Audit Exam 3
An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to A) extend appropriate audit procedures. B) assume responsibility for events after the date of the auditor's report. C) assume responsibility for event from fiscal year-end to the date of the audit report. D) roll the dice and hope for a successful outcome
.Answer: A
The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements? A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. C) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. D) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date
.Answer: B
Several factors influence the auditor's choice of the types of tests to select, including A) the availability of the types of evidence. B) the relative costs of each type of test. C) the effectiveness of the internal controls. D) all of the above
.Answer: D
The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.
1. Identify existing controls. Because deficiencies and material weaknesses are the absence of adequate controls, the auditor must first know which controls exist. 2. Identify the absence of key controls. Internal control questionnaires, flowcharts, and walkthroughs are useful tools to identify where controls are lacking and the likelihood of misstatement is therefore increased. It is also useful to examine the control risk matrix to look for objectives where there are no or only a few controls to prevent or detect misstatements. 3. Consider the possibility of compensating controls. A compensating control is one elsewhere in the system that offsets the absence of a key control. When a compensating control exists, there is no longer a significant deficiency or material weakness. 4. Decide whether there is a significant deficiency or material weakness. The likelihood of misstatements and their materiality are used to evaluate if there are significant deficiencies or material weaknesses. 5. Determine potential misstatements that could result. This step is intended to identify specific misstatements that are likely to result because of the significant deficiency or material weakness. The importance of a significant deficiency or material weakness is directly related to the likelihood and materiality of potential misstatements
There are eight types of audit evidence: physical examination, confirmation, inspection, observation, inquiries of the client, reperformance, analytical procedures, and recalculation. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances.
Answer: 1) Tests of controls. Inspection, observation, inquiries of the client, reperformance 2) Substantive tests of transactions. Inspection, inquiries of the client, reperformance, recalculation 3) Substantive analytical procedures. Inquiries of the client, analytical procedures 4) Tests of details of balances. Physical examination, confirmation, inspection, inquiries of the client, reperformance, recalculation
In phase IV of the audit, complete the audit and issue an audit report, there are five activities required. List below the activities.
Answer: 1) perform additional tests for presentation and disclosure 2)accumulate final evidence 3)evaluate results 4)issue audit report 5)communicate with audit committee and management
In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities. List the activities below.
Answer: 1) perform final analytical procedures 2) evaluate the going concern assumption 3) obtain a client representation letter 4) read information in the annual report to ensure that it is consistent with the financial statements
What are the three required conditions for a contingent liability to exist?
Answer: 1. There is potential for future payment to an outside party or the impairment of an asset that resulted from an existing condition. 2. There is uncertainty about the amount of the future payment or impairment. 3. The outcome will be resolved by some future event or events.
List the three reasons why an experienced member of the audit firm must thoroughly review audit documentation at the completion of the audit.
Answer: 1. To evaluate the performance of inexperienced personnel 2. To make sure that the audit meets the CPA firm's standard of performance 3. To counteract the bias that often enters into the auditor's judgment
When designing tests of controls and substantive tests an auditor is gathering evidence to satisfy the transaction-related audit objectives. What are the four steps the auditor would normally follow to reduce assessed control risk?
Answer: Apply the transaction-related audit objectives to the class of transactions being tested. Identify key controls that should reduce control risk for each transaction-related audit objective.3. Develop appropriate tests of controls for all internal controls that are used to reduce the preliminary assessment of control risk below maximum (key controls). 4. For potential types of misstatements related to each transaction-related audit objective, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls.
In evaluating the operational effectiveness of internal controls, the auditor is likely to use four types of audit procedures. List the procedures below.
Answer: Make inquiries of appropriate client personnel. Examine documents, records, and reports. Observe control-related activities. Reperform client procedures.
List the four principal purposes of the required communication with the audit committee regarding certain additional information obtained during the audit.
Answer: To communicate auditor responsibilities in the audit of financial statements To provide an overview of the scope and timing of the audit To provide those charged with governance with significant findings arising during the audit To obtain from those charged with governance information relevant to the audit
State the three purposes of the management representation letter.
Answer: To impress upon management its responsibility for the assertions in the financial statements To remind management of potential misstatements or omissions in the financial statements To document the responses from management to inquiries about various aspects of the audit
List each of the five types of audit tests.
Answer: risk assessment procedures tests of controls substantive tests of transactions substantive analytical procedures tests of details of balances
Besides the search for contingent liabilities and the review for subsequent events, the auditor has five important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.
Answer: • Final analytical procedures performed as a final review for material misstatements or financial problems and to help the auditor take a final objective look at the financial statements. Evaluate the going-concern assumption. Obtain a management representation letter documenting management's most important oral representations during the audit. Consider supplementary information in relation to the financial statements taken as a whole. Read other information in the annual report.
