related party

After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation? A. No further action is necessary if the audit report can still be supported. (56%) B. Let the current report stand and correct material errors on the next audit report. (0%) C. Immediately notify known users of the omitted audit procedure. (25%) D. Require that the client notify financial statements users of the omitted procedures. (17%)

A

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing A. Both test of controls and substantive tests. B. Test of controls, not substantive tests. C. Substantive tests, not test of controls. D. Neither test of controls nor substantive tests. SHOW CORRECT ANSWER

A

In a CPA's audit of a jewelry operation, the auditor relied heavily on a specialist for the purpose of verifying the value of the client's inventory. The auditor was able to obtain sufficient appropriate audit evidence, relying on the work of the specialist, and decided to issue an unmodified report. A. The auditor may not refer to the specialist in the report. B. The auditor may, but is not required to, refer to the specialist and, if so, will do so in an emphasis-of-matter paragraph. C. The auditor is required to refer to the specialist. D. The auditor may, but is not required to, refer to the specialist and, if so, will do so in an other-matter paragraph. SHOW CORRECT ANSWER

A

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the A. Internal auditor's compliance with professional internal auditing standards. B. Client's policies that limit the internal auditor's access to management salary data. C. Evidence supporting a further reduction in the assessed level of control risk. D. Results of ratio analysis that may identify unusual transactions and events.

A

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the A. Internal auditing standards developed by The Institute of Internal Auditors. B. Tests of internal control activities that could detect errors and fraud. C. Materiality of the accounts recently inspected by the internal auditors. D. Results of the tests of transactions recently performed by the internal auditors. SHOW CORRECT ANSWER

A

Jenkins Jewelry is being audited by Whitman CPA. Whitman, who is not skilled in valuing fine jewelry, hires Cindy, an expert jewelry appraiser. What is true about Whitman's use of Cindy? A. Whitman should obtain a sufficient understanding of Cindy's field in order to understand the objectives and scope of Cindy's work. B. Whitman is not required to evaluate the adequacy of Cindy's work. C. Jenkins must consent to Whitman's use of Cindy. D. Cindy must be independent from Jenkins. SHOW CORRECT ANSWER

A

Regarding warranty reserves and their associated auditing issues, which of the following statements is true? A. The warranty reserve account can be manipulated to understate income during a good sales year. B. A known decrease in product reliability, with all other factors remaining the same, should lead to a decrease in the warranty reserve account. C. A common fraud scheme known as 'channel stuffing' relies on manipulation of reserve accounts, sometimes including the warranty reserve account. D. An inherent risk of warranty reserves is the reliance on outside parties.

A

When assessing internal auditors' objectivity, an independent auditor should A. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. B. Review the internal auditors' reports to determine that their conclusions are consistent with the work performed. C. Verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment. D. Evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations. SHOW CORRECT ANSWER

A

Which of the following account balances reported on Hermida Co.'s balance sheet dated December 31, 20X5 is most likely to rely on management estimates? A. Deferred income taxes of $30,000. B. Cash of $10,000. C. Investment in Gruler Co., accounted for under the equity method. D. Accounts payable of $7,000. SHOW CORRECT ANSWER

A

Which of the following factors most likely would assist an independent auditor in assessing the objectivity of the internal auditor? A. The organizational status of the director of internal audit. B. The professional certifications of the internal audit staff. C. The consistency of the internal audit reports with the results of work performed. D. The appropriateness of internal audit conclusions in the circumstances. SHOW CORRECT ANSWER

A

Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations? A. The auditor is required to understand the objectives and scope of the actuary's work. B. The reasonableness of the actuary's assumptions is strictly the auditor's responsibility. C. The client is required to consent to the auditor's use of the actuary's work. D. If the actuary has a relationship with the client, the auditor may not use the actuary's work. SHOW CORRECT ANSWER

A

Which of the following statements is correct with regard to management use of a broker's quotation to support a fair value estimate? A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation. B. A broker's quotation that is based on a cash flow methodology cannot be accepted. C. The auditor is not required to obtain an understanding of the broker's methodology for obtaining the fair value estimate. D. A broker's quotation that is based on a combination of methodologies cannot be accepted. SHOW CORRECT ANSWER

A

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? A. The client did not record $47,000 in trade accounts payable at year end. B. The client did not disclose $45,000 of related party transactions in the footnotes. C. The client misclassified $42,000 of supplies expense as miscellaneous expense. D. The client's estimate of the allowance for doubtful accounts is $40,000 more than the auditor's estimate. SHOW CORRECT ANSWER

B

Which of the following events requires adjustment to the financial statements for the year ended December 31, Year 1? A. Loss on an accounts receivable as the result of a customer suffering a major loss from a flood in January, Year 2. B. 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. C. Loss of inventory due to an earthquake in January, Year 2. D. Sale of a major bond issue in January, Year 2.

