Exam 3

For each factor below, determine if the sample size for substantive testing should be smaller or larger. If the factor will not affect the sample size, choose "No difference." 1 High assessment of inherent risk 2 Low assessment of control risk 3 Low assessment of risk associated with other relevant substantive procedures 4 Higher expected frequency of misstatements 5 Smaller expected value of misstatements 6 Larger measure of tolerable misstatement for the account 7 Use of statistical sampling versus nonstatistical sampling

1. Larger 2. Smaller 3. Smaller 4. Larger 5. Smaller 6. Smaller 7. No difference

Which of the following items does the auditor need in order to determine a sample size for attribute sampling? Select "Yes" or "No" in each indicated cell below. 1. Projected rate 2. Risk of assessing control risk too low 3. Reliability level 4. Random number table 5. Estimated error rate 6. Standard deviation 7. Actual number of deviations found 8. Maximum tolerable rate 9. Control risk

1. No 2. No 3. Yes 4. No 5. Yes 6. No 7. No 8. Yes 9. No

Choose the correct term for each definition in the table below. 1. Allows the relative frequency of any interval to be determined by knowing only the mean and the standard deviation 2. Measures the extent to which the values of the items are spread about the mean 3. A measure of central tendency obtained by totaling all the values and dividing by the number of items 4. A concept expressed either quantitatively or qualitatively

1. Normal 2. Standard 3. Mean 4. Materiality

For each of the following audit objectives in the table below, select the substantive test that would most likely provide support for the objective. A substantive test may be used once, more than once, or not at all. 1. Verify existence of accounts receivable 2. Determine that inventory balance is accurately stated

1. Perform tests of subsequent cash receipts after the balance sheet date 2. Perform shipping cutoff procedures

A CPA's audit workpapers include a narrative description of the cash receipts and billing portions of the internal control of Parktown Medical Center, Inc. Parktown is a small health care provider owned by a publicly held (issuer) corporation. It employs 7 salaried physicians, 10 nurses, 3 support staff in a common laboratory, and 3 clerical workers. The clerical workers perform tasks such as reception, correspondence, cash receipts, billing, and appointment scheduling, and are adequately bonded. They are referred to below as the office manager, "Clerk 1," and "Clerk 2." Most patients pay for services by cash or check at the time services are rendered. Credit is not approved by the clerical staff. The physician who is to perform the respective services approves credit based on an interview with the patient. When credit is approved, the physician files a memo with the billing clerk (Clerk 2), who sets up the receivable using data generated by the physician. The attending physician prepares a charge slip that is given to Clerk 1 for pricing and preparation of the patient's bill. Clerk 1 transmits a copy of the bill to Clerk 2 for preparation of the revenue summary and for posting in the accounts receivable subsidiary ledger. The cash receipt functions are performed by Clerk 1, who receives cash and checks directly from patients and issues a prenumbered cash receipt to each patient. Clerk 1 opens the mail, immediately stamps all checks "for deposit only," and prepares a list of cash and checks for deposit by the office manager. The list of cash and checks together with the related remittance advices are forwarded by Clerk 1 to Clerk 2. Clerk 1 also serves as receptionist and performs general correspondence duties. Clerk 2 prepares and sends monthly statements to patients making payments during the month and also to those patients with unpaid balances. Clerk 2 also prepares the cash receipts journal and is responsible for the accounts receivable subsidiary ledger. Clerk 2 is the only clerical employee permitted access to the accounts receivable subsidiary ledger. When the physician who performed the respective services believes an account to be uncollectible and communicates uncollectible account approval to the office manager, the office manager issues a write-off memo to Clerk 2. Clerk 2 receives the memo and writes off the account. The office manager supervises the clerks, issues write-off memos, schedules appointments for the doctors, makes bank deposits, reconciles bank statements, and performs general correspondence duties. Additional services are performed monthly by a local accountant who receives summaries prepared by the clerks and posts them to the general ledger, prepares income statements, and files the appropriate payroll forms and tax returns. The accountant reports directly to the parent corporation. The following exercise presents a list of potential misstatements that could occur and not be prevented or detected by Parktown's internal control over the cash receipts and billing function. For each item, select the significant deficiency that could cause the misstatement. 1. Uncollectible accounts expense could be understated and accounts receivable could be overstated because of the lack of an appropriate credit check. 2. The cash balance per books may be overstated because not all cash is deposited. 3. Accounts receivable may be understated because write-offs of accounts receivable could be approved for accounts that are, in fact, collectible; or accounts receivable may be overstated because write-offs of accounts receivable might not be recorded for accounts that are uncollectible. 4. Uncollectible accounts expense could be either understated or overstated because the lack of established credit limits may make it more difficult to identify uncollectible amounts. 5. Uncollectible accounts expense could be either understated or overstated because of the lack of established write-off criteria. 6. Fees earned and accounts receivable may be understated because not all services performed might be reported for billing or the same two accounts might be overstated or understated because of the use of incorrect price or service date or because of mathematical errors. 7. Fees earned, cash receipts, and uncollectible accounts expense could be understated or overstated because of undetected differences between the subsidiary and general ledger, or fees earned, cash receipts, or accounts receivable could be understated because of failure to record billings, cash receipts, and write-offs accurately. 8. Fees earned and cash receipts could be understated because of omitted or inaccurate billing. 9. Uncollectible accounts expense could be overstated because write-offs of accounts receivable could be approved for accounts that are, in fact, collectible, or uncollectible accounts expense could be understated because write-offs of accounts receivable might not be initiated for accounts that are uncollectible.

1. The employees who perform services also are permitted to approve credit without an external credit check. 2. The employee who makes bank deposits also reconciles bank statements. 3. The employees who approve credit also approve write-offs of uncollectible accounts. 4. Credit is not granted on the basis of established limits. 5. Uncollectible accounts are not determined on the basis of established criteria. 6. There is no independent verification of the billing process. 7. Trial balances of the accounts receivable subsidiary ledger are not prepared independently of, or verified and reconciled to, the accounts receivable control account in the general ledger. 8. The employee who initially handles cash receipts also prepares billings. 9. The employees who approve credit also approve write-offs of uncollectible accounts.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. The allowance for sampling risk was:

4.5%.

What is the maximum number of days in which a nonissuer's auditor should complete the assembly of the final audit file following the report release date?

60 days

Which of the following statements concerning audit evidence is correct?

A client's accounting data cannot by itself be considered sufficient appropriate audit evidence to support the financial statements.

Which of the following matters most likely would be included in a management representation letter?

A confirmation that the entity has complied with contractual agreements

Which of the following is a subsequent event that occurs after the balance sheet date but before the audit report date, and should be adjusted to the financial statements in a financial statement audit?

A lawsuit pending is settled.

Which of the following procedures would yield the most appropriate evidence?

A recalculation of bad debt expense

What paragraph in the professional standards provides an example of a standard representation letter for a review?

AR-C 90.A215

During an engagement, the client's personnel make a variety of oral representations in response to questions raised by the auditor. The auditor should obtain written representations from the client's management to confirm the oral representations and to reduce any possible misunderstanding between the client and the auditor. What paragraph in the auditing professional standards requires that the auditor obtain written representations from the client?

AU-C §580.01

In a review engagement with comparative financial statements, the accountant must obtain representations from management for which of the following?

All financial statements and periods covered by the accountant's review report

Which of the following procedures is considered a test of controls?

An auditor interviews and observes appropriate personnel to determine segregation of duties.

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry?

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

An increase in tolerable misstatement would decrease the sample size; an increase in assessed level of control risk would increase the sample size.

In an audit of financial statements, which of the following would most likely be considered a known misstatement?

An unrecorded liability related to services rendered by a vendor during the period under audit

In a review engagement, how should the review accountant initially respond if the reviewed financial statements have been made available to third parties and a subsequently discovered fact becomes known?

Assess whether management takes appropriate steps to ensure financial statement users are made informed, as necessary

Which of the following types of sampling allows an auditor to quantify sampling risk?

Attribute

Analytical procedures are required for which of the following?

Audit planning

Which of the following is true regarding significant deficiencies?

Auditors must communicate them to the audit committee.

Which of the following types of audit evidence is the most persuasive?

Bank statements obtained from the client

What is the statistical sampling term that describes the risk that the results of the sample to test an account balance will result in incorrect acceptance of the population, when the population actually contains misstatement?

Beta risk, the risk of incorrect acceptance of conclusions

In determining the appropriate analytical procedures to be performed in a review of financial statements, an accountant may consider which of the following? 1. Knowledge obtained during current and previous engagements 2. The likelihood of a misstatement in the financial statements

Both I and II

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Cash flows from operating activities are negative.