Attorneys in recent years have become reluctant to provide certain information to auditors because of their own exposure to legal liability for providing incorrect or confidential information. State the two main reasons that attorneys refuse to provide the auditors with complete information.
Answer: • The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. • The attorneys refuse to disclose information that they consider confidential.
The fieldwork for the December 31, 2018 audit of Schmidt Corporation ended on March 17, 2019. The financial statements and auditor's report were issued on March 29, 2019. In each of the material situations (1 through 5) below, indicate the appropriate action (a, b, c). The possible actions are as follows Adjust the December 31, 2018 financial statements. Disclose the information in a footnote in the December 31, 2018 financial statements. No action is required. The situations are as follows: ________ 1. On March 1, 2019, one of Schmidt Corporation's major customers declared bankruptcy. The customer's financial condition in 2018 was deteriorating and they owed Schmidt Corporation a large sum of money as of the balance sheet date. ________ 2. On February 17, 2019, Schmidt Corporation sold some machinery for its book value. ________ 3. On February 20, 2019 a flood destroyed the entire uninsured inventory in one of Schmidt's warehouses. ________ 4. On January 5, 2019, there was a significant decline in the market value of the securities held for resale from their value as of the balance sheet date. ________ 5. On March 10, 2019, the company settled a lawsuit at an amount significantly higher than the amount recorded as a liability on the books as of the balance sheet date.
Answer: 1. a 2. c 3. b 4. b 5. a
The fieldwork for the December 31, 2016 audit of Treble Corporation ended on March 17, 2017. The financial statements and auditor's report were issued and mailed to stockholders on March 29, 2017. In each of the material situations (1 through 5) below, indicate the appropriate action (a, b, c, d, or e). The possible actions are as follows: a. Adjust the December 31, 2016 financial statements. b. Disclose the information in a footnote in the December 31, 2016 financial statements. c. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve an adjustment to the December 31, 2016 financial statements. d. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve the addition of a footnote, but no adjustment, to the December 31, 2016 financial statements. e. No action is required. The situations are as follows: ________ 1. On January 16, 2017 a lawsuit was filed against Treble for a patent infringement action that allegedly took place in early 2014. In the opinion of Treble's attorneys, there is a reasonable (but not probable) danger of a significant loss to Treble. ________ 2. On February 19, 2017, Treble settled a lawsuit out of court that had originated in 2015 and is currently listed as a contingent liability. ________ 3. On March 30, 2017, Treble settled a lawsuit out of court that had originated in 2014 and is currently listed as a contingent liability. ________ 4. On February 2, 2017, you discovered an uninsured lawsuit against Treble that had originated on August 30, 2013. There is a reasonable (but not probable) danger of a significant loss to Treble. ________ 5. On April 7, 2017, you discovered that a debtor of Treble went bankrupt on January 22, 2017, due to a major uninsured fire that occurred on January 2, 2017.
Answer: 1. b 2. a 3. e 4. b 5. d
Match seven of the terms (a-p) with the description/definitions provided below (1-7). a. commitments b. completing the engagement checklist c. contingent liability d. dual-dated audit report e. financial statement disclosure checklist f. independent review g. inquiry of client's attorneys h. letter of representation i. other information in annual reports j. review for subsequent events k. subsequent events l. unadjusted misstatement worksheet m. management letter n. pending claim o. unasserted claim p. Audit documentation review ________ 1. a review of the financial statements and the entire set of audit files by an independent reviewer to whom the audit team must justify the evidence accumulated and the conclusions reached ________ 2. a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place ________ 3. a written communication from the client to the auditor formalizing statements that the client has made about matters pertinent to the audit ________ 4. a potential legal claim against a client where the condition for a claim exists but no claim has been filed ________ 5. transactions that occurred after the balance sheet date, which affect the fair presentation or disclosure of the statements being audited ________ 6. agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price ________ 7. the use of one audit report date for normal subsequent events and a later date for one or more subsequent events
Answer: 1. f, 2. c, 3. h, 4. o, 5. k, 6. a, 7. d
A commitment is best described as A) an agreement to commit the firm to a set of fixed conditions in the future. B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability. C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions. D) a potential future obligation to an outside party for an as yet to be determined amount.
Answer: A
An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied? A) accuracy and valuation B) occurrence and rights and obligations C) completeness D) classification and understandability
Answer: A
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit .D) the final billing for audit services rendered.
Answer: A
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A) extend auditing procedures and assume responsibility for a greater period of time. B) accept responsibility for subsequent events. C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D) assume responsibility for events subsequent to the issuance of the auditor's report.
Answer: A
As directed by the Sarbanes-Oxley Act, A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer. B) attorneys cannot breach confidentiality rules even if a client is committing a crime or a fraud. C) if the audit committee fails to remedy any material violations of the federal securities law, the attorney must report the violation to the SEC. D) All of the above are required by Sarbanes-Oxley.
