Chapter 3 (Auditing)

Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date? 30 days 45 days 60 days 90 days

45 days

Under the Statements on Auditing Standards (SASs), the auditor should complete the assembly of the final audit file on a timely basis, but within how many days following the report release date? 30 days 45 days 60 days 90 days

60 days

An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable? A decrease in costs of goods sold as a percentage of sales A decrease in accounts payable A decrease in retained earnings A decrease in notes payable

A decrease in retained earnings

Which of the following statements correctly defines the term "reasonable assurance"? A substantial level of assurance to allow an auditor to detect a material misstatement A significant level of assurance to allow an auditor to detect a material misstatement An absolute level of assurance to allow an auditor to detect a material misstatement A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

An accountant performed a review engagement of the financial statements of a nonissuer oil and gas refinery. Which of the following would be included in the accountant's documentation? The internal auditor's inspection reports of the level of oil reserves The response of the client's legal counsel to pending worker's compensation claims A memo on a discussion with the CFO regarding a suspected kiting scheme An evaluation of the refinery's controls over oil pressure levels

A memo on a discussion with the CFO regarding a suspected kiting scheme

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

A review of the segregation of duties in the cash disbursement process

Which of the following procedures does a firm not need to consider when adopting policies for retention of engagement documentation? Ability to retrieve and access the engagement documentation during the entire retention period Ability to provide a record of changes made to engagement documentation after assembly of engagement files has been completed Ability to provide authorized external parties access to and review of specific engagement documentation for quality control or other purposes Ability to retrieve and access the engagement documentation in perpetuity

Ability to retrieve and access the engagement documentation in perpetuity

An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take? Request that management engage an independent industry expert to consult with the accountant Accept the engagement and obtain an adequate level of knowledge about the industry Decline the engagement Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge about the industry

Accept the engagement and obtain an adequate level of knowledge about the industry

Compilation documentation at a minimum should include which of the following? A copy of the financial statements The engagement letter A copy of the accountant's report All of the answer choices are correct.

All of the answer choices are correct.

If an accountant has no previous experience in the prospective client's industry, he or she may obtain the required level of knowledge through which of the following? AICPA guides Industry publications Financial statement of other entities in the industry All of the answer choices are correct.

All of the answer choices are correct.

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards? An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting

An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives

What is the definition of fraud in an audit of financial statements? An intentional act that results in a material misstatement in financial statements that are the subject of an audit The unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure An intentional act that results in a material weakness in financial statements that are the subject of an audit Management's inability to design and implement programs and controls to prevent, deter, and detect material misstatements

An intentional act that results in a material misstatement in financial statements that are the subject of an audit

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result? Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed. Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions. Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company's profitability. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Which of the following is the authoritative body designated to promulgate attestation standards? Auditing Standards Board Governmental Accounting Standards Board Financial Accounting Standards Board Government Accountability Office

Auditing Standards Board

In connection with a compilation or review of financial statements, how might an accountant obtain an understanding of an entity's business, including the stated qualifications of accounting personnel? Experience with the entity Inquiry of the entity's personnel I only II only Both I and II Neither I nor II

Both I and II

After the documentation completion date, the auditor must: not add or change any audit documentation, including signatures, unless he or she documents the date and reason(s) for such additions or changes. not delete or discard audit documentation before the end of his or her firm's retention period. Both of the answer choices are correct. Neither of the answer choices is correct.

Both of the answer choices are correct.

When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control? Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year-end Inquire of the entity's outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation Consider the results of audit procedures performed with respect to the current year's financial statements

Consider the results of audit procedures performed with respect to the current year's financial statements

Under the Statements on Auditing Standards (SASs), the auditor should adopt reasonable procedures to retain and access audit documentation for a period of time sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements for records retention. Such retention period, however, should not be fewer than how many years following the report release date? One year Three years Five years Seven years

Five years

Which of the following best characterizes an auditor's exercise of professional skepticism? Conducting all fraud-related inquiries in a nonconfrontational manner Obtaining adequate conclusive evidence in support of the fairness of the financial statements Having an attitude that includes a questioning mind Taking into account past relationships and experiences with management

Having an attitude that includes a questioning mind

Interpretation No. 1 to AU-C 230, Audit Documentation, entitled "Providing Access to or Copies of Audit Documentation to a Regulator," contains guidance relating to providing access to or copies of audit documentation to a regulator. Under what circumstances does this apply to an attestation engagement? In all cases In no cases In all cases; however, the letter to the regulator should outline the purpose of the regulatory request as understood by the practitioner In all cases for access, but not for copies

In all cases; however, the letter to the regulator should outline the purpose of the regulatory request as understood by the practitioner

Which of the following inquiries would an accountant most likely make during a review of financial statements? Inquiries directed toward internal audit personnel related to their activities concerning the design and effectiveness of the entity's internal control Inquiries directed toward management regarding the entity's accounting principles and practices and the methods followed in applying them Inquiries directed toward in-house legal counsel related to litigation, compliance with laws and regulations, fraud or suspected fraud, etc. Inquiries directed toward marketing, sales, or production personnel related to change in the entity's marketing or production strategies, sales trends, etc.