Which of the following does an auditor usually confirm on one form?

Cash in bank and collateral for loans

Which of the following parties should prepare the letter of inquiry to a client's lawyer?

Client management

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Compare the financial statements with budgets or forecasts

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Compare the latest available interim financial information with the financial statements being reported upon

Which of the following procedures should an auditor generally perform regarding subsequent events?

Compare the latest available interim financial statements with the financial statements being audited

How should an auditor verify the valuation of marketable securities at the balance sheet date?

Compare the prices of the securities to published closing prices at the balance sheet date.

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Confirming with third parties the details of arrangements to maintain financial support

Which of the following terms best describes an accounting transaction that contains an uncertainty which will ultimately be resolved when one or more future events occur or fail to occur?

Contingency

Which of the following statements regarding the going concern assumption is correct?

Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary.

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

Cost of goods sold ÷ Average inventory

Vouching sales transactions before and after year-end will address which of the following assertions in a financial statement audit?

Cutoff

An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for bad debts in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for bad debts and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences?

Debit bad debt expense $700,000; credit allowance for bad debts $700,000.

After issuing an auditor's report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?

Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?

Differences between reconciliations of control accounts and subsidiary records are not investigated.

Which of the following is a true statement related to communication with an entity's legal counsel on a financial statement audit of a nonissuer?

Direct communication with external legal counsel is necessary when there is a risk of material misstatement that exists due to a loss contingency.

After the balance sheet date, an auditor's client suffers a material loss from a decline in value of marketable securities. Which of the following actions should the auditor advise the client to take?

Disclose the material loss in the financial statements to assure that the financial statements are not misleading

Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments?

Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments

Which of the following procedures would an auditor most likely perform regarding litigation?

Discuss with management its policies and procedures for identifying and evaluating litigation.

Which of the following presumptions is correct about the reliability of audit evidence?

Effective internal control provides more assurance about the reliability of audit evidence.

In an audit of a nonissuer, what is the auditor's appropriate response if there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, management's plans do not alleviate that uncertainty, and the reporting entity refuses to provide adequate disclosure of the circumstances?

Either issue a qualified or adverse opinion

Which of the following is the term used in financial statement audits to indicate unintentional misstatements of amount or disclosures?

Errors

During the performance of an audit, the auditor notes that accounting estimates fair value using a valuation method when there are no observable inputs available. As a result, the auditor should consider which of the following to determine if the entity's method of measurement is appropriate?

Evaluating whether the valuation is appropriate in the circumstance given the nature of the item being evaluated

What type of evidence would provide the highest level of assurance in an audit engagement?

Evidence obtained from independent sources

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Examining vendor statements for amounts not reported as purchases

Which of the following is an example of a likely misstatement in a financial statement audit?

Extrapolation of errors in a sample of inventory price testing

Which of the following is an example of a known misstatement in a financial statement audit?

Fixed asset addition in-transit was recorded in the wrong reporting period.

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Gross profit percentage decreased.

The types of misstatements that are relevant to the auditor's consideration of fraud include which of the following? I. Misstatements arising from fraudulent financial reporting II. Misstatements arising from misappropriation of assets III. Misstatements arising from cash account misstatements

I and II

For which of the following audit tests would a CPA most likely use attribute sampling?

Identifying entries posted to incorrect accounts

Which of the following is a false statement regarding subsequent discovery of facts existing at the date of the accountant's compilation or review report?

If the engagement was a compilation, the accountant must modify his or her report for a lack of independence.

Which of the following statements is correct with regard to management use of a broker's quotation to support a fair value estimate?

If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation.

Dexter CPA is unable to observe the physical inventory count because the inventory is held in a foreign subsidiary that currently is unsafe to visit. Which of the following is true?

If unable to obtain sufficient appropriate alternative evidence of existence and condition, modify the audit report

Which of the following parties would most likely be the best resource for gathering information about an entity's potential fraud or noncompliance with laws and regulations?

In-house legal counsel

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?

Incorrect acceptance

To what degree, if at all, is a significant deficiency related to a material weakness?

It is less severe than a material weakness.

Which of the following events requires adjustment to the financial statements for the year ended December 31, year 1?

Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January, year 2

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1?

Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2

Which of the following procedures does a CPA usually perform when reviewing the financial statements of a nonissuer?

Make inquiries of management concerning restrictions on the availability of cash balances.

An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern?

Management's plans for disposal of assets

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations when the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate

Which of the following statements about audit risks is correct for a nonissuer?

Nonsampling risk can arise because an auditor failed to recognize misstatements.

Which of the following pairs of accounts would an auditor most likely analyze on the same workpaper?

Notes receivable and interest income

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?

Number of items in the population

Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Obtain a management representation letter

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

Obtain additional evidence regarding the valuation of inventory

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?

Obtain an understanding of how management developed its estimates

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management's accounting estimates?

Obtain an understanding of how management developed its estimates.

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Obtaining a current value appraisal of the collateral

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies?

Obtaining a letter of audit inquiry from the client's lawyer

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions

In which of the following scenarios is a financial statement auditor most likely to externally confirm amounts due to third parties?

Outstanding balance due on a line of credit with variable interest rates and frequent withdrawals and repayments for cash flow management purposes

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

Performance of audit tests on a continual basis

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

Personnel

Which of the following statements is true related to applying analytical procedures on a financial statement audit?

Plausible relationships among financial and nonfinancial data must be able to be determined to apply analytical procedures as evidence.

Which of the following has the least influence on the reliability of audit evidence?

Quantity of the evidence obtained

A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time?

Recurring working capital shortages

Bohanon CPA is auditing an entity that has material inventory held by an outside custodian. Which of the following audit procedures is typically performed of the primary test of existence and valuation?

Request external confirmation of the quantities and condition of inventory

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

Heath Co.'s current ratio is 4:1. Which of the following transactions would normally increase its current ratio?

Selling inventory on account

Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable?

Sending second requests for confirmation of accounts receivable

Which of the following documents are examples of audit evidence generated by the client?

Shipping documents and receiving reports

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Square footage of selling space

Which of the following is an acceptable approach to sampling as a means to obtain evidence through tests of details in a financial statement audit?

Statistical or nonstatistical is acceptable based on the auditor's professional judgment.

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

Stratify the cash disbursements population so that the unusually large disbursements are selected

Which of the following audit procedures most likely will involve sampling?

Testing of process for approval of credit to customers for sales on account

Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet?

Testing the data used to arrive at the fair value of the interest rate swap contract

On February 17, year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $650000 as of December 31, year 1. The company anticipates that insurance proceeds of $385000 will be received. The audit of the financial statements dated December 31, year 1, was completed February 25, year 2. How should the fire be reported in the financial statements for the year ended December 31, year 1?

The December 31, year 1, financial statements should disclose the effect of the fire with no financial statement adjustment.

Which of the following qualitative factors would an auditor consider most relevant to the consideration of whether a discovered misstatement is material?

The audit team found a misstatement that, if recorded, affects the client's compliance with loan covenants.

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

Subsequent to the issuance of the audit report for the final year of a 3-year contract, a fact is discovered that may have affected the final year's report. Which of the following actions is the auditor required to take?

The auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report.

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

The auditor's allowable risk of assessing control risk is too low.

Which of the following statements is correct regarding accounting estimates of a nonissuer?

The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances.

To which of the following matters would materiality limits not apply in obtaining written representations?

The availability of minutes of stockholders' and directors' meetings

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

The chief financial officer waived approvals on all checks to one vendor to expedite payment.

An auditor has set the materiality level for the financial statements as a whole at $125,000. Which of the following misstatements would the auditor most likely consider material?

The client did not disclose $48500 of related party transactions in the footnotes.

Which of the following matters would an auditor most likely include in a management representation letter?

The completeness and availability of minutes of stockholders' and directors' meetings

Which of the following factors would least likely affect the quantity and content of an auditor's working papers?

The content of the representation letter

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's payroll expense with the prior year's payroll expense

Which of the following statements is correct regarding a management representation letter?

The date of the representation letter should be the same as the audit report.

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

The entity declines to provide the accountant with a signed representation letter.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

The form was mailed by the controller.

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

The lawyer and the auditor

Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?

The population size has little effect on the sample size.

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?

The population size has little or no effect on the sample size.

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

The recipients are likely to sign the confirmations without devoting proper attention to them.

An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management?

The representation letter needs to address all of the years being covered in the report.

For audit sampling purposes, audit risk is the risk that material errors will not be detected by the auditor. Which of the following describes the element of sampling risk that must be assessed in designing an audit sample?

The risk that the conclusion would be different if the entire population were tested

Which of the following factors would the auditor not explicitly consider when determining sample size in an attribute sample for a test of controls?