Answer: A
Auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist, is known as A) auditing through the computer. B) auditing around the computer. C) embedded audit module approach. D) parallel simulation testing.
Answer: A
Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is A) analytical procedures. B) confirmations from creditors. C) statistical sampling procedures D) tests of internal controls.
Answer: A
Contingent liability disclosure in the footnotes of the financial statements would normally be made when A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. B) a reasonable estimation of the loss can be made, but the outcome is not probable. C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.
Answer: A
If no material differences are found using analytical procedures, and the auditor concludes that misstatements are not likely to have occurred, A) other substantive tests may be reduced. B) it will be necessary to increase the tests of balances. C) it will not be necessary to perform tests of balances. D) it will be necessary to increase the tests of transactions.
Answer: A
If tests of controls support the control risk assessment, then ________ in the audit risk model is increased. A) planned detection risk B) planned inherent risk C) planned fraud risk D) planned assurance risk
Answer: A
In connection with the annual audit, which of the following is not a "subsequent events" procedure? A) Prepare any necessary closing journal entries. B) Examine the minutes of stockholders' and directors' meetings subsequent to the balance sheet date. C) Review journals and ledgers. D) Obtain a letter of representation.
Answer: A
Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n) A) qualified opinion or a disclaimer of opinion. B) adverse opinion or a disclaimer of opinion. C) qualified or an adverse opinion. D) unqualified opinion with an explanatory paragraph.
Answer: A
Risk assessment procedures are performed by auditors during an audit in order to A) determine the risk of material misstatement in the financial statements. B) determine the amount of testing of internal control. C) determine the extent of testing of details of balances. D) determine the extent of testing of transactions.
Answer: A
Tests of controls A) are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk. B) are used to support the ending balances in the balance sheet and income statement accounts. C) are performed at the end of the audit. D) are designed to detect fraud.
Answer: A
Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances. Which of the following is true? A) They are likely to be performed prior to the client's end of the fiscal year. B) They are likely to eliminate the need for tests of details of balances. C) They are likely to have no impact on the planned tests of details of balances. D) They are likely to be used only in the audit of internal control.
Answer: A
The audit procedures for the subsequent events review can be divided into two categories:(1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category? A) Correspond with attorneys. B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts. C) Subsequent period sales and purchase transactions are examined to determine whether the cutoff is accurate. D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower of cost or market valuation.
Answer: A
The auditor has completed her or his assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to A) adjust the financial statements for the year under audit. B) disclose in the notes to the financial statements the amount of the adjustment. C) duly note in the audit workpapers that next year's financial statements need to be adjusted. D) make no adjustment of the financial statements for the year under audit.
Answer: A
The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation? A) Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized shipping document and approved customer order. B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed. C) Examine a sample of sales invoices and agree prices to the authorized computer price list. D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.
Answer: A
The auditor should identify and include only ________ controls since they will be sufficient to achieve the transaction-related audit objectives and will also provide audit efficiency. A) key B) significant C) material D) compensating
Answer: A
The auditor's objective in determining whether the client's computer program correctly processes valid and invalid transactions is accomplished through the A) test data approach. B) generalized audit software approach. C) microcomputer-aided auditing approach. D) generally accepted auditing standards.
Answer: A
The primary emphasis in most tests of details of balances is on the A) balance sheet accounts. B) revenue accounts. C) cash flow statement accounts. D) expense accounts.
Answer: A
When a compensating control exists, the absence of a key control A) is no longer a concern because there is no longer a significant deficiency or material weakness. B) is still a major concern to the auditor. C) could cause a material loss, so it must be tested using substantive procedures. D) is magnified and must be removed from the sampling process and examined in its entirety.
Answer: A
When using the test data approach, A) test data should include data that the client's system should accept or reject. B) application programs tested by the auditor's test data must be different from those used by the client throughout the year. C) select data may remain in the client system after testing. D) None of the above statements is correct.
Answer: A
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A) review compliance with the terms of debt agreements B) confirmation of accounts receivable from principal customers C) reconciliation of interest expense with debt outstanding D) confirmation of bank balances
Answer: A
Which of the following audit tests is usually the least costly to perform? A) substantive analytical procedures B) tests of controls C) tests of balances D) substantive tests of transactions
Answer: A
Which of the following best describes the test data approach? A) Auditors process their own test data using the client's computer system and application program. B) Auditors process their own test data using their own computers that simulate the client's computer system. C) Auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files. D) Auditors use client-controlled software to do the same operations that the client's software does, using auditor created data files.
Answer: A
Which of the following is a correct statement? A) The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk. B) The auditor links the inherent risk assessments to the balance-related audit objectives. C) The audit risk model is used determine the level of audit risk D) All of the above are correct statements.
