Audit FR Missed Questions

For which of the following events would an auditor of a nonissuer most likely issue an unmodified opinion with an emphasis-of-matter paragraph referencing a lack of consistency? 1. A change in depreciation method from straight-line to double-declining balance. The effect of the change is material. 2. A change in the useful life used to calculate the provision for depreciation expense. The effect of the change is material. 3. A change in reporting entity as a result of purchasing a subsidiary during the year. The effect of the change is material. 4. A change from percentage of completion to completed contract method. The effect of the change is not material.

1. (A change in accounting estimate that is inseparable form a change in accounting principle, such as a change in depreciation method, should be described in an emphasis-of-matter paragraph.)

Which of the following procedures most likely represents an internal control designed to reduce the risk of errors in the billing process? 1. Comparing control totals for shipping documents with corresponding totals for sales invoices. 2. Matching receiving documents with approved sales orders before invoice preparation. 3. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. 4. Requiring customers that purchase on account to be approved by the credit department.

1. (Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors. This is a common internal control procedure performed by the accounts receivable department.)

Which of the following items are NOT require to be documented about uncorrected misstatements? 1. An explanation as to the auditor's reasons for not booking the adjusting journal entries for the uncorrected misstatements. 2. The aggregate effect of uncorrected misstatements on the financial statements. 3. An evaluation of whether the materiality level for particular classes or transactions, account balances, or disclosure shave been exceeded. 4. The effect of uncorrected misstatements on key ratios or trends and compliance with legal, regulatory, and contractual requirements?

1. (The auditor does not have the ability to book the adjusting journal entries, as management is responsible for the financial statements. However, if management refuses to correct some or all of the misstatements communicated by the auditor, then the auditor should obtain an understanding of why management did not book the corrections.)

A practitioner's report on agreed-upon procedures should contain: 1. A statement that the engagement was conducted in accordance with generally accepted auditing standards established by the American Institute of Certified Public Accountants. 2. A list of procedures performed and related findings. 3. A statement that the practitioner conducted an examination of the subject matter. 4. A disclaimer of opinion on the financial statements.

2. (A practitioner's report on agreed-upon procedures should contain a list of procedures performed and related findings. Choice "4" is incorrect. Although a practitioner's report on agreed-upon procedures should contain a disclaimer of opinion on the subject matter, the subject matter of an agreed-upon procedure engagement varies and may be unrelated to the financial statements.)

1. Randall may not change the prior opinion, but may add an other-matter paragraph to the report indicating that the previous error has been correced. 2. Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation. 3. Randall may not change the prior opinion, and should not issue a report on the comparative financial statements. 4. Randall may revise the prior opinion and need not make mention of the change, as long as the comparative financial statements include the revised statements (and not the original statements) for Year 1.

2. (Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.)

To measure how efficiently an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into: 1. Net sales 2. Cost of goods sold 3. Operating Income 4. Gross sales

2. (The appropriate numerator for calculating inventory turnover is cost of goods sold. Cost of goods sold is the expense most clearly associated with the sale (turnover) of inventory, which is priced at acquisition cost, not selling price.)

Which limitation on response from an attorney in response to auditor's inquiry may result in a qualified opinion? 1. The client's refusal to permit inquiry of the attorney. 2. The attorney's refusal to respond when the attorney has given substantial attention to the matter. 3. An inherent uncertainty making it difficult for a lawyer to form conclusions regarding pending litigation. 4. The attorney limits replies to matters to which he or she has given substantial attention.

2. (The attorney's refusal to respond when the attorney has given substantial attention to the matter would represent a scope limitation. Depending on materiality, this may result in a qualified opinion or disclaimer of opinion. Choice "1" is incorrect. A refusal to permit inquiry will generally result in a disclaimer of opinion or withdrawal from the audit. Choice "3" is incorrect. If the auditor is satisfied that financial statement disclosure is adequate, no modification to the opinion would be required. Choice "4" is incorrect. Lawyers may limit their replies to matters to which they have given substantial attention.)

