Auditing Mini Exam #1

A special report on financial statements prepared on the cash basis of accounting should include: A. A statement that the audit was conducted in accordance with generally accepted auditing standards. B. A disclaimer of opinion, because an auditor should not report on financial statements that are not designed to be in conformity with GAAP. C. A qualified or adverse opinion, due to the departure from GAAP. D. An emphasis-of-matter paragraph including a brief explanation of the cash basis of accounting.

A. A statement that the audit was conducted in accordance with generally accepted auditing standards.

An uncertainty may result in: Unmod. Qual. Adverse Disclaim Yes Yes Yes Yes No Yes No Yes Yes No No No No Yes Yes Yes

A. Yes Yes Yes Yes

Which of the following is a required component of the independent auditor's report expressing an unmodified opinion? A. An Auditor's Responsibility section including the audit firm name. B. A Basis for Opinion section including a reference to generally accepted auditing standards. C. An other-matter paragraph including the reason for the unmodified opinion. D. An Opinion section including a reference to generally accepted auditing principles.

B. A Basis for Opinion section including a reference to generally accepted auditing standards.

How do auditing standards differ from auditing procedures? A. Auditing procedures are determined by the AICPA (non-issuers) and the PCAOB (issuers), whereas auditing standards are determined by the auditor based on his/her professional judgment. B. Auditing standards apply to all audits, whereas auditing procedures may vary from one engagement to the next. C. Auditing procedures must be determined first, before auditing standards can be applied. D. Auditing standards may not apply to all audits, whereas auditing procedures are always necessary to some extent.

B. Auditing standards apply to all audits, whereas auditing procedures may vary from one engagement to the next.

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

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

Dante, CPA, is auditing the financial statements of Crest Computing. During the previous year, Kratzke & Kratzke, CPAs, audited Crest's financial statements. Crest has decided to present comparative financial statements for the current year. Which statement is true about Kratzke & Kratzke's report? A. Kratzke & Kratzke may reissue their report on the previous statements without performing any additional procedures as long as no changes have been made to those statements. B. Kratzke & Kratzke may reissue their report on the previous statements only after performing limited procedures to evaluate the continuing appropriateness of the report. C. Kratzke & Kratzke should not issue their report, since they may be unaware of recent circumstances that might have affected the previous year's financial statements. D. Kratzke & Kratzke should not reissue their report unless Dante agrees to co-sign that report.

B. Kratzke & Kratzke may reissue their report on the previous statements only after performing limited procedures to evaluate the continuing appropriateness of the report.

Which of the following are considered internal control environment factors? A. Detection risk, management philosophy, personnel policies, and accounting systems. B. Management philosophy and personnel policies. C. Detection risk and accounting systems. D. Neither detection risk, management philosophy, personnel policies, nor accounting systems.

B. Management philosophy and personnel policies.

Which of the following inquiries should be made of a predecessor auditor before accepting a new client engagement? A. Specific inquiries of the predecessor regarding audit areas that have required an inordinate amount of time. B. The predecessor's understanding as to the reasons for the change of auditors. C. Specific inquiries of the predecessor regarding audit problems that arose from the condition of the accounting system and records. D. Specific inquiries of the predecessor regarding communication to management, the audit committee, and those charged with governance about operational inefficiencies.

B. The predecessor's understanding as to the reasons for the change of auditors.

In planning the audit, the auditor should consider materiality for the financial statements as a whole in terms of: A. The smallest aggregate level of misstatement that could be considered material to the financial statements as a whole. B. The smallest aggregate level of misstatement that could be considered material to any one of the financial statements. C. The largest aggregate level of misstatement that could be considered material to the financial statements taken as a whole. D. The largest aggregate level of misstatement that could be considered material to any one of the financial statements.

B. The smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Which of the following is not true about audit documentation? A. Audit documentation should demonstrate that sufficient appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued. B. Audit documentation should include identification of the staff who performed the audit work. C. Audit documentation should include a separate page for each material account balance or transaction class. D. Audit documentation should include information related to the selection and application of accounting principles.

C. Audit documentation should include a separate page for each material account balance or transaction class.

For an entity's financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should: A. Be U.S. GAAP, for all audits performed in the United States. B. Be approved by the Auditing Standards Board or the appropriate industry subcommittee. C. Include an adequate description of the framework in the financial statements. D. Match the reporting framework used by most other entities within the entity's particular industry.

C. Include an adequate description of the framework in the financial statements.

Assuming no other material misstatements are found, an independent auditor determines that supplementary information is not fairly stated relative to the basic financial statements taken as a whole. In this instance where the independent auditor was engaged to audit both the financial statements and the supplementary information, the independent auditor should: A. Issue a qualified (except for) or adverse opinion on the financial statements. B. Issue a disclaimer of opinion on the financial statements. C. Issue an unmodified opinion on the financial statements and modify the auditor's opinion on the supplementary information within a separate section of the auditor's report with the heading "Supplementary Information." D. Issue an unmodified opinion on the financial statements without reference to the supplementary information outside the basic financial statements.

C. Issue an unmodified opinion on the financial statements and modify the auditor's opinion on the supplementary information within a separate section of the auditor's report with the heading "Supplementary Information."

The auditor performs a preliminary risk assessment for a new client. During the initial fieldwork phase the auditor's test of the client's controls indicate that certain controls are not operating effectively. Under this scenario, the auditor would most likely take which of the following actions? A. Issue a modified audit report. B. Determine the impact on the client's financial statements without performing additional audit procedures. C. Revise the preliminary risk assessment and modify the planned audit procedures. D. Perform additional audit procedures but do not revise the preliminary risk assessment.