Answer: A
Which of the following is an accurate statement regarding the four phases of the audit process? A) After the planning stage, the auditor should have a well-defined audit strategy and plan and a specific audit program for the entire audit. B) The objective of phase III is to perform tests of controls. C) During phase II, the auditor must evaluate the going-concern assumption. D) All of the above are correct statements.
Answer: A
Which of the following is true regarding the auditor's opinion on the effectiveness of internal control? A) The auditor is attesting to the effectiveness of internal controls as of the end of the fiscal year. B) If the client remedies a material weakness before the end of the fiscal year, the auditor must still issue a qualified opinion or a disclaimer of opinion. C) A scope limitation requires the auditor to issues an adverse opinion. D) Section 404 requires that the auditor design the audit to detect all deficiencies in internal control.
Answer: A
Which of the following is true? A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts. B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts. C) Tests of details of balances focus on the auditor's understanding of internal controls. D) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.
Answer: A
Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management. B) Any significant matter reported to those charged with governance must also be communicated to management. C) Communication is required before the audit report is issued D) The auditor does not have any requirement to communicate with anyone other than the company's senior management.
Answer: A
Which of the following tests commonly occur together? A) substantive tests of transactions and tests of controls B) substantive tests of transactions and obtaining an understanding of internal controls C) analytical procedures and tests of controls D) tests of controls and tests of details of balances
Answer: A
Which of the following is the correct definition of "control deficiency"? A) A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis. B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably. C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements. D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements.
Answer: A A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.
The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would A) constitute a deficiency in operation of internal controls. B) constitute a deficiency in design of internal controls. C) constitute a deficiency of management. D) not constitute a deficiency.
Answer: A constitute a deficiency in operation of internal controls.
Define the term contingent liability and discuss the criteria accountants and auditors use to classify these accounting events.
Answer: A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Three conditions are required for a contingent liability to exist: (1) there is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition; (2) there is uncertainty about the amount for the future payment or impairment; and (3) the outcome will be resolved by some future event or events. Accounting standards describe three levels of likelihood of occurrence and the appropriate financial statement treatment for each likelihood as follows: a. Probable—future event likely to occur and amount can be reasonably estimated then the financial statement accounts are adjusted. If amount cannot be reasonably estimated, then a footnote disclosure is necessary. b. Reasonably possible—chance of occurring is more than remote, but less than probable. Footnote disclosure is necessary. c. Remote—chance of occurrence is slight, no disclosure is necessary.
You are the audit manager for a new audit client. Your staff auditors are unsure of what constitutes a control deficiency. Discuss the terms control deficiency, design deficiency, and operating deficiency.
Answer: A control deficiency exists if the design and implementation or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis in the normal course of performing assigned functions. A design deficiency exists if a necessary control is missing, is not properly designed, or is not properly implemented. An operating deficiency exists if a well-designed control does not operate as designed or if the person performing the control is insufficiently qualified or authorized.
2) For financial statement audits, auditors need to understand controls that are relevant to the audit in order to A) identify and assess the risks of material misstatements B) perform preliminary analytical procedures. C) detect fraud. D) assess inherent risk.
Answer: A identify and assess the risks of material misstatements
Once auditors determine that entity level controls are designed and placed in the operation, they A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction. B) make a preliminary assessment of control risk. C) obtain an understanding of the design and implementation of internal control. D) prepare audit documentation in order to express their opinion on the company's internal control system.
Answer: A make a preliminary assessment for each transaction-related audit objective for each major type of transaction.
When assessing whether the financial statements are auditable, the auditor must consider A) that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability. B) that the integrity of management and the adequacy of risk management are the two primary factors determining auditability. C) that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited. D) the control risk before determining if the entity is auditable.
Answer: A that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability.
Discuss the advantages and benefits of using generalized audit software.
Answer: Advantages and benefits of using generalized audit software include: It is relatively easy to train the audit staff in its use, even if they have little formal IT training. The software can be applied to a wide variety of clients with minimal customization. It has the ability to do audit tests much faster and, in more detail, than using traditional manual procedures.
There are three stages of the audit in which analytical procedures are performed. Identify each of these three stages and, for each stage, discuss the purpose of performing analytical procedures in that stage. Also indicate in which stage(s) analytical procedures are required by current professional auditing standards.
Answer: Analytical procedures are performed in the audit planning stage to help the auditor decide the other evidence needed to satisfy sufficient competent evidence requirements. Analytical procedures can also be performed as substantive tests in the testing phase of the audit. Analytical procedures are performed in the audit completion phase as a final test of reasonableness. Auditing standards require that analytical procedures be performed in the planning and completion phases of every audit.
A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement? A) the amount of the misstatement B) the likelihood of the misstatement C) the amount, likelihood, and classification of the misstatement D) the amount and the classification of the misstatement
Answer: B
A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a A) test of controls. B) substantive test. C) test of attributes. D) monetary unit sampling test.
