Auditing Final
Following are audit procedures that are normally conducted in the purchasing process and related accounts. 1. Test a sample of purchase requisitions for proper authorization. 2. Test transactions around year-end to determine if they are recorded in the proper period. 3. Review results of confirmation of selected accounts payable. 4. Compare payables turnover to previous years' data. 5. Obtain selected vendors' statements and reconcile to vendor accounts. 6. Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data.
1.Tests of details of transactions 2.Tests of details of transactions 3.Tests of details of account balances 4.Substantive analytical procedures 5.Tests of details of account balances 6.Substantive analytical procedures
In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. 1 and 2. 1 and 3. 2 and 3. 1, 2, and 3.
2 and 3.
An audited company has not paid its 2018 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2019 audit, the 2018 audit fees must be paid before the: 2018 report is issued. 2020 fieldwork is started. 2019 fieldwork is started. 2019 report is issued.
2019 report is issued.
Which of the following is an example of a subsequent event that requires disclosure in the notes to the financial statements (but not adjustments to the financial statements)? An entity's customer, who has been experiencing financial difficulty for several months, declares bankruptcy. The customer is one of over 1000 customers of the entity and appropriate reserves for any related accounts receivable have been properly maintained. The entity completes an environmental cleanup. The liability for the clean-up was recorded as a contingent liability at the balance sheet date. An event that confirms the auditor's belief that a large portion of the entity's inventory is obsolete. The issue was documented prior to the end of the fiscal year and appropriate inventory adjustments were made at the balance sheet date. A chemical explosion at a customer's warehouse causes all accounts receivable from that customer to be uncollectible.
A chemical explosion at a customer's warehouse causes all accounts receivable from that customer to be uncollectible.
For which of the following services is an auditor not required to be independent? Financial statement audits. Financial statement reviews. Any attest service. A compilation of financial statements.
A compilation of financial statements.
Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? A conversation with those charged with governance to discuss matters pertaining to financial reporting. A conversation with the head of the entity's internal audit department and those charged with governance to discuss matters pertaining to financial reporting. A conversation in which those charged with governance report on management's views on matters pertaining to financial reporting. A conversation with only management to discuss matters pertaining to financial reporting.
A conversation with those charged with governance to discuss matters pertaining to financial reporting.
Which of the following is not a covered member according to Interpretation 101-1? An individual in a position to influence the attest engagement. The firm, including the firm's employee benefits plans. A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit. An individual on the attest engagement team.
A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit.
Management should request that the attorneys provide information about all of the following except: A list of any pending or threatened litigation. A request that the attorney describe and evaluate each pending or threatened litigation. A list of litigation which has been settled prior to the current year under audit. A list of litigation which has been settled prior to the current year under audit.
A list of litigation which has been settled prior to the current year under audit.
Which of the following is not part of the AICPA's auditor objectivity and independence principle? A member in public practice should be independent in appearance when providing auditing and other attestation services. A member should not enter into contingent fee arrangements. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact when providing auditing and other attestation services.
A member should not enter into contingent fee arrangements.
All of the following are inherent risk factors for the purchasing process except: Whether the supply of raw materials is adequate. How volatile raw material prices are. Misstatements detected in prior audits. A new IT system placed in operation during the year.
A new IT system placed in operation during the year.
The basic elements of a standard unqualified/unmodified report for a public company include all of the following except: The "Basis for Opinion Section." A title that includes the word "Independent." A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results. An indication of how long the auditor has served as the company's auditor.
A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results.
Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts." Existence. Completeness Accuracy, Valuation and allocation. Rights and Obligations.
Accuracy, Valuation and allocation.
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to Accuracy, valuation, and allocation Presentation Existence Rights and Obligations
Accuracy, valuation, and allocation
Which of the following legal situations would be considered to impair the auditor's independence? Actual litigation by the auditor against the present management, alleging management fraud or deceit. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed.
Actual litigation by the auditor against the present management, alleging management fraud or deceit.
Analytical procedures performed at the overall review stage of an audit appear to indicate that several accounts have unexpected balances and/or relationships. The result of these procedures most likely would indicate that Internal control activities are not operating effectively. The communications with the audit committee should be revised. Additional detail tests of account balances are necessary. Fraud exists among the relevant account balances involved.
Additional detail tests of account balances are necessary.