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? 1. "I believe that the possible liability to the company is nominal in amount." 2. "I believe that the action can be settled for less than the damages claimed." 3. "I believe that the plaintiff's case against the company is without merit." 4. "I believe that the company will be able to defend this action successfully."

2. (The auditor is concerned with preventing an understatement of contingent liabilities. The auditor would therefore request clarification before determining that a reduction in such liability (from damages claimed to some lesser amount) is reasonable. Choices "1", "3", and "4" are incorrect because when a lawyer asserts that a contingent liability is immaterial ("nominal") or improbable ("without merit" and "successful defense likely"), it is unlikely that the auditor would require further clarification.)

In reporting on the internal control of an issuer, an auditor may: 1. Not express an unqualified opinion on the effectiveness of internal control if significant deficiencies have been noted. 2. Not express an unqualified opinion on the effectiveness of internal control if there are restrictions on the scope of the engagement. 3. Express either a qualified opinion or an adverse opinion on the effectiveness of internal control when a material weakness is noted, depending on the significance of the weakness 4. Not express a qualified opinion unless control deficiencies have been noted

2. (When there are restrictions on the scope of the engagement, the auditor should withdraw from the engagement or disclaim an opinion. An unqualified opinion would not be appropriate.)

A government audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentations to include: Program Results, Compliance, Economy & Efficiency 1. Yes, Yes, No 2. Yes, Yes, Yes 3. No, Yes, Yes 4. Yes, No, Yes

2. (The requirement is to determine the proper scope of a government audit. The Government Accountability Office Yellow Book suggests that in addition to financial statements, such an audit may include consideration of (1) program results; (2) compliance with laws and regulations; and (3) economy and efficiency.)

The risk of incorrect acceptance: 1. Relates to substantive tests and affects audit efficiency. 2. Relates to substantive tests and affects audit effectiveness. 3. Relates to tests of controls and affects audit efficiency. 4. Relates to tests of controls and affects audit effectiveness.

2. (The risk of incorrect acceptance relates to substantive tests and affects audit effectiveness. Choice "4" is incorrect. The risk of assessing control risk too low relates to tests of controls and affects audit effectiveness.)

An auditor observed that gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. The most likely explanation would be: 1. Sales increased at a greater percentage than cost of goods sold increased as compared to the prior year. 2. Sales increased at the same percentage as cost of goods sold, as compared to the prior year. 3. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year. 4. None of the above choices are correct.

2. (Tip: set up a Sales, COGS, GM for the two years and make up numbers to figure it out!)

Which of the following controls would most likely detect a kiting scheme? 1. Use of a lockbox system for customer receipts. 2. Comparison of the details of deposit tickets and recorded remittance credits. 3. Preparing a bank transfer schedule. 4. Preparing a bank reconciliation.

3. (A kiting scheme occurs when a check drawn on one bank is deposited in another bank, and the funds are included in both accounts. A bank transfer schedule is used to analyze bank transfers and identify such situations.)

During an integrated audit, an auditor uncovers one control deficiency 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. In this situation, the auditor should issue an opinion on internal control that is: 1. Unmodified 2. Qualified 3. Adverse 4. A disclaimer

3. (A material weakness in internal control, which is a control deficiency, or a combination of control 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, requires the auditor to issue an adverse opinion.)

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review: 1. Provides only limited assurance that the financial statements are fairly presented. 2. Includes examining, on a test basis, information that is the representation of management 3. Includes primarily applying analytical procedures to management's financial data and making inquiries of company management 4. Does not contemplate obtaining corroborating audit evidence or applying certain other procedures ordinarily performed during an audit

3. (A review report states that a review includes primarily applying analytical procedures to management's financial data and making inquiries of company management. Choice "1" is incorrect because the review report does not state that limited assurance is provided. The report simply states that the accountant is not aware of any material modifications that should be made to the financial statement.)