The tolerable misstatement

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

There are significant unexplained variances between standard and actual labor cost.

Which of the following is the primary objective of probability proportional to sample size?

To identify overstatement errors

When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Unaudited information from internal quarterly reports

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Usual trade credit from suppliers is denied.

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Variables sampling

Which of the following would most likely be an appropriate test of the existence assertion?

Vouch from the general ledger to the underlying source document

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?

Whether the data was developed under a system with adequate controls

If a client will not permit inquiry of outside legal counsel, the auditor's report ordinarily will contain:

a disclaimer of opinion.

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of:

a lien on the plant equipment.

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage is most likely from:

a management representation letter.

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is:

a payroll register entry.

If the audit objective of a test of details is to detect overstatements of sales, the auditor should vouch transactions from the:

accounting records to the source documents.

A client's lawyer is unable to form a conclusion about the likelihood of an unfavorable outcome of pending litigation because of inherent uncertainties. If the litigation's effect on the client's financial statements could be material, the auditor most likely would:

add an explanatory paragraph to the auditor's report because of the uncertainty.

After assessing control risk below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether:

additional audit evidence sufficient to support a further reduction is likely to be available.

Financial statement audits require the auditor to have direct communication with the entity's external legal counsel in:

all audits of issuers.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting:

an inspection.

Management makes representations to the auditor through the audit process. Such representations:

are audit evidence, whether written or verbal.

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

assess the difficulty in controlling the incremental audit risk.

The date of the management representation letter should coincide with the date of the:

auditor's report.

Management should address written representations about a firm's annual audit to the:

auditor.

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

be related to preliminary judgments about materiality levels.

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:

be unaware of all the financial relationships that the bank has with the client.

In testing controls for operating effectiveness, the risk of assessing control risk too low is called _______, which impacts __________.

beta risk; effectiveness

When searching for unrecorded liabilities at year-end, an auditor most likely would examine:

cash disbursements recorded in the period subsequent to year-end.

The primary source of information to be disclosed regarding litigation, claims, and assessments is:

client's management.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:

client-prepared statements of account that show the details of the account balances.

In auditing payroll, an auditor most likely would:

compare payroll costs with entity standards or budgets.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:

complement, but do not replace, substantive tests designed to support the assertion.

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:

completeness of recorded investment income.

An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:

control policies and procedures are unlikely to pertain to the assertions.

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

An auditor's program to examine long-term debt most likely would include steps that require:

correlating interest expense recorded for the period with outstanding debt.

An auditor requests a client to send letters of audit inquiry to attorneys who have been consulted concerning litigation, claims, and assessments. The primary reason for this request is to obtain:

corroboration of the information furnished by management concerning litigation, claims, and assessments.

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to:

discover expenditures that were expensed but should have been capitalized.

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:

effectiveness of the audit.

Vouching selected items from the payroll register to employee timecards that have been approved by supervisory personnel provides evidence that:

employees worked the number of hours for which their pay was computed.

Analytical procedures used in planning an audit should focus on:

enhancing the auditor's understanding of the client's business.

Analytical procedures used in the planning phase of an audit should focus on:

enhancing the auditor's understanding of the transactions and events that have occurred since the last audit.

The objective of a dual-purpose test of details of transactions performed as tests of controls is to:

evaluate whether controls operated effectively.

In terms of accounting estimates, the financial statement auditor is responsible for:

evaluating whether changes from the prior period are appropriate in the circumstances

Audit procedures that center on observation and inspection include all of the following except:

evaluating whether the financial statements as a whole are presented fairly, in all material respects, in conformity with generally accepted accounting principles.

The auditor's responsibility regarding the entity's ability to continue as a going concern consists of:

evaluating whether there is substantial doubt.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

fictitious credit sales have been recorded during the year.

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor may consider obtaining written management representations acknowledging that management has:

identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

identify potential liabilities for unpaid payroll taxes.

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

incorrect rejection.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:

increase ownership equity.

If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, then the auditor would most appropriately:

increase the assessed risks of material misstatement.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

individual invoices.

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:

inquiry.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:

inspect the property ledger and the insurance and tax records and then tour the client's facilities.

Sampling risk varies __________ with sample sizes.

inversely

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that:

involves an estimate.

In evaluating controls over cash disbursements, an auditor most likely would determine that the control risk is lower when the person who signs checks also:

is responsible for mailing the checks.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

lease rather than purchase operating facilities.

In a financial statement audit, a lawyer may:

limit a response to matters that are material individually or in the aggregate.

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices." The foregoing passage is most likely from a:

management representation letter.

An auditor most likely would issue a disclaimer of opinion because of:

management's refusal to furnish written representations.

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to:

matters to which the attorney has given substantive attention in the form of legal representation.

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

minutes of board of directors' meetings.

The procedure, "The accountant should perform specific procedures to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern," is:

not required for either a compilation or a review.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

observe physical counts of the inventory items.

In determining the effectiveness of an entity's policies and procedures relating to the existence assertion for payroll transactions, an auditor most likely would inquire about and:

observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:

observing the employees who are performing the control activities.

In determining whether transactions have been recorded, the direction of the audit testing should be from the:

original source documents.

An auditor most likely would extend substantive tests of payroll when:

overpayments are discovered in performing tests of details.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to:

payments mailed to the client that have not been recorded.

An auditor may achieve audit objectives related to particular assertions by:

performing analytical procedures.

An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the:

possible effects on the entity's financial statements.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the:

precision and reliability of the data used to develop expectations.

An auditor usually determines whether dividend income from publicly held investments is reasonable by computing the amounts that should have been received by referring to:

records produced by investment services.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

reperformance and observation.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:

represented by inventory tags are included in the listing.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items:

represented by tags were included on the listing.

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would:

request that the senders mail the original forms to the auditor.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year-end but arose after year-end. These events may be important to the auditor because they may:

require disclosure to keep the financial statements from being misleading.

The procedure, "The accountant should perform analytical procedures designed to identify relationships that appear unusual," is:

required for a review only.

The procedure, "The accountant should request written representation from members of management who have appropriate responsibilities for the financial statements...," is:

required for a review only.

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:

reviewing payroll accruals for reasonableness.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record:

sales returns.

In testing for unrecorded retirements of equipment, an auditor most likely would:

select items of equipment from the accounting records and then locate them during the plant tour.

Tracing shipping documents to prenumbered sales invoices provides evidence that:

shipments to customers were properly invoiced.

A widely used statistic that is employed to measure the extent to which the values of the items are spread about the mean in sampling applications is referred to as:

standard deviation.

During an audit of a nonissuer's financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if:

substantive procedures alone cannot provide sufficient appropriate audit evidence.

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are:

susceptible to bias.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

tests of controls and limited tests of current year property and equipment transactions.

If the client refuses to cooperate in disclosing the facts related to a subsequent discovery, the auditor should notify all the following except for:

the IRS.

In a review engagement, the review accountant is responsible for performing review procedures (including identifying subsequent events) through the date of:

the accountant's review report.

In selecting an appropriate sample for a substantive test, the auditor most likely would stratify the population if:

the auditor plans to give greater representation to large recorded amounts.

In evaluating the overall effect of audit findings on the auditor's report, the auditor should document all of the following except:

the auditor's conclusion as to whether undetected misstatements, individually or in aggregate, do or do not cause the financial statements to be materially misstated, and the basis for that conclusion.

The use of the ratio estimation sampling technique is most effective when:

the calculated audit amounts are approximately proportional to the client's book amounts.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

the combined assessed level of inherent and control risk relative to accounts receivable is low.

An auditor may decide to increase the risk of incorrect rejection when:

the cost and effort of selecting additional sample items is low.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

the deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:

the difficulty in controlling the incremental audit risk.

As part of the process of observing a client's physical inventories, an auditor should be alert to:

the inclusion of any obsolete or damaged goods.

With respect to litigation involving a nonissuer that could give rise to a risk of material misstatement, an auditor should obtain audit evidence relevant to each of the following matters, except:

the objectivity and experience of the entity's legal counsel.

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1 million. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

tolerable deviation rate.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and seven of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

tolerable rate (7%) was less than the achieved upper precision limit (8%).

The sample size of a test of controls varies inversely with:

tolerable rate.

If audit procedures indicate that an accounting estimate is not reasonable, the auditor should:

treat the difference between the accounting estimate and the closest reasonable estimate determined by the auditor as a likely misstatement.

The objective of performing analytical procedures in planning an audit is to identify the existence of:

unusual transactions and events.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

verify the sources and contents of the faxes in telephone calls to the senders.