What type of report is issued when the financial statements are not presented fairly? Unqualified/Unmodified. Qualified. Highly qualified. Adverse.
Adverse
Without first receiving consent from the client, a CPA firm should not disclose confidential client information contained in its working papers to (a) Another entity looking for benchmarking information. PCAOB inspection team. Disciplinary body created under state statute. Federal court that has issued a subpoena.
Another entity looking for benchmarking information.
In most cases, commitments Are likely to result in additional losses to the entity. Are found through the accounts payable search for unrecorded liabilities. Do not require any adjustments to the financial statement amounts. Are disclosed in a footnote to the financial statements with an adjustment to Other Comprehensive Income for any gains or losses.
Are disclosed in a footnote to the financial statements with an adjustment to Other Comprehensive Income for any gains or losses.
The existence of audit risk is best recognized by the statement in the standard auditor's report that the Opinion is based, in part, on the report of other auditors. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the Accounts receivable subsidiary ledger. Customer order file. Bill of lading (shipping report) file. Sales invoice file.
Bill of lading (shipping report) file.
Which of the following is not considered an act discreditable to the profession? Solicitation of CPA exam questions. Failure to file a personal tax return on a timely basis. Billing an audit client an amount in excess of the originally quoted fee. Discrimination or harassment of employees.
Billing an audit client an amount in excess of the originally quoted fee.
Which of the following is a change that affects comparability but does not affect the consistency of the financial statements? Change in accounting principle. Change in accounting estimate. A change from an incorrect to a correct classification of transactions or balances on the financial statements. Correction of a material misstatement in previously issued financial statements.
Change in accounting estimate.
Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated? Occurrence Completeness Authorization Presentation
Completeness
If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? Existence. Rights and obligations. Completeness Classification
Completeness
Which of the following is a change that affects the comparability and consistency of the financial statements? Change in accounting estimate. Correction of a material misstatement in previously issued financial statements. Change in classification of assets from long-term to current. Reducing the expected service life of a truck from 7 to 5 years to better reflect how long a company's trucks are actually lasting.
Correction of a material misstatement in previously issued financial statements.
Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that Shipments to customers were recorded in the sales journal. Recorded sales were actually shipped. Customers were billed for goods shipped to them. Customers were billed for the correct amounts.
Customers were billed for goods shipped to them.
An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of Accuracy Occurrence Authorization. Cutoff.
Cutoff.
Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? Multiple Choice A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character.
Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.
In order to maintain independence from a public company audit client, the partner on the engagement must rotate off from the client Every year. Every 5 years. Every 7 years. There is no requirement for the partner to be reassigned from any public company audit client after any specified period of time.
Every 5 years.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report? Inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end. Review a fire insurance settlement during the subsequent period. Examine relevant internal audit reports issued during the subsequent period. Confirm bank accounts established after year-end.
Examine relevant internal audit reports issued during the subsequent period.
When auditing contingent liabilities, which of the following procedures would generally be least effective? Reading the minutes of the board and other committee meetings. Examining all IRS documentation related to possible tax disputes. Examining legal letters. Examining accounts payable confirmations.
Examining accounts payable confirmations.
All of the following are typical audit procedures used to identify subsequent events except: Inquiring of management as to their knowledge of subsequent events. Reading available interim financial statements from after year end. Reading board meeting minutes for meetings held after year end. Extending the search for unrecorded liabilities to the report date.
Extending the search for unrecorded liabilities to the report date.
Under the SEC's rules regarding independence, which of the following must an entity disclose? Only fees for systems implementation and design and nonaudit services performed by the audit firm. Only fees for the external audit. Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm. Only fees for internal and external audit services provided by the audit firm.
Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.
To which of the following matters would an auditor not apply materiality limits when obtaining specific written management representations? Disclosure of compensating balance arrangements involving restrictions on cash balances. Information concerning related-party transactions and related amounts receivable or payable. Fraud involving employees with significant roles in the internal control system. The absence of errors and unrecorded transactions in the financial statements.
Fraud involving employees with significant roles in the internal control system.
Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? Product costs. Functional costs. Period costs. Allocable costs.
Functional costs.
Each of the following pairings includes a category of rules and a specific rule which may or may not pertain to that category. Choose the pairing which is correctly matched. Independence; Confidential client information. General standards; Contingent fees. General standards; Due professional care. Responsibilities to clients; Acts discreditable.
