AUD

Which special purpose frameworks require a description of purpose for which such financial statements are prepared?

only regulatory basis

which special purpose frameworks require an other matter paragraph to restrict the distribution of the auditor's report to specific users?

only regulatory basis (restricted) and contractual basis.

Gross Profit Percentage

(Sales - COGS) / Sales

Quick Ratio (Acid Test Ratio)

(cash + marketable securities + receivables )/ current liabilities

rate of return on common stockholders' equity

(net income - preferred dividends) / avg common stockholders equity

Earnings Per Share (EPS)

(net income - preferred dividends) / avg number of commons shares outstanding

What is audit evidence?

-Audit evidence is all the info used by the auditor in arriving at the conclusions on which the auditor's opinion is based -the auditor needs to obtain appropriate audit evidence that is sufficient to support the opinion expressed in the audit report

What are the five assertions about classes of transactions and events during the period?

1) Accuracy 2) Occurrence 3) Completeness 4) Cutoff 5) Classification

What are the five assertions about classes of transactions and events during the period? (AICPA)

1) Accuracy 2) Occurrence 3) Completeness 4) Cutoff 5) Classification

What are the five interrelated components of internal control? (5)

1) Control environment 2) Risk assessment 3) Information and communication systems 4) Control activities 5) Monitoring

What three analytical procedures for auditors use to address the risk of omission when it comes to financial securities? (Completeness testing)

1) Evaluate investment income or loss accounts 2) compare dividends, interest or other investment income to prior year's workpapers for reasonableness 3) Review the minutes of the meetings of those charged with governance for approval of any large investment related transactions

What are the four assertions specific to account balances at period end? (AICPA)

1) Existence 2) Completeness 3) Rights and Obligations 4) Valuation and allocation

What are the five traditional financial statement assertions for the PCAOB?

1) Existence 2) Completeness 3) Rights and Obligations 4) Valuation or allocation 5) Presentation and disclosure

What are the four assertions related to account balances at period end?

1) Existence 2) Completeness 3) Rights and obligations 4) Valuation and allocation

What typically are the two audit procedures involved when assessing the valuation assertion when it comes to financial securities?

1) For bonds - verify the interest earned by calculations, review the amortization of any premium or discount, inquire about management's intent and ability to hold the security to maturity 2) for investments - compare the carrying value at the beginning of the period to prior years workpapers, verify the year end fair value with an outside independent source, inquire of management about imparities that may be other than temporary

What are the two types of misstatements that are relevant to the auditor's consideration of fraud?

1) Fraudulent financial reporting - involves misstatements that are intended to deceive financial statement users. 2) Misappropriation of assets- involves theft of assets causing the financial statements to be misstated owing to false entries intended to conceal the theft.

under PCAOB related party transactions the auditor should obtain an understanding of the company's process for (3)

1) Identifying related parties and transactions with related parties 2) Authorizing and approving transactions with related parties 3) Accounting for and disclosing relationships and transactions with related parties for the financial statements

What are the three charictoristics generally associated with fraud?

1) Incentive/pressure 2) Opportunity 3) Attitude/rationalization

What are the five key points for an auditor in understanding of an entity and its environment in regards to internal control?

1) Industry, regulatory, and other external factors 2) nature of the entity 3) objectives and strategies and related business risks that may cause material misstatement of the financial statements 4) measurement and review of the entity's financial performance 5) internal control

What are the two things auditors use when assessing the rights and obligations of financial securities?

1) Inquire of management about any restrictions applicable to investments 2) Review cash receipts and cash disbursements subsequent to year end for any material transactions affecting investments.

What are the six elements of a quality control system?

1) Leadership responsibility for quality- policies and procedures should promote an internal culture that emphasizes a commitment to quality 2) Relevant Ethical Requirements- policies and procedures should address the independence of personnel as necessary 3) Acceptance and continuance of client-relationships and engagements - policies and procedures should carefully assess the risks associated with each engagement and the firm should only undertake engagements that can be completed with professional competence. 4) Human Resources - policies and procedures should address important personnel issues 5) Engagement Performance - policies and procedures should focus on compliance with all applicable firm and professional standards and applicable regulatory requirements, and encourage personnel to consult as necessary with professional literature or other human resources within or outside the firm for appropriate guidance 6) Monitoring- policies and procedures should provide an ongoing assessment of the adequacy of the design and the operating effectiveness of the system of quality control.

Independence is impaired if the firm, its covered persons or their IMFs have:

1) Loans/Debtor creditor relationships 2) Savings and Checking Accounts (anything that exceeds the FDIC insurable amount) 3) Broker-Dealer Accounts 4) Credit Cards (greater than $10,000) 5) Insurance Products (except when the policy was obtained when the covered person was not a covered person in the firm and the likelihood of the insurer becoming insolvent is remote)

SEC basic requirements to audit a public company (2)

1) Must be registered and in good standing under the laws of his/her state 2) Must be and appear to be independent and capable of exercising objective impartial judgement.

What are the four factors or considerations by the AICPA for the effectiveness and efficiency of substantive analytical procedures?

1) Nature of the assertion- may be particularly effective in testing for omissions of transactions that would be hard to detect with procedures that focus on recorded amounts. 2) Plausibility and predictability of the relationship - relationships in a stable environment are usually more predictable, relationships involving income statement accounts tend to be more predictable than those involving balance sheet accounts, and relationships involving transactions subject to management discretion tend to be less predictable. 3) Availability and reliability of data used - the reliability of expectation increases when the data used is obtained from an independent or third party, when it is subject to audit testing, or is developed under conditions of effective internal control 4) Precision of the expectation - the likelihood of detecting a misstatement decreases as the level of aggregation of that data increases

What are the four assertions about presentation and disclosure? AICPA

1) Occurrence and rights and obligations 2) Completeness 3) Classification and understandability 4) Accuracy and valuation

What are the four assertions in relation to presentation and disclosure?

1) Occurrence and rights and obligations 2) Completeness 3) Classification and understandability 4) Accuracy and valuation

What are the two types of issues relation to consistency that might affect the auditor's report according to PCAOB?

1) change in accounting principle 2) an adjustment to correct a misstatement in previously issued financial statements

What are the five primary responsibilities of the PCAOB?

1) Registration of public accounting firms 2) Inspections of registered accounting firms ( firms that provide audit reports for 100 or more firms must be inspected annually, firms that provide audit reports for less than 100 issuers must be inspected every three years) 3) Standard setting- PCAOB is directed to establish auditing and related attestation, quality control, ethics and independence standards and rules to be used by registered public accounting firms 4) Enforcement - PCAOB has broad authority to investigate registered public accounting firms and persons associated with such firms 5)Funding - PCAOB's budget is funded by a) registration and annual fees from public accounting firms, b) an annual accounting support fee assessed on issuers

what are the four benefits of statistical sampling?

1) Relates to the sufficiency on the evidence 2) the results may seem more defensible to others 3) A common misconception is that statistical sampling a need for judgement, but actually numerous judgements must be made 4) Sampling applications occur in either attribute sampling or variable sampling

What are two circumstances for which an auditor may consider it necessary to add an other matter paragraph?

1) Relevant to user's understanding of the audit (why it was not possible for the auditor to withdraw from an engagement in which a scope limitation that was pervasive resulted in a disclaimer of opinion) ---rare 2) Relevant to users' understanding of the auditor's responsibilities or the auditor's report

Some examples of permitted contingent fees in the tax area:

1) Representing a client before a revenue agent examining the client's income tax return 2) Filing an amended federal or state income tax return claiming a refund based on a tax issue that is the subject of a test case involving a different tax payer 3) Filing an amended federal or state income tax return claiming a tax refund in an amount that will be examined by a tax authority, such as the Joint Committee on Taxation 4) Helping a client obtain a private letter ruling or influencing the drafting of a regulation or statue

What are the two categories of audit procedures performed in response to the assessed risks of material misstatements?

1) Test of controls 2) Substantive procedures

What three matters should an auditor document in the cases of misstatements?

1) The amount below which misstatements would be viewed as clearly trivial 2) all misstatements accumulated during the audit and whether they have been corrected 3) the auditor's conclusion about whether the uncorrected misstatements are material, individually or in aggregate.

What three safeguards must be met for an operating lease to not impair independence?

1) The lease meets the GAAP criteria for an operating lease 2) the terms and conditions are comparable with similar leases 3) All amounts are paid in accordance with the terms of the lease.

According to PCAOB when there is a change in accounting principle, what dour things must an auditor evaluate?

1) The newly adopted principle is GAAP 2) The method of accounting for the effect of the change conforms to GAAP 3) the disclosures related to the change are adequate 4) the company has justified that the alternative accounting principle is preferable

What are three things to consider when determining the sample size with PPS Sampling?

1) The reliability factor (AICPA table) 2) population book value 3) tolerable misstatement

what are the three distinct purposes of analytical procedures?

1) They are useful as a risk assessment procedure for planning purposes 2) They are useful as a form of substantive evidence 3) The auditor is required to perform analytical procedures as near the end of the audit to assist the auditor when forming an overall conclusion about the financial statements.

What are the three instances where an emphasis of matter paragraph is required?

1) When the auditor has substantial doubt about the entity's ability to continue as a going concern 2) When there is an inconsistency in accounting principles used 3) When the financial statements are prepared in accordance with special purpose framework

What are the four criteria that an auditor should evaluate when there is a change in accounting principles?

1) Whether the adopted principle is in accordance with the applicable financial reporting framework 2) Whether the method of accounting for the effect of the change is in accordance with the applicable financial reporting framework 3) Whether the disclosures about the change are adequate 4) Whether the entity has justified that the alternative adopted is preferable

What are three options the auditor has when issuing a report about compliance under GAGAS?

1) a separate report on compliance only 2) a combined report on compliance and on internal control over compliance 3) a separate report on internal control over compliance

What is a top down approach and how does an auditor use it?

1) begin at the financial statement level 2) use the auditor's understanding of the overall risks to internal control 3) focus on entity level controls 4) focus on significant classes of transactions, accounts, disclosures, and relevant assertions that have a reasonable possibility of material misstatement to the financial statements 5) verify the auditor's understanding of the risks in the entity's process 6) select controls for testing based on the assessed risk of material misstatement to each relevant assertion

What makes 'subject matter' appropriate? (2 things)

1) capable of consistent measurement or evaluation and 2) can be subject to procedures to obtain sufficient appropriate evidence to support the opinion, conclusion, or findings, as applicable

What are three circumstances resulting in a scope limitation?

1) circumstances beyond control of the entity (fire, act of god, etc.) 2) Circumstances related to the nature or timing of the auditor's work (substantive procedures alone are not suff. and the entity's controls are ineffective, unable to obtain audited f/s of an investee, or timing of the appointment does not permit auditor to observe physical counting of inv.) 3) limitations imposed by management

What are the two categories of requirements under SSARS?

1) conditional 2) presumptively mandatory

what are the four variables sampling techniques an auditor would use?

1) difference estimation 2) Ratio estimation 3) mean per unit estimation 4) probability proportionate to size sampling

What are three reservations concerning procedures or findings that a practitioner might include an explanatory paragraph to comment on?

1) disclosure of assumptions or interpretations used 2) description of the condition of records, controls, or data involved 3) explanation that the practitioner has no responsibility to update the practitioner's report

What are four indicators of a material weakness?

1) discovery of any fraud involving senior management, whether material or not 2) restatement of previously issued financial statements to correct a material misstatement 3) identification of any material misstatement during the audit that was not detected by internal control 4) ineffective oversight of reporting and controls by those charged with governance

What does pervasive mean in terms of the financial statements?

1) effects that are not confined to specific elements, accounts or items of the financial statements 2) effects that, if so confined, represent or could represent a substantial proportion of the financial statements 3) regarding disclosures, are fundamental to users' understanding of the financial statements

What eight steps comprise an attribute sampling?

1) identify the sampling objective 2) Define what constitutes an occurrence 3) Identify the relevant population 4)Determine the sampling method 5) Determine the sample size 6) Select the sample 7) Evaluate the sample results 8) Document the auditor's sampling procedures

If the auditor is engaged to audit a single financial statement or a specific element of a financial statement in connection with an audit of the complete set of financial statements, the auditor should (2 things)

1) issue a separate report and express a separate opinion for each engagement 2) indicate in the report on a specific element of a financial statement the date of the auditor's report on the complete set of financial statements and the nature of that opinion under an appropriate heading.

What are the two ways to use the work of an internal audit function?

1) obtain audit evidence that modifies the nature, timing or extent of audit procedures to be performed by the external auditor and or 2) provide direct assistance to the external auditor under the external auditor's direction, supervision and review.

What are the two types of reports a service auditor may be engaged to issue on internal controls applicable to a service organization?

1) on the adequacy of the design of internal control (type 1) 2) on the operating effectiveness of internal control based on tests of controls (type 2)

what two main things do auditors do related to the existence assertion for financial securities?

1) physically inspect securities in the possession of the client entity 2) confirm stocks and bonds held by an independent custodian

What are the eight areas an auditor should address when auditing employee benefit plans?

1) plan investments and investment income 2) employee and employer contributions 3) payments of benefits 4) participant demographic and payroll data 5) loans to participants 6) the allocation of investment income to individual participants 7) liabilities and plan obligations 8) administrative expenses

What are the three fundamental conditions applicable to any attestation engagement?

1) practitioner must be independent 2) the responsible party must take responsibility for the subject matter 3) the engagement must have the following four characteristics a)subject matter is appropriate b) criteria to be used are suitable and available c) the practitioner expects to obtain the necessary evidence related to the opinion, conclusion or findings d) the practitioner's opinion, conclusion or findings is to be expressed in a written report.

What are the three review engagements that are prohibited?

1) prospective financial information 2) internal control 3) compliance with the requirements of specified laws, regulations, rules, contracts, or grants

what are the three types of engagements under SSARS?

1) reviews 2) compilations 3) engagements to prepare financial statements for a client without issuing an accompanying report

What 5 matters are required by the PCAOB to be communicated to a company's audit committee?

1) significant risks the auditor identified 2) relevant matters regarding the company's accounting policies and estimates 3) significant unusual transactions 4) matters regarding the auditor's evaluation of any related parties and transactions with those related parties 5) Other matters identified that are significant to the oversight of the company's financial reporting process

When reporting on the adequacy of the design of internal controls, a service auditor's report ordinarily would consist of what type of opinion?

1) that the description fairly presents the system that was designed and implemented as of the specific date and 2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively as of the specific date

when reporting on the operating effectiveness of internal control, the service auditor's report would ordinarily consist of what type of opinion?

1) that the description fairly presents the system that was designed and implemented throughout the period 2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively throughout the period and 3) that the controls tested operated effectively throughout the period

With payroll, in relation to the classification assertion what four things should an auditor look for?

1) the comments related to accuracy and occurrence apply to recording the transactions in the proper accounts as well 2) review outside reports related to pension, other post retirement benefits, and profit sharing plans 3) Verify payroll deductions and taxes, trace cash disbursements for withholdings to appropriate agencies 4) Note that ordinarily income statement elements are primarily audited by analytical procedures. Tests of details will be performed only when the analytical procedures suggest that a risk of material misstatement exists and that more detailed investigation is warranted.