If a service auditor is unable to obtain a written assertion from the service organization's management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to:

withdraw from the engagement unless prohibited by law.

If current audited entity management was not present during all periods covered by the auditor's report:

written representations are still required from current management on all periods covered by the auditor's report.

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

"I believe that the plaintiff will have problems establishing any liability."

Which of the following statements would an auditor most likely add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipients?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."

Which of the following statements in an attorney's legal letter requires further investigation?

"It is our opinion that the company will be able to assert meritorious defenses to this action."

Selected data pertaining to Lore Co. for the calendar year 20X1 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 The accounts receivable turnover for 20X1 was 5.0 times. What were Lore's 20X1 net credit sales?

$105,000

An auditor randomly samples 60 out of 1,000 items and discovers an overstatement of $2000. What is the projected misstatement for the entire population?

$33333

Which of the following objectives is achieved when an auditor decides to employ classical variable sampling?

To determine the inventory quantities on hand

What is the primary audit objective of reviewing legal expense accounts, minutes of board of directors' meetings, and correspondence with legal counsel?

To identify litigation, claims, and assessments involving the entity that may give rise to a risk of material misstatement

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the combined assessed level of inherent and control risk over the sale is high

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?

When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter from the external counsel with the following response: "We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured two years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million." Should the CPA accept the letter from the external counsel?

Yes, even though the CPA did not get a specific amount of loss

In evaluating the overall effect of audit findings on the auditor's report, the auditor should document all of the following except:

a summary of all uncorrected misstatements related to known and likely misstatements.

For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent: 1. in the planning stage. 2. as a substantive test. 3. in the review stage.

I and III

When an auditor requests information from marketing, sales, or production personnel, which of the following would the auditor request? 1. Production strategies 2. Compliance with laws and regulations 3. Sales trends 4. Application of accounting policies

I and III

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the: 1. likely rate of deviations and 2. allowable risk of assessing control risk too high.

I only

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: 1. presentation and disclosure. 2. existence or occurrence.

II only

A company's management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of corroborating management's information?

Inquiring of company's outside counsel

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Inquiring of the entity's legal counsel about litigation, claims, and assessments

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?

Inquiry

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Inquiry and inspection of records

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise and date sold to the debtors

For which of the following audit tests would an auditor most likely use attribute sampling?

Inspecting employee timecards for proper approval by supervisors

For which of the following audit tests would an auditor most likely use attribute sampling?

Inspecting purchase orders for proper approval by supervisors

Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client's financial institution

To which of the following matters would materiality limits not apply when obtaining written client representations?

Instances of fraud involving management

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Interest expense

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Internal controls during the remaining period are effective.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Investigate changes in capital stock recorded after year-end

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Investigate changes in long-term debt occurring after year-end

Which of the following is not an appropriate auditor response if management refuses to provide a written management representation letter?

Issue an unmodified opinion, with an other-matter paragraph discussing the lack of management representations

Which of the following is a characteristic of nonstatistical sampling?

It requires judgment to select a sample.

Key Co. plans to present comparative financial statements for the years ended December 31, 20X1 and 20X2, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 20X3. Key's current management team was not present until January 1, 20X2. What period of time should be covered by Key's management representation letter?

January 1, 20X1, through May 1, 20X3

Which of the following is required documentation when evaluating the summary of uncorrected misstatements at the end of an audit?

Levels of materiality applied, and how those considerations were determined

An engagement team is performing the audit of the financial statements of Griffin, Inc. as of and for the year ended December 31, year 7. Task 1: The senior accountant has identified three misstatements that have been carried forward onto the summary of proposed audit adjustments. Determine the impact of the identified misstatements on the financial statement ratios noted below. For each of the identified misstatements below, indicate the impact on the financial ratio identified. In the "Impact on Current Ratio" and "Impact on Profit Margin" columns, select the impact, if any, that the misstatement has on the financial ratio from the option list. Selections may be used once, more than once, or not at all. Consider each misstatement independently. The information in the "Analytics Definitions" exhibit (Exhibit #1, under the Exhibits tab) must be used for all financial ratio calculations. Task 2: The engagement manager has requested that the summary of proposed audit adjustments, started by the senior accountant, be updated for any additional misstatements identified. Use the information under the Exhibits tab to determine the adjusting journal entries required. To prepare each required journal entry: Enter the required journal entry for the exhibit referenced in the heading for each adjusting journal entry. Do not combine entries or record entries not related to the referenced exhibit. Click on a cell in the "Account Name" column and select the appropriate account. An account may be used once or not at all for a journal entry. Enter all debits first, in alphabetical order. Enter the corresponding debit or credit amount in the associated column. All amounts should be rounded to the nearest dollar. Not all rows in the table might be needed to complete each journal entry. To receive full credit, you must make an entry in each cell even if it is not used ("0" or "No entry required").

Task 1 1. Decrease Decrease 2. No impact Decrease 3. Increase Increase Task 2 1. Account Name Debit Credit Current portion of long-term debt 2,500,000 0 Long-term debt 0 2,500,000 0 0 2. Account Name Debit Credit Revenue 25,000 0 Deferred revenue 0 25,000 0 0 3. Account Name Debit Credit Accounts receivable 75,000 0 Unbilled receivables 0 75,000 0 0

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Test the computation of standard overhead rates.

Which of the following would be the most appropriate initial response to a situation when substantive procedures alone will not provide sufficient appropriate audit evidence on a financial statement audit?

Test the operating effectiveness of controls

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

Test the operating effectiveness of such controls in the current audit

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

measure the sufficiency of the audit evidence obtained.

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:

more than the deviation rate in the auditor's sample.

Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill's plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill's plans to:

negotiate reductions in required dividends being paid on preferred stock.

If the client refuses to disclose the newly discovered facts and their impact on the financial statements to persons known to be currently using or likely to use the financial statements, all of the following steps should be taken by the accountant except:

notification to the Better Business Bureau.

On February 25, a CPA issued an auditor's report expressing an unmodified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that on February 11 the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to:

notify each member of the entity's board of directors about management's refusal to adjust the financial statements.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:

number of shares issued and outstanding.

A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should:

obtain a letter of representation from the former client's management

A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should:

obtain a letter of representation from the former client's management.

One of the responsibilities of the auditor in an audit conducted in accordance with generally accepted auditing standards is to:

obtain evidence to support his opinion.

During the compilation of a client's financial statements, an accountant comes to believe that the financial statements are materially misstated. The accountant should:

obtain the additional or revised information needed to correct the financial statements.

In an audit of a nonissuer, if going concern uncertainty is mitigated due to financial support guarantees by third parties or the owner-manager, the auditor must:

obtain written evidence of the intent and ability on the part of the guaranteeing parties to provide such financial support.

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:

sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

One of the purposes for sending a confirmation request to all banks with which the client has done business during the year under audit is to:

seek information about contingent liabilities and security agreements.

A weakness in internal control over recording retirements of equipment may cause an auditor to:

select certain items of equipment from the accounting records and locate them in the plant

A weakness in internal control over recording retirements of equipment may cause an auditor to:

select certain items of equipment from the accounting records and locate them in the plant.

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

shipping document file.

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:

deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

Each of the following is a type of factual misstatement, except:

differences between management and the auditor's judgment regarding estimates.

An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:

discovery of invalid employee ID numbers.

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to:

dividend record books produced by investment advisory services.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

employees work the number of hours for which they are paid.

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.

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:

examine the audited financial statements of the investee company.

An auditor's tests of controls over the issuance of raw materials to production would most likely include:

examining material requisitions and re-performing client controls designed to process and record issuances.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

extend the due dates of existing loans.

An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order, the auditor ordinarily would replace the voided purchase order with another if the voided purchase order:

has been properly voided in the normal course of business.

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

has been properly voided.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

"Sufficient appropriate audit evidence has been made available to the auditor to permit the issuance of an unmodified opinion."

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

"We believe that the action can be settled for less than the damages claimed."

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

$2,000.

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be:

$2,000.

With which of the following entities can the auditor inquire for information throughout an audit?

All of the answer choices are correct. ~Management and internal audit personal ~Personnel responsible for financial reporting ~Marketing, sales, and production personnel

Which of the following procedures regarding inventory would be performed by an accountant during a nonissuer's review engagement?