B

Which of the following factors would an independent auditor most likely consider in assessing the objectivity of an internal auditor? A. The internal auditor has obtained the Certified Internal Auditor designation. B. The audit committee reviews employment decisions related to the director of internal auditing. C. The internal auditor was previously an employee of the auditor's public accounting firm. D. The internal auditor attends a number of comprehensive continuing professional education courses each year.

B

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Examine a sample of transactions that occurred since the year end to verify the effectiveness of computer controls. B. Inquire of management whether there have been significant changes in working capital since the year end. C. Recompute depreciation charges for plant assets sold for substantial gains since the year end. D. Reperform the tests of controls that indicated significant deficiencies in the operation of internal control. SHOW CORRECT ANSWER

B

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Examine changes in the quoted market prices of investments purchased since the year end. B. Compare the latest available interim financial information with the financial statements being reported upon. C. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates. D. Inquire about payroll checks that were recorded before the year end but cashed after the year end. SHOW CORRECT ANSWER

B

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A. Verify inventory pledged under loan agreements by confirming the details with financial institutions. B. Inquire about the current status of transactions that were recorded on the basis of preliminary data. C. Compare the financial statements being reported with those of the prior year. D. Trace information from shipping documents to sales invoices and sales journal transactions.

B

Which of the following situations may prevent an independent auditor from relying on assistance from internal auditors? A. Determining what control procedures the entity has in regard to the custody of inventory. B. Determining whether or not inventory is properly adjusted for obsolete items. C. Determining the process to order, receive, warehouse, and disburse inventory. D. Determining whether or not the entity's inventory control procedures are functioning as intended

B

Which of the following statements is correct regarding an independent auditor's reliance on a client's internal audit staff? A. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors. B. An independent auditor should assess the organizational status of the director of an internal audit. C. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers. D. An independent auditor should use internal audit workpapers when available. SHOW CORRECT ANSWER

B

Which of the following steps should an auditor perform first to determine the existence of related parties? A. Examine invoices, contracts, and purchasing orders. B. Request a list of related parties from management. C. Review the company's business structure. D. Review proxy and other materials filed with the SEC.

B

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? A. Notify each member of the board of directors that the auditor's report may not be associated with the financial statements from this point forward. B. Issue revised financial statements and auditor's report describing the reason for the revision in a note to the financial statements. C. 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. D. Notify regulatory agencies having jurisdiction over the client that the auditor's report should not be relied upon from this point forward. SHOW CORRECT ANSWER

C

An auditor is considering the use of the client's internal auditors to assist in the audit. As a result, the auditor is evaluating the competence and objectivity of the internal auditors. Factors the auditor will consider when evaluating an internal auditor's competence will include all of the following except: A. The internal auditor's education. B. The internal auditor's professional certifications. C. The organizational level to which the internal auditor reports. D. The internal auditor's experience

C

An auditor most likely would modify an unmodified opinion if the entity's financial statements include a footnote on related-party transactions A. Disclosing loans to related parties at interest rates significantly below prevailing market rates. B. Describing an exchange of real estate for similar property in a nonmonetary related-party transaction. C. Stating that a particular related-party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction. D. Presenting the dollar volume of related-party transactions and the effects of any change in the method of establishing terms from prior periods.

C

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 A. Require adjustments to the financial statements as of the year end. B. Have been recorded based on preliminary accounting estimates. C. Require disclosure to keep the financial statements from being misleading. D. Have been recorded based on year-end tests for asset obsolescence. SHOW CORRECT ANSWER

C

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? A. The auditor should talk with the successor auditor about the circumstances of the subsequently discovered information and advise whether the financial statements should be revised. B. The auditor should extend audit procedures with regard to management's revised financial statements with the objective of expressing a dual-dated qualified opinion. C. 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. D. Because the auditor is no longer associated with the entity, the auditor has no further responsibilities with regard to the financial statements.