What are four factors that an auditor might consider as factors when assessing the risk of noncompliance? (GAGAS)

1) the complexity of the compliance requirements 2) how long the entity has been subject to those compliance requirements 3) the degree of judgement involved in compliance 4) the entity's compliance in prior periods

When accepting an engagement with special purpose framework, the auditor should obtain an understanding of what three things?

1) the purpose for which the financial statements are prepared 2) the intended users 3) the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances

What are the four instances that the reporting accountant should not consult with the continuing accountant?

1) the reporting accountant does not believe that a second opinion is being requested 2) the reporting accountant has full access to management 3) the reporting accountant believes that the relevant information has been obtained 4) the reporting accountant deems it unnecessary to consult with the continuing accountant, the reporting accountant should document the justification for not consulting.

What are some risk factors affecting whether a misstatement may occur?

1) the size and composition of the account 2) susceptibility to misstatement 3) volume of activity and complexity 4) nature of the account, transactions, or disclosures 5) accounting and reporting complexities associated with the account, transactions or disclosures 6) exposure to losses in the account 7) possibility of significant contingent liabilities resulting 8) existence of related party transactions 9) changes from the prior period

What are three circumstances in which an accountant should not accept an engagement to be performed in accordance with SSARS?

1) there is reason to believe that relevant ethical requirements will not be satisfied 2) information that is needed to perform the engagement is unlikely to be either available or reliable 3) there is reason to doubt management's integrity

What are the four characteristics of 'suitable' criteria?

1) they are relevant to the subject matter 2) they are free from bias 3) they allow reasonably consistent measurements/evaluations 4) they do not omit relevant factors.

What are the two objectives with AICPA guidance on reporting on internal control in an integrated audit?

1) to obtain reasonable assurance whether material weakness exist at the 'as of' date in management's assessment of ICFR and 2) to express an opinion on the effectiveness of ICFR and communicate appropriately with management and those charged with governance

What are four situations which an auditor may consider having it necessary to include an emphasis of matter paragraph (that is not required)?

1) uncertainty as to the outcome of unusually important litigation or regulator action 2) A major casualty having significant effect 3) significant transactions with related parties 4) unusually important subsequent events

What are the two additional reports that are required under GAGAS versus GAAS?

1) written report on internal control in every financial audit under GAGAS 2) written report on compliance with applicable laws and regulations (should also distinguish between general requirements and specific requirements)

Number of days sales in inventory ratio

365 days/ inventory turnover

number of days' sales in receivables

365 days/receivable turnover

What are the levels of assurance with a compilation?

A compilation conveys no assurance about the reliability of the financial statements.

What is a significant deficiency?

A deficiency, or combination of deficiencies, in I/C over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

What is a material weakness?

A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.

what is a derivative

A derivative is a type of investment that derives its value from the value of other assets like stocks, bonds, commodity price, or market index values. Some derivates are futures contracts, forward contracts, calls, puts, etc.

What is a misstatement?

A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework (GAAP).

What is an other matter paragraph?

A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgement, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report

What are the levels of assurance with a review?

A review conveys a lower level of assurance about financial statements

The definition of 'supplemental information' under PCAOB auditing standards includes all of the following except for A) A public company's sustainability report consisting of a variety of financial and nonfinancial measure of performance, which is made available to readers on the entity's website B) Supporting schedules that brokers and dealers are required to file with the SEC C) Information outside of the financial statements that is derived from the entity's accounting records, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standard D) Information that is required to be presented under the rules of a regulatory authority, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standards

A) A public company's sustainability report consisting of a variety of financial and nonfinancial measure of performance, which is made available to readers on the entity's website Information that a company voluntarily presents on its web site is outside the PCAOB's definition of supplemental information. As a practical matter, sustainability reports are not required, nor is third party assurance on sustainability required

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that A) Any difference in the facts, circumstances, or assumptions presented my change the report B) The engagement was performed in accordance with statements on standards for consulting services C) The guidance provided is for management use only and may not be communicated to the prior or continuing auditors D) Nothing came to the accountant's attention that caused the accountant to believe that the accounting principles violated GAAP

A) Any difference in the facts, circumstances, or assumptions presented my change the report An accountant's report on the application of accounting principles to a specific transaction should include 1) a statement that the engagement was conducted in accordance with applicable AICPA standards, 2) a description of the transaction and the accounting principles to be applied 3) a statement indicating that responsibility for proper accounting treatment rests with the preparers of the financial statements 4) a statement that any difference in the facts, circumstances, or assumptions may change the report.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: A) Cash disbursements. B) Approved vouchers. C) Receiving reports. D) Vendors' invoices.

A) Cash disbursements. If the auditor is concerned that invoices and vouchers are being paid and destroyed, the most appropriate population for testing is cash disbursements. The auditor would select a sample of inventory disbursements and trace to the vendor invoice, approved voucher, and receiving report.

Which of the following is an analytical procedure? A) Comparing current year balanced to prior year balances B) Matching sales invoices to shipping documents C) Confirming accounts receivable D) Making inquiries of client management

A) Comparing current year balanced to prior year balances Analytical procedure are defined as evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. The definition encompasses evaluating the current year balances by comparing them to prior year balances for reasonableness.

Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded? A) Completeness B) Occurrence C) Accuracy D) Cutoff

A) Completeness Determining whether the sales have, in fact, been recorded addresses the risk of omission, which involves the completeness assertion.

Which of the following procedure would an auditor least likely perform before the balance sheet date? A) Confirmation of accounts payable B) Observation of merchandise inventory C) Assessment of control risk D) Identification of related parties

A) Confirmation of accounts payable Performing substantive tests before the balance sheet date increases the risk that the auditor will not detect material misstatements in the balances at the balance sheet date. In selecting procedures to perform before the balance sheet date, an auditor must consider the problems involved in controlling this increase in risk. The auditor's primary concern with accounts payable is completeness. Confirmation efforts in this area would, therefore, be directed toward zero or low-balance accounts, and would be least likely to be performed before the balance sheet date, as it would have to be re-preformed as of the balance sheet date.

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 auditor's assessment of control risk is comparable to the independent auditor's assessment D) Evaluate the quality of the internal auditor's working paper documentation and their recent audit recommendations.

A) Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. When assessing the internal auditors objectivity, the auditor should consider the organizational status of the internal audit function, and the policies affecting the internal auditor's objectivity about areas audited. The latter includes policies prohibiting the internal auditor from auditing areas where recently assigned.

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be A) Considered in the evaluation of audit findings in the current year B) Disclosed by the client in the current year financial statements C) Retested during the current year tests of controls D) Removed from the prior year summary because they were immaterial

A) Considered in the evaluation of audit findings in the current year In determining whether identified (uncorrected) misstatements are material in the aggregate, the auditor should take into consideration the effects of relevant misstatements identified in a prior period, even if they were deemed immaterial in the prior period.

In obtaining an understanding of an entity's internal control structure policies and procedures that are relevant to audit planning, an auditor is required to obtain knowledge about the A) Design of the policies and procedure pertaining to the internal control structure elements B) Effectiveness of the policies and procedures that have been places in operation C) Consistency with which the policies and procedures are currently being applied D) Control procedures related to each principal transaction class and account balance.

A) Design of the policies and procedure pertaining to the internal control structure elements In obtaining an understanding of an entity's internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the design of relevant internal controls pertaining to financial reporting in each to the five internal control components. Note that only those internal controls which impact the financial statements are to be considered. It is not necessary to understand and evaluate all of an entity's internal controls.

An auditor will most likely use computer assisted audit techniques, rather than manual techniques, when it is necessary to A) Examine all data in an accounts payable file B) Review approval of dividends C) Verify unrecorded legal liabilities D) Assess compliance with policies and procedures related to information security

A) Examine all data in an accounts payable file An advantage of computer assisted audit techniques is the capability of analyzing very large populations of data

For which of the following audit tests would an auditor most likely use attribute sampling? A) Inspecting purchase orders for proper approval by supervisors B) Making an independent estimate of recorded payroll expense C) Determining that all payables are recorded at year end D) Selecting accounts receivable for confirmation of account balances

A) Inspecting purchase orders for proper approval by supervisors The term attributes sampling is used in the context of testing internal control issues, such as evaluating the appropriate authorization of purchase transactions

What two situations make CPAs not independent?

A) Investments by the Audit Client in the Accounting firm B) Underwriting

Morgan is an audit partner at E & D. One of Morgan's audit clients is Beezle Corp, which is 100% owned by Dilbilly. Morgan must, of course, be concerned about independence. Which of the following situations would not create an independence problem for Morgan? A) Morgan and Dilbilly both own shares of Google. B) Morgan and Beezle both own 40% of a small manufacturing company in town. C) Morgan and DIlbilly both love to ski and co-own a ski chalet near Aspen. D) Morgan and Dilbilly both hate to ski but co-own a ski chalet near Aspen as an investment.

A) Morgan and Dilbilly both own shares of Google. Covered members and attest clients may both own the stock of a widely-held public corporation.

Which of the following are essential elements of the audit trail in an electronic data interchange system? A) Network and sender/recipient acknowledgments B) Message directories and header segments C) Contingency and disaster recovery plans D) Trading partner security and mailbox codes

A) Network and sender/recipient acknowledgments Network and sender/recipient acknowledgment document the trail of accounting data through the system. In doing so they serve as essential elements of the audit trail in an EDI system.

What are the SOX mandates for partner rotation?

A) No requirements that public companies rotate audit firms. B) Lead and concurring audit partners must be rotated every 5 years (5 on 5 off) C) Other partners providing more than 10 hours of attest services must be rotated every seven years (7 on, 2 off) d) There are exemptions for firms with fewer than five public company audit clients and fewer than 10 audit partners.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should A) Not refer to the change in the auditor's report B) refer to the note in the financial statements that discuss the change C) Refer to the change in an emphasis of matter paragraph D) Explicitly state whether the change conforms with GAAP

A) Not refer to the change in the auditor's report The auditor's report should not mention a change in accounting principle that has an immaterial effect on comparability. Only material matters are relevant to the auditor's report

On receiving a client's bank cutoff statement, an auditor most likely would trace A) Prior year checks listed in the cutoff statement to the year outstanding checklist B) Deposits in transit listed in the cutoff statement to the year end bank reconciliation C) Checks dated after year end listed in the cutoff statement to the year end outstanding checklist D) Deposits recorded in the cash receipts journal after year end to the cutoff statement

A) Prior year checks listed in the cutoff statement to the year outstanding checklist a cutoff bank statement is a regular bank statement that is prepared by the bank for a shorter period than normal, it is sent directly to the auditors. The cutoff bank statement is used by auditors to verify the components of the client's bank reconciliation. The auditor would trace the prior year checks cleaning the cutoff statement to the outstanding check list in the bank reconciliation as a means of verifying completeness and accuracy of the outstanding check list

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? A) Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts B) Vouch a sample of cash receipts and disbursements for the last few days of the current year C) Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year end cash balance D) Confirm the amounts included in the statement of cash flows with the entity's financial institution

A) Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts Much of the work done to audit the statement of cash flows consists of agreeing amounts included in the statement of cash flows to amounts reported in other financial statements. This would include, for example, agreeing depreciation expense to the amount reported in the income statement.

Which of the following audit procedure is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period B) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments D) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date

A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period the procedures used to identify unrecorded trade accounts payable are included in the basket of procedures performed as the search for unrecorded liabilities. Reviewing subsequent cash disbursements enables the auditor to detect items purchased before year end but not yet recorded.

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures? A) The acceptable level of detection risk decreases, and the extent of substantive procedures increases B) The acceptable level of detection risk increases, and the extent of the substantive procedures increases C) The acceptable level of the detection risk decreases, and the extent of the substantive procedures decreases D) The acceptable level of detection risk increases, and the extent of the substantive procedures decreases

A) The acceptable level of detection risk decreases, and the extent of substantive procedures increases As the risk of material misstatement increases, the auditor should decrease detection risk accordingly. The auditor may lower detection risk by increasing the extent of substantive procedures.

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.

A) The auditor is required to understand the objectives and scope of the actuary's work When using a specialist, in general, the auditor is obligated to obtain an understanding of the work to be performed by the specialist, including the nature, objectives, and scope of the specialists work.

The auditor's responsibility to communicate with those charged with governance about fair value measurements and disclosure issue is best described by the following statement: A) The auditor should determine whether those charged with governance are informed about management's processes in developing material fair value estimates, including significant assumptions used by management. B) The auditor should determine whether those charged with governance are actively involved in designing and taking responsibility for the adequacy of internal controls over fair value measurements and disclosures C) The auditor should determining whether those charged with governance were consulted by management and had adequate input in forming the entity's estimates for fair value measurement and disclosures D) The auditor should determine whether those charged with governance take responsibility for the reasonableness of the entity's fair value measurements and disclosures.

A) The auditor should determine whether those charged with governance are informed about management's processes in developing material fair value estimates, including significant assumptions used by management. The auditor will consider whether or not the nature of significant assumptions used in fair value measurements, the degree of subjectivity involved in the development of the assumptions, and the relative materiality of the items being measured at fair value need to be communicated to those charged with governance.

The use of the ratio estimation sampling technique is most effective when A) The calculated audit amounts are approximately proportional to the client's book amounts B) A relatively small number of differences exist in the population C) Estimating populations whose records consist of quantities but not book values D) Large overstatement differences and large understatement differences exist in the population

A) The calculated audit amounts are approximately proportional to the client's book amounts Ratio estimation is most efficient when the differences are proportional to book values. If the calculated audit amounts are approximately proportional to the book amounts, a correlation exists between book values and the individual differences, and ratio estimation will be effective.

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? A) The recipients are likely to sign the confirmations without devoting proper attention to them B) Subsequent cash receipts are unusually difficult to verify C) Analytical procedures indicate that few exceptions are expected D) The combined assessed level of inherent risk and control risk is low

A) The recipients are likely to sign the confirmations without devoting proper attention to them Using the blank form of confirmation of accounts receivable provides greater assurance that the recipient of the confirmation has verified that the information is correct. It is more likely to be used when the auditor is concerned that recipients will not devote proper attention to the confirmations.

Which legislation is most directly associated with pension and welfare plans? A) uniform commercial code of 1952 B) Securities act of 1933 C) employee retirement income security act of 1974 D) sarbanes-oxley act of 2002

A) uniform commercial code of 1952 the uniform commercial code focuses on sales laws and other commercial transactions, not employee benefit plans

Form AP, which must be filed with the PCAOB for every audit of an issuer, addresses each of the following matters except for A) The year when the auditor first began serving consecutively as the company's auditor B) The extent of participation of any other accounting firm whose participation in the audit accounts for 5% or more of the total audit hours involved with the engagement C) The name of the engagement partner D) The number and extent in total of all other accounting firms whose participation in the audit accounts for less than 5% of the total audit hours involved with the engagement

A) The year when the auditor first began serving consecutively as the company's auditor OCAOB auditing standards require that such a statement regarding the auditor's tenure be expressed somewhere within the audit report, not in Form AP

Which of the following is the primary objective of probability proportional to sample size? A) To identify overstatement errors B) To increase the proportion of smaller-value items in the sample C) To identify items where controls were not properly applied D) To identify zero and negative balances

A) To identify overstatement errors PPS sampling is most effective in detecting overstatements, since the likelihood of an item's selection increases with the recorded magnitude of the item.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A) Vendors with whom the entity has previously done business B) Amounts recorded in the accounts payable subsidiary ledger C) Payees of checks drawn in the month after the year end D) Invoices filed in the entity's open invoice file.