Inquiring of company personnel about excess or obsolete inventory

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

Attribute

The table below presents ratios that the company uses to track its performance. During fieldwork, the auditors determined that the ratios were inaccurate due to significant errors, described below, made by the company in Year 2. The company has agreed to make adjusting journal entries for Year 2 to correct the errors. After you have determined the appropriate adjusting journal entry (entries) to correct each error, click the indicated cells in the second table and select from the menu provided the impact, if any, that the adjusting journal entry (entries) would have on the erroneous ratio. Ratio Year 2 Erroneous Ratio Inventory turnover 4.38 Return on equity 17.53% 1. Inventory stored at a distribution center on December 31, Year 2, was inadvertently omitted during the Year 2 physical inventory count, to which the general ledger was adjusted. 2. During the physical inventory, the company included inventory that it was holding on consignment. 3. The company failed to record the materials in transit accrual for late supplier/vendor invoices. 4. The company declared and paid a cash dividend on December 30, Year 2, but failed to record the transaction in Year 2.

1) D & I 2) I & D 3) D & N 4) N & I

You have decided to use Probability Proportional to Size (PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client's accounts receivable balances. Few, if any, errors of account balance overstatement are expected. You plan to use the provided PPS sampling table. Reliability Factors for Errors of Overstatement Overstatement Errors Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 0 4.61 3.00 2.31 1.90 1.61 1 6.64 4.75 3.89 3.38 3.00 2 8.41 6.30 5.33 4.72 4.28 3 10.05 7.76 6.69 6.02 5.52 4 11.61 9.16 8.00 7.27 6.73 Calculate the total projected error if errors were discovered in a PPS sample. Recorded Amount Audited Amount Tainting (%) Sampling Interval Projected Error 1st Error $ 400 $ 320 1. ? $1,000 2. ? 2nd Error 500 - 3.? 1,000 4. ? 3rd Error 3,000 2,500 5. ? 1,000 6.?

1. 20% 2. 200 3. 100% 4. 1000 5. 0% 6. 50

You have decided to use Probability Proportional to Size (PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client's accounts receivable balances. Few, if any, errors of account balance overstatement are expected. You plan to use the provided PPS sampling table: Reliability Factors for Errors of Overstatement Overstatement Errors Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 0 4.61 3.00 2.31 1.90 1.61 1 6.64 4.75 3.89 3.38 3.00 2 8.41 6.30 5.33 4.72 4.28 3 10.05 7.76 6.69 6.02 5.52 4 11.61 9.16 8.00 7.27 6.73 Given the following information, calculate the sampling interval and the sample size you should use. Tolerable error $15,000 Risk of incorrect acceptance 5% Number of errors allowed 0 Recorded amount of accounts receivable $300,000 1. Reliability factors for errors of overstatement ? 2. Sampling Interval ? 3. Sample Size ?

1. 3 2. 5000 3. 60

At December 31, 20X2, Curry Co. had the following balances in selected asset accounts: 20X2 Increase Over 20X1 Cash $ 300 $100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $2,500 $890 Curry also had current liabilities of $1,000 on December 31, 20X2, and net credit sales of $7,200 for the year then ended. What was the average number of days to collect Curry's accounts receivable during 20X2?

50.7

Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X2. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. The unaudited balance sheet for Miller Mailorder, Inc., as of December 31, 20X1, is as follows: Assets Cash $2,400,000 Receivables - Net 1,623,800 Inventory 798,200 Prepaids 20,000 Property, Plant, and Equipment - Net 1,200,000 Total Assets $6,042,000 Liabilities and Stockholders' Equity Accounts Payable $500,000 Current Portion of LT Debt 800,000 Other Current Liabilities 742,000 Long-Term Debt 1,000,000 Total Liabilities $3,042,000 Stockholders' Equity Common Stock $100,000 Additional Paid-in Capital 400,000 Retained Earnings 2,500,000 Total Stockholders' Equity $3,000,000 Total Liabilities and Stockholders' Equity $6,042,000 Net income for the current year is $600,000. Interest expense was $250,000. Calculate the following ratios using the information above; express to two decimal places. 1. Debt Ratio 2. Quick Ratio 3. Rate of Return on Assets

1. 50.35 2. 197.05 3. 14.07

During the course of the year 2 audit of the Chester Co., the auditor discovered potential cutoff problems that may or may not require adjusting journal entries. For each of the potential cutoff problems indicated below, complete the required journal entries. To prepare each required journal entry: Click on a cell in the "Account Name" column and select the appropriate account. An account may be used once or not at all for a journal entry. Enter all debits first, in alphabetical order. Enter the corresponding debit or credit amount in the associated column. All amounts should be rounded to the nearest dollar. Not all rows in the table might be needed to complete each journal entry. To receive full credit, you must make an entry in each cell even if it is not used ("0" or "No entry required"). Journal Entry 1: The company shipped merchandise valued at $75,000 F.O.B. destination on December 23, year 2, and recorded the sale and relief of inventory on that date. The customer received the merchandise on December 31, year 2. The merchandise has a profit margin of 10%. Record the necessary year 2 adjustments, if any. Journal Entry 2: The company shipped merchandise valued at $45,000 to a consignee on December 24, year 2, and recorded the sale and the relief of inventory on that date. The consignee had not sold the merchandise as of January 5, year 3. The merchandise has a profit margin of 10%. Record the necessary year 2 adjustments, if any.

1. Account Name Debit Credit (No entry required) 0 0 (No entry required) 0 0 (No entry required) 0 0 (No entry required) 0 0 (No entry required) 0 0 2. Account Name Debit Credit Inventory 45,000 0 Sales 50,000 0 Accounts receivable 0 50,000 Cost of goods sold 0 45,000 (No entry required) 0 0

Examine the flowchart for subsequent event discovery below. For each blank spot in the chart (identified by a letter), choose the statement in the table that should occupy that spot. Assign the letter for the empty spot to the statement in the "Location on Flowchart" column. 1. Accountant notifies users relying on financial statements or SEC that report cannot be relied upon 2. Issue revised financial statements and audit report 3. No action necessary 4. Accountant should advise client to disclose information 5. Accountant notifies board of directors concerning need to disclose

1. D 2. C 3. E 4. A 5. B

The purpose of all auditing procedures is to gather sufficient appropriate evidence for an auditor to form an opinion regarding the financial statements taken as a whole. In the table below, identify and describe means or techniques of gathering audit evidence used to evaluate a client's inventory balance. 1. Which of the following is not a means or technique of gathering evidence used to evaluate a client's inventory balance? 2. Which of the following is not a means or technique of gathering evidence used to evaluate a client's inventory balance? 3. An auditor watches the client's employees take a physical inventory count. This is an example of what technique? 4. Scanning, scrutinizing, and reading documents are often referred to as _______ of the evidence. 5. The auditing technique whereby an auditor obtains an acknowledgement in writing from a third party is known as:

1. Existence 2. Completeness 3. Observation 4. Inspection 5. Confirmation

For the statements about sampling below, determine if each statement is true or false. 1 Nonstatistical sampling is not permitted under generally accepted auditing standards. 2 Statistical sampling enables the auditor to make subjective statements about the population on the basis of the sample. 3 Only nonstatistical sampling requires auditor judgment. 4 Sampling risk is a component of audit risk. 5 The risk of incorrect rejection is related to the efficiency of the audit. 6 Variables sampling is used when testing controls. 7 Discovery sampling is used when the auditor believes that the population occurrence rate is near zero.

1. F 2. F 3. F 4. T 5. T 6. F 7. T

For each statement in the table below, choose whether it is true or false. 1. Management's representations may not be limited to matters considered either individually or collectively material to the financial statements. 2. The representation letter should not be signed by current management if they were not present during the entire period covered by the financial statements. 3. Management needs to provide written representation that all financial records and related data have been made available to the auditor. 4. Representations made by management should be in written format only. 5. Management must make a written representation to the auditor that they have complied with aspects of contractual agreements that may affect the financial statements. 6. Management must represent in written form that there were no uncorrected misstatements from the audit.

1. False 2. False 3. True 4. False 5. True 6. False

Which of the following is the auditor's primary means of obtaining corroboration of information furnished by management concerning litigation, claims, and assessments?

A letter of audit inquiry to the client's lawyer

The year under audit is Year 2. During the audit of accounts payable, you detected misstatements previously undetected by the client. All misstatements were related to Year 2. For each of the liability misstatements shown below, click the indicated cells and select from the menu provided the most appropriate item. In column B, indicate the audit procedure that was most likely used to detect the misstatement. In column C, select the internal control that most likely could prevent or detect this type of misstatement in the future. Audit procedures and internal controls may be selected once, more than once, or not at all. 1. An accounts payable clerk misplaces year-end invoices for raw materials that were received on December 21, Year 2, and therefore liabilities were not recorded. 2. The company tends to be careless in recording payables in the correct period. 3. The company has the same person approving pay requests and cutting checks. 4. The company's receiving department misplaces receiving reports for purchases of raw materials at year-end and therefore liabilities were not recorded.