C. Revise the preliminary risk assessment and modify the planned audit procedures.

Which of the following statements concerning the auditor's use of the work of a specialist is correct? A. The auditor need not obtain an understanding of the methods and assumptions used by the specialist. B. The auditor should refer to the work or findings of the specialist in the auditor's report when an unmodified opinion is issued. C. The auditor may engage a specialist and use that specialist's work as audit evidence in performing substantive tests to evaluate material financial statement assertions. D. If the specialist is related to the client, the auditor is not permitted to use the specialist's findings as corroborative evidence.

C. The auditor may engage a specialist and use that specialist's work as audit evidence in performing substantive tests to evaluate material financial statement assertions.

An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the report for: A justified An unjust. A justified change in change in change in accountingaccounting accounting principle principle estimate No Yes Yes Yes Yes No Yes No No No No Yes

C. Yes No No

Which of the following are elements of a firm's quality control that should be considered in establishing its quality control policies and procedures? A. Client acceptance, professional development, and analytical review. B. Assigning personnel, professional development, and analytical review. C. Assigning personnel, client acceptance, and analytical review. D. Assigning personnel, client acceptance, and professional development.

D. Assigning personnel, client acceptance, and professional development.

A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when the client: A. Omits the statement of cash flows. B. Refuses to disclose in the notes to the financial statements a significant related party transaction. C. Asks the auditor to report on the balance sheet and not the other basic financial statements. D. Does not make the minutes of the Board of Directors meetings available to the auditor.

D. Does not make the minutes of the Board of Directors meetings available to the auditor.

Which of the following procedures would an auditor be least likely to use in an effort to obtain evidence regarding subsequent events? A. Making inquiry of management about unusual adjustments after year-end. B. Obtaining lists of litigation for review with the client's attorneys. C. Reading minutes of board meetings and reading interim financial statements. D. Investigating personnel changes which occurred after year-end.

D. Investigating personnel changes which occurred after year-end.

Which of the following properly describes the auditor's responsibilities as opposed to management's responsibilities? A. The auditor is responsible for the entity's financial statements and management is responsible for the selection and application of accounting policies. B. The auditor is responsible for identifying the laws and regulations applicable to the entity's activities and management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial. C. Management is responsible for the entity's financial statements and the auditor is responsible for the selection and application of accounting principles. D. Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.

D. Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatements.

Whitney, CPA, is assessing the auditability of Nissen Manufacturing, a possible new client. Which of the following would be least likely to cause Whitney to reject Nissen as a new client? A. Management of Nissen is unable to provide financial records for the second half of the year due to a computer malfunction. B. Management of Nissen expresses a disregard for maintaining an adequate internal control environment. C. Management of Nissen is unwilling to provide all financial records to Whitney, due to a desire to keep such information confidential. D. Management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers.

D. Management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers.

A risk assessment based on the effective operation of internal control most likely would involve all of the following, except: A. Testing of controls B. Identifying specific internal control policies and procedures relevant to specific assertions. C. Identifying the types of potential misstatements. D. Performing more extensive substantive tests with larger sample sizes than originally planned.

D. Performing more extensive substantive tests with larger sample sizes than originally planned.

Cyrus, CPA is the continuing auditor of Topaz, Inc. During the current year's audit, Cyrus becomes aware of evidence that affects the previous year's statements as well as the opinion that was expressed. Topaz is planning to preset comparative financial statements that will include last year's financial statements. How should Cyrus handle this situation? A. Report only on the current year's financial statements. B. Report on both sets of financial statements, using the original opinion on last year's financial statements. C. Report on both sets of financial statements, using the original opinion on last year's financial statements only after reviewing the previous year's audit documentation to ensure that auditing standards were followed. D. Report on both sets of financial statements, updating the previous opinion for any changes that have occurred.

D. Report on both sets of financial statements, updating the previous opinion for any changes that have occurred.

When a client makes extensive use of information technology, the auditor should consider the effect this may have on internal control. Which of the following is least likely to be affected? A. The audit procedures used to evaluate controls. B. The five components of internal control. C. The assessed level of control risk. D. The audit objectives with respect to evaluating internal control.

D. The audit objectives with respect to evaluating internal control.

Under which of the following circumstances would an adverse opinion be most appropriate? A. The client has severely limited the scope of the audit, not permitting access to outside client legal counsel. B. The auditor was unable to observe client inventory counts by virtue of the fact that the auditor was appointed after balance sheet date. C. There has been a material impact on the financial presentations due to a justifiable change in reporting entity, which has been fully disclosed in the financial statements and related footnotes. D. The financial statements include property, plant, and equipment amounts at fair market value based on management's position that fair market value better depicts true financial position and results of operations of the company.

D. The financial statements include property, plant, and equipment amounts at fair market value based on management's position that fair market value better depicts true financial position and results of operations of the company.

When assessing the competence of an entity's internal auditor, an independent CPA should obtain information about all of the following except: A. Education level and professional experience of the internal auditor. B. Professional certification of the internal auditor. C. Quality of the internal auditor's audit documentation. D. The organizational status of the internal auditor.

D. The organizational status of the internal auditor.

Which of the following are required as part of an auditor's planning process? Unders. Determin. Eval.Document design whether oper. underst. of cont. cont. effect. internal been imp. cont. cont. Yes No No Yes No No Yes No No Yes Yes No Yes Yes No Yes

D. Yes Yes No Yes