A) Vendors with whom the entity has previously done business In auditing the completeness assertion for accounts payable, the auditor is concerned about the possible understatement of accounts payable. The appropriate population for a confirmation effort would, therefore, be vendors with whom the entity has previously done business, in order to try and identify unrecorded payables.

An auditor may report on condensed financial statements that are derived from audited financial statements if the A) Auditor indicates whether the information in the condensed financial statements is consistent in all material respects B) Condensed financial statements are presented in comparative form with the prior year's condensed financial statements C) Auditor describes the additional review procedures performed on the condensed financial statements D) Condensed financial statements are distributed only to management and the board of directors

A) auditor indicates whether the information in the condensed financial statements is consistent in all material respects an auditor's report on condensed financial statements should indicate: 1) the auditor has audited and expressed an opinion on the complete financial statements 2) the date of the auditor's report on such statements 3) the type of opinion expressed 4) whether the information in the condensed financial statements is consistent, in all material respects, with the audited financial statements

Which of the following should a practitioner perform as part of an engagement for agreed upon procedures in accordance with statements on standards for attestation engagements? A) issue a report on findings based on specified procedures performed B) assess whether the procedures meet the needs of the parties C) express negative assurance on findings of work performed D) report the differences between agreed upon and audit procedures

A) issue a report on findings based on specified procedures performed an agreed upon procedures report expresses assurance in the form of procedures and findings with the respect to the procedures performed.

If the prior-period compiled financial statements have been restated and the predecessor accounting firm decides not to reissue its report, the successor accounting firm A) may be engaged to reissue the prior period report B) may not be engaged to reissue the prior period report C) must disclose the prior period misstatements in the introductory paragraph of its current year report D) must issue a combines report of both the prior period and current period financial statements

A) may be engaged to reissue the prior period report there is nothing in the applicable AICPA professional standards that would prevent an accountant from accepting an engagement to compile an entity's current year financial statements as well as the prior year's financial statements.

What is a type one report?

report on management's description of a service organization's system and the suitability of the design of controls

Which of the following procedures should a user auditor include in the audit plan to create the most efficient audit when an audit client uses a service organization for several processes? A) review the service auditor's report on controls placed in operation B) review the service auditor's report and outline the accounting system in a memo to the working papers C) audit the service organization's controls, assess risk, and prepare the audit plan D) audit the service organization's controls to test the work of the service auditor

A) review the service auditor's report on controls placed in operation the user auditor should plan to read the service auditor's report, whether on controls placed in operation or on operating effectiveness in connection with obtaining an understanding of internal controls at the service organization that may be relevant to the user entity's financial statements

A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. under these circumstances, the CPA's review report should include a A) statement that a review is substantially less in scope than an audit B) reference to the scope limitation that caused the changed engagement C) description of the auditing procedures that were completed before the engagement was changed D) reference to the CPA's justification for agreeing to change the engagement

A) statement that a review is substantially less in scope than an audit it may be permissible to change an engagement from an audit to a review. The review report should include a sentence stating that a review is substantially less in scope than an audit

which financial statement is specifically mentioned in the first paragraph of the auditor's report on an employee benefit plan's comparative financial statements? A) statements of financial position B) statements of net assets available for benefits C) statements of investment income and its allocation to participants D) statements of participants' equity in plan assets

A) statements of financial position the auditor's report references the statements of net assets available for benefits and the related statement of changes in net assets available for benefits

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if A) the results of alternative procedures that were performed compensate for the omission B) the auditor's assessed level of detection risk is low C) the omission is documented in a communication with the audit committee D) no individual investment is material to the financial statements taken as a whole

A) the results of alternative procedures that were performed compensate for the omission The auditor may not have to perform the omitted confirmation procedures if alternative procedures compensate for the omission and limit audit risk to an acceptable low level.

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate A) The type of opinion expressed previously. B) That the CPA did not update the assessment of control risk. C) The reasons for the change from an audit to a review. D) That the audit report should no longer be relied on.

A) the type of opinion expressed previously in these circumstances, AICPA standards require the accountant to add a separate paragraph to the review stating 1) that the prior period's financial statements were audited 2) the date of the previous report 3) the type of opinion expressed 4) the reason for any modification of the report and 5) that no auditing procedures were performed after the date of the previous report

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to issue a report on PDC's internal controls implemented as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should A. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. B. State whether PDC's controls were suitably designed to achieve the retailer's objectives. C. Identify PDC's controls relevant to specific financial statement assertions. D. Disclose Cook's assessed risks of material misstatement for PDC. (CPA)

A. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. a report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum

Inventory Turnover Ratio

cost of goods sold/average inventory

What is the difference between accounts payable and vouchers payable?

AP is when payables are tracked by the name of the vendor, VP is when the payables are tracked by an individual transaction without summarizing the amounts owed by vendor name

What are the levels of assurance with an audit?

An audit conveys a high level of assurance about the reliability of the financial statements, and is expressed as a positive assurance in the form of an opinion.

What is PPS Sampling Unit?

An individual dollar associated with the financial statement element involved

SOX Requirements for audit committees

Audit committees should select, evaluate, and compensate the auditors. In addition, they must preapprove any permitted nonaudit services purchased by a company from its auditor.

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 A) $1,000 B) $2,000 C) $4,000 D) $5,000

B) $2,000 In a probability proportional to size application, the projected error of the sample is the amount of the difference between the book value and the audit value when the amount of the account is examined is greater than the sampling interval. As the selected account receivable was $10,000 and the sampling interval was $5,000, the projected error was $2,000 (the actual difference between the recorded amount and the audit value).

For audits of public companies, audit documentation must be assembled within how many days of the report release date? A) 30 days B) 45 days C) 60 days D) 90 days

B) 45 days PCAOB auditing standards specify a documentation completion date of no more than 45 days following the report release date

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? A) incorrect rejection B) Incorrect acceptance C) Assessing control risk too low D) Assessing control risk too high

B) Incorrect acceptance Incorrect acceptance involves concluding that a financial statement element was fairly stated, based on an audit sampling application, when in fact, the element was materially misstated. This is consistent with the circumstances described in the question.

An auditor should ordinarily add an explanatory paragraph to the auditor's report to identify a material matter related to A) A change in reporting entity resulting from a specific transaction or event B) A change in accounting principle cause by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted C) A change in classification in previously issued financial statements D) All of the above

B) A change in accounting principle cause by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted PCAOB auditing standards identify two specific matters that affect the auditor's evaluation of consistency of financial statements 1) a change in accounting principle 2) an adjustment to correct a misstatement in previously issued financial statements. A change in accounting principle may be at management's discretion or it may be mandated by a change in accounting standards that eliminates an accounting alternative that was previously accepted by no longer is.

A CPA in public practice may not disclose confidential client information regarding auditing situations without the client's consent in response to which of the following situations? A) A review of the CPA"s professional practice by a state CPA society B) A letter to the client from the IRS C) An inquiry from the professional ethics division of the AICPA D) A court ordered subpoena or summons

B) A letter to the client from the IRS

The auditor's report on supplemental information under PCAOB auditing standards should include a statement about each of the following except for A) A statement that the supplemental information is management's responsibility B) A statement that the methods of measurement and presentation have not changed from those used in the prior period C) A statement that the supplemental information complies with the applicable regulatory requirements D) An opinion (or disclaimer) as to whether the supplemental information is fairly stated in relation to the financial statements as a whole

B) A statement that the methods of measurement and presentation have not changed from those used in the prior period The auditor should obtain management's representation that the methods of measurement or presenetation have not changed from those used in the prior period. However, the auditor's report does not include such a statement

In an audit of a nonissuer's financial statements, projected misstatement is A) the likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented B) An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample C) The only amount that the auditor considers in evaulating materiality and fairness of the financial statements D) An auditors best estimate before performing audit procedures, of misstatements that the auditor expects to find during the audit

B) An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample AICPA professional standards have described projected misstatement as the amount of known misstatements identified in a sample that is projected to the population from which the sample was drawn

Interpretive publications include all of the following except for: A) Appendices to Statements on Auditing Standards B) Articles in the AICPA's Journal of Accountancy C) Auditing guidance included in AICPA Audit and Accounting Guides D) Auditing interpretations of the Statement on Auditing Standards

B) Articles in the AICPA's Journal of Accountancy Articles in the Journal of Accountancy have no authoritative status and would be classified as other auditing publications.

How should differences of opinion between the engagement partner and the quality control reviewer be resolved? A) By adhering to industry best practices B) By following the firm's policies and procedures C) By accepting the recommendations of the client's audit committee D) By issuing a disclaimer of opinion and reporting the issue to those charged with the entity's governance.

B) By following the firm's policies and procedures Differences of opinion between the engagement partner and the quality control reviewer should be resolved using the firm's established policies and procedures

As part of a fraud audit, a CPA wishes to identify employees with invalid SSN in the client's payroll transaction data. Which of the following audit tests of controls using computer assisted audit techniques would best meet the objective? A) Obtaining statistics on the population of the payroll file to identify unusual pay amounts to employees. B) Comparing SSN paid in the payroll transaction file to a file of government authorized SSNs C) Randomly selecting 25 payments from the payroll department and comparing the results to the employee SSN cards in the HR Records D) Comparing the payroll transaction file to the employee master file to extract payments to employees who are not in the employee master file

B) Comparing SSN paid in the payroll transaction file to a file of government authorized SSNs Using computer assisted audit techniques to match the SSN for all employees in the payroll transaction file to the population of government authorized SSN would identify any employees having invalid SSN

In establishing the existence and ownership of long term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or A) Correspond with the investee company to verify the number of stocks owned B) Confirm the number of shares owned that are held by an independent custodian C) Apply analytical procedures to the dividend income and investment accounts D) Inspect the cash receipts journal for amounts that could represent the sale of securities

B) Confirm the number of shares owned that are held by an independent custodian Publicly traded stock is commonly held by a custodian on behalf of the investor. It would be most efficient and effective to confirm the number of shares owned with the independent custodian

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is A) Appropriate for the environment in which the entity operates B) Consistently applied from prior periods C) Evaluated and appropriately applied based on generally accepted accounting principles D) Appropriate for the debt security being valued

B) Consistently applied from prior periods When an active trading market for debt securities has been introduced in the current year, the fair value of the debt securities would be based on that active trading market. However, the prior year's financial statements presented for comparative purposes would still be based on the model selected by management. Hence, consistency in the model's application would not be maintained.

The exercise of due professional care requires that an auditor A) Examine all available corroborating evidence B) Critically review the judgement exercised at every level of supervision C) Reduce control risk below the maximum D) Attain the proper balance of professional experience and formal education

B) Critically review the judgement exercised at every level of supervision

The objectives of the internal control structure for a production cycle are to provide assurance that transactions are properly executed and recorded, and that A) Production orders are prenumbered and signed by a supervisor B) Custody of work in progress and of finished goods is properly maintained C) Independent internal verification of activity reports is established D) Transfers to finished goods are documented by a completed production report and a quality control report.

B) Custody of work in progress and of finished goods is properly maintained Management's objectives in establishing and maintaining internal control structure are to ensure that 1) transactions are executed in accordance with management's general or specified authorizations 2) transactions are recorded as necessary to permit preparation of the financial statements in accordance with GAAP and to maintain accountability for assets 3) access to assets is permitted only in accordance with management's authorization 4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and differences are investigated and resolved. Ensuring that custody of work in process and of finished goods is properly maintained is an example of the third objective.

According to PCAOB auditing standards, after the documentation completion date A) Documentation can be added or deleted as deemed appropriate B) Documentation can be added but bot deleted C) Documentation cannot be added by can be deleted D) Documentation cannot be added or deleted

B) Documentation can be added but bot deleted PCAOB auditing standards state that additional documentation can be added after the documentation completion date but nothing can be deleted after that date

An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques? A) Snapshot application B) Embedded audit module C) Integrated data check D) Test data generator

B) Embedded audit module An embedded audit module is a program inserted into the client's system to capture designated transactions, such as large or unusual transactions, for later review by the auditor. It enables the auditor to continuously test the client's computerized information system

An auditor's responsibility to express an opinion on the financial statements is A) Implicitly represented in the auditor's unmodified report B) Explicitly represented in the responsibility paragraphs of the auditor's unmodified report C) Explicitly represented in the opening paragraph of the auditor's unmodified report D) Explicitly represented in the opinion paragraph of the auditor's unmodified report.

B) Explicitly represented in the responsibility paragraphs of the auditor's unmodified report

A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by: A) Adhering to generally accepted auditing standards B) Having an appropriate system of quality control C) Joining professional societies that enforce ethical conduct D) Maintaining an attitude of independence in its engagements

B) Having an appropriate system of quality control A firm is required to establish an appropriate system of quality control to provide reasonable assurance of conforming with professional standards.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would A) issue a disclaimer of opinion about the internal controls as part of the auditor's report B) Increase the assessment of control risk and increase the extent of substantive tests C) Issue a qualified opinion of this finding as part of the auditor's report D) Withdraw from the audit because the internal controls are ineffective

B) Increase the assessment of control risk and increase the extent of substantive tests Significant deficiencies are control deficiencies, or combinations of control deficiencies such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected, on a timely basis.

Of which of the following matters is a management representation letter required to contain specific representations? A) Length of a material contract with a new customer B) Information concerning fraud by the CFO C) Reason for a significant increase in revenue over the prior year D) The competency and objectivity of the internal audit department

B) Information concerning fraud by the CFO A management representation letter routinely includes a statement pointing out that senior management has no knowledge of any fraud or suspected fraud involving management, which includes the CFO

An auditor is obligated to communicate an uncorrected audit adjustment to an entity's audit committee (or those charged with governance) only if the adjustment A) Is individually material B) Is not believed to be trivial C) Is a recurring matter that was proposed to management the prior year D) Results from the correction of a prior period's departure from GAAP

B) Is not believed to be trivial All uncorrected misstatements must be communicated to the audit committee or those charged with governance, unless they are deemed to be trivial.

Decision tables often differ from program flowcharts in that decision tables emphasize A) Ease of manageability for complex programs B) Logical relationships among conditions and actions C) Cost benefit factors justifying the program D) The sequence in which operations are performed

B) Logical relationships among conditions and actions The decision table presents in tabular form the conditions and alternative actions related to making a particular decision. It emphasizes logical relationships among the conditions and actions. `

When there are no observable market prices, the auditor is not obligated to consider whether A) Management's valuation method is appropriate in the circumstances B) Management's selection of a specialist is appropriate for the audit engagement C) Management's valuation method is appropriate relative to the industry and environment of the entity D) Management has appropriately applied criteria provided by GAAP

B) Management's selection of a specialist is appropriate for the audit engagement The decision to engage a specialist is an auditor judgement not a management decision

Unconditional requirements in the clarified statements on standards for accounting and review services are indicated by the word A) Should B) Must C) May D) Could

B) Must must indicates an unconditional requirement in the ssars

Which of the following statements about audit sampling risks is correct for a nonissuer? A) Nonsampling risk arises from the possibility that, when the substantive test is restricted to a sample, the conclusions might be different than if the auditor had tested each item in the population B) Nonsampling risk can arise because an auditor failed to recognize misstatements C) Sampling risk is derived from the uncertainty in applying audit procedures to specific risks D) Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective

B) Nonsampling risk can arise because an auditor failed to recognize misstatements Nonsampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence.