1. Investigate unmatched receiving reports dated prior to January 1, Year 3. The purchasing department supervisor forwards a monthly listing of matched purchase orders and receiving reports to the accounts payable supervisor for comparison to a listing of vouched invoices. 2. From the January, Year 3, cash disbursements journal, select payments and match to corresponding invoices. A clerk is responsible for matching purchase orders with receiving reports and making certain they are included in the proper month. 3. Select an unpaid invoice and ask to be walked through the invoice payment process. Accounts payable personnel are assigned different responsibilities each quarter within the department. 4. Identify open purchase orders and vendors' invoices at December 31, Year 2, and investigate their disposition. The accounts payable supervisor reviews a monthly listing of open purchase orders and vendors' invoices for follow-up with the receiving department.

The following situations in the table below represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of Year 1. For each excerpt, click the associated cell and select the most appropriate audit response related to the financial statements in the "Audit Response (Financials)" column. Then, in the "Audit Response (Report)" column, click the associated cell and select whether the auditor's report or the attorney's legal response letter needs to be updated. Each excerpt is independent. Responses may be used once, more than once, or not at all. ~The client's year-end is December 31, Year 1. ~The anticipated audit report date is February 15, Year 2. ~All amounts are material to the financial statements. 1) Letter dated February 14, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, Year 1." 2) Letter dated January 21, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, Year 1." 3) Letter dated February 26, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: "K. Bowt v. XYZ Co.: This matter commenced in December, Year 1. The plaintiff alleges discrimination relating to his termination on November 17, Year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss." 4) Letter dated March 16, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: "J. Myers v. XYZ Co.: This matter commenced in March, Year 2. The plaintiff alleges discrimination relating to his termination on November 17, Year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000." 5) Letter dated January 10, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: "R. Brown v. XYZ Co.: This matter commenced in November, Year 1. The plaintiff alleges discrimination relating to his termination on March 17, Year 1. The case was tentatively settled for $35,000, which will be covered by XYZ's insurance carrier." 6) Letter dated January 20, Year 2: "I advise you that at and since December 31, Year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: "L. Peep v. XYZ Co.: This matter commenced in November, Year 1. The plaintiff alleges discrimination relating to his termination on March 17, Year 1. The case was tentatively settled for $35,000."

1. No impact on financial statement or footnotes Legal response is appropriately dated 2. Verify amount due attorney is recorded in financial statements Update legal response 3. Disclosure in footnotes relating to nature of litigation, but no amount disclosed Update report date 4. Disclosure in footnotes relating to nature of litigation, but no amount disclosed Update report date 5. Potential litigation settlement not accrued in financial statements, amount disclosed in footnotes Update legal response 6. Potential litigation settlement accrued in financial statements Update legal response

Answer the following questions in the table below about confirmations. 1. Confirmation is the process of obtaining a ______ communication from _____ in response to a request for information about a particular item affecting financial statement assertions. 2. Which of the following assertions can be addressed by confirmations? Existence or occurrence Completeness Rights and obligations Valuation or allocation Presentation and disclosure 3. "Nonresponses do not provide audit evidence about the financial statement assertions being addressed." This statement describes a drawback of which type of confirmation? 4. Under the right circumstances, which type of confirmation should be used when the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration? 5. Which type of confirmation runs the risk of the third party signing it and returning it without verifying that the information is correct?

1. direct; a third party 2. I, II, III, IV, V 3. Positive 4. Negative 5. Positive

An accounting firm is performing the year 2 audit of DDR Corp., a nonissuer. Consider the following: The auditor will rely on tests of controls for sales and cash receipts, and purchasing and cash disbursements. The amount in the "Potential Misstatement" column in the table below represents the potential misstatement as a result of the identified control deficiency. The auditor will assess control risk as high for all other controls. Materiality for each of the situations is $750,000. For each situation in the table below: select the deficiency type, if any. select the evaluation of deficiency, if any. select the communication requirement, if any, to those charged with governance. An option may be used once, more than once, or not at all. A selection must be made for each indicated cell (do not leave blank). 1. The controller reviews and approves consolidating journal entries during the month-end close. However, the auditor determined that the year-end December consolidating journal entries were not properly reviewed. There are no compensating controls to mitigate the effects of this control deficiency. 2. The company does not have a process for matching invoices with purchase orders or receiving documents prior to payment. There are no other qualitative factors that would affect the deficiency evaluation. 3. There is no physical security for a small portion of the company's inventory, and a warehouse employee stole $10,000 of the unsecured inventory in year 1. The value of this inventory is inconsequential to the company's inventory balance. There are no other qualitative factors that would affect the deficiency evaluation. 4. The payroll clerk created fictitious employees in order to collect unauthorized payroll checks. The misappropriated funds were more than inconsequential. There are no other qualitative factors that would affect the deficiency evaluation.

1. operating deficiency material weakness communication requirement: In writing, no later than 60 days following the audit report release date 2. design deficiency significant deficiency communication: In writing, no later than 60 days following the audit report release date 3. design deficiency deficiency No formal communication necessary 4. Design deficiency significant deficiency communication: In writing, no later than 60 days following the audit report release date

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ending December 31, 20X1. Assume that all checks are dated and issued on December 30, 20X1. Disbursement Date Receipt Date Check Bank Accounts per per per per No. from to Books Bank Books Bank 101 National Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3 202 County State Jan. 3 Jan. 2 Dec. 30 Dec. 31 303 Federal American Dec. 31 Jan. 3 Jan. 2 Jan. 2 404 State Republic Jan. 2 Jan. 2 Jan. 2 Dec. 31 Which of the following checks might indicate kiting?

202 and 404

What paragraph in the auditing professional standards defines sufficiency and appropriateness of audit evidence?

AU-C 200.14

What paragraph in the auditing professional standards discusses where the auditor must disclose substantial doubt about the entity's ability to continue as a going concern?

AU-C 570.24

During an engagement, the client's personnel make a variety of oral representations in response to questions raised by the auditor. The auditor should obtain written representations from the client's management to confirm the oral representations and to reduce any possible misunderstanding between the client and the auditor. What paragraph in the auditing professional standards requires that the auditor obtain written representations from the client?

AU-C 580.01

Find the paragraph in the auditing professional standards that defines the risk of incorrect acceptance.

AU-C §530.A13

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?

Accept the confirmation but verify the source and content by directly contacting the respondent

Which of the following is not an example of an accounting estimate that might be included in financial statements?

Accounts receivable

Which of the following circumstances could appropriately overcome the presumption that the financial statement auditor will confirm the existence of accounts receivable?

Accounts receivable is immaterial.

Which of the following statements concerning material weaknesses and significant deficiencies is correct?

All material weaknesses are significant deficiencies.

Uncorrected misstatements should be documented in a manner that allows the auditor to:

All of the answer choices are correct. ~separately consider the effects of known and likely misstatements, including uncorrected misstatements identified in prior periods. ~consider the aggregate effect of misstatements on the financial statements. ~consider the qualitative factors that are relevant to the auditor's consideration whether misstatements are material.

What period of time should written representations cover in a financial statement audit?

All periods covered by the auditor's report

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

An acknowledgment by a client representative that the securities were returned intact

An auditor is testing a client's pension benefit obligation. Which of the following types of evidence would be most appropriate for determining that the financial statement balance is fairly stated?

An actuarial valuation obtained by an outside firm

Which of the following presumptions does not relate to the appropriateness of audit evidence?

An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.

Which of the following statements is incorrect concerning analytical procedures?

Analytical procedures used in planning an audit generally use data aggregated at a low level.

Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer?

Analytical review of payroll tax expense

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Are procedures in place to monitor and properly restrict access to equipment?

Stone CPA is engaged to perform a financial statement audit. What is the objective related to the allowance for doubtful accounts receivable and other estimates?

Areas of significant estimation are properly disclosed.

Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer?

Ask management about the entity's procedures for recording transactions

Which of the following is not generally considered necessary if an auditor applies principal substantive tests to details of balance sheet accounts at an interim date?

Assessing control risk below the maximum is required in order to have a reasonable basis for extending audit conclusions from an interim date to the balance sheet date.

For each of the procedures described in the table below, click the associated cell in the "Audit Procedure Performed" column and select from the list provided the audit procedure that the auditor performed. Then, click the associated cell in the "Classification of Audit Procedure" column and select from the list provided the proper classification of the audit procedure. A selection may be used once, more than once, or not at all. 1. Examined sales invoices to see if they were initialed by the credit manager indicating credit approval. 2. Compared this year's expenses with last year's expenses and investigated unusual fluctuations. 3. Requested responses directly from customers. 4. Questioned management about subsequent events. 5. Observed the accounting clerk record the daily deposit of cash receipts. 6. Examined invoices to support additions to the fixed asset account during the year. 7. Agreed sales invoices to credit files to determine whether the customer had a credit file and had been approved for credit. 8. Asked the accounting manager how often cash is deposited and by whom.

