AUD - Incorrect Questions 3/25
When is timely, i.e., as soon as practicable, communication of matters involving noncompliance with laws and regulations to those charged with governance required? A When the noncompliance is believed to be intentional and its effect on the financial statements is material B If the effect of the noncompliance on the financial statements is material, whether intentional or unintentional C When the effect of the noncompliance on the financial statements is believed to be both material and pervasive D When the appropriate response by the entity includes reporting the noncompliance to parties outside the entity
A When the noncompliance is believed to be intentional and its effect on the financial statements is material The auditor should, of course, communicate with those charged with governance matters involving noncompliance with laws and regulations that come to the auditor's attention during the course of the audit, other than when the matters are clearly inconsequential; however, US GAAS only requires that the communication take place as soon as practicable when the noncompliance is believed to be intentional and material. None of the other answer alternatives reflect the US GAAS requirement regarding timely communication with those charged with governance. Although the circumstance in incorrect answer D. is not a factor in determining if the communication to those charged with governance is required to be timely, if the auditor has identified or suspects noncompliance with laws and regulations, the auditor is required to determine whether the auditor has a responsibility to report the identified or suspected noncompliance to parties outside the entity.
Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer? A Four years B Five years C Six years D Seven years .
B Five years Under the Sarbanes-Oxley Act of 2002, the lead auditor coordinating partner and the reviewing partner must rotate off the audit every five years
Which of the following procedures is an accountant required to perform before issuing a compilation report under Statements on Standards for Accounting and Review Services (SSARS)? A Make inquiries of third parties regarding liabilities that appear in the financial statements. B Read the financial statements and consider whether such financial statements appear to be free from obvious material errors. C Obtain a letter supporting management representations in the financial statements. D Review account balances for material changes subsequent to the year-end
B Read the financial statements and consider whether such financial statements appear to be free from obvious material errors. The objective of the accountant in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report without undertaking to obtain or provide any kind of assurance. To perform a compilation, the accountant must: have (or obtain during the engagement) knowledge of the accounting principles and practices of the client's industry, have a general understanding of the client's business transactions and accounting records, establish an understanding with the management regarding services to be performed, and read the financial statements and notes to ensure that they are free of material error and appropriate in form. (A) is incorrect because no need to make inquiries of third parties regarding liabilities owed as this is a procedure not undertaken in a compilation engagement. (C) is incorrect because obtaining a management representation letter is required in a review and an audit but is not required for a compilation engagement. (D) is incorrect because this is a compilation and not an audit or a review and there is no need to review account balances for material changes in a compilation engagement
According to US GAAS, an auditor is associated with financial information when A The auditor submits to a client or others financial information that the auditor has prepared or assisted in preparing. B The auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS. C The auditor has accepted an engagement to report on the financial information in accordance with US GAAS. D The auditor has consented to the use of the auditor's name in a report, document, or written communication containing the financial information.
B The auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS. According to US GAAS, an auditor is associated with financial information when the auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS. Regarding incorrect answer A., Statements on Standards for Accounting and Review Services address the accountant's considerations when the accountant prepares and presents financial statements to the entity or third parties. Regarding incorrect answer C., the criteria is more stringent than accepting an engagement—the auditor is not associated with financial statements until the auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS. Regarding incorrect answer D., it is part of the superseded guidance for the determination of when an accountant was associated with financial statements.
The following explanatory paragraph was included in an auditor's report on a public company's financial statements to indicate a lack of consistency: "As discussed in note T to the financial statements, the company changed its method of accounting for long-term contracts in Year 2." How should the auditor report on this matter if the auditor concurred with the change? # Type of opinion Location of explanatory paragraph A Unqualified Before opinion paragraph B Unqualified After opinion paragraph C Qualified Before opinion paragraph D Qualified After opinion paragraph
B Unqualified After opinion paragraph If there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company's financial statements, the auditor should refer to the change in an explanatory paragraph of the report. Such explanatory language (following the opinion paragraph) should identify the nature of the change and refer the reader to the note in the financial statements that discusses the change in detail.Editor note: This is one of the circumstances that, while not affecting the auditor's unqualified opinion, requires that the auditor add an explanatory paragraph to the standard report. The auditor's concurrence with a change is implicit.If a newly adopted accounting principle is not a generally accepted accounting principle; the method of accounting for the effect of the change is not in conformity with generally accepted accounting principles; or management has not provided reasonable justification for the change in accounting principle, the auditor should express a qualified opinion or, if the effect of the change is sufficiently material, the auditor should express an adverse opinion on the financial statements.