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample? A) Tolerable rate of deviation B) Number of items in the population C) Degree of assurance desired D) Planned assessed level of control risk

B) Number of items in the population Population size is not considered in determining the sample size for an attributes sampling application. The tables that are used to determine the sample size for attribute sampling are based upon an assumption that the population is very, very large. Hence, an increase in the population size would have a negligible effect.

The Single accounting firm audits Double, Inc, a public company. Which of the following people may not receive any tax service consulting from Single? A) Bill, who is an outside director on Double's board. B) Omar, Double's head of internal audit. C) Kelly, Double's controller, who was hired away from a competitor in the middle of an audit cycle when the former controller died suddenly and the contract to provide the tax advice was assigned before Kelly joined Double and the services were terminated 39 days after Kelly began work. D) Sally, assistant CFO of a Double subsidiary that is audited by Triple accounting firm.

B) Omar, Double's head of internal audit. Because Omar is in a Financial Reporting Oversight Role and none of the exceptions appears to apply, he may not receive any tax services from Single.

There are certain substantive auditing procedures that might appropriately be performed when auditing any element of the financial statements, particularly balance-sheet elements. Which of the following is not a substantive procedure potentially applicable to every balance-sheet element? A) Reviewing the accounting records for anything that appears to be unusual B) Performing tests of controls to evaluate the effectiveness of relevant controls C) Making appropriate inquiries of management or other client personnel about matters related to the particular balance sheet element D) Agreeing the financial statement elements to the underlying accounting records such as the entity's general ledger

B) Performing tests of controls to evaluate the effectiveness of relevant controls tests of controls are not a substantive procedure

When assessing the competence of the internal auditors, an independent CPA should obtain information about the A) Organizational level to which the internal auditors report B) Quality of the internal auditors' working paper documentation C) Policies prohibiting internal auditors from auditing sensitive matters. D) Internal auditor's preliminary assessed level of control.

B) Quality of the internal auditors' working paper documentation AICP Professional standards indicate that the auditor should assess the competence and objectivity of the internal audit function if the internal auditor's work is considered relevant to planning the audit. The independent auditor would consider the quality of the internal auditor's work products, including documentation, among other matters, in evaluating the internal auditor's competence.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the A) Auditor's system of quality control has been maintained at a high level B) Results are consistent with the conclusions to be presented in the auditor's report C) Audit procedures performed are approved in the professional standards D) Audit has been performed by persons having adequate technical training and proficiency as auditors

B) Results are consistent with the conclusions to be presented in the auditor's report

During planning, an auditor of a nonissuer should communicate which of the following to those charged with governance at an entity? A) The auditor is responsible for preparing financial statements in conformity with the applicable financial reporting framework B) The audit does not relieve management of its responsibilities for the financial statements C) The auditor will express an opinion on the effectiveness of internal controls over compliance with laws and regulations D) All audit findings will be communicated in writing to those charged with governance.

B) The audit does not relieve management of its responsibilities for the financial statements During the planning, the auditor will communicate that the audit does not relieve management of its responsibilities for the financial statements.

Which of the following statements is not correct about the auditor's report under PCAOB auditing standards? A) The auditor's opinion is expressed at the beginning of the audit report B) The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the SEC C) Each section of the audit report must have an appropriate label D) Critical audit matters must be identified and discussed in the auditor's report

B) The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements to the SEC The PCAOB requires the auditor's report to be dated at the point at which the auditor obtained sufficient appropriate audit evidence as a basis for the opinion. The date of the audit report is unrelated to when the company files its financial statements with the SEC

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? A) The industry and the business and regulatory environments in which the client operates B) The degree to which information technology is used in the accounting function C) The relationship between management, the board of directors, and external stakeholders. D) The degree to which the auditor intends to use internal audit personnel to perform substantive tests

B) The degree to which information technology is used in the accounting function

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? A) The reporting status of the internal auditor within the organization B) The educational level and professional experiences of the internal auditor C) Whether policies prohibit the internal auditor from auditing areas where relatives are employed D) Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.

B) The educational level and professional experiences of the internal auditor In evaluating the internal auditor's competence, the auditor should obtain or update information about educational level, professional experience, professional certifications and continuing education, policies related to assignment of internal auditors, policies related to supervision and review, quality of work products, and performance evaluations.

Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period? A) The acceptance level of detection risk B) The timing of control and substantive tests C) Whether to adopt substantive or reliance test strategies D) The assessed level of inherent risk

B) The timing of control and substantive tests when it might be best (or even possible) to perform tests if control and substantive tests could be affected by the availability of underlying evidence.

Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the auditor to request clarification? A) We believe that the possible liability to the company is nominal in amount B) We believe that the action can be settled for less than the damages claimed C) We believe that the plaintiff's case against the company is without merit D) We believe that the company will be able to defend this action successfully.

B) We believe that the action can be settled for less than the damages claimed This comment is extremely vague and clarification would be required. What exactly would this mean? In litigation, settlements are always less than the damages claimed. This is part of the negotiation process.

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning: a. Overpayment of employees for hours not worked. b. Control and distribution of unclaimed checks. c. Withholding of taxes and Social Security contributions. d. Missing employee identification numbers.

B) control and distribution of unclaimed checks Test data would not be helpful in evaluating physical security controls over unclaimed checks or other documents

Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under GAS (yellow book)? A) auditors are not required to report fraud, illegal acts, and other material noncompliance in the audit report B) in some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity C) the auditor's key findings of the audit of the financial statements should be communicated in a separate report D) the reporting standards in a governmental audit are identical to the auditor's responsibilities under GAAS

B) in some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity auditors are required to report known or likely fraud, illegal acts, violations of contracts or grants, or abuse directly to outside parties when 1) management fails t report such information as required by law or regulation 2) management fails to take timely and appropriate action to respond to fraud, illegal acts, violations, or abuse that is likely to be material to the financial statements and involves government agency funding

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 A) discuss the matter with management and if appropriate, those charged with governance B) issue a qualified compliance report describing the subsequent noncompliance C) determine whether the noncompliance related to conditions that exited as of period end or arose subsequent to the reporting period D) modify the standard compliance report to include a paragraph describing the nature of the subsequent noncompliance

B) issue a qualified compliance report describing the subsequent noncompliance If the material noncompliance occurred subsequent to the period associated with the audit report, the auditor would not modify the opinion

Mill, CPA, was engaged by a group of royalty recipients to apply agreed upon procedure to financial data supplied by Modern Co regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agree upon procedures should contain a (an) A) disclaimer of opinion about the fair presentation of Modern's financial statements B) list of the procedures performed and Mill's findings C) opinion about the effectiveness of Modern's internal control activities concerning royalty payments D) acknowledgement that the sufficiency of the procedures is solely Mill's responsibility

B) list of the procedures performed and Mill's findings an agreed upon procedures engagement results in the issuance of a report that identifies the procedure performed and the results obtained. the report would include a list of the procedures performed and their findings

When the practitioner determines that the subject matter of an examination engagement is materially misstated but that the misstatement is not pervasive, the practitioner should express a (an) A) qualified opinion either directly on the subject matter or on the responsible party's assertion when the assertion acknowledges the misstatement B) qualified opinion directly on the subject matter C) qualified opinion on the responsible party's assertion, whether or not the assertion acknowledges the misstatement D) adverse opinion on either the responsible party's assertion or directly on the subject matter

B) qualified opinion directly on the subject matter when a misstatement of the subject matter is material but not pervasive, the practitioner should express a qualified opinion. when expressing either a qualified or adverse opinion due to misstatement of the subject matter, the practitioner should express the opinion directly on the subject matter.

A practitioner reporting on pro forma financial information does not possess an understanding of the client's business and the industry in which the client operates. The practitioner should take which of the following actions? A) issue a disclaimer, because the scope of work was not sufficient to express an opinion B) review industry trade journals C) refer a substantial portion of the audit to another cpa who will act as the principal practitioner D) perform ratio analysis of the financial data of comparable prior periods

B) review industry trade journals when a practitioner does not have the necessary understanding of the client's business and industry for purposes of reporting on pro forma financial information, the practitioner should consider whether sufficient knowledge of these matters can be obtained. It is possible that industry related knowledge might be obtained by reviewing applicable industry trade journals

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, and auditor would most likely gather evidence in support of management's financial statement assertions of existence or occurrence and A) Valuation or allocation B) Rights and obligations C) Completeness D) Presentation and disclosure

B) right and obligations The rights and obligations assertion deals with whether the entity has the rights to or is obligated for the assets and liabilities in the financial statements. Confirming with an outside agent that the agent is holding securities in the client's name would address the existence of, and the client's rights to, such assets.

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance? A) statements on auditing standards B) statements on standards for attestation engagements C) statements on standards for accounting and review services D) statements on standards for consulting services

B) statements on standards for attestation engagements Statements on standards for attestation engagements apply specifically to an attest engagement performed by a CPA. that is defines as examining, reviewing or performing agreed upon procedure on subject matter or an assertion by the responsible party about the subject matter. The engagement described here is an examination on management's assertion about the square footage of a warehouse.

In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? A) the prospective financial statements depart from AICPA presentation guidelines B) the practitioner was not able to perform certain procedures deemed necessary C) the prospective financial statements fail to disclose significant assumptions D) the significant assumptions do not provide reasonable basis for the statements

B) the practitioner was not able to perform certain procedures deemed necessary If the practitioner is unable to obtain sufficient appropriate evidence regarding the prospective financial statements, the practitioner should disclaim an opinion (and describe the scope limitation in the report)

Which of the following is a requirement for accepting an attestation engagement to report on the controls at a service organization? A) the description of the controls is completed prior to the signing of the engagement letter B) the service auditor has the competence and capability to perform the engagement C) the suitability of the evaluation criteria is reviewed by a third party D) management agrees that the service auditor will be responsible for documenting the controls

B) the service auditor has the competence and capability to perform the engagement The subjective matter attestation standards also require compliance with other relevant attestation standards.

In a PPS sampling application, the sampling interval was $6,000. The auditor discovered that a selected account receivable having a recorded amount of $5,000 had an audit amount of $1,000. What was the projected error associated with this sample? A) $4,000 B) $1,200 C) $4,800 D) $3,200

C) $4,800 When the recorded balance of the account involved is less than the sampling interval, the auditor must determine the 'tainting' percentage and apply that percentage to the sampling interval. In this case, the tainting percentage (5000-1000)/5000= 80%. Accordingly this projected misstatement is 6000*80%= 4,800

Audit documentation associated with public companies must be retained for at least A) 3 years B) 5 years C) 7 years D) 10 years

C) 7 years PCAOB standards specify a 7 year retention period for audit documentation

The auditor is required to communicate each of the following items to those charged with governance except A) An overview of the planned scope and timing of the audit B) The auditor's responsibilities to complete the audit in accordance with generally accepted auditing standards C) All control deficiencies detected during the course of the audit D) Any significant findings from the audit

C) All control deficiencies detected during the course of the audit AICPA professional standards requires the auditor to communicate to those charged with governance any significant deficiencies in internal control identified by the auditor. The auditor is not required to communicate all control deficiencies identified.

Which of the following types of sampling allows an auditor to quantify sampling risk? A) Stratified nonstatistical B) Haphazard C) Attribute D) Block

C) Attribute Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence (quantifiable)

An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the A) Auditor believes that the specialist's findings are reasonable in the circumstances B) Specialist's findings support the related assertions in the financial statements C) Auditor modified the report because of the difference between the client's and the specialist's valuations of an asset D) Specialist's findings provide the auditor with greater assurance of reliability about management's representations.

C) Auditor modified the report because of the difference between the client's and the specialist's valuations of an asset AICPA Professional standards indicate that reference to the work of a specialist may be made in the auditor's report if the auditor believes such reference will facilitate an understanding of the reason for a modified opinion.

When assessing control risk at below the maximum level, an auditor is required to document the auditor's understanding of the 1) Entity's control activities that help ensure management directives are carried out 2) Entity's control environment factors that help the auditor plan the engagement A) 1 only B) 2 only C) Both 1 and 2 D) Neither 1 nor 2

C) Both 1 and 2 The auditor is always required to obtain a sufficient understanding of the internal control system in order to plan the audit. This understanding must be documented, regardless of the level at which control risk is to be assessed. Control activities and control environment factors are both components of the internal control system. As a result, they would both be documented.

Which of the following is not an assertion associated with account balances at the end of the period? A) Valuation and allocation B) Rights and obligations C) Classification D) Existence

C) Classification Classification is included among the five assertions associated with classes of transactions and events for the period under the audit, as identified by GAAS

In auditing long-term bonds payable, an auditor most likely would: A) Perform analytical procedure on the bond premium and discount accounts B) Examine documentation of assets purchased with bond proceeds for liens C) Compare interest expense with the bond payable amount for reasonableness D) Confirm the existence of individual bondholders at year end

C) Compare interest expense with the bond payable amount for reasonableness In auditing long term bonds payable, an auditor would compare interest expense with the bond payable amount for reasonableness. This procedure would provide evidence supporting the completeness and proper statement of interest expense, including limited evidence related to the amortization of bond premium and discounts. It would also provide evidence supporting the completeness and proper statement of the bonds payable balance.

How should an auditor verify the valuation of marketable securities at the balance sheet date? A) Confirm all securities with the related custodians and test interest income B) Observe the inventory count of all securities at the balance sheet date C) Compare the prices of the securities to published closing prices at the balance sheet date D) Inquire of management that securities are valued at fair value

C) Compare the prices of the securities to published closing prices at the balance sheet date To verify the year end fair value of marketable securities, trace to an independent outside source, such as the wall street journal or other appropriate quotation

Reports are considered special reports when issued in conjunction with A) Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP B) Feasibility studies presented to illustrate an entity's results of operation C) Compliance with aspects of regulatory requirements related to audited financial statements D) Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions

C) Compliance with aspects of regulatory requirements related to audited financial statements Special reports apply to engagements that involve compliance with contracts or regulatory requirements related to financial statements

The auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately A) Adopt an attitude of acceptance unless evidence indicates otherwise B) Authenticate documents used as audit evidence C) Consider the reliability of information to be used as audit evidence D) Assess the entity's document-retention controls before using documents as audit evidence

C) Consider the reliability of information to be used as audit evidence The auditor should routinely consider the reliability of audit evidence in assessing the risks of material misstatement whether due to fraud or error.

The permanent file section of the audit documentation that is kept for continuing audit engagement most likely would contain A) The most recent lawyer's letter applicable to unresolved litigation B) The most recent time budget for the audit engagement C) Copies or abstracts of the entity's lease agreements D) Copies of the entity's most recent tax returns

C) Copies or abstracts of the entity's lease agreements The permanent file would usually include copies or abstracts of significant contracts that affect multiple years. Lease agreements have financial statement effects and frequently involve multiple years, so the auditor would keep those copies or abstracts of key provisions in the permanent file.

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit? A) Total liabilities/net sales B) Accounts receivable/inventory C) Cost of goods sold/average inventory D) Current assets/quick assets

C) Cost of goods sold/average inventory This ratio is called inventory turnover, which is a traditional ratio that is useful in evaluating whether inventory might be slow moving. In that event, inventory might need to be written down to better reflect the estimated future benefits. This might be appropriately considered in the partner's review.