General standards; Due professional care.
According to FASB ASC 606, which of the following is not one of the five-step approach required for revenue recognition? Identify the contract(s) with a customer. Identify if cash is received. Determine the transaction price. Identify the performance obligations in the contract.
Identify if cash is received.
In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? Departure from generally accepted accounting principles. Inadequate disclosure of accounting policies. Unreasonable justification for a change in accounting principle. Inability of the auditor to obtain sufficient appropriate evidence.
Inability of the auditor to obtain sufficient appropriate evidence.
Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests? Review the cash receipts journal for the month prior to year-end. Inspect related shipping records and sales invoices documenting the merchandise sold to customers. Intensify the study of internal control concerning the revenue and collection cycle. Increase assessed detection risk related to existence assertion in this area.
Inspect related shipping records and sales invoices documenting the merchandise sold to customers.
An auditor notifies management that there is a material inconsistency between information in the audited financial statements and other information provided in the annual report. If management refuses to correct the material inconsistency, the auditor is not permitted to Include an explanatory (or other matter) paragraph in the audit report. Withhold the audit report until the material is presented consistently. Withdraw from the engagement. Issue a qualified opinion.
Issue a qualified opinion.
A violation of the profession's ethical standards is most likely to occur when a CPA Issues an unqualified opinion on an entity's financial statements when fees for the prior year audit have not been paid in full. Serves as an honorary member of the board of directors of a charitable organization for which he or she also audits the entity's financial statements. Arranges with a financial institution to collect notes issued by a client in payment of fees due. Compiles the financial statements of an entity that employs the CPA's spouse as a bookkeeper.
Issues an unqualified opinion on an entity's financial statements when fees for the prior year audit have not been paid in full.
With respect to the issuance of an audit report that is dual dated because of an event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before the audit report was issued, the auditor's responsibility for events occurring after the completion of fieldwork is Extended to include all events occurring before the audit report is issued. Nonexistent- auditors have no responsibility for subsequent events. Extended to cover the period up to the issuance of the next audit report. Limited to the specific event referred to.
Limited to the specific event referred to.
A CPA, while performing an audit, strives to achieve independence in appearance in order to Reduce risk and liability. Comply with the generally accepted standards of fieldwork. Become independent in fact. Maintain public confidence in the profession.
Maintain public confidence in the profession.
Dewey, Needham, & Howe accept an engagement to audit the 2013 financial statements of Syracuse Co. and begin fieldwork in September 2013. Syracuse (December 31st year-end) gives the unaudited financial statements to the auditors on 1/17/2014. The auditors completed the fieldwork on 3/12/2014 and distributed the audit report on 3/23/2014. The entity's letter of representation should be dated ________ and the audit report should be dated __________. March 23rd; March 12th. March 12th; March 12th. January 17th; March 23rd. March 23rd; March 23rd.
March 12th; March 12th.
NUMBER 20 CH 18 ON CONNECT
NUMBER 20 CH 18 ON CONNECT
Which of the following material events occurring after the issuance of an auditor's report would most likely cause the auditor to make further inquiries about the previously issued financial statements to determine if they may need to be restated? An uninsured flood occurs that may affect the entity's ability to continue as a going concern. A major contingency is resolved that had been disclosed in the audited financial statements. New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases. A subsidiary is sold that accounts for 25% of the entity's consolidated revenues.
New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? Communications with the audit committee indicate a higher than normal rate of employee turnover. Normal trade credit from major suppliers has recently been restricted or denied. There are a significant number of related party transactions occurring. Plans to repurchase a large block of treasury stock have been delayed.
Normal trade credit from major suppliers has recently been restricted or denied.
Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since Other procedures such as the search for unrecorded liabilities are generally very effective. A/P confirmations generally have lower response rates than accounts receivable confirmations. A/P confirmations do not address the existence assertion. A/P confirmations do not address specific audit assertions.
Other procedures such as the search for unrecorded liabilities are generally very effective.
Which of the following is not one of the major steps in setting control risk for the purchasing process? Understand and document the purchasing process. Plan and perform analytical procedures on accounts used in the purchasing process. Plan and perform tests of controls on purchase transactions. Set and document the control risk for the purchasing process.
Plan and perform analytical procedures on accounts used in the purchasing process.
