A3: All MCQs wrong
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that: A. The assessed level of inherent risk exceeded the assessed level of control risk. B. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. C. The available evidence obtained through tests of controls would not support an increased level of control risk. D. A reduction in the assessed level of control risk is justified for certain financial statement assertions.
B. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.
A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity? A. Obtain a list of current data center employees. B. Observe whether the data center is monitored. C. Inspect the policy manual establishing this control activity. D. Ask the chief technology officer about known problems.
B. Observe whether the data center is monitored. The auditor's direct personal observation provides the most reliable evidence about whether access to the data center is being appropriately limited.
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit? A. Make inquiries of the client's attorney regarding pending and threatened litigation and assessments. B. Obtain representations from management regarding the availability of all financial records. C. Communicate with those charged with governance concerning the prior year's audit adjustments. D. Compare recorded financial information with anticipated results from budgets and forecasts.
D. Compare recorded financial information with anticipated results from budgets and forecasts.
Analytical procedures performed in the final review stage of an audit generally would include: A. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk. B. Calculating projected uncorrected misstatements estimated through audit sampling techniques. C. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances. D. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
D. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
A decrease in which economic indicator would most appropriately encourage a business owner to move forward on a planned expansion? A. Commercial loans B. Stock prices C. Building permits D. Initial claims for unemployment
D. Initial claims for unemployment
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A. Accounts receivable B. Travel and entertainment expense C. Accounts payable D. Interest expense
D. Interest expense Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time. In addition, relationships involving transactions subject to management discretion (travel and entertainment) are less predictable.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods: A. Afford greater assurance than a nonstatistical sample of equal size. B. Can more easily convert the sample into a dual-purpose test useful for substantive testing. C. Eliminate the need to use judgment in determining appropriate sample sizes. D. Provide an objective basis for quantitatively evaluating sample risk.
D. Provide an objective basis for quantitatively evaluating sample risk.
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling? A. The sampling distribution should approximate the normal distribution. B. Overstated units have a lower probability of sample selection than units that are understated. C. The sampling interval is calculated by dividing the number of physical units in the population by the sample size. D. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
D. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
Assuming the auditor intends to use the information produced by the client, which one of the following is not required? A. The information received must be accurate. B. The information obtained must contain sufficient detail for the purpose of the auditor's test. C. The information provided should be in complete form and deemed reliable by the auditor. D. The information obtained should be consistent with the prior year's audit.
D. The information obtained should be consistent with the prior year's audit.
An auditor decides not to perform tests of the operating effectiveness of controls surrounding receivables. Which one of the following is not likely to be a reason for this decision? A. A very material error is noted in the accounts receivable account. B. The design of controls surrounding accounts receivable is inadequate. C. It would be faster to do extensive substantive testing of the year-end receivables balance than it would be to test the related controls. D. Due to the lack of a paper audit trail, it is not possible for appropriate control tests to be performed.
A. A very material error is noted in the accounts receivable account. An error in the receivables balance is not definitive evidence that controls are not working. The auditor would need to evaluate the situation surrounding the error to determine its cause.
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? A. 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. B. 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. C. 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. D. Analyze the newly identified risk in conjunction with economic circumstances relat
A. 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 economic indicators tends to occur as a result of economic activity? A. Average duration of unemployment. B. Manufacturing and trade sales. C. Building permits for residences. D. Average new unemployment claims.
A. Average duration of unemployment. The average duration of unemployment is a lagging economic indicator. Lagging economic indicators tend to follow economic activity, or occur as a result of economic activity. If the average duration of unemployment increases, it is likely a result of employers being reluctant to hire due to economic results. Other lagging indicators include the prime rate charged by banks and bank loans outstanding. Lagging indicators give signals after the fact.
Which of the following are leading economic indicators of business cycles? A. Manufacturers' new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers' unfilled orders for durable goods in constant dollars. B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars. C. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income. D. Results of decisions requiring clear knowledge of the state of the economy.
A. Manufacturers' new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers' unfilled orders for durable goods in constant dollars.