Answer: B
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n) A) commitment. B) unasserted claim. C) pending litigation .D) subsequent event.
Answer: B
An exception or deficiency found in a test of controls A) indicates a financial statement misstatement. B) indicates the likelihood of a misstatement. C) indicates that the financial statements are fairly stated. D) indicates that an adverse opinion is warranted on the audit of internal control.
Answer: B
Analytical procedures performed during phase III of the audit A) must be performed before the balance sheet date. B) can be used as a means of planning and directing other audit tests to specific areas. C) should be done after tests of details of balances D) are expensive and are therefore not frequently used by the auditor.
Answer: B
Auditors follow a four-step approach to reduce assessed control risk. Which of the following is not one of the four? A) Apply transaction-related audit objectives to a class of transactions. B) Identify accounts that have high inherent risk. C) Identify key controls that reduce control risk D) For potential misstatements, design appropriate substantive tests of transactions.
Answer: B
Auditors will generally send a standard inquiry to the client's attorney letter to A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) every attorney whose legal fees for the year exceed a materiality threshold. D) only the attorney who represents the client in proceeding where the client is defendant.
Answer: B
Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to A) determine the range of probable loss for asserted claims. B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs. C) obtain an outside opinion of the probability of losses in determining accruals for contingencies. D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.
Answer: B
For clients with highly sophisticated computerized accounting systems, auditors perform tests throughout the year to identify significant or unusual transactions. This approach is called ________ and is frequently used in integrated audits of financial statements and internal control for public companies. A) continuous audit program B) continuous auditing C) continuous analytical testing D) continuous audit mix
Answer: B
If a potential loss on a contingent liability is remote, the liability usually is A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements.
Answer: B
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, A) the attorney may face sanctions from the American Bar Association. B) the auditors must modify their audit report to reflect the lack of available evidence. C) the attorney can no longer represent the client. D) the auditor must withdraw from the engagement.
Answer: B
If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment. A) a lower B) the same C) a higher D) either a lower or higher
Answer: B
Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information? A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. B) Request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments. C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
Answer: B
Management implements internal controls to ensure that all required footnote disclosures are accurate. Auditors tests those controls to provide evidence supporting the ________ presentation. A) completeness and valuation B) completeness and accuracy C) rights and obligations and existence D) occurrence and accuracy
Answer: B
Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? risk assessment procedures tests of controls substantive tests of transactions substantive analytical procedures tests of details of balances A) 1, 2, and 3 B) 3, 4, and 5 C) 2, 3, and 5 D) 2, 3, and 4
Answer: B
Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent A) the culmination of conditions that existed at the balance sheet date. B) additional new information related to events that were in existence on the balance sheet date. C) final estimates of losses relating to casualties occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
Answer: B
Tests of controls are directed toward the control's A) efficiency. B) effectiveness. C) cost and effectiveness. D) cost benefit ratio.
Answer: B
The ________ is the combination of the types of tests to obtain sufficient appropriate evidence for a cycle. There are likely to be variations in the mix from cycle to cycle depending on the circumstances of the audit. A) testing mix B) evidence mix C) audit process mix D) procedures mix
Answer: B
The auditor designs and performs a combination of tests of controls and substantive procedures to obtain reasonable assurance that the financial statements are fairly stated when control risk A) is assessed above the maximum. B) is assessed below the maximum. C) cannot be assessed. D) none of the above
Answer: B
The auditor would design which of the following audit tests to detect possible monetary errors in the financial statements? A) control tests B) substantive analytical procedures C) risk assessment procedures D) tests of operating effectiveness of controls over revenue and cash
Answer: B
The date of the management representation letter received from the client should A) be the date of latest subsequent event disclosed in the notes to the financial statements. B) be dated no earlier than the date of the audit report. C) have the same date as the date of the balance sheet. D) have the same date as the date of the engagement letter.
Answer: B
The document that details the specific audit procedures for each type of test is the A) audit strategy. B) audit program. C) audit procedure. D) audit risk model.
Answer: B
The letter of representation obtained from an audit client should be A) dated as of the end of the period under audit. B) dated as of the audit report date. C) dated as of any date decided upon by the client and auditor. D) dated as of the issuance of the financial statement.
Answer: B
The purpose of tests of controls is to provide reasonable assurance that the A) accounting treatment of transactions and balances is valid and proper. B) internal control procedures are functioning as intended. C) entity has complied with GAAP disclosure requirements. D) entity has complied with requirements of quality control.
Answer: B
The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily A) parallel. B) inverse. C) direct. D) equal.
Answer: B
Three conditions are required for a contingent liability to exist. Which of the following is notone of those conditions? A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition. B) The outcome must be resolved by a third-party. C) There is uncertainty about the amount of the future payment or impairment. D) The outcome will be resolved by some future event or events.