C

In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on key factors and assumptions that are A. Stable and not sensitive to variation. B. Objective and not susceptible to bias. C. Deviations from historical patterns. D. Similar to industry guidelines. SHOW CORRECT ANSWER

C

In which of the following circumstances is an auditor most likely to rely on work done by internal auditors? A. If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high. B. If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible. C. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence. D. For financial statement amounts determined largely or entirely on the basis of estimates made by management. SHOW CORRECT ANSWER

C

In which of the following situations would an auditor most likely engage an IT auditor? A. The client requested that the audit engagement team include an IT auditor. B. Including an IT auditor on the engagement team will provide greater audit objectivity. C. Expertise in IT is required to obtain sufficient audit evidence. D. The audit will be completed in less time with an IT auditor on the engagement team. SHOW CORRECT ANSWER

C

On February 17, year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, year 1. The company anticipates that insurance proceeds of $300,000 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? A. The loss of $250,000 should be recorded as of December 31, year 1, and disclosed in the notes to the financial statements. B. The value of the building and equipment should be adjusted to $250,000 as of December 31, year 1, and the adjustment disclosed. C. The December 31, year 1, financial statements should disclose the effect of the fire with no financial statement adjustment. D. The December 31, year 1, financial statements should be adjusted without disclosure. SHOW CORRECT ANSWER

C

On March 1, Green, CPA, expressed an unmodified opinion on the financial statements of Ajax Co. On July 1, Green's internal inspection program discovered that engagement personnel failed to observe Ajax's physical inventory. Green believes that this omission impairs Green's ability to support the unmodified opinion. If Ajax's creditors are currently relying on Green's opinion, Green should first A. Request Ajax's management to communicate to its creditors that Green's opinion should not be relied on. B. Reissue Green's auditor's report with an explanatory paragraph describing the departure from GAAS. C. Undertake to apply the alternative procedures that would provide a satisfactory basis for Green's opinion. D. Advise Ajax's board of directors to disclose this development in its next interim report. SHOW CORRECT ANSWER

C

RJS CPAs has an audit client that has been involved in numerous related party transactions. In developing a plan for obtaining audit evidence, the auditor's objective will be primarily to obtain evidence to ascertain whether A. The terms were similar to an arm's-length transaction. B. The transactions would have taken place in the absence of the relationship. C. The transactions have been properly identified, disclosed, and presented. D. The internal controls are designed to prevent future third-party transactions. SHOW CORRECT ANSWER

C

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management's accounting estimates? A. Review transactions occurring prior to the completion of field work that indicate variations from expectations. B. Compare independent expectations with recorded estimates to assess management's process. C. Obtain an understanding of how management developed its estimates. D. Analyze historical data used in developing assumptions to determine whether the process is consistent. SHOW CORRECT ANSWER

C

Which of the following procedures would most likely assist an auditor in identifying related party transactions? A. Evaluate the reasonableness of management's accounting estimates that are subject to bias. B. Retest ineffective internal control activities for evidence of management override. C. Review the minutes of the meetings of the board of directors and its committees. D. Send second requests for unanswered positive confirmations of accounts receivable. SHOW CORRECT ANSWER

C

Which of the following statements is correct regarding the auditing of management estimates? A. Management bias is rarely a consideration in the auditing of management estimates. B. The auditor will often adjust downward the inherent lack of precision associated with an accounting estimate. C. In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework. D. Developing a point estimate or range to evaluate management estimates is a presumptively mandatory requirement of the auditor. SHOW CORRECT ANSWER

C

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? A. Adjust the financial statements to include the material loss. B. Expand audit procedures to test current prices of marketable securities the client holds. C. Restate the financial statements as if the material loss occurred at the balance sheet date, including disclosure in the notes. D. Disclose the material loss in the financial statements to assure that the financial statements are not misleading. SHOW CORRECT ANSWER