Which of the following agencies/organizations govern the independence rules for audits of public companies? AICPA. Public Company Accounting Oversight Board. FASB. Auditing Standards Board [ASB].
Public Company Accounting Oversight Board.
Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. Receiving reports require the signature of the individual who authorized the purchase. Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.
Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.
An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. Sending quarterly confirmations to all vendors. Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. Tracing the totals from the purchases journal to the various general ledger accounts.
Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger.
Which of the following is not an element of quality control as defined by the AICPA's Statement of Quality Control Standards No. 8? Monitoring. Human resources. Reliability. Acceptance and continuance of clients and engagements.
Reliability
If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000, the auditor is most likely to Resign from the engagement. Issue a qualified opinion. Request that the entity review internal controls over accounts receivable. Request that the entity adjust its accounts receivable balance by $82,000.
Request that the entity adjust its accounts receivable balance by $82,000.
During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance? The interests of Moon Co., the auditor, and the public should be weighed equally in the decision. There is a small but reasonable chance that Accounts Receivable as stated by Moon Co. might turn out to be fully collectible. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. Moon management has the right to make company estimates.
Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.
Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? Review management's plans to dispose of assets. Consider management's plans to reduce or delay expenditures. Evaluate management's plans to borrow money or restructure debt. Review compliance with the terms of debt agreements.
Review compliance with the terms of debt agreements.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable? Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
A CPA firm should establish monitoring procedures to provide reasonable assurance that the policies and procedures over each of the other elements of quality control are suitably designed and are being applied effectively. To achieve this goal, the firm would most likely establish procedures for Evaluating prospective and continuing client relationships. Reviewing engagement audit documentation and reports. Requiring personnel to adhere to the applicable independence rules. Maintaining personnel files containing documentation related to the evaluation of personnel.
Reviewing engagement audit documentation and reports.
A CPA is aware that a sole proprietor client has "skimmed" unrecorded cash receipts and thus not reported them to the Internal Revenue Service. If the CPA signs the entity's tax return as a CPA after preparing the return, he/she would be violating which AICPA Rule of Conduct? Rule 1.200—Independence Rule 1.100—Integrity and Objectivity Rule 1.320—Accounting Principles Rule 1.700—Confidential Information
Rule 1.100—Integrity and Objectivity
Which of the following procedures is least likely to be performed before the balance sheet date? Test of internal control over cash. Observation of inventory. Confirmation of receivables. Search for unrecorded liabilities.
Search for unrecorded liabilities.
Which of the following internal controls would be most likely to deter the lapping of collections from customers? Segregation of duties between receiving cash and posting the accounts receivable ledger. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Segregation of duties between receiving cash and posting the accounts receivable ledger.
According to the Public Company Accounting Oversight Board's (PCAOB) auditing standard (AS 1215) related to audit documentation and retention, an auditor should retain audit documentation for how long of a period of time beyond completion of the engagement? Seven years, unless a shorter period is required by state law. Seven years, unless a longer period is required by state law. Seven years for electronic documentation; ten years for physical documentation. The same period as required under state tax law.
Seven years, unless a longer period is required by state law.
Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue? Shipping documents. Shipping documents. Customer account receivable balances. The record of sales returns.
Shipping documents.
The SEC and the Sarbanes-Oxley Act of 2002 prohibit public accounting firms from providing certain services to audit clients that are public companies. Which of the following services is not prohibited? Internal audit outsourcing services. Information system design services. Tax preparation services. Business valuation and appraisal services.
Tax preparation services.
Which of the following is not a major element of an unqualified/unmodified audit report of a public company? The "Opinion" section. The "Basis for Opinion" section. The "Audit Timeline" section. The "Critical Audit Matters" Section.
The "Audit Timeline" section.
Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms? The AICPA peer review program is mandatory for participating firms. The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines. These inspections focus on the system of quality controls put in place by the CPA firms. The "Big 4" CPA firms are a good example of a "registered" firm with the PCAOB.
The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines.
Which of the following is not a key segregation of duties in the revenue process? The credit function should be segregated from the billing function. The shipping function should be segregated from the billing function. The accounts receivable function should be segregated from the invoice preparation function. The cash receipts function should be segregated from the accounts receivable function.
The accounts receivable function should be segregated from the invoice preparation function.