Answer: B
Transaction-related audit objectives would most likely be performed in which phase of the audit process? A) plan and design audit approach B) perform tests of controls and substantive tests of transactions C) perform substantive analytical procedures and tests of details of balances D) complete the audit and issue the audit report
Answer: B
When a client uses a service center for processing transactions, A) the auditor can assume that the controls are adequate because it is an independent enterprise. B) auditing standards require the auditor to test the service center's controls if the service center application involves processing significant financial data. C) and the user auditor decides to rely on the service auditor's report, the user auditor must make reference to the report of the service auditor in the opinion on the user organization's financial statements. D) none of the above.
Answer: B
When dealing with contingencies, A) all contingencies must be disclosed or footnoted. B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. C) it is easy for the auditor to uncover contingencies without management's cooperation. D) the review for contingent liabilities is only performed at the beginning and the end of the audit.
Answer: B
When reviewing the summary of misstatements found in the audit, A) an adjusting journal entry must be made by the auditor for all material misstatements. B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. C) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected. D) auditors only need to consider the misstatements that impact the income statement.
Answer: B
When the auditor has completed the tests of details of balances and enters phase IV of the audit process, she or he must still perform audit procedures for which of the following? A) contingent liabilities and employee compensation B) contingent liabilities and subsequent events C) subsequent events and contractual commitments D) subsequent events and unrecorded liabilities
Answer: B
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as A) not likely, likely, or highly likely. B) remote, reasonably possible, or probable. C) slight, moderate, great. D) remote, likely, possible.
Answer: B
When using the test data approach, A) auditors process test data supplied by the client. B) auditors often obtain assistance from a computer audit specialist. C) the tests must be performed at the end of the year. D) the test data must remain in the client's records.
Answer: B
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation A) took place before the balance sheet date. B) did not take place until after the balance sheet date. C) occurred both before and after the balance sheet date. D) are reimbursable through insurance policies.
Answer: B
Which of the following audit tests would be regarded as a test of controls? A) comparison of the inventory pricing to vendors' invoices B) tests of the signatures on canceled checks to board of directors' authorizations C) tests of the additions to property, plant, and equipment by physical inspections D) review of the specific items making up the balance in a given general ledger account
Answer: B
Which of the following is an accurate statement relating to the extent of procedures? A) If an auditor wants a lower assessed control risk than the preliminary assessed control risk, the number of controls tested increases while the extent of the tests for each control decrease. B) The extent of testing depends on the frequency of the operation of the controls. C) All controls must be tested only at year-end. D) The frequency of testing is the same for both manual and computer controls.
Answer: B
Which of the following is most correct for audits of non-public companies? A) An audit of internal control is required B) An audit of internal control is not required. C) An audit of the design of internal controls is required. D) An audit of the operational effectiveness of internal controls is required.
Answer: B
Which of the following is not a common audit procedure used to search for contingent liabilities? A) examine letters of credit B) examine payroll reports C) review internal revenue agent reports D) analyze legal expense
Answer: B
Which of the following is not seen as an advantage to using generalized audit software (GAS)? A) Auditors can learn the software in a short period of time. B) It can be applied to a variety of clients after detailed customization. C) It can be applied to a variety of clients with minimal adjustments to the software. D) It greatly accelerates audit testing over manual procedures.
Answer: B
Which of the following statements is not true? A) Analytical procedures emphasize the overall reasonableness of transactions and balances. B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures. C) Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. D) Tests of details of balances emphasize the ending balances in the general ledger.
Answer: B
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? A) merger or acquisition activities B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance C) issuance of common stock D) an uninsured loss of inventories due to a fire
Answer: B
Which of the following types of evidence is not available when using substantive tests of transactions? A) inspection B) confirmation C) inquiries of the client D) reperformance
Answer: B
You are auditing Rodgers and Company. After performing substantive analytical procedures, you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that A) details test of balances can be eliminated for those accounts. B) certain tests of details of balances may be eliminated for those accounts. C) control tests may be eliminated for those accounts. D) control tests may be reduced for those accounts.
Answer: B
You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to A) accrue a $4 million liability. B) disclose a liability and provide a range of outcomes. C) since there is less than a 50% chance of occurrence, ignore. D) since there is greater that a remote chance of occurrence, accrue the $10 million.
Answer: B
You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control? A) The company's audit committee has experienced an unusual turnover of members. B) The company's CFO was indicted for embezzling from the company. C) Bank reconciliations are done monthly. D) The CEO retired after twenty years of service to the company.
Answer: B The company's CFO was indicted for embezzling from the company.
When making a preliminary assessment of control risk, the starting point for most auditors is A) IT assessment controls. B) assessment of entity level controls. C) transaction-related controls. D) fraud controls.