D

An auditor concludes that a substantive auditing procedure considered necessary during the prior year's audit was omitted and there are persons currently relying on the auditor's report. The auditor most likely would promptly apply the omitted procedure if A. Control risk was assessed at the maximum level for the relevant financial statement assertions. B. The auditor's working papers will be subject to post-issuance review in connection with a peer review program. C. The results of other procedures that were applied tend to compensate for the one omitted. D. The omission of the procedure impairs the auditor's present ability to support the previously expressed opinion. SHOW CORRECT ANSWER

D

Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management: Recalculating most estimates is typical at this stage. Overly conservative estimates are preferable to overly aggressive estimates. A company's accounting for compensation plans involving stock options requires little additional scrutiny if the stock is publicly traded at a known market price. A. II and III only B. II only C. I and II only D. None of the above

D

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Evaluation of significant accounting estimatesMateriality of misstatements A. YesYes B. YesNo C. NoYes D. NoNo SHOW CORRECT ANSWER

D

In auditing related party transactions, an auditor ordinarily places primary emphasis on A. The probability that related party transactions will recur. B. Confirming the existence of the related parties C. Verifying the valuation of the related party transactions. D. The adequacy of the disclosure of the related party transactions.

D

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are A. Prepared in a satisfactory control environment. B. Consistent with industry guidelines. C. Based on verifiable objective assumptions. D. Reasonable in the circumstances.

D

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor A. Desires to disclose the specialist's findings, which imply that a more thorough audit was performed. B. Makes suggestions to management that are likely to improve the entity's internal control. C. Corroborates another specialist's findings that were consistent with management's assertions. D. Adds an emphasis-of-matter paragraph to the auditor's report to emphasize an unusually important subsequent event.

D

On February 9, Brown, CPA, expressed an unmodified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first A. Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion. B. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements. C. Take no additional action because subsequent events have no effect on the financial statements that were reported on. D. Assess the importance of the omitted procedures to Brown's present ability to support the opinion. SHOW CORRECT ANSWER

D

Regarding pension obligations and their associated auditing issues, which of the following statements is true? A. The independent actuarial firm relied upon by an entity's management provides certain assumptions, such as workforce life expectancy, which are trusted implicitly by the auditor. B. If all other factors remain the same, a decrease in the discount rate assumption will reduce an entity's pension liability. C. Defined contribution plans require more accounting estimates than defined benefit plans. D. The findings of a specialist, such as an actuary, constitute audit evidence to be evaluated by the auditor. SHOW CORRECT ANSWER

D

When assessing an internal auditor's objectivity, an independent auditor should A. Perform tests of controls to determine whether significant internal control activities are properly maintained. B. Analyze the risk factors that relate to misstatements arising from the misappropriation of assets. C. Review the internal auditor's reports to verify that the conclusions reached are consistent with the procedures performed. D. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions. SHOW CORRECT ANSWER

D

When using a specialist to obtain evidence in an audit, the auditor will consider the specialist's competence and objectivity. Which of the following would the auditor do when evaluating the specialist's objectivity? A. Make inquiries about the specialist's reputation. B. Read the specialist's written reports. C. Make inquiries regarding the specialist's licenses and certifications. D. Make inquiries regarding the specialist's relationships. SHOW CORRECT ANSWER

D

Which of the following events least likely would indicate the existence of related party transactions? A. Making a loan with no scheduled date for the funds to be repaid. B. Maintaining compensating balance arrangements for the benefit of principal stockholders. C. Borrowing funds at an interest rate significantly below prevailing market rates. D. Writing off obsolete inventory to net realizable value just before year end. SHOW CORRECT ANSWER

D

Which of the following procedures would an auditor generally perform regarding subsequent events? A. Inspect inventory items that were ordered before year end but arrived after year end. B. Test internal control activities that were previously reported to management as inadequate. C. Review the client's cutoff bank statements for several months after year end. D. Compare the latest available interim financial statements with the statements being audited.

D

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness? A. Develop independent expectations of management's estimates. B. Consider the appropriateness of the key factors or assumptions used in preparing the estimates. C. Test the calculations used by management in developing the estimates. D. Obtain an understanding of how management developed its estimates.

D

Which of the following steps might an auditor take to evaluate the work of an IT auditor assigned to perform audit tests that will be used as a basis for the audit opinion? Observe IT auditor's testingPerform analytical procedures A. YesYes B. YesNo C. NoNo D. NoYes SHOW CORRECT ANSWER

D