Inquiries directed toward management regarding the entity's accounting principles and practices and the methods followed in applying them

Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)? Inquiry to identify transactions between related parties and management Inquiry regarding the client's principles and practices and the method of applying them Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants Inquiry concerning the effectiveness of the client's system of internal control

Inquiry regarding the client's principles and practices and the method of applying them

Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements? Test the entity's internal controls to determine if adequate controls exist so that financial projections can be reasonably achieved Make inquiries prior to the date of the report about possible future transactions that may impact the forecast once the report is issued Make inquiries about the accounting principles used in the preparation of the prospective financial statements Compare the prospective financial statements with the entity's historical results for the prior year

Make inquiries about the accounting principles used in the preparation of the prospective financial statements

When should the auditor's report be dated? The date that substantially all fieldwork is completed The date the auditor grants the entity permission to use the auditor's report in connection with the financial statement The date of all significant subsequent events coming to the attention of the auditor No earlier than the date on which the auditor has obtained sufficient appropriate audit evidence

No earlier than the date on which the auditor has obtained sufficient appropriate audit evidence

Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer? Make preliminary judgments about risk and materiality to determine the scope and nature of the procedures to be performed. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services. Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets. Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.

Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

Which of the following is required of an accountant in reviewing a company's financial statements under the Statements on Standards for Accounting and Review Services (SSARS)? Obtain knowledge of the client's industry Send bank confirmations Obtain a signed letter from the previous auditor Observe client's physical inventory

Obtain knowledge of the client's industry

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan? Procedures performed to assess independence and the ability to perform the engagement The understanding of the terms of the engagement, including scope, fees, and resource allocation Other audit procedures to be performed to comply with generally accepted auditing standards Issues with management integrity that could affect the decision to continue the audit engagement

Other audit procedures to be performed to comply with generally accepted auditing standards

Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARS)? Perform a reasonableness test of the balance by computing days' sales in receivables Vouch a sample of subsequent cash receipts from customers Confirm individually significant receivable balances with customers Review subsequent bank statements for evidence of cash deposits

Perform a reasonableness test of the balance by computing days' sales in receivables

Which of the following is not part of the documentation included in a compilation? A copy of the financial statements Engagement letter Review checklist A copy of the accountant's report

Review checklist

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

Review industry trade journals.

Which of the following procedures would an auditor least likely perform in planning a financial statement audit? Coordinating the assistance of entity personnel in data preparation Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity Selecting a sample of vendor invoices for comparison to receiving reports Reading the current year's interim financial statements

Selecting a sample of vendor invoices for comparison to receiving reports

Under PCAOB Auditing Standard 1215, audit documentation should be retained no fewer than how many years following the report release date? One year Three years Five years Seven years

Seven years

To compile financial statements, the accountant should possess a general understanding of the nature of the entity's operations. This most likely will include which of the following? Stated qualifications of the entity's accounting personnel Design of the entity's internal controls placed in operation Risk factors relating to misstatements arising from noncompliance with laws and regulations Internal control awareness of the entity's senior management

Stated qualifications of the entity's accounting personnel

Which of the following statements is most accurate regarding sufficient and appropriate documentation? Accounting estimates are not considered sufficient and appropriate documentation. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate, and therefore should be deleted from the working papers. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

At the completion of an audit, which of the following entities has ownership of the audit working papers? The client The client's audit committee The CPA firm that performed the audit The client's stockholders

The CPA firm that performed the audit

Interpretation No. 1 to AU-C 230, Audit Documentation, entitled "Providing Access to or Copies of Audit Documentation to a Regulator," contains guidance relating to providing access to or copies of audit documentation to a regulator. Which of the following is not considered a "regulator" under this Interpretation? State insurance and utility regulators Various health care authorities Federal agencies such as the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Department of Housing and Urban Development, the Department of Labor, and the Rural Electrification Administration The Internal Revenue Service

The Internal Revenue Service

If an accountant has no previous experience in the prospective client's industry, he or she may obtain the required level of knowledge through all of the following except: textbooks and periodicals. individuals knowledgeable about the industry. conferences, classes, and workshops. The accountant can obtain the required level of knowledge through any of the items listed.

The accountant can obtain the required level of knowledge through any of the items listed.

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? The complexity of the accounting system The existence of related party transactions The adequacy of the accounting records The operating effectiveness of controls

The adequacy of the accounting records

Which of the following statements is correct about actions taken after the documentation completion date? An auditor must not make any amendments to audit documentation before the end of the specified retention period. An auditor must not make any additions to audit documentation before the end of the specified retention period. An auditor must not make any changes to audit documentation before the end of the specified retention period. The auditor must not make any deletions to audit documentation before the end of the specified retention period.