PCAOB auditing standards dealing with related party issues specifically require an auditor of an issuer to obtain an understanding of the company's process for each of the following except for A) Identifying related parties and transactions with related parties B) Authorizing and approving transactions with related parties C) Determining that the terms of related party transactions are substantially equivalent to those prevailing in arm's length transactions with unrelated parties D) Accounting for and disclosing relationships and transactions with related parties in the financial statements.

C) Determining that the terms of related party transactions are substantially equivalent to those prevailing in arm's length transactions with unrelated parties The PCAOB requires the auditor to obtain an understanding of the company's process for the following 1) identifying related parties and transactions with related parties 2) Authorizing and approving transactions with related parties 3) Accounting for and disclosing relationships and transactions with related parties in the financial statements There is no reason to expect that related party transactions will have terms substantially equivalent to those associated with transactions with unrelated parties.

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by: A) Reading the details of the board of director meetings B) Confirming the details with the investee companies' registrars C) Electronically accessing the details of dividend records on the internet D) Examining the details of the client's most recent cutoff bank statement

C) Electronically accessing the details of dividend records on the internet to establish the reasonableness of dividends on investments in public companies, the auditor might find relevant corroborating information using the internet, such as visiting the SEC's website for information about dividends pertaining to investee companies.

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? A) Monitoring compliance with internal control requirements imposed by regulatory bodies. B) Limiting direct access to assets by physical segregation and protective devices C) Establishing budgets and forecasts to identify variances from expectations D) Supporting employees with the resources necessary to discharge their responsibilities

C) Establishing budgets and forecasts to identify variances from expectations The use of budgets and forecasts to compare planned and actual results will enable management to supervise more effectively than the other controls listed. It provides a means for management to establish expectations, to compare them to actual results, and then to follow up in areas where significant differences appeared. Monitoring compliance with regulatory requirements, limiting access to assets, and providing adequate support are important to the successful operation of the business but they do not necessarily help management to supervise more effectively.

When auditing related party transactions, an auditor places primary emphasis on A) Confirming the existence of the related parties B) Verifying the valuation of the related party transactions C) Evaluating the disclosure of the related party transactions D) Ascertaining the rights and obligations of the related parties

C) Evaluating the disclosure of the related party transactions

Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would A) add an emphasis of matter paragraph to the standard auditor's report that justified the reason for the omission B) Refuse to accept the engagement as proposed because of the client imposed scope limitation C) Explain to Zag that the omission requires a qualification to the auditor's opinion D) prepare that statement of cash flows as an accommodation to Zag and express an unmodified opinion

C) Explain to Zag that the omission requires a qualification to the auditor's opinion When an entity omits a statement of cash flows, the auditor may accept an engagement to audit the other financial statements, but should qualify the opinion since a statement of cash flows is required when general-purpose financial statements present financial position and results of operation

Control risk should be assessed in terms of A) Specific control procedures B) Types of potential irregularities C) Financial statement assertions D) Control environment factors

C) Financial statement assertions The auditor assesses control risk for the assertions present in the financial statements. Such assertions may be found in the account balance, transaction class, or disclosure components. Based on the understanding of internal control and the control risk assessments, the auditor determines the nature, timing and the extent of the auditing procedures to be performed.

Tammy is looking to increase the revenue stream for her accounting firm. She is thinking of using commissions and referral fees to do so. Which of the following is true regarding commissions and referral fees? I) Neither is permitted when the client is an attest client. II) Both are permitted when the client is not an attest client, if they are properly disclosed. A) I only B) II Only C) I and II D) Neither I or II

C) I and II

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 verified that the bank reconciliation is properly prepared by the controller, as evidenced by their respective sign offs. Which of the following types of audit procedures do these actions illustrate? A) Observation and inspection of records B) Confirmation and re-performance C) Inquiry and inspection of records D) Analytical procedures and re-performance

C) Inquiry and inspection of records The interview of the controller is inquiry the review of the bank reconciliation for evidence that the control procedure of interest was performed is inspection of records

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would agree A) Inventory tags noted during that auditor's observation to items listed in receiving reports and vendor's invoices B) Items listed in receiving reports and vendor's invoices to the inventory listing C) Inventory tags noted during the auditor's observation to items listed in the inventory listing D) Items in the inventory listing to inventory tags and the auditor's recorded count sheets

C) Inventory tags noted during the auditor's observation to items listed in the inventory listing Validity pertains to existence that inventory is real and exists. Agreeing items in the inventory listing to the underlying inventory tags and the auditor's recorded count sheets provides support that the inventory in the listing actually exists. The direction of the test is critical to determining whether existence or completeness is most involved.

Under the SOX Act of 2002, which of the following is not a stated responsibility of the PCAOB? A) Conducting inspections of registered public accounting firms B) Overseeing the registration of public accounting firms C) Issuing accounting standards that must be followed by issuers in financial reporting D) Issuing auditing standards that must be followed by registered public accounting firms in auditing the financial statements of issuers.

C) Issuing accounting standards that must be followed by issuers in financial reporting THE PCAOB is a standard setting body for certain matters related to registered public accounting firms. However, the PCAOB is not an accounting standard-setting body and does not promulgate GAAP affecting the financial statements of issuers.

Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the reporting entity? A) Review the audit documentation and the audit programs of the component auditor B) Visit the other CPA and discuss the results of the component auditor's procedures C) Make inquiries about the professional reputation and independence of the component auditor D) Determine that the component auditor has a sufficient understanding of the subsidiary's internal control

C) Make inquiries about the professional reputation and independence of the component auditor When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor

GAAS requires the auditor's report to contain either an expression of opinion regarding the financial statements or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent A) An auditor from expressing different opinions on each of the basic financial statements B) Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence C) Misinterpretations regarding the degree of responsibility the auditor is assuming D) An auditor from reporting on one basic financial statement and not others.

C) Misinterpretations regarding the degree of responsibility the auditor is assuming The objective is to prevent users of audited financial statements from misinterpreting the degree of responsibility the auditor is assuming when the auditor's name is associated with 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: A) Amount of dividends paid to related parties B) Expected proceeds from stock subscriptions receivable C) Number of share issued and outstanding D) Proper authorization of stock rights and warrants

C) Number of share issued and outstanding The primary responsibility of an independent registrar or stock transfer agent is to ensure that the stock issued by a corporation is in accordance with the capital stock provisions in the corporate charter and the authorization by the board of directors. Auditors confirm with them to determine whether any capital stock transactions have occurred and the accuracy of existing transactions, the effect of which is to confirm issued and outstanding shares.

Sound internal control procedures dictate that, immediately upon receiving checks from customers by mail, a responsible employee should A) Add the checks to the daily cash summary B) Verify that each check is supported by a prenumbered sales invoice C) Prepare a duplicate listing of checks received D) Record the checks in the cash receipts journal

C) Prepare a duplicate listing of checks received The greatest risk for checks received in the mail is the risk of such checks being lost or misappropriated. Sound internal control, therefore, dictates the preparation of a listing of checks received as soon as possible.

Suppose that management of an issuer makes an assertion in a footnote to the company's financial statements that material transactions with related parties were conducted on terms equivalent to those prevailing in arm's length transactions. If evidence cannot be obtained to support this assertion and management declines to alter the footnote, what type of audit opinion would be appropriate? A) Unqualified with an explanatory paragraph B) Qualified for a scope limitation C) Qualified or adverse for a material misstatement D) Disclaimer of opinion

C) Qualified or adverse for a material misstatement PCAOB auditing standards state that the auditor should consider a qualified or adverse opinion under such circumstances

Which of the following auditing procedures would be most likely to assist an auditor in identifying related party transactions? A) Inspecting correspondence with lawyers for evidence of unreported contingent liabilities B) Vouching accounting records for recurring transactions recorded just after the balance sheet date C) Reviewing confirmations of loans receivable and payable for indications of guarantees D) Performing analytical procedures to seek indications of possible financial difficulties

C) Reviewing confirmations of loans receivable and payable for indications of guarantees Reviewing confirmations of loans receivable and payable for indications of guarantees is one of the auditing procedures that will assist the auditor in identifying related party transactions

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support managements financial assertions of A) Presentation and disclosure, and rights and obligations B) Presentation and disclosure but not rights and obligations C) Rights and obligations by not presentation and disclosure D) Neither presentation and disclose or rights and obligations

C) Rights and obligations by not presentation and disclosure Follow-up on errors reported by customers provides evidence that the customers exist and that the receivables are valid. The auditor's test of controls thus provides evidence to support the assertion of rights and obligations. It does not address presentation and disclosure.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud? A) Reviewing the segregation of duties for staff and who had responsibility for sales, shipping and invoicing B) Reviewing the support for open sales orders not yet shipped at Dec 31 C) Sending positive confirmations to all of the client's customers with balances on Dec 31 D) Examining the reconciliation between the subsidiary ledger and the general ledger account.

C) Sending positive confirmations to all of the client's customers with balances on Dec 31 A positive confirmation test requires a response whether the individual customer agrees or disagrees with the stated balance. A nonresponse indicated a situation that should be followed up by the auditor.

An auditor is not required to document A) Identified material misstatements that have been corrected by management B) The basis for the auditor's determination of materiality levels used C) Senior management's awareness of (and agreement with) the tolerable misstatement specified by the auditor for material elements of the financial statements D) The auditor's conclusions as to whether any misstatements that management chose not to correct are, in fact, material.

C) Senior management's awareness of (and agreement with) the tolerable misstatement specified by the auditor for material elements of the financial statements The auditor should not divulge to management the specific levels of materiality levels allocated to individual elements of the financial statements. So obtaining such agreement would not be appropriate.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee (or those charged with governance) because they represent A) Disclosures of information that significantly contradict the auditor's going concern assumption B) Material irregularities or illegal acts perpetuated by high-level management C) Significant deficiencies in the design or operation of internal control D) Manipulation or falsification of accounting records or documents from which financial statements are prepared

C) Significant deficiencies in the design or operation of internal control Significant deficiencies should be reported to the audit committee because they are significant deficiencies in the design or operation of internal control that could adversely affect the entity's financial reporting process.

Which of the following is an example of a validity check? A) The computer ensures that a numerical amount in a record does not exceed some predetermined amount B) As the computer corrects errors and data are successfully resubmitted to the system, the cause of the errors are printed out C) The computer flags any transmission for which the control field value did not match that of an existing file record D) After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent

C) The computer flags any transmission for which the control field value did not match that of an existing file record A validity check is a check to see if the data carry valid values. Of the items listed, this item is the only validity check. The computer matches a control field value to an existing file record and highlights those which do not.

Which of the following is a management assertion regarding account balances at the period end? A) Transactions and events that have been recorded have occurred and pertain to the entity B) Transactions and events have been recorded in the proper accounts C) The entity holds or controls the rights to assets, and liabilities are obligations of the entity D) Amounts and other data related to transactions and events have been recorded appropriately.

C) The entity holds or controls the rights to assets, and liabilities are obligations of the entity There are 4 assertions applicable to account balances at the period end 1) existence 2) completeness 3) rights and obligations 4) valuation and allocation

Misstatements in a batch computer system caused by incorrect programs or data may not be detected immediately because A) Errors in some transactions may cause rejection of other transactions in the batch B) The identification of errors in input data is typically not part of the program C) There are time delays in processing transactions in a batch system D) The processing of transactions in a batch system is not uniform

C) There are time delays in processing transactions in a batch system Misstatements in a batch computer system caused by incorrect programs or data may not be detected immediately because there are time delays in processing transactions in a batch system. In a batch system, transactions are grouped together in batches and then processed.

When companies use information technology extensively, evidence may be available only in electronic form. What is an auditor's best course of action in such situations? A) Assess the control risk as high B) Use audit software to perform analytical procedures C) Use generalized audit software to extract evidence from client databases D) Perform limited tests of controls over electronic data.

C) Use generalized audit software to extract evidence from client databases. When evidence is available only in electronic form, the auditor may find that generalized audit software is the best and most efficient means of extracting evidence from client databases.

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? A) Attributes sampling B) Stop or go sampling C) Variables sampling D) Random number sampling

C) Variables sampling Variables sampling, or classical variables sampling, is used to calculate a best estimate of a population value with confidence intervals around the estimate. Commonly used variables sampling methods are mean per unit, difference estimation, and ratio estimation.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A) Trace a sample of accounts payable entries recorded just before year end to the unmatched receiving report file B) Compare a sample of purchase orders issued just after year end with the year end accounts payable trial balance C) Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices D) Scan the cash disbursements entries recorded just before year end for indications of unusual transactions

C) Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices Vouching a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices would enable the auditor to determine if the goods were actually received or owned before year end. As a result, the amounts paid after year end would need to be accrued as year end liabilities

Which of the following statements would not normally be included in a representation letter for a review of interim financial information? A) To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information B) We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud C) We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information D) We have made available to you all financial records and related data.

C) We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information The AICPA's sample management representation letter for interim financial information does not include a representation about understanding the meaning of review of interim financial information. The nature of such an engagement would be clearly communicated in the required engagement letter, but it would not be a statement of fact by management in response to the auditor's inquiries.

A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner use? A) unqualified B) qualified C) adverse D) disclaimer

C) adverse when the underlying assumptions do not provide a reasonable basis for the prospective financial statements, the practitioner should issue an adverse opinion

When the practitioner determines that the subject matter of an examination engagement has a misstatement that is both material and pervasive, the practitioner should express a (an) A) unmodified opinion with an explanatory paragraph B) disclaimer of opinion C) adverse opinion D) qualified opinion

C) adverse opinion the practitioner should express an adverse opinion when the subject matter is misstated in a way that is material and pervasive

Which of the following statements correctly describes the 'top down approach' used during an audit of internal control over financial reporting? A) begin reviewing balance sheet accounts and then review income statement accounts B) begin reviewing income statement accounts and then review balance sheet accounts C) begin by understanding the overall risks to internal control over financial reporting at the financial statement level D) begin by understanding the overall risks to internal control over financial reporting at the general ledger level

C) begin by understanding the overall risks to internal control over financial reporting at the financial statement level a top down approach begins at the financial statement level, uses the auditor's evaluation of overall risks to internal control over financial reporting, considers entity level controls, considers significant account balances, disclosures, and their relevant assertions, and so on. it begins at the financial statement level and works down to the relevant assertion level to select relevant controls for testing

An auditor is engaged to report on selected financial data that are included in a client prepared document containing audited financial statements. Under these circumstances, the report on the selected data should A) state that the presentation is based on a special purpose framework B) restrict the use of the report to those specified users within the entity C) refer to the report issued on the entity's audited financial statements D) indicate that the data are subject to prospective results that may not be achieved

C) refer to the report issued on the entity's audited financial statements when an auditor is engaged to audit a specific element of the financial statements, like selected financial data, in conjunction with an engagement to audit the financial statements, the report on the specific element should include the date of the audit report on the financial statements and the type of opinion expressed.

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 A) test of controls and extensive tests of property and equipment balances at the end of the year B) analytical procedures for current year property and equipment transactions C) tests of controls and limited tests of current year property and equipment transactions D) analytical procedures for property and equipment balances at the end of the year.

C) tests of controls and limited tests of current year property and equipment transactions The assessment of control risk at a low level requires that the auditor provide the basis for reducing the assessment. The basis is provided by performing tests of controls and documenting the results which support a lowered control risk assessment. In turn, the low control risk assessment enables the auditor to reduce the amount of substantive testing in that area, thus limiting the testing of current year property and equipment transactions.

