MGMT 443 Quiz 3 (Chapters 5)
A CPA is conducting the first audit of a nonissuer's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is A. Acceptable if the client and the predecessor auditor agree to it B. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work as part of the basis for the CPA's own opinion C. Required if the CPA is to express an unmodified opinion D. Unacceptable because the CPA should bring an independent viewpoint to a new engagement
Answer: A
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about A. Suspense debits that management believes will benefit future operations B. Suspense debits that the auditor verifies will have realizable value to the client C. Suspense credits that management believes should be classified as "current liability" D. Suspense credits that the auditor determines to be customer deposits
Answer: A
After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on A. Whether the financial statements are consistent with the auditor's understanding of the entity B. Fraud involving he client's management and its employees C. The materiality of the adjusting entries proposed by the audit staff D. The communication of internal control weaknesses to those charged with governance
Answer: A
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
Answer: A
An auditor's audit documentation will least likely show how the A. Client's schedules were prepared B. Engagement was planned C. Understanding of the client's internal control was obtained and the risks of material misstatement were assessed D. Significant issues were resolved
Answer: A
Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the A. Difficulty and cost involved in testing a particular item B. Assessment of the risks of material misstatement at a low level C. Inherent risk involved D. Relationship between the cost of obtaining evidence and its usefulness
Answer: A
The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of A. Transactions B. Authorizations C. Costs D. Cutoffs
Answer: A
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? A. Auditor judgement B. Materiality C. Audit risk D. Reasonable assurance
Answer: A
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
Answer: A
Ajax, Inc., is an affiliate of the audit client and is audited by another audit firm. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees by the client of the affiliate's indebtedness have been detected? A. Send the standard bank confirmation request to all 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.
Answer: B
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
Answer: B
Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? A. Physical inspection of a sample inventory B. Search for unrecorded cash receipts C. Obtaining a client representation letter D. Confirmation of accounts receivable
Answer: B
Most of the auditor's work in forming an opinion on financial statements consists of A. Understanding internal control B. Obtaining and evaluating audit evidence C. Examining cash transactions D. Comparing recorded accountability with assets
Answer: B
Using personal computers in auditing may affect the methods used to review the work of staff assistants because A. Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers B. Audit documentation may not contain readily observable details of calculations C. The audit standards for supervision may differ D. Documenting the supervisory review may require assistance of consulting services personnel
Answer: B
Which of the following presumptions is least likely to relate to the reliability of audit evidence? A. The more effective internal control is, the more assurance it provides about the accounting data and financial statements B. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity D. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly
Answer: B
Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both B. The sufficiency and appropriateness of audit evidence is a matter of professional judgement C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test D. A client's accounting records can be sufficient audit evidence to support the financial statements
Answer: B
Which of the following statements is most accurate regarding sufficient and appropriate documentations? A. Accounting estimates are not considered sufficient and appropriate documentation B. Sufficient and appropriate documentation should include evidence that has been reviewed C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least 5 years
Answer: B
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 from management C. Review the company's business structure D. Review proxy and other materials filed with the SEC
Answer: B
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 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
Answer: C
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for A. Cash flow increases and decreases B. Risk assessments and assertions C. Reclassifications and adjustments D. Reconciliations and tick marks
Answer: C
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 option
Answer: C
Audit documentation that records the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being audited B. Viewed as the connecting link between the books of account and the financial statements C. Designed to meet the circumstances of the particular engagement D. Destroyed when the audited entity ceases to be a client
Answer: C
Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should A. Obtain evidence about the operating effectiveness of controls B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable D. Obtain written representation from management that all financial records and related data will be made available
Answer: C
In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to A. Point out to the responsible entity officials the errors made by various entity personnel B. Summarize the corrections that must be made before the entity can prepare and submit its federal tax return C. Identify the potential financial statement effects of misstatements that were not considered trivial when discovered D. To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released
Answer: C
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 requirement 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
Answer: C
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
Answer: C
When performing procedures to identify and assess the risks of material misstatement for accounting estimates, the auditor should A. Review transactions occurring prior to the date of the auditor's report that indicate variations from expectations B. Compare independent expectations with recorded estimates to assess management's process C. Obtain an understanding of how management developed its estimates D. Analyze the historical data used in developing assumptions to determine whether the process is consistent
Answer: C
Which of the following documentation is not required for an audit in accordance with auditing standards? A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives B. An indication that the accounting records agree or reconcile with the financial statements C. A client letter that details the auditor's planned field work D. The basis for the auditor's conclusions about the assessed risks of material misstatement
Answer: C
Which of the following is not considered an auditor's specialist? A. Actuary B. Appraiser C. Internal auditor D. Tax attorney
Answer: C
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be dissociated from the resolution of the matter. The audit documentation would probably be A. Silent on the matter because it is an internal matter of the auditing firm B. Expanded to note that the assistant auditor is completely dissociated from responsibility for the auditor's opinion C. Expanded to record the additional work required because all disagreements of this type will require expanded substantive testing D. Expanded to detail the assistant auditor's position and how the difference of opinion was resolved
Answer: D
Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include A. Schedules that support the current year's adjusting entries B. Prior years' accounts receivable confirmations that were classified as exceptions C. Documentation indicating that the audit work was adequately planned and supervised D. Analyses of capital stock and other owners' equity accounts
Answer: D
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 B. Interentity transactions may have been consummated on terms equivalent to arm's-length transactions C. This may reveal whether a 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
Answer: D
The audit working paper components of an amount reported in the financial statements is the A. Interbank transfer schedule B. Carryforward schedule C. Supporting schedule D. Lead schedule
Answer: D
Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing? A. Analysis of noncurrent balance sheet accounts B. Analysis of current balance sheets accounts C. Analysis of contingencies D. Analysis of income statement accounts
Answer: D
Which of the following is usually included or shown in the audit documentation? A. The procedures used by the auditor to verify the personal financial status of members of the client's management team B. Analyses that are designed to be a part of, or a substitute for, the client's accounting records C. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements D. A summary of how significant findings were addressed
Answer: D
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 amounts originally recognized C. Confirm inventories at locations outside the entity D. Review the lawyer's letter for information about litigation
Answer: D
Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private B. Inspection of prenumbered client purchase orders filed in the vouchers payable department C. Analytical procedures performed by the auditor on the entity's trial balance D. Inspection of bank statements obtained directly from the client's financial institution
Answer: D
Which of the following statements about evidence is true? A. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive B. Effective internal control contributes little to the reliability of the evidence created within the entity C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained D. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion
Answer: D
Which of the following statements is true about 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 length transactions D. The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed
Answer: D
Which of the following statements is true about 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 no obligated to do so D. The auditor should obtain an understanding of the methods and assumptions used by the specialist
Answer: D