Cooper, CPA, performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A Merchandise received B Vendors' invoices C Receiving reports D Canceled checks
B Vendors' invoices
An auditor most likely would apply analytical procedures in the overall review stage of an audit to A Enhance the auditor's understanding of subsequent events B Identify any omitted auditing procedures C Determine whether additional audit evidence may be needed D Evaluate the effectiveness of the internal control activities
C Determine whether additional audit evidence may be needed Analytics are used in the overall review stage to assist the auditor when forming an overall conclusion about whether the financial statements are consistent with the auditor's understanding of the entity. The overall review generally would include reading the financial statements and notes and considering the adequacy of evidence gathered in response to unusual or unexpected balances. The results of these procedures may indicate that, answer c., additional audit evidence is needed. Analytical procedures would not be used for the objectives of the incorrect answers. Further regarding incorrect answers a. and d., procedures to achieve these objectives would be performed before the overall review stage. Further regarding incorrect answer b., the auditor would examine the workpapers to determine if any procedures were omitted.
Analytical procedures used in planning an audit should focus on A Reducing the scope of tests of controls and substantive tests B Providing assurance that potential material misstatements will be identified C Enhancing the auditor's understanding of the client's business D Assessing the adequacy of the available audit evidence
C Enhancing the auditor's understanding of the client's business The purpose of applying analytical procedures in planning the audit is to assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions. To accomplish this, the analytical procedures used in planning the audit should focus on enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date. Consideration of reductions in the scope of test of controls and substantive tests occurs after the auditor understands the client's business (which the auditor will obtain through assessing the financial and non-financial data that the auditor will utilize in applying the analytical procedures). The audit as a whole provides reasonable assurance that potential material misstatements will be identified. Assessing the adequacy of available audit evidence can occur only after examination of audit evidence, not in the planning stage.
Alpha, CPA is engaged to issue an audit report on the financial statements of Bravo Corp. Alpha proposes audit adjustments to Bravo Corp. that are individually and collectively not material, but Bravo Corp. refuses and insists that Alpha issue the report based on unadjusted numbers. Which of the following statements are correct regarding the financial statement presentation? A The financial statements do not conform with generally accepted accounting principles B The financial statements contain unadjusted misstatements that should result in a qualified opinion C The financial statements are free from material misstatements, and no disclosure is required in the notes to the financial statements D The financial statements are free from material misstatements, but disclosure of the proposed adjustments are required in the notes to the financial statements.
C The financial statements are free from material misstatements, and no disclosure is required in the notes to the financial statements When the financial statements taken as a whole are not materially misstated, an auditor would issue an unmodified report, even if certain adjustments are required as per the auditor's opinion. (A) is incorrect, since the financial statements would be in conformity with GAAP if they are not materially misstated when taken as a whole. (B) is incorrect, since the auditor is not required to issue a qualified opinion if the financial statements taken as a whole are not materially misstated, even if the financial statements contain unadjusted immaterial misstatements. (D) is incorrect, because if the financial statements contain unadjusted immaterial misstatements, disclosures of the proposed adjustments are not required in the notes to the financial statements. The auditor would issue an unmodified report.
Which of the following internal control procedures is not usually performed in the vouchers payable department? A Matching the vendor's invoice with the related receiving report B Approving vouchers for payment by having an authorized employee sign the vouchers C Indicating the asset and expense accounts to be debited D Accounting for unused prenumbered purchase orders and receiving reports
D Accounting for unused prenumbered purchase orders and receiving reports Accounting for unused purchase orders and receiving reports by the same department does not provide sufficient segregation of duties for the authorization, custody, and reporting functions of an effective internal control system. The lack of segregation of these items could result in an employee defalcation scheme. Answers A. - C. each represent a procedure that is usually performed in the vouchers payable department.
