Quiz 3

3.6.16. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A. A high turnover of senior management. B. A lack of independent checks. C. A strained relationship between management and the predecessor auditor. D. An inability to generate cash flow from operations.

A lack of independent checks.

3.2.2. Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in A. A more efficient manner. B. A more thorough manner. C. Accordance with quality control standards. D. Accordance with generally accepted auditing standards.

A more efficient manner.

4.3.2. Which of the following would not necessarily be a related party transaction? A. A sale to another corporation with a similar name. B. A purchase from another corporation that is controlled by the corporation's chief shareholder. C. Loan from the corporation to a major shareholder. D. Sale of land to the corporation by the spouse of a director.

A sale to another corporation with a similar name.

3.4.6. A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information? A. AICPA Codification of Statements on Auditing Standards. B. AICPA Accounting Trends and Techniques. C. PCAOB Inspection Reports. D. SEC Statement 10-K Guide.

AICPA Accounting Trends and Techniques.

3.5.7. Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that A. Misstatements exist in the relevant account balances. B. Internal control activities are not operating effectively. C. Additional audit procedures are required. D. The communication should be revised. with the audit committee

Additional audit procedures are required.

3.1.3. Which of the following statements would least Tikely appear in an auditor's engagement letter? A. Fees for our services are based on our regular per diem rates, plus travel and other out-of- pocket expenses. B. Management is responsible financial records and related information for making all available to us. to the risk that C. Our engagement is subject material fraud or errors, if they exist, will not be detected. D. After performing our procedures, we will procedures we consider preliminary analytical discuss with you the other necessary to complete the engagement.

After performing our procedures, we will procedures we consider preliminary analytical discuss with you the other necessary to complete the engagement.

3.2.1. Which of the following is required documentation in an audit in accordance with auditing standards? A. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting. B. An audit plan documenting the procedures to be used to reduce audit risk. C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. D. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.

An audit plan documenting the procedures to be used to reduce audit risk.

3.6.5. Which of the following statements reflects an auditor's responsibility for detecting fraud and errors? A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. B. An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework. C. An auditor is not responsible for detecting fraud unless the application of GAAS would result in such detection. D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

3.6.1. What is the definition of fraud in an audit of financial statements? A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit. B. The unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. C. An intentional act that results in a material weakness in financial statements that are the subject of an audit. D. 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.

3.5.6. Which of the following statements about analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used as risk assessment procedures should not use nonfinancial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

3.4.1. Which of the following statements is true concerning analytical procedures used as risk assessment procedures? A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management. B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level. C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk. D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level.

3.2.9. Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? A. Make copies of those client supporting documents examined by the auditor for inclusion in the audit documentation. B. Provide the client with copies of the audit plans to be used during the audit. C. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. D. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

3.3.6. The acceptable level of detection risk is inversely related to the A. Assurance provided by substantive procedures. B. Risk of misapplying auditing procedures. C. Preliminary judgment about materiality levels. D. Risk of failing to discover material misstatements.

Assurance provided by substantive procedures.

3.6.15. Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud? A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion. B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. C. The factors considered in assessing the risk of material misstatement indicated an increased risk of intentional misstatements, but only a low risk of errors in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.

3.5.16. An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the A. Availability of data aggregated at a high level. B. Auditor's determination about whether audit risk can be sufficiently reduced. C. Timing of tests performed after the balance sheet date. D. Auditor's familiarity with industry trends.

Auditor's determination about whether audit risk can be sufficiently reduced.

4.2.2. An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the A. Auditor is not familiar with the professional certification, personal reputation, or particular competence of the specialist. B. Auditor, as a result of the specialist's findings, adds a paragraph emphasizing a matter regarding the financial statements. C. Auditor's report contains a qualified opinion. D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist for the audit opinion.

Auditor's report contains a qualified opinion.

3.4.10. When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client's internal control C = Substantive procedures A. ABC. B. ACB. C. BAC. D. BCA.

BAC.

3.6.22. An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the A. PCAOB. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Board of directors.

Board of directors.

3.2.11. Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. A. Ionly. B. Il only. C. Both I and II. D. Neither I nor II.