Which of the following statements about a practitioner's review report for an attestation engagement is correct? A) the statements on standards for attestation engagements require CPAs to express a review report in a standardized format B) the practitioner should report on the responsible party's written assertion, not directly on the subject matter C) the practitioner's review report should include a disclaimer of opinion D) when the subject matter of a review engagement has a misstatement that is material but not pervasive, the practitioner should restrict the distribution of the repost to the engaging party

C) the practitioner's review report should include a disclaimer of opinion the review report should include a statement that a review is substantially less in scope than an examination, and a disclaimer of opinion should be included.

Stockholders Equity, in relation to the existence assertion, what could an auditor do to prove existence of shares/stocks?

Confirm the outstanding shares of stock if there is an external registrar, and verify that the stock was issued in accordance with the company's articles of incorporation and with the approval of those charged with governance.

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

With payroll, in relation to the cutoff assertion, what should an auditor do to test cutoff?

Cutoff is effectively addressed when occurrence and completeness have been addressed, in other words when the auditor has established that recorded transactions are properly recorded and that there are no omissions of transactions that should have been recorded, the auditor has established that the transactions have been recorded in the correct accounting period.

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? A) Qualified opinion B) Unmodified opinion C) Disclaimer opinion D) Adverse opinion

D) Adverse opinion When a misstatement is material and the effect on the financial statements is pervasive, the auditor should express an adverse opinion indicating that the financial statements are not fairly stated

Which of the following transactions impairs independence under the SEC rules? A) The Lark audit firm audits ABC Co, a Fortune 100 company that manufactures widgets. Pam, who is on Lark's audit team, borrows money from ABC to buy a car. The loan is collateralized by the automobile B) The Wren audit firm audits XYZ Co, a publicly traded financial institution. Pim, who is on Wren's audit team, has a credit card issued by XYZ and currently owes $20,000. C) The Meadowlark audit firm audits LMN Co, a publicly traded company, which is teetering on the bring of bankruptcy. Pom is on Meadowlark's audit team for the LMN audit and owns a life insurance policy issued by Pom that she bought before she became a covered person. D) All of the options

D) All of the options

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? A) Disclosing lack of segregation of duties to external auditors during the annual review B) Replacing personnel every three or four years C) Requiring accountants to pass a yearly background check D) Allowing for greater management oversight of incompatible activities

D) Allowing for greater management oversight of incompatible activities Closer management oversight directed specifically at such incompatible activities would be an effective approach in mitigating the risks involved.

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review except A) Identification of the engagement quality reviewer and others who assisted the reviewer B) Identification of the documents reviewed by the engagement quality reviewer and others who assisted the reviewer C) The date on which the engagement quality reviewer provided concurring approval of issuance D) An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team

D) An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team This answer is not identified by PCAOB auditing standards as a matter that is required documentation in an engagement quality review

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting A) A reperformance B) A confirmation C) An observations D) An inspection

D) An inspection AICPA professional standards identifies seven types of audit procedures, the AICPA describes examining accounting records as inspection.

Which of the following matters in a financial statement audit is most appropriate to communicate with those charged with governance? A) Clearance explanations of workpaper review notes B) Major variances in budgeted versus actual audit hours C) The nature and timing of detailed audit procedures D) An overview of the planned scope and timing of the audit

D) An overview of the planned scope and timing of the audit The auditor would appropriately discuss the planned scope and timing of the audit at a fairly general level with those charged with governance.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? A) Are assets that collateralize notes payable critically needed for the entity's continued existence B) Are two or more authorized signatures required on checks that repay notes payable C) Are the proceeds from notes payable used for the purchase of noncurrent assets D) Are direct borrowings on notes payable authorized by the board of directors

D) Are direct borrowings on notes payable authorized by the board of directors An internal control questionnaire for notes payable would ask about controls over direct borrowings on notes payable. The concern would be whether it was possible for borrowings to occur without proper authorization.

Before applying principal substantive tests to an entity's accounts receivable at the interim date, and auditor should A) Consider the likelihood of assessing the risk of incorrect rejection too low B) Project sampling risk at the maximum for tests covering the remaining period C) Ascertain that accounts receivable are immaterial to the financial statements D) Assess the difficulty in controlling incremental audit risk

D) Assess the difficulty in controlling incremental audit risk The auditor would consider the difficulty in controlling the incremental audit risk, the risk that the material misstatements will not be detected due to the early testing at interim. This difficulty would be impacted by the effectiveness of internal controls, the prescense of rapidly changing business conditions or circumstances, and the availability of relevant information.

Which of the following is the primary reason that many auditors hesitate to use embedded audit modules? A) Embedded audit modules cannot be protected from computer viruses B) Auditors are required to monitor embedded audit modules continuously to obtain valid results C) Embedded audit modules can easily be modified through management tampering D) Auditors are required to be involved in the system design of the application to be monitored.

D) Auditors are required to be involved in the system design of the application to be monitored. Embedded audit modules continuously monitor transaction activity and collect data on auditor designed transactions. They must be inserted into the clients system and thus would require that the auditor be involved with the system design of the application to be monitored.

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements? A) Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements B) Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement C) Determine whether inadequate provisions for the safeguarding of assets have been corrected D) Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

D) Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud During the overall review stage, the auditor assesses the conclusions reached and the evaluation of the overall financial statement presentation. As part of that evaluation, he/she would consider whether the results of the audit procedures performed affect the risk of material misstatement due to fraud. The overall review would include considering the adequacy of the evidence gathered in response to unusual or unexpected balances and whether such balances reflected a misstatement due to fraud.

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? A) Establish procedures that comply with the standards of the SOX Act B) Use attributes sampling techniques in testing internal controls C) Consider inherent risk and control risk before determining detection risk D) Establish policies to ensure that the audit work meets applicable professional standards

D) Establish policies to ensure that the audit work meets applicable professional standards The AICPA's quality control standands are applicable to the CPA firm's portfolio of audit services, which is consistent with this answer.

The objective of tests of details of transactions performed as tests of controls is to A) Monitor the design and use of entity documents such as prenumbered shipping forms B) Determine whether internal control structure policies and procedures have been placed in operations C) Detect material misstatements in the account balances of the financial statements D) Evaluate whether internal control structure procedures operated effectively

D) Evaluate whether internal control structure procedures operated effectively The objective to tests of details of transactions performed as tests of controls is to evaluate whether internal controls operated effectively. A test of details of transactions performed as a test of control will enable the auditor to detect a control failure.

An auditor review the reconciliation of payroll tax dorms that a client is responsible for filing in order to A) Verify that payroll taxes are deducted from employees' gross pay B) Determine whether internal control activities are operating effectively C) Uncover fictitious employees who are receiving payroll checks D) Identify potential liabilities for unpaid payroll taxes

D) Identify potential liabilities for unpaid payroll taxes The review of payroll tax reconciliation is performed to identify potential liabilities for unpaid payroll taxes. The salaries and wages to which the payroll taxes are based are typically reconciled to gross salaries and wages per the general ledger. If the amounts differ, it may indicate additional payroll tax liabilities.

Assessing control risk at below the maximum level most likely would involve A) Performing more extensive substantive tests with larger sample sizes than originally planned B) Reducing inherent risk for most of the assertions relevant to significant account balances C) Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end D) Identifying specific internal control structure policies and procedures relevant to specific assertions

D) Identifying specific internal control structure policies and procedures relevant to specific assertions In order to assess control risk below maximum, the auditor must collect evidence to support the reduction. Collecting such evidence involves identifying specific internal controls relevant to specific assertions and then performing tests of controls to evaluate the effectiveness of the controls.

In planning an audit of certain accounts, an auditor may conclude that specific procedures used to obtain an understanding of an entity's internal control structure need not be included because of the auditor's judgements about materiality and assessments of A) Control Risk B) Detection Risk C) Sampling Risk D) Inherent Risk

D) Inherent Risk If the auditor has concluded that an account is immaterial and that inherent risk is low, the auditor might decide to skip the procedures used to obtain an understanding of the related internal controls because the risk of a material misstatement occurring is low,

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions? A) Professional requirements B) Professional standards C) Professional experience D) Professional judgement

D) Professional judgement Professional judgement is required to determine when sufficient appropriate audit evidence has been obtained as a reasonable basis for the auditor's conclusions.

Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer? A) The distinguishing factor between fraud and error is the materiality of the transaction involved B) An auditor who initially detects fraud ultimately makes the legal determination whether fraud has actually occurred C) Fraudulent financial reporting can include the unintentional misstatement of amounts or disclosures in financial statements D) It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.

D) It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles. The determination of whether a misstatement is intentional or unintentional may be difficult, especially subjective circumstances involving accounting estimates or the application of accounting principles.

Based on new information gained during an audit of a non-issuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. in this circumstance, which of the following statements is accurate? A) The auditor is required to repreform audit procedures already completed on the audit using the revised materiality B) The auditor should consider disclaiming an opinion due to a scope limitation C) The revision of materiality at the financial statement levels will not affect the planned nature and timing of audit procedures, only the extent of those procedures D) Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

D) Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? A) Disagreements between the predecessor auditor and management as to significant accounting policies and principles B) The predecessor auditor's understanding of the reasons for why the change of auditor's C) Facts known to the predecessor auditor that might bear on the integrity of management D) Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years

D) Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years The auditor may inquire of the predecessor auditor about issues related to the consistency of financial reporting over time, but that is not something that the auditor is required to inquire about prior to accepting the audit engagement. The other options should be conducted prior to acceptance. AICPA Professional standards require and auditor (successor) so make several inquires to the predecessor auditor before accepting the audit engagement. These matters include 1) information bearing on the integrity of management 2) disagreements with management about accounting or auditing issues 3) communications to those charged with governance about fraud and noncompliance with laws and regulations 4) communications with management and those charged with governance about internal control issues, and 5) the predecessor's understanding for the reasons the entity changed auditors

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable? A) Sending a positive confirmation letter to the debtor to confirm the loan balance B) Performing a site visit to physically inspect the collateral C) Reviewing the debtor's purchase records to test the historical value of the collateral D) Obtaining a current value appraisal of the collateral

D) Obtaining a current value appraisal of the collateral Obtaining a current appraisal of the collateral would be directly relevant to establishing the current value of that collateral

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the A) Distribution of the financial statements and Ford's report is restricted to internal use only. B) Reason for omitting the disclosures is acknowledged in the notes to the financial statements. C) Omitted disclosures would not influence any potential creditor's conclusions about General's financial position. D) Omission is not undertaken with the intention of misleading the users of General's financial statements.

D) Omission is not undertaken with the intention of misleading the users of General's financial statements. in general, the accountant who compiles such financial statements must believe that the omission of the disclosures is not undertaken for the purpose of misleading readers of the financial statements

Which of the following computer assisted auditing techniques processes client input data on a controlled program under the auditor's control to test controls in the computer system? A) Test data B) Review of program logic C) Integrated test facility D) Parallel simulation

D) Parallel simulation Parallel simulation is a computer assisted auditing technique in which an auditor written or auditor controlled program is used to process client data. The results are then compared to those obtained using the clients program and differences are investigated. This technique enables the auditor to test controls in and processing performed by a client program.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? A) Scanning perpetual inventory, production, and purchasing records B) Examining paid vendor's invoices C) Tracing inventory items from the tag listing back to the physical inventory quantities D) Performing cutoff procedures for shipping and receiving

D) Performing cutoff procedures for shipping and receiving The completeness assertion pertains to transactions that have not been recorded or are missing. Performing cutoff procedures for shipping and receiving enables the auditor to detect late transactions that may not have been recorded in the proper period and may be missing from the current year

An advantage that using statistical sampling methods have over nonstatistical sampling methods in tests of controls is that the statistical methods A) Can more easily convert the sample into a dual purpose test useful for substantive testing B) Eliminate the need to use judgement in determining appropriate sample sizes C) Afford greater assurance than a nonstatistical sample of equal size D) Provide an objective basis for quantitatively evaluating sample risk

D) Provide an objective basis for quantitatively evaluating sample risk The use of statistical methods assists the auditor in designing an efficient sample, measuring the sufficiency of the evidence, and evaluating the sample results. Thus, this provides an objective basis for quantitatively evaluating sample risk.

When audited financial statements are presented in an entity's document containing other information, the auditor should A) Perform inquiry and analytical procedures to ascertain whether the other information is reasonable B) Add an emphasis of matter paragraph to the auditor's report without changing the opinion on the financial statements C) Perform the appropriate substantive auditing procedures to corroborate the other information D) Read the other information to determine that it is consistent with the audited financial statements

D) Read the other information to determine that it is consistent with the audited financial statements When the audited financial statements are presented in a client's document containing other information, the auditor is required to read the other information to determine whether it is consistent with the audited financial statements

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized? A) Cash B) Depreciation Expense C) Property tax expense D) Repairs and maintenance

D) Repairs and maintenance Debits that appear in repairs and maintenance expense have not been capitalized. A careful analysis of those charges will enable the auditor to identify major repairs and other expenditures that should have been capitalized.

According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession? A) Refusing to provide the client with copies of the CPA's audit documentation B) Auditing financial statements according to governmental standards despite the client's preferences. C) Accepting a commission from a nonattest function client. D) Retaining client records after the client demands their return.

D) Retaining client records after the client demands their return.

Which of the following audit procedures most likely would 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? A) Confirmation of accounts receivable from principal customers B) Reconciliation of interest expense with debt outstanding C) Confirmation of bank balances D) Review of compliance with terms of debt agreements

D) Review of compliance with terms of debt agreements The normal effect of violating the terms of debt agreements is to render the associated debt immediately due, which may cause significant financial stress on the entity and cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

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? A) Inquire about the existence of related party transactions B) Determine whether accounting estimates deviate from historical patterns C) Confirm inventories at locations outside the entity D) Review the lawyer's letter for information about litigation

D) Review the lawyer's letter for information about litigation If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer's letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements. It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.

Which of the following audit procedures most likely will involve sampling? A) Risk assessment procedures performed to obtain an understanding of internal control B) Tests of automated application controls when effective information technology general controls are present C) Analyses of controls to determine the appropriate segregation of duties D) Testing of process for approval of credit to customers for sales on account

D) Testing of process for approval of credit to customers for sales on account Testing controls associated with granting credit to customers for sales on account would appropriately involve sampling (specifically attributes sampling)

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) The adequacy of the disclosure of the related party transactions GAAP focuses on providing full disclosure of related party issues, so the auditor places primary emphasis on evaluating the adequacy of disclosure of such transactions

What is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements, but required by the GASB? A) The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable B) The auditor's only responsibility for supplementary information is to determine that such information has not been omitted C) The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior year information D) The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information

D) The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information AICPA Professional Standards describe the limited procedures that the auditor is to perform to address required supplementary information. The auditor is further required to report deficiencies in or the omissions of such information

When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recognizes that A) Internal control policies and procedures may be ineffective due to misstatements in judgement and personal carelessness B) Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability C) Establishing and maintaining the internal control structure is an important responsibility of management D) The cost of an entity's internal control structure should not exceed the benefits expected to be derived.