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees' use of cash registers and tapes. B. Compare the cash balance in the general ledger with the bank confirmation request. C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. D. Inquire about employees' access to recorded but undeposited cash.
A. Observe the consistency of the employees' use of cash registers and tapes. The completeness assertion relates to the recording of all transactions. Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance do not provide evidence regarding possible unrecorded transactions.
An audit firm is currently in the planning phase of a new retail client audit. Which of the following analytical procedures would most likely not be performed during the planning phase of the audit? A. Reviewing financial statements and disclosures for unusual transactions or unexpected balances. B. Obtaining selected client financial ratios and comparing to industry averages. C. Comparing the client's current year's same-store sales with budgeted amounts. D. Comparing current year's sales per store square foot with the prior year.
A. Reviewing financial statements and disclosures for unusual transactions or unexpected balances.
Josh, CPA, is reviewing the previous year's audit documentation related to the audit of accounts receivable, and notes that statistical sampling methods were applied. Josh would like to perform a similar sampling application in the current year. He observes that there is more variation in the dollar value of the accounts this year than existed in the previous year. He would also like to reduce the risk of incorrect acceptance, which was 5% in the previous year, to 3% in the current year. How will these changes affect sample size? A. Sample size will increase. D. The increase in variation will result in an increase in sample size, whereas the decrease in the desired risk of incorrect acceptance will result in a decrease in sample size. The net effect on sample size is therefore indeterminate.
A. Sample size will increase. There is a direct relationship between population variability and sample size, so an increase in variability results in an increase in sample size. There is an inverse relationship between desired risk of incorrect acceptance and sample size, so a decrease in the desired risk of incorrect acceptance will also result in an increase in sample size.
Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance with laws and regulations? A. The discovery of unexplained payments made to government employees. B. The failure to develop adequate procedures that detect unauthorized purchases. C. The presence of several difficult-to-audit transactions affecting expense accounts. D. The exchange of property for similar property in a nonmonetary transaction.
A. The discovery of unexplained payments made to government employees. Choice "D" is incorrect. Exchange of property for similar property in a nonmonetary transaction might be indicative of a related party transaction, not noncompliance with laws and regulations
What is the auditor's primary purpose in performing a retrospective review of management's significant accounting estimates reflected in the prior year financial statements of a nonissuer? A. To indicate whether a bias by management existed B. To indicate whether an adjustment should have been recorded C. To indicate whether a significant deficiency existed D. To reevaluate professional judgments made by the auditor in the prior year
A. To indicate whether a bias by management existed
The trough of a business cycle is generally characterized by: A. Unused productive capacity and an unwillingness to risk investments. B. Shortages of essential raw materials and rising costs. C. Increasing purchasing power and increasing capital investments. D. Declining purchasing power and unused productive capacity.
A. Unused productive capacity and an unwillingness to risk investments.
A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter from the external counsel with the following response: "We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured two years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million." Should the CPA accept the letter from the external counsel? A. Yes, even though the CPA did not get a specific amount of loss. D. No, because the CPA allowed Paper Plate to prepare the letter.
A. Yes, even though the CPA did not get a specific amount of loss. Paper Plate is allowed to draft the letter to external legal counsel. Management of Paper Plate will sign this letter because management needs to authorize the confidential legal information to be released to the auditor. The auditor will then review the letter and mail it to the external counsel. External counsel then responds directly to the auditor.
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry? A. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit. B. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded. C. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible. D. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.
B. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded. It is the auditor's responsibility to evaluate the ability of the client to continue as a going concern. The attorney would not make such an evaluation.
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective? A. There were many transactions posted to the account during the period. B. Analytical procedures have revealed no unusual or unexpected results. C. The audit is being performed soon after the balance sheet date. D. Audit staff are experienced in performing the planned procedures.
B. Analytical procedures have revealed no unusual or unexpected results.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should: A. Obtain written representations from management that all financial records and related data will be made available. B. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. C. Assess control risk at a low level for the assertions embodied in the accounts selected for interim testing. D. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
B. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. Choice "C" is incorrect. It is not necessary for control risk to be assessed at a low level level for the assertions relating to the accounts that will be substantively tested at an interim date. It may simply be more efficient to perform a substantive audit. As long as the balances tested at interim are reasonably predictable with respect to amount, relative significance and composition, the account may be tested at interim.