Both I and II.

3.1.5. Which of the following factors would most likely cause an auditor not to accept a new audit engagement? A. An inadequate understanding of the entity's internal controls. B. The close proximity to the end of the entity's fiscal year. C. Concluding that the entity's management probably lacks integrity. ba D. An inability to perform preliminary analytical procedures before assessing control risk.

Concluding that the entity's management probably lacks integrity.

3.6.17. Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether inadequate provisions for the safeguarding of assets have been corrected. D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

3.5.20. Analytical procedures used to form an overall audit conclusion generally include A. Considering unusual or unexpected account balances that were not previously identified. B. Performing tests of transactions to corroborate management's financial statement assertions. C. Gathering evidence concerning account balances that have not changed from the prior year. D. Retesting controls that appeared to be ineffective during the assessment of control risk.

Considering unusual or unexpected account balances that were not previously identified.

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

Consistently applied from prior periods.

3.3.10. When planning an audit, an auditor should A. Consider whether substantive procedures may be reduced based on the results of the internal control questionnaire. B. Determine materiality for the financial statements as a whole. C. Conclude whether changes in compliance with prescribed controls require a change in the reliance on controls. D. Prepare a preliminary draft of the representation letter. management

Determine materiality for the financial statements as a whole.

3.6.10. Which of the following circumstances most Tikely will cause an auditor to suspect that material misstatements exist in a client's financial statements? A. The assumptions used in developing the prior year's accounting estimates have changed. B. Differences between reconciliations of control accounts and subsidiary records are not investigated. C. Negative confirmation requests yield fewer responses than in the prior year's audit. D. Management consults with another CPA firm about complex accounting matters.

Differences between reconciliations of control accounts and subsidiary records are not investigated.

3.2.16. The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to A. Refer the disagreement to the AICPA's Peer Review Board. B. Document the details of the disagreement with the conclusion reached. C. Discuss the llam disagreement with the entity's management or its audit committee. D. Report the disagreement to an impartial peer review monitoring team.

Document the details of the disagreement with the conclusion reached.

3.5.1. Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? A. Earnings per share. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Operating cycle.

Earnings per share.

3.1.4. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth scal in the A. Management representation letter. B. Scope paragraph of the auditor's report. C. Engagement letter. D. Introductory paragraph of the auditor's report.

Engagement letter.

3.5.5. The objective of analytical proceduresosmoo performed as risk assessment procedures is to A. Evaluate the adequacy of evidence gathered in response to unusual balances identified during the audit. B. Test individual account balances that depend on accounting estimates. C. Enhance the auditor's understanding of the client's business. D. Identify material weaknesses in internal control.

Enhance the auditor's understanding of the client's business.

4.3.4. After identifying a significant related party transaction outside the entity's normal course of business, an auditor should A. Add an emphasis-of-matter paragraph to the (E auditor's report to explain the transaction. B. Perform analytical procedures to identify similar transactions that were not recorded. C. Evaluate the business purpose of the transaction. D. Substantiate that the transaction was consummated on terms equivalent to those of an arm's-length transaction.

Evaluate the business purpose of the transaction.

3.5.18. An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that A. Fictitious credit sales have been recorded during the year. B. Employees have stolen inventory just before year end. C. The client recently tightened its credit-granting policies. D. An employee has been lapping receivables in both years.

Fictitious credit sales have been recorded during the year.

3.2.7. In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the A. Timing of the audit. B. Costs and benefits of gathering evidence. C. Financial statements as a whole. D. Financial statement assertions.

Financial statement assertions.

3.2.20. The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants A. That immaterial fraud is not to be reported to the client's audit committee. B. How the results of various auditing procedures performed by the assistants should be evaluated. C. What benefits may be attained by the assistants' adherence to established time budgets. D. Why certain documents are being transferred from the current file to the permanent file.

How the results of various auditing procedures performed by the assistants should be evaluated.

3.6.13. Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? I. To the SEC when the client reports an auditor change II. To a successor auditor when the successor makes appropriate inquiries III. To a government funding agency from which the client receives financial assistance A. I and II. B. I and III. C. Il and II. D. I, II, and III.