The auditor must not make any deletions to audit documentation before the end of the specified retention period

Which of the following statements is most accurate regarding audit documentation requirements? The auditor should document findings that could result in a modification of the auditor's report. If different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the working papers. If an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the working papers. If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed.

The auditor should document findings that could result in a modification of the auditor's report.

How long do the standards require a firm to retain documentation for engagements other than audits? 7-10 years The firm should establish policies and procedures for the retention of the records for a sufficient period. There is no specific requirement. As long as the client wants the records retained

The firm should establish policies and procedures for the retention of the records for a sufficient period.

What should an accountant consider in determining needs for retention of engagement documents? Who should sign the retention log Whether the engagement letter should be included Whether the document should be saved electronically or as a hard copy. The nature of the engagement and the firm's circumstances

The nature of the engagement and the firm's circumstances

An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters? Method of sampling to be used Preliminary judgments about materiality levels Nature of reports to be rendered Understanding the client's operations and business

Understanding the client's operations and business

The permanent file of an auditor's working papers generally would not include: bond indenture agreements. lease agreements. a working trial balance. a flowchart of internal control.

a working trial balance

The documentation on a review engagement should include all of the following except: matters covered in the accountant's inquiry procedures. results of the comparison of expectations to the recorded amounts. analytical procedures performed. abstracts or copies of important documents.

abstracts or copies of important documents.

Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co., but not on the statements of income, retained earnings, or cash flows. Harris will have access to all information underlying the basic financial statements. Under these circumstances, Harris may: not accept the engagement because it would constitute a violation of the profession's ethical standards. not accept the engagement because it would be tantamount to rendering a piecemeal opinion. accept the engagement because such engagements merely involve limited reporting objectives. accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary.

accept the engagement because such engagements merely involve limited reporting objectives.

Although the quantity and content of audit documentation varies with each particular engagement, an auditor's permanent files most likely include: documentation indicating that the audit work was adequately planned and supervised. prior years' accounts receivable confirmations that were classified as exceptions. analyses of capital stock and other owners' equity accounts. schedules that support the current year's adjusting entries.

analyses of capital stock and other owners' equity accounts.

Audit documentation should enable an experienced auditor, having no previous connection to the audit, to understand all of the following except: the nature, timing and extent of the auditing procedures performed. the results of the audit procedures performed and the audit evidence obtained. changes in the audit plan from the prior year. that the accounting records agree or reconcile with the auditing financial statements.

changes in the audit plan from the prior year.

In documenting the nature, timing, and extent of audit procedures performed, the auditor should include all of the following except: who performed the audit work and the date such work was completed. who reviewed specific audit documentation and the date of such review. identifying characteristics of the specific items tested when performing tests of operating effectiveness or substantive tests of details. copies of client invoices supporting the tests of operating effectiveness or substantive tests of details.

copies of client invoices supporting the tests of operating effectiveness or substantive tests of details.

The permanent (continuing) file of an auditor's workpapers most likely would include copies of the: lead schedules. attorney's letters. bank statements. debt agreements.

debt agreements

During the initial planning phase of an audit, a CPA most likely would: inquire of the client's attorney about whether any unrecorded claims are probable of assertion. discuss the timing of the audit procedures with the client's management. identify specific internal control activities that are likely to prevent fraud. evaluate the reasonableness of the client's accounting estimates

discuss the timing of the audit procedures with the client's management.

In an electronic environment, auditors and practitioners frequently carry forward and update files or schedules from one audit or attest period to the next. The auditor or practitioner must be careful, however, to adopt reasonable procedures that: all such files or schedules be printed and bound in the firm's working papers. enable him or her to access the electronic audit or attest documentation throughout the entire retention period. Both of the answer choices are correct. Neither of the answer choices is correct.

enable him or her to access the electronic audit or attest documentation throughout the entire retention period.

The phrase "generally accepted accounting principles" is an accounting term that: includes broad guidelines of general application but not detailed practices and procedures. encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. provides a measure of conventions, rules, and procedures governed by the AICPA. is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS).

encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

A written audit plan is required to be prepared by an auditor for: every account balance that is immaterial. every person who assists in the performance of the audit engagement. every audit. every audit where the opinion to be rendered by the auditor is likely to be other than unmodified.

every audit.

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the: timing of audit procedures. cost-benefit of gathering evidence. selected audit techniques. financial statement assertions.

financial statement assertions.

When reviewing the financial statements of a nonissuer in accordance with the Statements on Standards for Accounting and Review Services (SSARS), an accountant's procedures should include: obtaining an understanding of internal control. assessing fraud risk. applying substantive tests of transactions. inquiring into actions taken at meetings of the board of directors.

inquiring into actions taken at meetings of the board of directors.