In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? The auditor decides not to refer to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor wishes to emphasize that the entity had significant related-party transactions. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
The auditor decides not to refer to the report of another auditor as a basis, in part, for the auditor's opinion.
Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report? The auditor should extend the examination to the extent necessary to verify the "other information." The auditor has no obligation to read the "other information." The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially consistent with the financial statements. The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report."
The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially consistent with the financial statements.
Which of the following is not a situation that would require an explanatory paragraph in an unqualified/unmodified report? The auditor decides to refer to the report of other auditors as the basis, in part, for the auditor's own report. There is substantial doubt about the company's ability to continue as a going concern. The auditor performs an integrated audit and issues separate reports on the company's financial statements and internal control over financial reporting. The auditor is unable to apply necessary procedures because of a client imposed restriction.
The auditor is unable to apply necessary procedures because of a client imposed restriction.
Which of the following is true with respect to a scope limitation? The auditor can choose to issue an adverse report or disclaim an opinion. The auditor will generally issue a qualified report or disclaim an opinion. The auditor may not issue an unqualified/unmodified report even if the auditor can compensate for the scope limitation by performing alternative procedures. The auditor should withdraw from the engagement.
The auditor will generally issue a qualified report or disclaim an opinion.
Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? The entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales. A technological development in the industry that could affect the entity's future ability to continue as a going concern. The discovery of information regarding a contingency that existed before the financial statements were issued. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.
The discovery of information regarding a contingency that existed before the financial statements were issued.
In which of the following situations is an auditor permitted to issue an unqualified/unmodified report (assume all information is material)? The entity has omitted required footnote disclosures. The auditor is not independent of the entity. The auditor is unable to gather sufficient evidence in support of assets reported by a consolidated subsidiary. The entity failed to make a large debt payment during the subsequent event period.
The entity failed to make a large debt payment during the subsequent event period.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. The inventory account is misstated due to improper application of the lower-of-cost-or-market principle. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.
The inventory account is misstated due to improper application of the lower-of-cost-or-market principle.
Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions? The nature of the credit authorization process. Industry-related factors. The difficulty of auditing transactions and account balances. The complexity and contentiousness of revenue recognition issues.
The nature of the credit authorization process.
The auditor must communicate several items to "those charged with governance" at the conclusion of the audit. Which of the following is not a typical communication? Appointment and retention of the auditor. Obtaining information relevant to the audit and communicating the audit Strategy. The planned audit procedures for the audit. Communicating results of the audit.
The planned audit procedures for the audit.
If the principal auditor decides to make reference to other auditors used in the engagement, the audit report must make reference to The portion or parts of the financial statements examined by the other auditors. The name of the other auditor. Whether or not a subsidiary corporation was examined. Whether the other auditors are members of the SEC Division of firms.
The portion or parts of the financial statements examined by the other auditors.
Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? Evaluate proper segregation of duties. Confirm accounts receivable directly with customers. Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. Review receipt of cash from customers in the period subsequent to the balance sheet date.
Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.
Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? Unauthorized goods returned for credit. Unrecorded sales for the year. Excessive sales discounts. Lapping of year-end accounts receivable.
Unrecorded sales for the year.
Which of the following is an example of a contingent liability? Accounts payable. Long term debt. Warranty payable. All liabilities are "contingent."
Warranty payable.
Which of the following is not a typical procedure performed related to other non-trade receivables? Confirmation of the amount with the other party. Evaluation of the collectability of other receivables. Examination of the note for repayment terms and interest arrangements. Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.
Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.
Which of the following matters should an auditor communicate to those charged with governance? Significant Audit Adjustments Management's Consultations with Other Accountants Yes No Yes Yes No Yes No No
Yes Yes
Tech Company has appropriately disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: an inability to estimate the amount of loss. a lack of insurance coverage for possible losses from such litigation. the entity's lack of experience with such litigation. a lack of sufficient evidence.
a lack of sufficient evidence.
Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: a qualified opinion or an adverse opinion. a qualified opinion or a disclaimer of opinion. an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph. a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.
a qualified opinion or a disclaimer of opinion.
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: a system of peer review. continuing professional education. compliance with generally accepted reporting standards. a system of quality control.
a system of quality control.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: Existence Rights and obligations accuracy, valuation, and allocation. Completeness
accuracy, valuation, and allocation.