I, II, and III.

3.4.7. An auditor most likely obtains an understanding of a new client to A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop an attitude of professional skepticism concerning management's financial statement assertions. C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Identify areas of audit emphasis.

Identify areas of audit emphasis.

3.2.15. Which of the following is an aspect of scheduling and controlling the audit engagement? A. Include in the audit plan a column for estimated and actual time. B. Perform audit work only after the client's books of account have been closed for the period under examination. C. Write a conclusion in the audit documentation indicating how the results of the audit will affect the auditor's report. D. Include in the engagement letter an estimate of the minimum and maximum audit fee.

Include in the audit plan a column for estimated and actual time.

4.3.1. Which of the following steps should an auditor perform first to determine the existence of related parties? A. Examine invoices, contracts, and purchasing orders. B. Inquire about the existence of related parties o from management. C. Review the company's business structure. D. Review proxy and other materials filed with the SEC.

Inquire about the existence of related parties from management.

4.2.3. Which of the following is not considered an auditor's specialist? A. Actuary. B. Appraiser. C. Internal auditor. D. Tax attorney.

Internal auditor.

3.2.3. With respect to the auditor's planning of a year- end audit, which of the following statements is always true? A. An engagement should not be accepted after the fiscal year-end. B. An inventory count must be observed at the balance sheet date. C. Those charged with governance should not be told of the specific audit procedures that were performed. D. It is an acceptable practice to carry out part of the audit at interim dates.

It is an acceptable practice to carry out part of the audit at interim dates.

3.1.8. Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client's signature to the engagement letter. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management with the prospective client's audit committee. representation letter

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

3.6.11. Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

3.1.2. An auditor's engagement letter most likely will include A. Management's acknowledgment of its responsibility for maintaining effective internal control. B. The auditor's preliminary assessment of the Yilrisk factors relating to misstatements arising from fraudulent financial reporting. C. A reminder that management is responsible for illegal acts committed by employees. D. A request for permission to contact the client's lawyer for assistance in identifying litigation, snoclaims, and assessments.

Management's acknowledgment of its responsibility for maintaining effective internal control.

3.3.12. Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of A. Materiality. B. Comparative analysis. C. Reasonable assurance. D. Audit risk.

Materiality.

3.3.3. As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from a less effective to a more effective procedure. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of inherent risk to a higher amount.

Nature of substantive procedures from a less effective to a more effective procedure.

4.4.1. When performing procedures to identify and assess the risks of material misstatement for accounting estimates, the auditor should A. Review transactions occurring of the auditor's report that indicate variations prior to the date from expectations. B. Compare independent recorded estimates to assess expectations with process. management's C. Obtain an understanding of how management developed its estimates. D. Analyze historical data used in developing assumptions to determine whether the process is consistent.

Obtain an understanding of how management developed its estimates.

3.5.8. Analytical procedures are most appropriate when testing which of the following types of transactions? A. Payroll and benefit liabilities. B. Acquisitions and disposals of fixed assets. C. Operating expense transactions. D. Noncurrent debt transactions.

Operating expense transactions.

3.2.5. In developing an audit plan, an auditor should A. Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. B. Evaluate findings from substantive procedures performed at interim dates. C. Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D. Perform risk assessment procedures.

Perform risk assessment procedures.

3.4.4. Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should A. Reduce audit risk by lowering initial levels of materiality. B. Design special substantive procedures to compensate for the lack of industry expertise. C. Engage financial nature of the industry. D. Perform risk assessment procedures.

Perform risk assessment procedures.

3.2.18. Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? A. Discrete phases of planning, interim, and year- end fieldwork. B. Increased effort to search for evidence of management fraud. C. Performance of audit tests on a continuous basis. D. Increased emphasis on the completeness assertion.

Performance of audit tests on a continuous basis.

3.5.11. A basic premise underlying analytical m procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

3.6.4. Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Objective judgment. B. Integrity. C. Professional skepticism. D. Impartial conservatism.

Professional skepticism.

3.4.5. To obtain an understanding of a continuingo client in planning an audit, an auditor most likely would A. Perform tests of details of transactions and balances. B. Read internal audit reports. C. Read specialized industry journals. D. Reevaluate the risks of material misstatement.

