misstatement.
performance
The most reliable evidence regarding the existence of newly acquired computer equipment is:
physical observation
Audit _______ begins with determining the requirements for the engagement.
planning
Part of performing analytical procedures involves considering ________.
ratios
Routine transactions are for _____ activities.
recurring
Identify circumstances and relationships that create threats to independence and take appropriate action to eliminate those threats or reduce them to an acceptable level.
relevant ethical requirements
An account is ________ if there is a reasonable possibility that it could contain a misstatement that has a material effect on the financial statements.
significant
bank statement received directly from the bank
strictly external document
Analytical procedures can also be used as ______ procedures in testing.
substantive
What requirements are usually necessary to become licensed as a certified public accountant?
successful completion of the Uniform CPA Examination, experience in the accounting field, education
An audit report indicates that the audit evidence we have obtained is _______ to provide a basis for the opinion.
sufficient
An independent auditor must have which of the following?
technical training that is adequate to meet the requirements of a professional