D) The cost of an entity's internal control structure should not exceed the benefits expected to be derived Internal control can provide only reasonable assurance as a limiting factor is the cost/benefit ratio. The cost of an entity's internal control should not exceed the benefits derived therefrom.

Which of the following statements is correct regarding review of interim financial information under AICPA professional standards? A) The independent auditor should establish an understanding with the client regarding the engagement, but documenting that understanding through a written communication with the client is optional B) An engagement to review the entity's interim financial information can only be accepted if the independent accountant has already audited the entity's most recent annual financial statements C) The independent accountant should make appropriate inquiries of persons responsible for financial and accounting matters, but need not obtain written representations from management D) The independent accountant is required to obtain sufficient knowledge of the entity's business and its internal control related to the interim financial information

D) The independent accountant is required to obtain sufficient knowledge of the entity's business and its internal control related to the interim financial information The professional standards indicate that in order to perform a review of interim financial information, the accountant should have an understanding of the entity's business and its internal control as they relate to the preparation of both annual and interim financial information sufficient to identify potential material misstatements and to select appropriate inquiry and analytical procedures.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? A) The planned level of control risk B) Management's assertions that internal controls exist and are operating efficiently C) The effectiveness of internal controls D) The planned level of assurance at the relevant assertion level

D) The planned level of assurance at the relevant assertion level The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor's substantive procedures.

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? A) As the population size doubles, the sample size should increase by about 67 B) The sample size is inversely proportional to the expected error rate C) There is no relationship between the tolerable error rate and the sample size D) The population size has little or no effect on the sample size

D) The population size has little or no effect on the sample size In attributes sampling, the sample size is determined using available tables that do not explicitly consider population size. That is because the tables are based on an underlying assumption of very large population sizes. Accordingly, a change in population size has little impact on sample size.

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? A) Management fails to modify prescribed internal controls for changes in information technology. B) Internal control activities requiring segregation of duties are rarely monitored by management C) Management is dominated by one person who is also the majority stock holder D) There is a substantial risk of intentional misapplication of accounting principles.

D) There is a substantial risk of intentional misapplication of accounting principles. The auditor would conclude that a financial audit could not be performed if they have determined that a substantial risk of intentional misapplication of accounting principles existed. The key word is intentional as the risk of management override is inherent limitation of any internal control system. Management can override the system to make material misstatements in the f/s and the auditors may not be able to detect such entries.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? A) Accounts receivable B) Credit C) Accounts payable D) Treasurer

D) Treasurer In testing the completeness assertion related to sales and receivables, the auditor starts with a source document and agrees the item to the accounting records. Starting with a shipping document and tracing it to the sales journal would be an appropriate test for unrecorded sales and receivables.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? A) More detailed analytical procedures from year end to interim B) Increase the dollar threshold of vouching customer invoices C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations D) Use more experienced audit team members to perform year end testing

D) Use more experienced audit team members to perform year end testing AICPA Professional Standards discuss responses to the auditor's assessment of the risks of material misstatement at two levels 1) overall response and 2) response at the relevant assertion level. At the overall level, the auditor might assign more experienced staff to the engagement in response to a higher risk of material misstatement

Which of the following would not be included in an accountant's documentation of a compilation of a client's financial statements? A) discussion with the client regarding the proper presentation of gross cash flows for investment purposes B) an engagement letter C) a memo to the CFO about a potentially significant fraud revealed during compilation procedures D) a review of the segregation of duties in the cash disbursement process

D) a review of the segregation of duties in the cash disbursement process A compilation engagement carries no expectation that the accountant will obtain an understanding of the entity's internal control. There would be no such review of the entity's segregation of duties.

According to PCAOB auditing standards, when the auditor issues separate reports on the financial statements and on internal control over financial reporting A) the reports will normally have different dates, depending upon when audit fieldwork is completed for the financial statements and when the tests of control are completed B) each report should be entitled Report of Independent Auditor C) each report should include a separate paragraph that discusses the inherent limitations of any engagement D) each report should include a paragraph that references the other related report

D) each report should include a paragraph that references the other related report when issuing a separate audit report on the financial statements and on internal control over financial reporting, the separate reports should each contain an additional paragraph hat references the other report

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that A) Specific internal control activities are not operating as designed B) The collective effect of the control environment may not achieve the control objectives C) Tests of controls may fail to identify activities relevant to assertions D) Material misstatements may exist in the financial statements

D) material misstatements may exist in the financial statements The auditor's objective is to collect sufficient evidence to express an opinion on the financial statements and to provide reasonable assurance that the financial statements are not materially misstated. Thus, the auditor's objective is assessing control risk is o determine how internal controls affect the risk that the financial statements will be materially misstated. Remember that control risk is the risk that internal controls will fail to prevent or detect a material misstatement.

As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA A) May not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole. B) May not audit only Maxim's balance sheet if Maxim is a nonissuer. C) May audit only Maxim's balance sheet if the CPA disclaims an opinion on the other financial statements. D) May audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited.

D) may audit only maxim's balance sheet if access to the information underlying the basic financial statements is not limited The auditor may express an pinion on a single financial statement and this is consistent with the meaning of the phrase taken as a whole. of course, the auditor must still obtain sufficient appropriate evidence as a reasonable basis for that opinion.

A service organization provides processing services for a client's sales orders. Which of the following information is relevant when gathering data for the report on the service organization's internal controls? A) the client's sales manager reviews accounts receivable balances B) the client's data entry clerk used the sales manager's password to make unauthorized changes to customer prices C) credit limits are established and updated by the client's credit department D) the service organization's system calculates accounts receivable balances

D) the service organization's system calculates accounts receivable balances this question focuses on matters that are relevant to the service auditor's report on internal controls at the service organization. of the answer choices, this is the only one that involved a procedure that is actually performed at the service organization, so it would be relevant to the service auditor's engagement

If a firm does attest work, what two criteria must it meet?

I) CPAs must own a majority of its financial interest II) CPAs must remain responsible, financially and otherwise, for a firm's attest work.

Long term liabilities, in relation to the rights and obligations assertion, what are some proper inquiries an auditor could make of management?

Debt covenants, making sure they are properly disclosed. Collateral, making sure that it is properly disclosed. Making sure that the current portion of long term debt is recorded as a current liability.

What are other members required not to engage in?

Discreditable acts (discrimination/harassment, solicitation or disclosure of exam questions, failure to file a tax return, improper disclosure of confidential info obtained from a former employment, false/misleading or deceptive acts in promoting or marketing services, and improper use of CPA credential.)

times interest earned ratio

EBIT/Interest expense

What is the Employee retirement income security act of 1974?

ERISA applies to most employee benefit plans

What is the primary advantage of PPS Sampling?

Efficiency, d there are few differences between audit and book values, PPS Sampling may result in smaller sample sizes than the other sampling methods.

What are analytical procedures?

Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data (e.g., ration analysis). Note: Analytical procedures are required in the planning and final review stages of an audit. They may be used (but are not required) in substantive testing.

With payroll, in relation to the accuracy and occurrence assertions, what are three things an auditor should do?

Examine personnel records on a test basis, to determine that the levels of compensation and support for all deductions exist for all employees, Trace selected transactions from the payroll register to the general ledger and to the payroll bank account, Recalculate selected entries on the payroll register.

What are the four assertions associated with account balances?

Existence Completeness Rights and Obligations Valuation and Allocation

What are other auditing publications?

Include articles in the Journal of Accountancy and the AICPA's CPA Letter, other professional publications, continuing professional education programs, textbooks, etc.

how do you calculate the mean per unit estimation?

MPU = av/n AV = MPU * N

In building an electronic data interchange (EDI) system, what process is used to determine which elements in the entity's computer system correspond to the standard data elements?

Mapping in an EDI system, a standard format is adopted. Mapping is the process by which the elements in the client's computer system are related to the standard data elements

Receivables Turnover Ratio

Net sales / avg net accounts receivable

Does an auditor need to refer to consistency if there is not a material change in accounting principle or restatement?

No

In an agreed upon procedure engagement, can internal auditors be used?

No only the work of the engagement team should perform the agreed upon procedures referenced in the practitioner's report

Are contingent fees allowed for a public company audit clients for services or products?

No, independence would be impaired by offering a product or service to a public company audit client for a contingent fee or commission.

Does PCAOB standards require a report on whether a previously reported material weakness still exists?

No, such an engagement is voluntary

Long term liabilities, in relation to the existence/occurrence assertion, what are some substantive tests of transactions an auditor could/would do?

Obtain copies of new loan agreements for the auditor's review and documentation, Verify authorization of new debt in minutes of meetings with those charged with governance, Trace receipts from the accounting records to the bank statement.

Stockholders Equity, in relation to the valuation assertion, what are two things an auditor should do?

Review cash receipts and disbursements for increases or decreases in stock accounts, Compare the subsidiary ledger to the general ledger stock accounts.

How do you calculate the ratio estimation?

R = av/bv AV = R * BV

What are the two types of statistical sampling approaches in attribute sampling?

Random number, and systematic

What is the Form AP?

Required each registered public accounting firm to file this. Has three disclosures 1) The engagement partner's name 2) name, location, and extent of any other accounting firms whose participation in the audit accounts for 5% or more of the total audit hours 3) the numbers and extent in total of all other accounting firms whose participation in the audit accounts for less than 5% of the total audit hours

Stockholders Equity, in relation the the completeness assertion, what are two things and auditor should do?

Review the minutes of meetings of those charged with governance to identify authorized transactions, Account for all certificate numbers to establish that no unauthorized shares were issued.

Stockholder Equity, in relation to the rights and obligations assertion, what are three things an auditor should do?

Review the minutes of the board meetings to verify that any stock and dividend transactions were duly authorized by those charged with governance, Review contracts with employee stock option plans to verify compliance with such agreements, Inquire of management about any restrictions that might exist on the availability of retained earnings for purposes of dividend distribution.

With payroll, in relation to the completeness assertion, what two things should an auditor do?

Review time reports and time cards to verify support for production records, apply analytical procedures to verify that the payroll related accruals at year end are reasonable

what is variable sampling?

Sampling for purposes of deciding whether account balances are fairly stated

what should an auditor express when the use of the going concern basis of accounting is inappropriate?

Should express an adverse opinion when liquidation is imminent and management's use of the going concern basis of accounting is inappropriate

Immediate family members

Spouses, spousal equivalents, and dependents

What does sufficient and appropriate mean in terms of audit evidence?

Sufficient refers to the quantity of evidence whereas appropriate refers to the quality of evidence. The quantity of evidence required is directly related to the risk of misstatement and inversely related to the quality of evidence

what are tests of details?

Tests of details consist of audit procedures used to gather evidence to support the account balances as reflected in the FS.

What is the evaluation of engagement documentation under the PCAOB standards for an engagement quality review?

The engagement quality reviewer should evaluate whether the documentation that was reviewed 1) indicated that the engagement team responded appropriately to significant risks and 2) supports the conclusions reached by the engagement team.

In the PCAOB audit report where is the opinion paragraph?

The first paragraph

What is the primary disadvantage of PPS Sampling?

The main disadvantage of PPS sampling is that it does not work very well in auditing negative balances, or zero balances.

What is risk assessment?

The policies and procedures involving the identification, prioritization, and analysis of relevant risks as a basis for managing those risks

What is monitoring in regards to internal control?

The policies and procedures involving the ongoing assessment of the quality of internal control effectiveness over time.

What is information and communication systems in regards to internal control?

The policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities.

What are control activities in regards to internal control?

The policies and procedures that help ensure that management directives are carried out, especially those related to authorization, segregation of duties, performance reviews, information processing, and physical controls.

What are interpretive publications?

They consist of the appendices to the SASs, auditing interpretations of the SASs, auditing guidance included in AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.

What is a review? (SSARSs)

This occurs when the CPA is engage to provide a lower level of assurance on financial statements, performing analytical procedures and making appropriate inquiries of client personnel.

What is a compilation?

This occurs when the CPA is engaged simply to assemble into financial statement format the financial records of a private company, without expressing any degree of assurance on the reliability of those financial statements

What is the purpose of substantive procedures?

To detect material misstatements at the relevant assertion level

What is the engagement quality review process under PCAOB standards?

To evaluate significant judgements and conclusions of the engagement team, the engagement quality reviewer should 1) hold discussions with the engagement partner and other members of the engagement team, and 2) review documentation

Long term liabilities, in relation to the valuation assertion, what are some measurement issues associated with most liabilities, that an auditor could test on?

Trace related cash receipts and disbursements from accounting records to bank statements, Examine the underlying loan contracts related to the stated dollar amounts, Recalculate the amortization of any premium or discount using the effective interest method, Apply analytical procedure to the related expense accounts.

True or False: Independence is impaired if the firm, a team member, or someone in a position to influence accepts a gift from an attest client, unless the value is clearly insignificant to the recipient.

True

True or False: A firm may not designate itself as "Members of the AICPA: unless all of its CPA owners are members of the AICPA.

True

True or False: For non attest clients, contingent fees may be permitted if they are disclosed.

True

True or False: Referral fees and commissions are prohibited for attest clients

True

What are the two types of professional requirements distinguished by the AICPA?

Unconditional requirements (must comply with the requirement without exception). Presumptively mandatory requirements (in rare circumstances the practitioner may depart from such a requirement, but must document the justification for the departure and how the alternate procedures performed were adequate to meet the objective of the requirement).

When reporting on summary financial statements, what types of opinions are accepted?

Unmodified or adverse

Long term liabilities, in relation to the completeness assertion what are some of the substantive tests of transactions and auditor would do?

Verify due dates for payments in the loan agreements, Trace cash disbursements form the accounting records to the bank statement, Examine canceled notes if paid in full, Could confirm year end balances

What are the two fundamental types of employee benefit plans under ERISA (employee retirement income sec, act 1974)?

Welfare plans (healthcare, disability, death, unemployment, job training, and vacation) Pension plans (retirement income, or deferral of income beyond an employee's period of employment)

What is a deficiency in design?

When a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed.

What is a deficiency in operation?

When a properly designed control does not operate as designed, or when the person performing the control does not have the authority or competence to effectively perform the control.

What is a disclaimer of opinion?

When the auditor expresses no conclusion about the fairness of the entity's financial statements (due to a scope limitation that is material and pervasive)

What is a qualified opinion?

When the auditor expresses one or more reservations about the 1) Financial statement presentation 2) the audit engagement

When is is appropriate with a scope limitation for an auditor to issue a disclaimer of opinion?

When the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive

When should an auditor express a disclaimer of opinion?

When the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive

What is an adverse opinion?

When the auditor states that the financial statements are not fairly stated (that is material and pervasive)

What is a control deficiency?

When the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely basis.

Do capital leases impair independence?

Yes

what is a material noncompliance?

a failure to follow compliance requirements or a violation of prohibitions included in the specified requirements that results in noncompliance that is quantitatively or qualitatively material, either individually or when aggregated with other noncompliance.

Contingent fee

a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service.

What is special purpose framework?

a financial reporting framework other than GAAP that is one of the following bases of accounting 1) cash basis 2) tax basis 3) regulatory basis or 4) contractual basis, or 5) other basis (that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements)

what is a governmental audit requirement?

a governmental requirement established by law, regulation, rule, or provision of contracts or grant agreements requiring that an entity undergo an audit of its compliance with applicable compliance requirements related to one or more government programs

What is a transaction cycle?

a group of essentially homogenous transactions, that is, transactions of a particular type.