Read internal audit reports.

3.1.10. Which of the following circumstances01 would permit an independent auditor to accept an engagement after the close of the fiscal year? A. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of the acceptance of the engagement. B. An expectation of the effectiveness of internal control. C. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern. D. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those existence of physical inventory.

Remedy of limitations resulting from accepting after the close of the end of the year, such as those relating to the existence of physical inventory

4.3.8. An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a note on related party transactions A. Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties. B. Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from that used in the prior period. C. Explaining the business purpose of the sale of real property to a related party. D. Disclosing compensating balance arrangements maintained for the benefit of related parties.

Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.

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

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

3.4.11. An auditor is planning for a new client in a business that is unfamiliar to the an audit engagement auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, to obtain a general understanding of audit problems when the auditor is trying that might be encountered? A. Textbooks and periodicals related to the industry. B. AICPA Audit and Accounting Guides. C. Financial statements of other entities in the industry. D. Results of performing substantive procedures.

Results of performing substantive procedures.

43.5. Ajax, Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees of the affiliate's indebtedness have been detected? A. Send the standard bank confirmation request to all of the client's lender banks. B. Review client minutes and obtain a representation letter. C. Examine supporting documents for all entries in intercompany accounts. D. Obtain written confirmation of indebtedness from the auditor of the affiliate.

Review client minutes and obtain a representation letter.

4.4.2. Which of the following procedures will most likely assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? A. Inquire about the existence of related party transactions. B. Determine whether the outcomes of accounting estimates differ from the amountsA originally recognized. C. Confirm inventories at locations outside the entity. D. Review the lawyer's letter for information about litigation.

Review the lawyer's letter for information about litigation.

3.2.6. Which of the following is an auditor least likely to perform in planning a financial statement audit? A. Coordinating the assistance of entity personnel in data preparation. B. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. C. Selecting a sample of vendors' invoices for comparison with receiving reports. D. Reading the current year's interim financial statements.

Selecting a sample of vendors' invoices for comparison with receiving reports.

3.5.4. Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? A. Turnover of personnel in the accounting department. B. Objectivity of audit committee members. C. Square footage of selling space. D. Management's plans to repurchase stock.

Square footage of selling space.

4.2.4. In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include A. A statement that the specialist assumes no responsibility to update the specialist's report for future events or circumstances. B. The conditions under which a division of responsibility may be necessary. C. The applicability of the same confidentiality requirements to the auditor and the specialist. D. The auditor's disclaimer as to whether the specialist's findings corroborate the representations in the financial statements.

The applicability of the same confidentiality requirements to the auditor and the specialist.

4.2.5. When a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if A. The auditor is satisfied with the competence of the specialist. B. Circumstances made it impracticable or impossible for the auditor to test the work done by the specialist. C. The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory. D. The auditor's report contains a reference to the assumption of full responsibility by the specialist.

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

4.3.3. Which of the following statements is true about e related party transactions? A. In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. B. An auditor should determine whether a particular transaction would have occurred if the parties had not been related. C. An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm's- snlength transactions. D. The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

4.2.1. Which of the following statements is true about Answer the use of the work of an auditor's specialist? A. The specialist need not agree to the auditor's use of the specialist's findings. B. The auditor is required to perform substantive procedures to verify the specialist's assumptions and findings. C. The auditor must keep client information confidential, but the specialist is not obligated to do so. D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

The auditor should obtain an understanding of the methods and assumptions used by the specialist.

3.2.13. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A. The audit plan. B. The auditor's judgment. C. Auditing standards. D. The audit documentation.

The auditor's judgment.

3.1.1. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes A. The auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors. B. Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. C. The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. D. Management's responsibility for providing the auditor with an assessment of the risks of material misstatement due to fraud.

The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention.

4.3.7. An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because A. This may permit the audit of interentity account balances to be performed as of concurrent dates. exister B. Interentity transactions may have been consummated on terms equivalent to arm's- length transactions. C. This may reveal whether particular transactions would have taken place if the parties had not been related. D. The business structure may be deliberately designed to obscure related party transactions.