Answer: B assessment of entity level controls.
3) Narratives, flowcharts, and internal control questionnaires are three common methods of A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure.
Answer: B documenting the auditor's understanding of internal controls.
4) When dealing with the documentation of internal control ,A) in a narrative, most questions simply require a "yes" or "no" response. B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. C) questionnaires and flowcharts should not be used together. D) flowcharts fail to show the segregation of duties in the company.
Answer: B questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist.
A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting. A) potential misstatement B) significant weakness C) significant deficiency D) fraud symptom
Answer: C
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) sale of a major subsidiary B) adoption of accelerated depreciation methods C) write-off of a substantial portion of inventory as obsolete D) collection of 90% of the accounts receivable existing at December 31
Answer: C
A management representation letter is A) prepared on the CPA's letterhead. B) addressed to the client. C) signed by high-level corporate officials. D) dated as of the balance sheet date.
Answer: C
A system walkthrough is primarily used to help the auditor A) test the ending account balances. B) test the details of transactions. C) determine whether internal controls have been properly implemented. D) determine whether the audit engagement should be accepted.
Answer: C
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined
Answer: C
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the A) balance sheet date. B) date of the auditor's report. C) balance sheet date, but prior to the audit report. D) date of the management representation letter.
Answer: C
An auditor must obtain written client representations that might be signed by all but which of the following? A) treasurer B) chief financial officer C) vice president of operations D) chief executive officer
Answer: C
An auditor traces the cost of sales entry for a sample of product sales to the inventory unit costs in effect at the date of each transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination
Answer: C
An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination
Answer: C
An increased extent of tests of controls is most likely to occur when A) it is a first-year audit. B) the auditor is doing a "fraud audit." C) controls are effective and the preliminary control risk assessment is low. D) controls are ineffective and the preliminary control risk assessment is high.
Answer: C
At what point in the audit process are tests of details most appropriately designed? A) plan and design audit approach B) perform audit tests of controls and substantive tests of transactions C) perform substantive analytical procedures and tests of details of balances D) complete the audit and issue the audit report
Answer: C
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report.
Answer: C
Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements. A) audit B) express an opinion on C) read D) analyze
Answer: C
Auditors of accelerated filer public companies A) are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date. B) must always dual-date their audit reports. C) must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting. D) must perform all of the above procedures.
Answer: C
Auditors often identify less significant internal control-related issues, as well as opportunities for the client to make operational improvements in the A) adverse opinion. B) Section 404 report. C) management letter. D) Type 1 report.
Answer: C
Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's A) audit strategy. B) tests of controls. C) risk assessment procedures. D) tests of transactions.
Answer: C
How must significant deficiencies and material weaknesses be communicated to those charged with governance? A) Either oral or written communication is acceptable. B) Oral communication is required. C) Written communication is required. D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.
Answer: C
If the auditor finds extensive control test deviations and significant misstatements while performing substantive tests of transactions and substantive analytical procedures, A) the cost of the audit should decrease. B) the auditor will conclude that internal controls are effective. C) extensive tests of details of balances will need to be performed. D) all of the above.
Answer: C
In the context of an audit of financial statements, substantive tests are audit procedures that A) may be eliminated under certain conditions. B) are designed to discover significant subsequent events. C) are designed to test for dollar misstatements. D) will increase proportionately with the auditor's reliance on internal control.
Answer: C
Many auditors perform extensive analytical procedures because A) they are required by GAAS. B) they pinpoint errors in accounts. C) they indicate areas of potential risk and misstatement. D) they are required for tests of controls.
Answer: C
One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold. A) monetary B) materiality C) probability D) analytical
Answer: C
Risk assessment procedures are performed by the auditor to assess the risk of material misstatement in the financial statements. Below are four types of further audit procedures the auditor should perform that provide the basis for the auditor's opinion. Which of these are compliance procedures? Tests of controls Tests of details of balances Substantive tests of transactions Substantive analytical procedures A) 1, 2, and 3 B) 2, 3, and 4 C) 1 only D) 1 and 2
Answer: C
The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client's audited financial statements unless A) a development occurs that may affect the company's long-term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.
Answer: C
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and(2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category? A) Inquire of client regarding contingent liabilities. B) Obtain a letter of representation written by client .C) Subsequent period sales and purchase transactions are examined to determine whether the cutoff is accurate. D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1.
Answer: C
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication A) may be oral or written. B) must be oral. C) must be written. D) must be oral via direct communication.