A client's lawyer is unable to form a conclusion about the likelihood of an unfavorable outcome of pending litigation because of inherent uncertainties. If the litigation's effect on the client's financial statements could be material but it is properly disclosed in the financial statements, the auditor most likely would: A. Withdraw from the engagement because of the lack of information furnished by the lawyer. B. Issue an unmodified opinion. C. Disclaim an opinion on the financial statements because of the materiality of the litigation's effect. D. Issue a qualified opinion in the auditor's report because of the lawyer's scope limitation.
B. Issue an unmodified opinion. A lawyer may be unable to respond concerning the likelihood of an unfavorable outcome of litigation, claims, and assessments or the amount or range of potential loss, because of inherent uncertainties. Even if the effect of the matter on the financial statements could be material, if it is properly disclosed (and supported by available evidence), the auditor will ordinarily issue an unmodified opinion.
An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except: A. Even manual controls may be dependent to some extent on the effective functioning of automated controls. B. It is more efficient and cost-effective to focus on automated controls rather than manual controls. C. Unauthorized access to data, systems, or programs creates an additional control risk. D. Much of the information used in monitoring the internal control system may be provided through use of information technology.
B. It is more efficient and cost-effective to focus on automated controls rather than manual controls. It is not necessarily more efficient or cost-effective to focus on automated controls rather than manual controls. Evaluation of efficiency and effectiveness must be performed on a client-by-client basis.
Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to: A. Customers who have credit or zero balances with the client. B. Payments mailed to the client that have not been recorded. C. Accounts receivable that have been classified as uncollectible. D. Responses that were faxed rather than mailed to the auditor.
B. Payments mailed to the client that have not been recorded. Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to payments mailed to the client that have not been recorded. For example, the confirming party may have mailed the payment on 12/31/Year 1 and the client may receive the payment on 01/02/Year 2. In this situation, the confirming recipient would indicate that their balance was $0 as of 12/31/Year 1. This would initially be categorized as an exception because it indicates a difference in the entity's records and the information provided by the confirming party. The auditor would need to verify cash receipt date to determine that this is not a misstatement.
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually: A. May be applied to populations where many monetary errors are expected to occur. B. Produces an estimate having a desired level of precision with a smaller sample size. C. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population. D. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
B. Produces an estimate having a desired level of precision with a smaller sample size.
An auditor is in the process of gathering evidence during the current audit. Which of the following would not be considered corroborating evidence? A. Board minutes B. Sales invoices C. Inquiries D. Confirmations
B. Sales invoices If an auditor reviews a client's invoices, he or she would be examining the underlying accounting records of the client. Other underlying accounting records the auditor may review include contracts, ledgers, worksheets, checks, and journal entries.
In the integrated audit of an issuer, which of the following best states the use of substantive audit procedures in the audit of internal control over financial reporting and in the financial statement audit? A. Neither audit requires the performance of substantive auditing procedures. B. Substantive auditing procedures are required in the financial statement audit, but not in the audit of internal control. C. Substantive auditing procedures are required in the audit of internal control but not in the financial statement audit. D. Both audits require the performance of substantive auditing procedures.
B. Substantive auditing procedures are required in the financial statement audit, but not in the audit of internal control.
PCAOB standards state that the relevance of audit evidences depends on all but which of the following? A. The timing of the audit procedure. B. The auditor's risk assessment. C. Whether the audit procedure is designed to test for an understatement or overstatement. D. Whether the audit procedure is designed to directly test an assertion.
B. The auditor's risk assessment. The auditor's risk assessment affects the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence.
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information? A. Comments in the prior-year's management letter. B. Unaudited information from internal quarterly reports. C. Various account assertions in the planning memorandum. D. The control risk assessment relating to specific financial assertions.