The business structure may be deliberately designed to obscure related party transactions.

3.6.9. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A. The entity's industry is experiencing declining customer demand. B. Employees who handle cash receipts are not bonded. C. Bank reconciliations usually include in-transit deposits. D. Equipment is often sold at a loss before being fully depreciated.

The entity's industry is experiencing declining customer demand.

3.3.4. Which of the following would an auditor most Tikely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? A. The anticipated sample size of the planned substantive procedures. B. The entity's year-to-date financial results and position. C. The results of the internal control questionnaire. D. The contents of the representation letter.

The entity's year-to-date financial results and position.

3.3.11. A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation? A. The financial statements are free from material misstatement, and no disclosureis required in the notes to the financial statements. B. The financial statements are not in accordance with the applicable financial reporting framework C. The financial statements contain uncorrected misstatements that should result in a qualified opinion D. The financial statements are free from material misstatement, but disclosure is required in the notes to the financial statements.

The financial statements are free from material misstatement, and no disclosure the notes to the financial statements. is required in

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

There is a substantial risk of intentional misapplication of accounting principles.

3.1.7. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? A. Staff will need to be rescheduled to cover this new client. B. There will be a client-imposed scope limitation. C. The firm will have to hire a specialist in one audit area. D. The client's financial reporting system has been in place for 10 years.

There will be a client-imposed scope limitation.

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

Timing of inventory observation procedures to be performed.

3.4.2. Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? A. Prepare a rough draft of the financial statement and of the auditor's report. B. Assess control risk for the assertions embodied in the financial statements. • C. Tour the client's facilities. D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

Tour the client's facilities.

3.6.8. Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements? A. Management places little emphasis on meeting earnings projections of external parties. B. The board of directors oversees the financial reporting process and internal control. C. Control deficiencies previously communicated to management are not corrected. D. Transactions selected for testing are not supported by proper documentation.

Transactions selected for testing are not supported by proper documentation.

3.5.19. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities? A. Unrecorded purchases. B. Unrecorded sales. C. Merchandise purchases being charged to selling and general expense. D. Fictitious sales.

Unrecorded sales.

3.6.19. Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud? A. Property and equipment are usually sold at a loss before being fully depreciated. B. Unusual discrepancies between the entity's records and confirmation replies. C. Monthly bank reconciliations usually include several in-transit items. D. Clerical errors are listed on a computer- generated exception report.

Unusual discrepancies between the entity's records and confirmation replies.

3.4.9. The objective of performing analytical procedures in planning an audit is to identify the existence of A. Unusual transactions and events. B. Noncompliance with laws and regulations that went undetected because of internal control deficiency. C. Related party transactions. D. Recorded transactions that were not properly authorized.

Unusual transactions and events.

3.5.14, Which of the following is the most reliable analytical approach to verification of the year- end financial statement balances of a wholesale business? A. Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate. B. Verify commission expense by multiplying sales revenue by the company's standard commission rate. C. Verify interest expense, imputed interest, by multiplying which includes noncurrent debt balances by the year-end prevailing interest rate. D. Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year

Verify commission expense by multiplying sales revenue by the company's standard commission rate.

3.5.13. Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purposes of analytical procedures? A. Whether the data were processed in a computer system or in a manual accounting system. B. Whether sources within the entity were independent of those who are responsible for the amount being audited. C. Whether the data were subjected to audit testing in the current or prior year. D. Whether the data were obtained from independent sources outside the entity or from sources within the entity.

Whether the data were processed in a computer system or in a manual accounting system.

3.5.12. For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as A. Yes No Yes B. No Yes No C. No No Yes D. Yes Yes No

Yes No Yes

3.1.6. In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Risk CPAs. Risk A. Yes Yes B. Yes No C. No Yes D. No No

Yes Yes

3.1.9. Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to Contingencies. Balance Sheet A. Yes Yes B. Yes No C. No Yes D. No No

Yes Yes

3.3.7. Which of the following audit risk components may be assessed in nonquantitative terms? A. Yes Yes Yes B. No Yes Yes C. Yes Yes No D. Yes No Yes

Yes Yes Yes