What is an emphasis of matter paragraph?

a paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgement, is of such importance that it is fundamental to users' understanding the financial statements

Internal Control

a process - effected by those charged with governance, management, and other personnel - that is designed to provide reasonable assurance about the achievement of the entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

What is a modified opinion?

a qualified, adverse or disclaimer of opinion

What is a positive confirmation request?

a request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request

What is a negative confirmation request?

a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

When may an agreed upon procedure engagement be publicly available?

a restricted use report filed with regulatory authorities or governmental entities may be made available to the public as required by law or regulation

What is a hypothetical transaction?

a transaction or financial reporting issue that does not involve facts or circumstances of a specific entity

What does the PCAOB define as supplemental information?

a) supporting schedules that brokers and dealers are required to file b) supplemental information i) required to be presented pursuant to the rules and regulations of a regulatory authority ii) covered by an independent public accountant's report on that information relation to financial statements that are audited in accordance with PCAOB standards, or c) information that is i) ancillary to the audited financial statements ii) derived from the company's accounting books and records and iii) covered by an independent public accountant's report on that information in relation to the financial statements that are audited in accordance with PCAOB standards

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.

a. Internal auditing standards developed by The Institute of Internal Auditors Internal auditing standards developed by the institute of internal auditors address independence and objectivity and thus might be considered by an independent CPA in assessing the objectivity of internal auditors. in addition, the independent CPA would consider whether the internal auditor reports to an officer of sufficient status, whether the internal auditor has direct access to the board of directors and the audit committee, whether internal audit employment decisions are overseen by the board of directors and/or the audit committee, and whether policies exist to prohibit the audit of areas in which conflicts of interest arise.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the: a. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records . b. Securities are registered in the name of the trust company, rather than the entity itself. c. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. d. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.

a. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records . The concealment of fraud pertaining to marketable securities is best controlled through controlling access and providing for adequate segregation of duties. Use of a trust company aids in both respects. Access to the marketable securities is controlled by the trust company, an independent entity, and the duties of authorization and recording are automatically separated from the duty of custody. By limiting the trust company's direct contact with employees responsible for recordkeeping, the potential for fraud is further lessened as segregation of duties is increased.

approximately how many days after year end should an auditor request a cutoff bank statement?

about 10 days

What is an agreed upon procedures engagement?

an attestation agreement in which a practitioner performs specific procedures on subject matter or an assertion and reports the findings without providing an opinion or conclusion on it. The parties to the engagement...agree upon and are responsible for the sufficiency of the procedures for their purposes

What is a review engagement?

an attestation engagement in which the practitioner obtains limited assurance by obtaining sufficient appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it to be in accordance with the criteria or to the assertion in order for it to be fairly stated

What is an examination engagement?

an attestation engagement in which the practitioner obtains reasonable assurance by obtaining sufficient appropriate evidence about the measurement or evaluation of subject matter against criteria in order to be able to draw reasonable conclusions on which to base the practitioner's opinion about whether the subject matter is in accordance with the criteria or the assertion is fairly stated in all material respects

what is a component auditor?

an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit

What is the premise of an attestation engagement?

an engagement in accordance with the attestation standards is conducted on the premise that the responsible party is responsible for 1) subject matter in accordance with the criteria 2) its assertion about the subject matter 3) measuring, evaluating, and when applicable, presenting subject matter that is free from material misstatement, whether due to fraud or error 4) providing the practitioner with access to all information, access to additional information that may be requested, and unrestricted access to persons within the appropriate parties

What is an initial audit engagement?

an engagement in which a) the financial statements for the prior period were not audited or b) the financial statements for the prior period were audited by a predecessor auditor

What is an attestation engagement?

an engagement, review, or agreed upon procedures engagement performed under the attestation standards related to subjected matter or an assertion that is the responsibility of another party.

What is a component?

an entity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements

What are critical audit matters?

any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that related to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgement

What does a compilation engagement involve?

assisting management in presenting the financial statements along with the accountant's accompanying report, which provides no assurance about those financial statements

what is external confirmation?

audit evidence obtained as a direct written response to the auditor from a third party, either in paper form or by electronic or other medium

What is the difference between an audit, review, examination, or agreed upon procedures?

audit is to express an opinion on the financial statements or internal control review is to express a conclusion examination is to express an opinion on an assertion or subject matter agreed upon procedures is to report on the application of the agreed upon procedures

what are projected misstatements?

auditor's best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire population from which the samples were drawn

What are the two types of judgmental sampling approaches in attribute sampling?

block (group of contiguous items) haphazard (arbitrary selection with no conscious biases)

which special purpose frameworks require an emphasis of matter paragraph alerting readers to the special purpose framework?

cash basis, tax basis, regulatory basis (if restricted) and contractual basis. Only regulator basis intended for general use does not require such an alert.

What is an unqualified opinion?

clean opinion

what are complementary user entity controls?

controls that management of the service organization assumes, in the design of its service, will be implemented by user entities and which, if necessary to achieve the control objectives stated in management's description of the service organization's system, are identified as such in that description

Working capital formula

current assets - current liabilities

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: a. Discuss with lenders the terms of all debt and loan agreements. b. Strengthen internal controls over cash disbursements. c. Purchase production facilities currently being leased from a related party. d. Postpone expenditures for research and development projects.

d. Postpone expenditures for research and development projects. Cooper would consider Zero's plans to postpone expenditures for research and development projects, as such plans would reduce the cash requirements for future periods and provide the company with additional flexibility, if needed.

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: a. Observing the distribution of paychecks. b. Footing and crossfooting the payroll register. c. Inspecting payroll tax returns. d. Recalculating payroll accruals.

d. Recalculating payroll accruals When control risk is assessed as low, substantive procedures in this area are typically limited to analytical procedures and recalculating year end accruals

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the: a. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. b. Procedures to be undertaken to discover litigation, claims, and assessments. c. Pending legal matters to be included in the inquiry of the client's attorney. d. Timing of inventory observation procedures to be performed.

d. Timing of inventory observation procedures to be performed. Determination of the timing of inventory observation procedures to be performed would be most likely to be agreed upon with the client before implementation, because the auditor would need to be informed as to the timing of, and procedures related to, the physical inventory-taking by the client.

How do you calculate the difference estimation?

d= (av-bv)/n D= d*N AV= BV + D

what are judgmental misstatements?

differences arising from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate

When the current period's accounting policies are not consistently applied in the relation to opening balances, what kind of opinion should the auditor express?

either qualified or adverse

what are some indicators of impairment in terms of impairment losses?

fair value is significantly below cost and the decline has existed got an extended period of time, the security has been downgraded by a rating agency, the financial conditions of the issuer or counterparty have deteriorated, and dividends have been reduced or eliminated

What are examples of other information?

financial summaries or highlights, management reports on operations, employment data, financial ratios, selected quarterly data, employment data, names of officers/directors, etc.

what are assurance services?

independent professional services that improve the quality or context of information for decision makers

what are unconditional requirements under SSARS?

indicated by the word must, the accountant is required to comply with such a requirement without exception whenever the requirement is relevant

what is a presumptively mandatory requirement under SSARS?

indicated by the word should, the accountant is expected to comply with such a requirement except in rare circumstances

what is required supplementary information?

information that a designated accounting standard setter requires to accompany an entity's basic financial statements

what is the audit risk formula?

inherent risk X control risk X detection risk = overall audit risk

What are the seven types of audit procedures as defined by the AICPA?

inspection, observation, e0xternal confirmation, recalculation, reperformance, inquiry and analytical procedures

Management Responsibilities

involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources.

what is a hedge?

is a derivative used specifically as a defense strategy designed to protect against the risk of adverse price or interest rate movements to achieve a state of balance

Price to Earnings Ratio (P/E)

market price per share/earnings per share

What are factual misstatements?

misstatements for which there is no doubt

What is an uncorrected misstatement?

misstatements that the auditor has accumulated during the audit and that has not been corrected

Current Cash Debt Ratio

net cash from operations/ average current liabilities

Cash Debt Coverage Ratio

net cash provided by operating activities/average total liabilities

rate of return on assets

net income/average total assets

profit margin on sales ratio

net income/net sales

Asset Turnover Ratio

net sales/average total assets

What are the two general approaches to sampling?

nonstatistical and statistical

What are the four assertions implicitly embodied in the MD&A presentation?

occurrence consistency with the financials completeness of the explanation presentation and disclosure

what is operational risk?

operational risk related to the specific processing required for financial instruments. Operational risk may increase as the complexity of a financial instrument increases, and poor management of operational risk may increase other types of risk.

Close relatives

parents, siblings, and nondependent children

What is the purpose of an examination of MD&A? (positive assurance versus negative assurance too)

positive: to express an opinion whether the required elements (by the SEC) are present (discussion of financial condition, discussion of changes in financial condition, discussion of results of operations), that the historical financial amounts are accurately derived from the financials, and that the underlying information, assumptions, provide a reasonable basis for the disclosures within the MD&A negative: that the presentation does not include elements required by the SEC, the historical financial amounts are not accurately derived from the financials and that the underlying information, assumptions do not provide a reasonable basis for the disclosures within the MD&A

What is a parallel simulation?

processing the clients actual data on the auditors software and then comparing the auditors output to the clients output for agreement

What is the purpose of a comfort letter?

provides for liability to underwriters and certain others when there is a material omission or misstatement to a registration statement

Under PCAOB if a previously reported material weakness continues to exist, what are the two opinions that an auditor can issue?

qualified or disclaimer

what is a nonsampling risk?

refers to any other mistakes by the auditor, such as inappropriate auditing procedures, or failure to correctly identify errors or amounts sampled, misinterpreting the results, etc.

what is a type two report?

report on management's description of a service organization's system and the suitability of the design and operating effectiveness of controls.

what is an embedded audit module?

routines that are built into the application program to perform an ongoing audit function

What is attribute sampling?

sampling for purposes of deciding whether internal controls are working as designed

what should an auditor express if the auditor is unable to obtain sufficient appropriate audit evidence in terms of going concern?

should either express a qualified opinion or disclaimer of opinion, as appropriate

What should an auditor express when the disclosure is inadequate for going concern?

should either express a qualified or adverse opinion as appropriate

What should an auditor express when there is substantial doubt about the entity's ability to continue as a going concern?

should include an emphasis of matter paragraph in the auditors report

what is attributes sampling?

statistical sampling for the purpose of identifying the percentage of frequency of a characteristic in a population of interest to the auditor.

What are type 2 errors (false acceptance)?

tests of controls - the risk of overreliance on internal controls substantive testing - the risk of incorrect acceptance type two errors relate to effectiveness - now the auditor may have failed to meet the overall objective, which is to limit audit risk to an acceptable low level

What are type 1 errors (false rejection)?

tests of controls - the risk of underreliance on internal controls substantive testing- the risk of incorrect rejection type one errors relate to efficiency - the auditor will probably achieve the appropriate conclusions, although not in the most effecient manner

what are interpretive publications under SSARS?

the AICPA guide, compilation and review engagements, guidance on reviews, compilations, and engagements to prepare financial statements included in AICPA Audit and Accounting Guides, and AICPA statements of position, to the extent that those statements are applicable to such engagements

Who issues Statements and standards for accounting and review services? (SSARS)

the AICPA's accounting and review services committee

what is stratification?

the auditor may reduce the overall variability within a population by classifying similar items into sub populations, the resulting aggregate sample size may be smaller as a result of reducing the combined effects of variability

When there is other information included with the financial statements, what should the auditor do?

the auditor should read the other information to identify any material inconsistencies with the financial statements

What is the Group Engagement Partner responsible for?

the group engagement partner is responsible for 1) supervision and performance of the group audit engagement in compliance with professional standards and applicable regulatory requirements 2) determining whether the auditor's report is appropriate in the circumstances

Typically most governmental audits require the auditors opinion on compliance be on what and materiality based on what?

the opinion on compliance to be on program levels, and materiality based on the program taken as a whole

During an examination engagement, if the practitioner is expressing a qualified or adverse opinion fur to a misstatement on the subject matter, what should the opinion be expressed about?

the opinion should be expressed directly on he subject matter not the assertion

What is control environment?

the policies and procedures that determine the overall control consciousness of the entity, sometimes called a the tone at the top.

What is the precondition to accept an MD&A engagement?

the practitioner/auditor must have audited the annual financials for the latest period applicable to the MD&A presentation, any other financials involved must have been audited by the practitioner or a predecessor auditor

what is a risk consideration in terms of audit sampling?

the probability that the auditor fails to modify the opinion on financial statements containing a material misstatement

what is liquidity risk?

the risk of not being able to buy or sell a financial instrument at an appropriate price in a timely manner due to a lack of marketability for that financial instrument

what is credit risk?

the risk that one party to a financial instrument will cause a financial loss to another party by failing to discharge an obligation, and it is often associated with default

what is market risk?

the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices

What is sampling risk?

the risk that the sample may not be truly representative of the population, in other words, the chance of an erroneous conclusion that the auditor takes by examining a subset of the population, rather than the entire population.

what is probability-proportional-to-size sampling?

the sampling unit is an individual dollar, it is useful if there are relatively few differences between audit and book values, the main advantage is efficiency, the main disadvantage is that it does not work very well in auditing negative balances or zero balances.

What are substantive tests?

these are audit procedures that are directly related to the financial statement elements and disclosures. in other words these tests search for material misstatements if there are any.

What are the application and other explanatory material in SSARS?

these are not requirements and are presented separately within the SSARS. They are indicated by the words may, might or could, and may explain what a requirement means or provide examples of appropriate procedures

what is the difference estimation?

this approach involves identifying the dollar differences between the sample's audit values and applicable book values

what is ratio estimation?

this approach involves identifying the ratio of the audit value and book values for the sampled items ** useful when the dollar amount differences between the audit and the book values is expected to be proportional to the book values

What is the purpose of a review engagement?

to express a conclusion in a review, the practitioner obtains limited assurance about whether any material modifications should be made to the subject matter in order for it to be in accordance with the criteria or to an assertion about the subject matter in order for it to be fairly stated.

What is the purpose in an examination engagement?

to express an opinion in an examination, the practitioner obtains reasonable assurance about whether the subject matter, or an assertion about the subject matter, is free from material misstatements, whether due to fraud or error.

What is the purpose of an attestation engagement?

to provide users of information, generally third parties, with an opinion, conclusion, or findings regarding the reliability of subject matter or an assertion about the subject matter, as measured against suitable and available criteria

What is an agreed upon procedure engagement?

to report on the application of agreed upon procedures, the practitioner applies procedures determined by the specified parties who are the intended users of the practitioner's report and who are responsible for the sufficiency of the procedures for their purposes. As a result of the engagement, the practitioner reports on the results of the engagement but does not provide an opinion or conclusion on the subject matter or assertion.

debt to total assets ratio

total liabilities/total assets

Debt to Equity Ratio

total liabilities/total equity

What are 'other members'?

unemployed, retired or otherwise not working in the profession

what is mean per unit estimation?

useful when the difference or ratio estimation cannot be used.

when should an auditor issue a qualified opinion?

when the auditor concludes that misstatements are material but not pervasive

when should the auditor issue an adverse opinion?

when the auditor concludes that the misstatements are material and pervasive

When is it appropriate with a scope limitation for an auditor to issue a qualified opinion?

when the auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material but not pervasive