After obtaining an understanding of the entity and its environment and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that: it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. additional evidence to support a further reduction in control risk is not available. an increase in the assessed level of control risk is justified for certain financial statement assertions. there were many internal control weaknesses that could allow errors to enter the accounting system.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

The documentation of the inquiry and analytical procedures on a review engagement should include all of the following except: additional procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures. communications, whether oral or written, to the appropriate level of management regarding fraud or noncompliance with laws and regulations that come to the accountant's attention. legal representation letter. management representation letter.

legal representation letter.

The documentation of the inquiry and analytical procedures on a review engagement should include all of the following except: additional procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures. legal representation letter. communications regarding fraud or noncompliance with laws and regulations. management representation letter.

legal representation letter.

To compile financial statements of a nonissuer in accordance with the Statements on Standards for Accounting and Review Services, an accountant should: identify material misstatements in the financial statements. review bank statement reconciliations. make inquiries of significant customers, vendors, and creditors. obtain a general understanding of the client's business transactions.

obtain a general understanding of the client's business transactions.

The procedure of an accountant obtaining a general level of knowledge of the accounting principles and practices of the entity's industry is: required for a review only. required for both a compilation and review. not required for a review but required for a compilation. not required for either a compilation or a review.

required for both a compilation and review.

The form and content of documentation in a review engagement should include all of the following except: results of tests of operating effectiveness of the entity's internal controls. results of review procedures that indicate the financial statements could be materially misstated. actions taken to address such findings. basis for the final conclusions reached regarding such findings.

results of tests of operating effectiveness of the entity's internal controls.

To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would: perform tests of details of transactions and balances. review prior-year working papers and the permanent file for the client. read specialized industry journals. reevaluate the client's internal control.

review prior-year working papers and the permanent file for the client.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would: analyze the liquidity and turnover ratios of the inventory. perform analytical procedures designed to identify cost variances. review the entity's descriptions of inventory policies and procedures. perform test counts of inventory during the entity's physical count.

review the entity's descriptions of inventory policies and procedures

When engaged to compile the financial statements of a nonissuer, an accountant is required to possess a level of knowledge of the entity's accounting principles and practices. This requirement most likely will include obtaining a general understanding of the: stated qualifications of the entity's accounting personnel. design of the entity's internal controls placed in operation. risk factors relating to misstatements arising from noncompliance with laws and regulations. internal control awareness of the entity's senior management.

stated qualifications of the entity's accounting personnel.

Audit plans should be designed so that: most of the required procedures can be performed as interim work. inherent risk is assessed at a sufficiently low level. the auditor can make constructive suggestions to management. the audit evidence gathered supports the auditor's conclusions.

the audit evidence gathered supports the auditor's conclusions.

Audit programs should be designed so that: most of the required procedures can be performed as interim work. inherent risk is assessed at a sufficiently low level. the auditor can make constructive suggestions to management. the audit evidence gathered supports the auditor's conclusions.

the audit evidence gathered supports the auditor's conclusions.

An auditor should design the written audit plan so that: all material transactions will be selected for substantive testing. substantive tests prior to the balance sheet date will be minimized. the audit procedures selected will achieve specific audit objectives. each account balance will be tested under either tests of controls or tests of transactions.

the audit procedures selected will achieve specific audit objectives.

Knowledge of the client's "industry, regulatory, and other factors" includes an understanding of all of the following, except: broad economic environment in which the client operates. relevant accounting pronouncements. supplier and customer relationships. the entity's accounting policies and procedures.

the entity's accounting policies and procedures.

Guidance on the quantity, type, and content of attest documentation for attestation engagements requires that attest documentation for attestation engagements indicate: the limited responsibility being taken by the practitioner with respect to the final report. that the attest documentation be regarded as a part of or a substitute for the client's records when the procedures relate to specific account balances or classes of transactions found in the client's financial statements. the work was adequately planned and supervised, indicating observance of the fieldwork. the specific procedures that would have to be performed for the engagement to be unlimited in scope.

the work was adequately planned and supervised, indicating observance of the fieldwork

When compiling the financial statements of a nonissuer, an accountant should: review agreements with financial institutions for restrictions on cash balances. understand the accounting principles and practices of the entity's industry. inquire of key personnel concerning related parties and subsequent events. perform ratio analyses of the financial data of comparable prior periods.

understand the accounting principles and practices of the entity's industry.

An auditor obtains knowledge about a new client's business and its industry to: make constructive suggestions concerning improvements to the client's internal control. develop an attitude of professional skepticism concerning management's financial statement assertions. evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. understand the events and transactions that may have an effect on the client's financial statements.

understand the events and transactions that may have an effect on the client's financial statements.