Carson, CPA, is the group engagement partner for a multinational corporation. Johnson, CPA, audits a wholly owned subsidiary of this corporation. Carson decides not to assume responsibility for the work of Johnson. Among other requirements, Carson is required to: 1. Review Johnson's audit documentation and assume responsibility for Johnson's work. 2. Obtain written permission from the component auditor to reference Johnson as "other auditors" in the group engagement auditor's report. 3. Obtain and understanding of Johnson's professional competence and independence. 4. Verify that Johnson's audit report is restricted.

3. (Carson is required to obtain an understanding of Johnson's professional competence and independence.)

The group engagement partner decides not to assume responsibility for the component auditor's work. In this situation, the group engagement team should request that the component auditor, at a minimum, communicate matters related to: 1. The extent of internal auditor use. 2. The number of confirmations received. 3. Identification of the financial information of the component. 4. The nature of substantive procedures performed on revenue.

3. (Choice "3" is correct. When the group engagement partner decides not to assume responsibility for the component auditor's work, the group engagement team should request the component auditor to communicate: Whether the component auditor has complied with ethical requirements relevant to the group audit, including independence and professional competence. Identification of the financial information of the component on which the component auditor is reporting. The component auditor's overall findings, conclusions, or opinion.)

Which of the following is least likely to be evidence the auditor examines to determine whether controls are operating effectively? 1. Records documenting usage of computer programs. 2. Canceled supporting documents. 3. Confirmations of accounts receivable. 4. Signatures on authorized forms.

3. (Confirmation of accounts receivable is a substantive test, not a test of controls.)

Which financial statement assertion is violated when an expense occurring in one year is NOT recorded until the following year? 1. Accuracy 2. Classification 3. Completeness 4. Occurrence

3. (Expenses for the current year are not complete if an expense occurring in one year is not recorded until the following year.)

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an: 1. Understatement of revenues and receivables, and inventory. 2. Overstatement of revenues and receivables, and an understatement of inventory. 3. Understatement of revenues and receivables, and an overstatement of inventory. 4. Overstatement of revenues and receivables, and inventory.

3. (Items shipped without invoicing will result in a situation in which the accounting department is unaware of the sale. Therefore, debits to accounts receivable and credits to sales will not be recorded, resulting in an understatement of both revenues and receivables. Similarly, because accounting is unaware of the sale, no entry to reduce inventory will be made, resulting in an overstatement of inventory.)

Which of the following internal control activities is usually performed in the accounts payable department? 1. Match the vendor's invoices with the related internal shipping report. 2. Record the payable and mail the signed check. 3. Approve the voucher for payment and record the payment when made. 4. Count the goods received and prepare the receiving report.

3. (The accounts payable department typically performs the following functions in the expenditure cycle: Record the payable Approve the invoice for payment Record the payment after it is paid by the treasurer)

Which of the following is true about a report on a specific element of a financial statement? 1. An audit of the complete financial statements is required. 2. An unmodified opinion may not be expressed if an adverse opinion or disclaimer of opinion was expressed on the complete financial statements. 3. There should be a reference to both GAAS and GAAP in the report. 4. A restrictive use paragraph is required.

3. (The report on a specific element of a financial statement follows the standard auditor's report very closely, referring to GAAS in the auditor's responsibility paragraph and GAAP in the opinion paragraph.)

Which of the following matters most likely would be included in a management representation letter for an integrated audit? 1. A detailed evaluation of the riskiest areas of the audit. 2. Acknowledgment that management relied on the auditor's procedures as the basis for management's conclusion on internal control. 3. Identifying whether significant deficiencies and material weaknesses identified and communicated to management and those charged with governance during previous engagements have been resolved. 4. Sufficient audit evidence has been made available to permit the issuance of an unmodified opinion.

3. (In an integrated audit, the management representation letter should disclose whether significant deficiencies and material weaknesses identified and communicated to management and those charged with governance during previous engagements have been resolved.)