An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide: corroboration of the information furnished by management concerning litigation, claims, and assessments. a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome. an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. the opinion of a specialist as to whether loss contingencies are possible, probable, or remote.
corroboration of the information furnished by management concerning litigation, claims, and assessments.
Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to: develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. request a printout of all account balances so that they can be manually checked against the credit limits. develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.
develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were: fictitious sales in the current year. more thorough credit investigations made by the company late last year. unrecorded credit sales in the current year. unrecorded cash receipts last year.
fictitious sales in the current year.
An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: is appropriate and would not negate the unmodified opinion. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." violates auditing standards if this information is already disclosed in footnotes to the financial statements. is considered an "except for" qualification of the opinion.
is appropriate and would not negate the unmodified opinion.
An auditor would be most likely to identify a contingent liability by obtaining a(n): accounts payable confirmation. letter from the entity's general legal counsel. list of subsequent cash receipts. bank confirmation of the entity's cash balance.
letter from the entity's general legal counsel.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was: extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence. limited to events occurring up to the date of the last subsequent event referenced. extended to subsequent events occurring through the date of issuance of the report. limited to the specific event referenced.
limited to the specific event referenced.
The negative request form of accounts receivable confirmation is useful particularly when: The Assessed Level of Control Risk Relating to Receivables Is The Number of Small Balances Is Consideration by the Recipient Is low high likely high high likely low low unlikely high low likely
low high likely
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: pledging of the receivables is probable. no reply to a positive confirmation request is received. no reply to a negative confirmation request is received. the collectibility of the receivables is in doubt.
no reply to a positive confirmation request is received.
According to FASB ASC Topic 450, "Contingencies," which of the following terms means that the future event is "likely to occur"? Probable. Likely. Reasonably possible. More than remote.
pROBABLE
In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except: supervision responsibilities. consistent, high-quality engagement performance. performance evaluation. review responsibilities.
performance evaluation.
Final analytical procedures are generally intended to: provide the auditor with a final, overall evaluation of the relationships among financial statement balances. test transactions to corroborate management's financial statement assertions. Retest control activities that appeared to be ineffective during the assessment of control risk. gather evidence concerning account balances that have not yet been investigated.
provide the auditor with a final, overall evaluation of the relationships among financial statement balances.
Purchase cutoff procedures should be designed to test whether all inventory purchased and received before the end of the year was recorded. purchased and received before the end of the year was paid for. ordered before the end of the year was received. owned by the entity is in the possession of the entity at the end of the year.
purchased and received before the end of the year was recorded.
A violation of the profession's ethical standards is least likely to occur when a CPA: purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period. has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company. forms an association—not a legally binding partnership—with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs. receives a percentage of the amounts invested by the CPA's audit entities in a tax shelter with the entities' knowledge and approval.
purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all canceled checks. vendor invoices. receiving reports. purchase orders.
receiving reports.
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a: description of a CPA's procedures for responding to an inquiry from a trial board. list of violations that would cause the automatic suspension of a CPA's license. complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession. set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.
set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.
All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence with respect to an audited entity except: Multiple Choice information systems design and implementation. human resource services. management functions. some specific tax services. all of the above are seen by the SEC as impairing independence.
some specific tax services.
Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n): disciplinary body created under state statute. federal court that has issued a valid subpoena. successor CPA firm that has been engaged to audit the former audit entity. authorized quality control review board.
successor CPA firm that has been engaged to audit the former audit entity.
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: a majority of recipients usually lack the willingness to respond objectively. some recipients may report incorrect balances that require extensive follow-up. the auditor cannot infer that all nonrespondents have verified their account information. negative confirmations do not produce evidence that is statistically quantifiable.
the auditor cannot infer that all nonrespondents have verified their account information.
King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n): disclaimer of opinion. unmodified opinion. unmodified opinion with an emphasis-of-matter paragraph. qualified opinion.
unmodified opinion.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be amounts recorded in the accounts payable subsidiary ledger. vendors with whom the entity has previously done business. invoices filed in the entity's open invoice file. payees of checks drawn in the month after year-end.
vendors with whom the entity has previously done business.
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve: write-offs of customer accounts. cash disbursements. employee overtime wages. credit granted to customers.
write-offs of customer accounts.