Audit Procedure Performed 1. Inspection 2. Analytical procedure 3. Confirmation 4. Inquiry 5. Observation 6. Inspection 7. Reperformance 8. Inquiry Classification of Audit Procedure 1. Test of controls 2. Substantive procedures 3. Substantive procedures 4. Substantive procedures 5. Test of controls 6. Substantive procedures 7. Test of controls 8. Test of controls

If the client refuses to disclose the newly discovered facts and their impact on the financial statements to persons known to be currently using or likely to use the financial statements prompting the accountant to notify third party users, which of the following guidelines should be used for such disclosure? 1. The disclosure should include a description of the nature of the subsequently acquired information and its effect on the financial statements. 2. The information disclosed should be as precise and factual as possible.

Both I and II

Which of the following factors should an auditor consider in making a judgment about whether an internal control deficiency is so significant that it is a significant deficiency? I. Diversity of the entity's business II. Size of the entity's operations

Both I and II

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? 1. Expected amount of misstatements 2. Measure of tolerable misstatements

Both I and II

Which of the following factors is considered in determining the sample size for a test of controls?

Both expected and tolerable deviation rates

The auditor determines that the entity has effective controls and the auditor intends to design substantive procedures based on the effective operation of those controls. As a result, the auditor elects to perform tests of controls to obtain evidence about their operating effectiveness. This often is done for what type of transactions?

Class of transactions that is reasonably uniform, noncomplex, and routinely processed and controlled by the entity's information system

Which of the following types of evidence would an auditor most likely examine to determine whether control activities are operating as designed?

Client records documenting the use of EDP programs

Which of the following types of evidence would an auditor most likely examine to determine whether internal control activities are operating as designed?

Client records documenting the use of EDP programs

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Compare cash payments made after the balance sheet date with the accounts payable trial balance

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Comparing current-year balances to budgeted balances

Which of the following is an analytical procedure that an auditor most likely would perform during the planning stage of an audit?

Comparing the current-year account balances for conformity with predictable patterns

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results

Which of the following would be used on a review engagement?

Comparison of current-year to prior-year account balances

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?

Completeness

Which assertion is typically higher risk for auditing payables when there is incentive to overstate net income?

Completeness

Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?

Confirm directly with the client's lawyer that all claims have been recorded in the financial statements

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation

Which of the following types of audit evidence generally is the most appropriate?

Confirmation of account information

Which of the following key factors and assumptions would an auditor normally concentrate on when evaluating the reasonableness of an estimate?

Consideration of the historical experience of the entity in making past estimates as well as the auditor's experience in the industry

Which of the following is least likely to be an assertion that would be addressed by the financial statement audit procedure to verify the gain or loss on security transactions?

Cutoff

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

Management is responsible for making the accounting estimates in the financial statements. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate an amount at the financial statement date. In regards to accounting estimates made by management of a nonissuer, the auditor is responsible for: I. determining the accuracy of the estimate. II. evaluating the reasonableness of the estimate.

II only

Management is responsible for making the accounting estimates in the financial statements. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate an amount at the financial statement date. In regards to accounting estimates made by management of a nonissuer, the auditor is responsible for: 1. determining the accuracy of the estimate. 2. evaluating the reasonableness of the estimate.

II only

Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero's balance sheet date, but one month before the issuance of the financial statements and the auditor's report. Under these circumstances: 1. the financial statements should be adjusted. 2. the event requires financial statement disclosure, but no adjustment. 3. the auditor's report should be modified for a lack of consistency.

II only

The table below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate. True State of Population Deviation Rate Deviation Rate Auditor's estimate Is Less Than Exceeds based on sample results Tolerable Rate Tolerable Rate Maximum deviation rate is I. III. less than tolerable rate Maximum deviation rate II. IV. exceeds the tolerable rate As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by situation:

III.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

Including a list of items or invoices that constitute the account balance

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Inclusion of zero and negative balances generally does not require special design considerations.

On December 30, 20X1, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, 20X1, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Increased current ratio and decreased quick ratio

Of which of the following matters is a management representation letter required to contain specific representations?

Information concerning fraud by the CFO

Which of the following disclaimers of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?

Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Inquire about the current status of transactions that were recorded on the basis of preliminary data.

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

Inquire of management about related party transactions

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Inquire of management whether there have been significant changes in working capital since the year-end.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Inquiring as to whether any unusual adjustments were made after year-end

Before reissuing a company's prior-year review report, an accountant becomes aware of information that may have a material effect on the prior year's financial statements. Which of the following actions would be most appropriate for the accountant to take?

Make inquiries to determine how the information will affect the prior-year financial statements.

Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer's review engagement?

Making inquiries of management regarding maturities, interest rate, and collateral

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit?

Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

Which of the following statements ordinarily is included among the written management representations obtained by the auditor?

Management has made available to you all financial records and related data.

Which of the following management roles would typically be acknowledged in a management representation letter?

Management has the responsibility for the design of controls to detect fraud.

There are no material transactions that have not been properly recorded in the accounting records underlying the financial statements. What is the most likely source of this statement?

Management representation letter

What is the most likely source of the following statement? "There has been no fraud involving management or employees who have significant roles in internal control."

Management representation letter

For which of the following matters should an auditor obtain written management representations?

Management's compliance with contractual agreements that may affect the financial statements

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable?

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?

New convertible bonds are issued to expand the company's product line.

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

New information is discovered concerning undisclosed related party transactions of the prior year.

Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

New information regarding significant unrecorded transactions from the year under audit is discovered.

Which of the following expressions most likely would be included in a management representation letter?

No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?

None of the answer choices are correct.

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:

deviations from historical patterns.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

Obtaining a representation letter from members of management

Part 1: Auditing procedures are used to gather sufficient appropriate audit evidence for an auditor to form an opinion regarding the financial statements taken as a whole. In the table below, identify the techniques of gathering audit evidence used to evaluate a client's inventory balance. Click in each indicated cell to select the appropriate response. 1. __________ is not a technique of gathering evidence used to evaluate a client's inventory balance. 2. Scanning and reading documents are often referred to as _______ of the evidence. 3. __________ is not a technique of gathering evidence used to evaluate a client's inventory balance. 4. Employees of a company are taking a physical inventory account in front of the auditor. This is an example of __________. 5. The auditor obtains an acknowledgement in writing from a third party. This is known as a __________. Part 2: Systematic sampling is used to choose a random sample from among a larger population. Using the information provided, select the systematic sampling number for the audit in the table below by clicking the indicated cell and selecting the appropriate response. The accounts receivable balance is $35,750,000 and the audit requires a sample of 1,000 customer accounts. What is the Nth item to be tested? Part 3: Management has made the assertion that all customer accounts in accounts receivable are accurate. The payments for the invoices have been pulled according to the systematic sampling numbers figured in Part 2. Verify the assertion of accuracy with the customer payments in the Exhibits tab and the account receivables general ledger balance for February and September below. To revise the general ledger, click on each underlined item and select the correct item, if any, from the list provided. If the underlined item is appropriate, select [Original text]. If removal of the entire underlined item is the best revision to the statement as a whole, select [Delete].

Part 1: 1. Existence 2. inspection 3. Completeness 4. observation 5. confirmation Part 2: 35,750 Part 3: Toscano, Will [1A] 26444 [1B] 1,750.00 [1C] Pho, Tom [2A] 26648 [2B] 2,000.00 [2C] Seabart, Kathy [3A] 37812 [3B] 1,550.00 [3C] 61849 [4A] 3,600.00 [4B] Red, Ruby [5A] 33375 [5B] 2,000.00 [5C] Tagliano, Tina [6A] 15237 [6B] 4,000.00 [6C] 32548 [7A] 10,000.00 [7B] Deluxe, Joe [8A] 51423 [8B]

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels

Which of the following types of audit evidence is the least persuasive?

Prenumbered purchase order forms

Which of the following types of audit evidence provides the least assurance of reliability?

Prenumbered receiving reports completed by the client's employees

In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?

Project the detected error to the entire population

Which of the following is correct regarding the application of sampling to testing an account balance in a financial statement audit?

Project the error results from the sample to the population in which the sample was selected.

Which of the following would not be considered an analytical procedure?

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

If a financial statement auditor is asked to opine on financial statements that contain material inventory balances, and the auditor is unable to observe the physical inventory count either before or after the balance sheet date, which of the following is most likely to be the impact on the audit?