A review of the interim financial statements of a publicly held company: 1. Does not require the auditor to study internal control. 2. Is conducted under Statements on Standards for Accounting and Review Services (SSARS). 3. May be performed in connection with the provision of a comfort letter. 4. Includes positive assurance with respect to the fair presentation of the financial statements.

3. (When a comfort letter is to be issued, the auditor is required to perform a review of interim financial information in accordance with auditing standards. Choice "4" is incorrect. A review of the interim financial statements of a publicly held company provides negative assurance ("we are not aware of any material modifications that should be made") with respect to the financial statements in conformity with GAAP.)

When issuing letters for underwriters, an accountant may provide positive assurance related to: 1. Unaudited financial statements that have been reviewed. 2. Compliance of management's discussion and analysis (MD&A) with SEC rules and regulations. 3. Compliance of the form of the audited financial statements with the requirements of the SEC Act. 4. Qualitative disclosures and market-sensitive instruments.

3. (When issuing letters for underwriters, an accountant typically provides positive assurance concerning the compliance of the audited financial statements with the requirements of the SEC Act.)

According to GAAS, which of the following procedures is NOT required when the group auditor decides to make reference to the component auditor in the auditor's report on the group financial statements? 1. The group auditor should be satisfied with the independence of the component auditor. 2. The component auditor's report is not restricted. 3. The group auditor should be satisfied with the competence of the component auditor. 4. The group auditor should determine the type of work to be performed on the financial information of the components.

4. (Determining the type of work to be performed on the components is not required when the group auditor decides to make reference to the component auditor. The group auditor should determine the type of work to be performed on the financial information of the components when assuming responsibility for the work of the component auditor.)

Jett, CPA, is auditing the inventory of Calico Company. Which of the following is an audit procedure Jett would be likely to perform? 1. Physically count Calico's inventory as of the year-end date. 2. Ascertain that consigned goods held by Calico's customers (for resale to third parties) are excluded from inventory. 3. Ascertain that consigned goods provided by Calico's suppliers (for resale to third parties) are included in inventory. 4. Examine shipping documents and receiving reports for several days before and after year-end.

4. (Examining shipping documents and receiving reports for several days before and after year-end will help Jett determine whether purchases and sales were recorded in the proper period. Achieving an appropriate cutoff is important to the fair statement of inventory. Choice "1" is incorrect. The auditor observes the client's count, but does not typically perform the count. Choice "2" is incorrect. Consigned goods held by Calico's customers (for resale to third parties) are still owned by Calico, and would therefore properly be included in inventory. Choice "3" is incorrect. Consigned goods provided by Calico's suppliers (and held for resale to third parties) are not owned by Calico, and would therefore properly be excluded from inventory.)

Under which of the following situations would the expression of a disclaimer be inappropriate? 1. The entity's going concern disclosures are adequate. 2. Management refuses to allow the auditor to send a letter of inquiry to their attorneys. 3. The auditor is not independent. 4. Management fails to disclose a significant subsequent event.

4. (Inadequate disclosure of a material item or event results in a qualified or adverse opinion. Choice "1" is incorrect. Although the general rule in adequately disclosed going concern cases is to add an emphasis-of-matter paragraph to an unmodified opinion, the auditor is not prohibited from choosing to disclaim an opinion due to a going concern uncertainty.)

Which of the following is NOT an example of a feature that would be indicative of a strong system of internal control? 1. Access controls that prevent unauthorized access to physical assets. 2. Access controls that prevent unauthorized access to computer records. 3. An independent accounting clerk receives bank statements directly from the bank for comparison to the cash account in the general ledger. 4. An independent auditor receives accounts receivable confirmations directly from external parties.

4. (Confirming accounts receivable is a generally accepted auditing procedure. The fact that the auditor sends out confirmations does not indicate the strength of the client's internal controls.)

An auditor's report should include a restricted use paragraph and an alert to readers about the preparation of the financial statements in accordance with a special purpose framework when the financial statements are prepared on the _________ basis.

contractual