Which of the following is most likely to be a response to the assessed risk of material misstatement at the assertion level? A Assigning more experienced individuals or additional individuals with specialized skill and knowledge to the engagement B Evaluating whether the selection and application of accounting policies by the entity is indicative of management bias C Incorporating an element of unpredictability in the selection of the nature, timing, and extent of audit procedures D Inspecting certain assets
D Inspecting certain assets The physical observation and/or inspection of assets are examples of procedures performed in response to the assessed risk of material misstatement at the assertion level, i.e., the assertion of existence. The other answer alternatives are overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level rather than the assertion level (the assertion level is at a more specific level of testing than the financial statement level and hence a more thorough procedure is required)
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity? A Inquiry of client personnel B Inspection of documents and reports C Observation of client personnel D Preparation of system flowcharts
D Preparation of system flowcharts The CPA examiners generally recognize four types of tests of internal controls to determine the degree of operating effectiveness: inquiries of appropriate entity personnel, inspection of documents and reports, observation of the application of specific internal control policies and procedures, and re-performance of the application of the policy or procedures by the auditor. System flowcharts may document the auditor's understanding of internal control, but flowchart preparation provides little assurance about the documented activity's operating effectiveness. Editor note: It is important with CPA exam questions (especially ones like these) to carefully read the question. The question is asking for the LEAST assurance, so the answer choice that doesn't quite align with the others may be a clue as to the correct answer.
Before accepting an engagement to audit a new client, a CPA is required to A Obtain an understanding of the prospective client's industry and business B Obtain written representations from management and, when appropriate, those charged with governance C Obtain a preliminary understanding of the prospective client's control environment D Request the client to authorize the predecessor auditor to respond fully to inquiries that will assist the auditor in determining whether to accept the engagement
D Request the client to authorize the predecessor auditor to respond fully to inquiries that will assist the auditor in determining whether to accept the engagement Before acceptance of the engagement, the successor auditor is required to communicate with the predecessor auditor and include inquiries on the reasons for the change, the integrity of management, disagreements during the audit and communications with the audit committee. The prospective client's consent is required as the client would need to authorize the predecessor auditor to discuss confidential information and audit documentation with the new auditor.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? A Require all employees to record arrival and departure by using the time clock B Have a payroll clerk recalculate all time cards C Require all employees to sign their time cards D Require employees to have their direct supervisors approve their time cards
D Require employees to have their direct supervisors approve their time cards Requiring employees to have their direct supervisors approve their time cards would most effectively ensure that payment is made only for work performed. The other answers are good controls, but they are not as effective for this purpose. In most cases, the direct supervisor witnesses the actual work performed. Requiring employees to use a time clock improves accuracy and validity of amounts recorded. Having a payroll clerk recalculate the time cards also improves accuracy. Requiring employees to sign their time cards allows verification of employee existence and improves accuracy
An emphasis-of-matter paragraph that is included in an audit report prepared in accordance with US GAAS A May refer to disclosures in the financial statements required by the applicable financial reporting framework that management failed to include B May, in rare circumstances, be used to avoid modifying the audit opinion when, according to the auditor's professional judgment,it is appropriate in the specific circumstances of the audit engagement C May be used to explain why it is not possible for the auditor to withdraw from an engagement D Should be communicated to those charged with governance
D Should be communicated to those charged with governance If the auditor expects to include an emphasis-of-matter or other-matter paragraph in the audit report, the auditor should communicate with those charged with governance regarding this expectation and the proposed wording. This is usually done in the form of draft reports that are distributed prior to official issuance of the final audit report. Remember, although auditors must remain independent, they must also be transparent with their language and any findings and as such, should relay items such as an other-matter, to governance. Regarding incorrect answers a. and b., an emphasis-of-matter paragraph is not a substitute for either (1) disclosures in the financial statements that the applicable financial reporting framework requires management to make or (2) the auditor expressing a modified opinion, when required by the circumstances of a specific audit engagement. Regarding incorrect answer c., in the rare circumstance when the auditor is unable to withdraw from an engagement even though the possible effect of an inability to obtain sufficient appropriate audit evidence due to a scope limitation imposed by management is pervasive, the auditor may consider it necessary to include an other-matter paragraph, not an emphasis-of-matter paragraph, in the audit report to explain why it is not possible for the auditor to withdraw from the engagement.
An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions? A Controller B CFO C CEO D Staff accountant
D Staff accountant Under the AICPA Code of Professional Conduct, Rule 101-2 independence issues could arise if a professional joins an audit client within one year of disassociating from the audit firm and the professional is in a position to influence the accounting firm's operations or financial policies. Officer positions such as Controller, CFO, and CEO are included in this regard. The position of staff accountant is a lower management position not generally viewed as able to influence the accounting firm's operations or financial policies.