Qualify the audit opinion for lack of information related to inventory amounts

Which of the following would provide an auditor of a nonissuer with the best evidence of fair value pertaining to a client's investments in derivative instruments that are listed on a national exchange and disclosed at fair value?

Quoted market prices

An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicated numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?

Ratio estimation

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Reading the minutes of meetings of the stockholders and the board of directors

When an auditor requests information from the in-house legal counsel, which of the following would the auditor not request?

Receivables schedule

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

Reevaluate the risk of fraud, and design alternate tests for the related transactions

Based on the understanding of how management developed the estimate, the auditor would not use which of the following approaches in evaluating reasonableness?

Rely on the process used by management to develop the estimate

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Repairs and maintenance

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Revenue

Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?

Review of compliance with the terms of debt agreements

Which of the following procedures would best detect a liability omission by management?

Review purchase contracts and other legal documents

To support financial statement assertions, an auditor develops specific audit objectives. The auditor then designs substantive tests to satisfy or accomplish each objective. Which of the following audit procedures would primarily respond to the audit objective for accounts receivable that accounts receivable are properly described and presented in the financial statements?

Review the accounts receivable trial balance for amounts due from officers and employees.

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?

Review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Review the lawyer's letter for information about litigation.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments?

Reviewing the response from the client's lawyer to a letter of audit inquiry

Which of the following engagements performed under the Statements on Standards for Accounting and Review Services (SSARS) require(s) a written management representation letter to be obtained?

Reviews

Which of the following is a sampling risk that is associated with the efficiency of an audit?

Risk of assessing control risk too high

In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units?

Testing controls over specific risks at business units that are material to the company's consolidated financial statements

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

Testing the entity's computation of standard overhead rates

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Testing the operating effectiveness of the relevant controls would not be efficient.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Tests of controls and tests of details

Which of the following statements is false with respect to management representation letters on a review engagement?

The accountant acknowledges his or her responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows.

In an engagement performed in accordance with the Statements on Standards for Attestation Engagements (SSAEs), which of the following is true related to subsequent events?

The accountant should inquire as to whether the responsible party is aware of any subsequent events through the report date

Which of the following statements is incorrect regarding notification of third parties if the client refuses to disclose newly discovered facts and their impact on the financial statements?

The accountant's disclosure should include a brief description of the client's conduct or motive with regard to its refusal to notify third parties.

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?

The auditor selecting inappropriate auditing procedures

An auditor withdrew from further association with a nonissuer entity after issuing an audit report on it. Subsequently, the auditor discovered facts that, if known to the auditor at the date of the auditor's report, could have caused the auditor to revise the report. Which of the following statements about this circumstance is correct?

The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?

The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement

Mead, CPA, had substantial doubt about the ability of Tech Co., a nonissuer, to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 20X1. That doubt was removed in 20X2. What is Mead's reporting responsibility if Tech presented its financial statements for the year ended June 30, 20X2, on a comparative basis with those of 20X1?

The emphasis-of-matter paragraph included in the 20X1 auditor's report should not be repeated.

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?

The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.

Which of the following would be an issue that could cause a material misstatement in the financial statements?

The fair value disclosures are inconsistent with events subsequent to the balance sheet date.

A client decides not to make an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be lower.

According to the PCAOB, each of the following statements is true with respect to the auditor's responsibility to communicate material weaknesses in internal control over financial reporting, except:

all such weaknesses must be communicated in writing to all stockholders.

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to:

amounts concerning related party transactions.

"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies." The foregoing passage most likely is from:

an audit inquiry letter to legal counsel.

In an audit of a nonissuer's financial statements, projected misstatement is:

an auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should use:

attribute sampling.

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines:

both the variability in the dollar amounts of inventory items and the risk of incorrect acceptance.

An accountant is reporting on comparative financial statements that include year 1 and year 2 as part of a review engagement for a nonissuer. Current management was not in place until halfway through year 2. At the completion of the year 2 review, the accountant should obtain representations from management that cover:

both year 1 and year 2 from current management.

During an audit of a nonissuer, if the terms of a related party transaction are found to be materially inconsistent with the explanations provided by management, an auditor should:

consider the reliability of management's explanations and representations on other significant matters.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be:

considered in the evaluation of audit findings in the current year.

Analytical procedures performed in the overall review stage of an audit generally would include:

considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with:

corroboration of the information furnished by management about litigation, claims, and assessments.

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

cost of goods sold.

After testing a client's internal control activities, an auditor discovers a number of material weaknesses in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

increase the assessment of control risk and increase the extent of substantive tests.

In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

individual invoices.

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless:

information that existed at the report date and may affect the report comes to the auditor's attention.

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless:

information, which existed at the report date and may affect the report, comes to the auditor's attention.

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it were:

initially concealed by a forged document.

Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to:

issue a qualified compliance report describing the subsequent noncompliance.

In a financial statement audit, if the entity's substantial doubt about its ability to continue as a going concern for a reasonable period of time remains at year-end and is properly disclosed, the auditor should:

issue an unmodified opinion with an emphasis-of-matter paragraph.

In auditing material inventory, the auditor is required to observe the physical inventory counting, unless:

it is impracticable.

To gain assurances that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace:

items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

During the annual audit of Ajax Corp., an issuer (publicly held) company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the:

management representation letter.

In performing an audit of a nonissuer in accordance with generally accepted auditing standards, an auditor has responsibility for identifying and responding to risks that there is substantial doubt about the entity's ability to continue as a going concern for:

one year after the date the financial statements are issued or available to be issued.

An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely would reduce the:

planned reliance on the prescribed control.

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:

postpone expenditures for research and development projects.

An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

postpone expenditures to upgrade its information technology system.

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

precision.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of:

presentation and disclosure.

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

provide an objective basis for quantitatively evaluating sample risk.

In evaluating an entity's accounting estimates, one of the auditor's primary objectives is to determine whether the estimates are:

reasonable in the circumstances.

In evaluating the accounting estimates of a nonissuer, one of an auditor's primary objectives is to determine whether the estimates are:

reasonable in the circumstances.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

receiving reports.

Renfroe CPA is the predecessor auditor. The former client requests Renfroe CPA to reissue the report on prior-period financial statements, along with current-period financial statements for comparative purposes. As the predecessor auditor, Renfroe CPA:

should obtain an updated representation letter from former client management to ensure that no matters have occurred that would impact the previously released report.

The auditor considers the following procedures among others in evaluating whether management has identified all accounting estimates that could be material to the financial statements except for:

substantive procedures.

Regardless of the assessed risk of material misstatement, an auditor would perform:

substantive tests to restrict detection risk for significant transaction classes.

In regards to evaluating accounting estimates the auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance of all of the following except:

the accounting estimates have been subject to review by a specialist.

A subsequent event in a financial statement audit occurs after the balance sheet date but before:

the auditor's report date.

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except:

the cost of correcting the misstatements.

For uncorrected misstatements, the auditor should document all of the following, except:

the individual responsible for the misstatement.

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:

the population has highly variable recorded amounts.

A purpose of a management representation letter is to reduce:

the possibility of a misunderstanding concerning management's responsibility for the financial statements.

An important element in the effective application of analytical procedures is the development by the auditor of relevant expectations regarding the client's financial statements. As expectations on the part of the auditor become more precise:

the range of expected differences become narrower, and, accordingly, the likelihood increases that significant differences from the expectations are due to misstatements.

Although less encompassing than in an audit, an accountant is required to develop expectations in a review of financial statements by identifying and using plausible relationships that are reasonably expected to exist based on his or her understanding of the entity and the industry in which the entity operates. Which of the following might be sources of information for developing expectations?

~Financial information for comparable prior periods ~Budgets and forecasts ~Published information regarding the industry in which the client operates

When a client undertakes to disclose newly discovered facts and their impact on the financial statements to persons known to be currently using or likely to use the financial statements, which of the following methods should be used?

~If the effect on the accountant's report or the financial statements can be readily determined, disclosure should consist of issuing revised financial statements and, where applicable, the accountant's report. The reasons for the revision should be described in a note to the financial statements and, when applicable, be referred to in the accountant's report. ~If the effect on the accountant's report or the financial statements cannot be immediately determined, persons known to be using or likely to use the financial statements should be notified that they should not be used. If the financial statements will be revised, these persons should be notified that revised financial statements and, where applicable, the accountant's report will be issued as soon as practicable. ~When issuance of the financial statement for the subsequent period is imminent, disclosure can be made in those subsequent period statements.

With which of the following entities can the auditor inquire for information throughout an audit?

~Management and internal audit personal ~Personnel responsible for financial reporting ~Marketing, sales, and production personnel