B. Unaudited information from internal quarterly reports.
Which of the following types of audit evidence generally is the most reliable? A. Review of prior-year audit procedures. B. Analytical procedures. C. Confirmation of account information. D. Inquiries made of management.
C. Confirmation of account information.
Which of the following types of audit evidence generally is the most reliable? A. Review of prior-year audit procedures. B. Analytical procedures. C. Confirmation of account information. D. Inquiries made of management.
C. Confirmation of account information. Review of audit procedures from the previous year does not provide appropriate audit evidence regarding the current year's financial statements. Choice "B" is incorrect. Analytical procedures provide the auditor with direct personal knowledge, but because these procedures often are based on internal accounting data, the evidence obtained is not as reliable as that obtained from confirmations.
While auditing a client's accounting estimates used for their specific elements and accounts, the auditor has certain responsibilities. Which of the following is not a required audit procedure that the auditor would perform when evaluating the client's accounting estimates? A. Ensure that the accounting estimates used are properly disclosed in accordance with GAAP. B. Evaluate the degree of uncertainty that is associated with the client's accounting estimates. C. Determine if the accounting estimates used are consistent with the client's primary competitors. D. Verify that all material accounting estimates have been developed.
C. Determine if the accounting estimates used are consistent with the client's primary competitors.
Which of the following is least likely to be a continuous activity that an auditor would be expected to perform throughout an audit engagement? A. Understanding the entity and its environment B. Considering client continuance C. Inquiring as to the design of controls D. Assessing the risk of material misstatement
C. Inquiring as to the design of controls
Analytical procedures are most appropriate when testing which of the following types of transactions? A. Payroll and benefit liabilities. B. Long-term debt transactions. C. Operating expense transactions. D. Acquisitions and disposals of fixed assets.
C. Operating expense transactions. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time. As a result, analytical procedures are more appropriate for operating expense accounts.
Which of the following is not a risk assessment procedure recommended by PCAOB standards when performing an issuer audit? A. Inquiring of client management and the audit committee about the risks of material misstatement. B. Performing analytical procedures related to the client's revenue. C. Performing preliminary test of controls over selected transaction cycles. D. Developing an understanding of the client's internal control over financial reporting.
C. Performing preliminary test of controls over selected transaction cycles.
In order to obtain an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? A. Tests of key controls to determine whether they are effective. B. Analytical procedures to determine the need for specific controls. C. Risk-assessment procedures to evaluate the design of relevant controls. D. Expanded substantive testing to identify relevant controls.
C. Risk-assessment procedures to evaluate the design of relevant controls. Choice "A" is incorrect. An auditor is not required to evaluate operating effectiveness as part of understanding the system of internal control. Tests of controls are performed when the auditor's risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient (e.g., when the entity makes extensive use of information technology).
Which of the following is not a reason an auditor may apply audit data analytics (ADAs) when concluding an audit? A. The auditor will have a deeper knowledge of the entity being audited and may reperform tests done in the risk assessment process. B. To update existing analytics with numbers that were revised during the audit. C. To verify the assertions of accuracy and occurrence for all material transactions. D. To gain comfort that no material misstatements went unidentified during the audit.
C. To verify the assertions of accuracy and occurrence for all material transactions. These assertions are tested as part of substantive procedures.
Which of the following constitutes a potential risk associated with the use of information technology in an entity's system of internal control? A. A reduction in the ability to monitor the entity's activities. B. A reduction in the circumvention of controls. C. Unauthorized changes to systems. D. The facilitation of additional analyses.
C. Unauthorized changes to systems. IT benefits often include an enhanced, rather than reduced, ability to monitor the entity's activities.
At the peak of a business cycle, which of the following conditions is most true? A. The overall price level is likely to be falling. B. Output (GDP) tends to be below the potential level of output. C. There is likely to be an excess supply of labor and business inventories are likely to be high. D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.
D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
D. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. Choice "B" is incorrect. An increase in property tax rates should cause a corresponding increase in accrued property tax expense; however, the question indicates that the appropriate increase was not recorded in the current year. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the expense would likely result in there being little change between the two years.