Which of the following statements is false in regard to an engagement conducted in accordance with the standards of the PCAOB to report on whether a previously reported material weakness continues to exist? A The auditor may report on more than one previously reported material weakness as part of a single engagement. B This type of engagement is voluntary, i.e., the standards of the PCAOB do not require an auditor to undertake an engagement to report on whether a previously reported material weakness continues to exist. C A qualified opinion is not permitted. D The auditor's opinion on whether a previously reported material weakness continues to exist may be expressed as "the material weakness exists" or "the material weakness has been eliminated".
D The auditor's opinion on whether a previously reported material weakness continues to exist may be expressed as "the material weakness exists" or "the material weakness has been eliminated". The auditor's opinion on whether a previously reported material weakness continues to exist may be expressed as the material weakness no longer exists, not has been eliminated, or the material weakness exists. The PCAOB's guidance does not use the terms unqualified opinion and adverse opinion, instead, it refers simply to "an opinion" or "the auditor's opinion." The other answer alternatives are true.
In auditing accounts receivable, the negative form of confirmation request most likely would be used when A The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole. B Response rates in prior years to properly designed positive confirmation requests were inadequate. C Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. D The combined assessed level of inherent risk and control risk relative to accounts receivable is low.
D The combined assessed level of inherent risk and control risk relative to accounts receivable is low Negative confirmations are used when the auditor can tolerate a high level of detection risk, i.e., when the combined assessed level of inherent risk and control risk relative to accounts receivable is low. Negative confirmations provide less persuasive evidence than positive confirmations because the auditor is unable to determine if a lack of response is due to customer agreement or lack of delivery of the request for confirmation, etc. If the total recorded amount of accounts receivable is immaterial to the financial statement taken as a whole, confirmations of any kind would be unlikely. If response rates in prior years were inadequate, the auditor is more likely to consider other procedures rather than a type of confirmation for which response rates cannot be determined. If recipients are likely to return positive confirmations requests without verifying the accuracy of the information, it is unlikely they would have greater inclination to verify the accuracy of the information for negative confirmations.
An auditor may decide to increase the risk of incorrect rejection when A Increased reliability from the sample is desired. B Many differences (audit value minus recorded value) are expected. C Initial sample results do not support the planned level of control risk. D The cost and effort of selecting additional sample items is low.
D The cost and effort of selecting additional sample items is low. The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when, in fact, it is not materially misstated. Thus, the risk of incorrect rejection relates to the efficiency of the audit. If the auditor's evaluation of the audit sample leads him to the initial erroneous conclusion that a balance is materially misstated when it is not, the application of additional audit procedures and consideration of other audit evidence would ordinarily lead the auditor to the correct conclusion. The cost of this mistake is the cost of the additional procedures necessary to discover that the original conclusion was erroneous. If however, the cost and effort of those additional procedures is low, the auditor may well decide to use a high risk of incorrect rejection because doing so will reduce original sample size. If the desired results are achieved with the original small sample, overall audit cost will be lowered. If an incorrect rejection occurs, however, the incremental cost incurred would not be excessive. An increase in the desired reliability would likely result in a decrease (not increase) in the risk of incorrect rejection. The number of differences expected should have no bearing on the risk of incorrect rejection specified. The 'risk of incorrect rejection' is not a concept associated with test of controls. 'Risk of underreliance' would be the corresponding risk that is associated with control testing.
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? A As the population size doubles, the sample size should increase by about 67%. B The sample size is inversely proportional to the expected error rate. C There is no relationship between the tolerable error rate and the sample size. D The population size has little or no effect on the sample size.
D The population size has little or no effect on the sample size. When a sample is small in relation to the population, the population size has little or no effect on the determination of an appropriate sample size.
In order to opine on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole, all of the following conditions must be met except for A The supplementary information was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. B The supplementary information relates to the same period as the financial statements. C The auditor issued an audit report on the financial statements that contained neither an adverse opinion nor a disclaimer of opinion. D The supplementary information will accompany the entity's audited financial statements, or such audited financial statements will be made available upon request.
D The supplementary information will accompany the entity's audited financial statements, or such audited financial statements will be made available upon request. Being available upon request is not considered readily available. One of the conditions that must be met is that the supplementary information will accompany the entity's audited financial statements, or such audited financial statements will be made readily available by the entity. Audited financial statements are deemed to be readily available if a third-party user can obtain the audited financial statements without any further action by the entity. For example, financial statements on an entity's website may be considered readily available, but being available upon request is not considered readily available.