Answer: C
The auditor obtained an aged list of receivables and traced the accounts to the master file, footed the schedule, and traced the amounts to the general ledger. Which balance-related audit objective was met? A) existence B) cutoff C) detail tie-in D) all of the above
Answer: C
The auditor will issue an unqualified opinion on internal control over financial reporting when A) there are no identified material weaknesses as of the end of the fiscal year. B) there have been no restrictions on the scope of the auditor's work. C) both a and b D) either a or b
Answer: C
The auditor's primary concern relative to presentation and disclosure-related objectives is A) accuracy. B) existence. C) completeness. D) occurrence.
Answer: C
To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except A) review the audit documentation for the entire audit to determine whether all material classes of transactions have been adequately tested. B) make sure that all parts of the audit program have been accurately completed and documented. C) obtain the management representation letter. D) decide whether the audit program is adequate.
Answer: C
What type of report is issued when one or more material internal control weaknesses exist? A) unqualified opinion B) disclaimer of opinion C) adverse opinion D) qualified opinion
Answer: C
When assessing control risk, A) many auditors use actuarial tables to assist in the control risk assessment process .B) each control can be used to satisfy only one audit objective. C) many auditors use a control risk matrix to assist in the control risk assessment process. D) all controls, including key controls, should be considered.
Answer: C
When auditors must decide which type of test to select for obtaining sufficient appropriate evidence, the cost of obtaining the evidence is an important consideration. Rank the following types of tests in order of increasing cost: 1)Tests of controls 2)Substantive tests of transactions 3)Test of details of balances 4)Risk assessment procedures 5)Substantive analytical procedures A) 1, 2, 3, 4, and 5 B) 2, 4, 3, 5, and 1 C) 5, 4, 1, 2, and 3 D) 5, 4, 3, 2, and 1
Answer: C
When communicating with the audit committee and management, A) only material fraud and illegal acts are required by auditing standards to be communicated. B) all internal control deficiencies are required by auditing standards to be communicated. C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions. D) all communications with the audit committee and management must be in writing.
Answer: C
When designing the audit program and the particular audit tests, the auditor should keep in mind that A) the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances. B) the tests of controls will not vary depending on assessed control risk. C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning. D) auditing standards require that the tests contained in the audit program must be approved by the PCAOB.
Answer: C
When should auditors generally assess a client's ability to continue as a going concern? A) upon completion of the audit B) during the planning stages of the audit C) throughout the entire audit process D) during testing and completion phases of the audit
Answer: C
Which audit tests involve physical examination and confirmation? A) tests of controls B) tests of transactions C) tests of details of balances D) analytical procedures
Answer: C
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements? A) sale of a bond or capital stock issue B) loss of plant or inventories as a result of fire or flood C) a significant decline in the market price of the corporation's stock D) a merger or acquisition
Answer: C
Which of the following audit tests form the basis for an auditor's report on internal control over financial reporting? A) analytical procedures B) tests of transactions C) tests of controls D) tests of details of balances
Answer: C
Which of the following computer-assisted auditing techniques inserts an audit module in the client's application system to identify specific types of transactions? A) parallel simulation testing B) test data approach C) embedded audit module D) generalized audit software testing
Answer: C
Which of the following further audit procedures are used to determine whether all six transaction-related audit objectives have been achieved for each class of transactions? A) tests of controls B) risk assessment procedures C) substantive tests of transactions D) preliminary analytical procedures
Answer: C
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities? A) auditors B) legal counsel C) management D) management and the auditors
Answer: C
Which of the following is an accurate statement regarding audit documentation review? A) The audit partner must review the work of the least experienced auditor in more detail than the work of the audit supervisor. B) The audit senior must review all audit documentation. C) For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit. D) Checklists can never be used to verify that all financial statement disclosures have been made.
Answer: C
Which of the following is generally not included in the "evidence mix"? A) tests of controls B) substantive tests of transactions C) risk assessment procedures D) tests of details of balances
Answer: C
Which of the following is not completed during phase IV of the audit? A) Obtain a client representation letter. B) Read information in the annual report to make sure that it is consistent with the financial statements. C) Perform substantive tests of transactions. D) Perform final analytical procedures.
Answer: C
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) loss of a plant as a result of a flood B) sale of long-term debt or capital stock C) settlement of litigation in excess of the recorded liability D) major purchase of a business that is expected to double the sales volume
Answer: C
Which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control? A) a lack of competent, trustworthy personnel B) no clear lines of authority C) no adequate separation of duties D) a lack of adequate documents and records
Answer: C
Which of the following procedures would most likely be performed in response to the auditor's assessment of the risk of monetary misstatements in the financial statements? A) ratio analysis B) tests of controls C) tests of details of balances D) risk assessment procedures
Answer: C
Which of the following represents a correct statement regarding internal control testing? A) When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits, auditing standards require tests of the controls' effectiveness at least every other year. B) The greater the risk, the less audit evidence the auditor should obtain that controls are operating effectively .C) The auditor uses control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit. D) Testing of internal controls can only be performed by the auditor at the end of the fiscal year.
Answer: C
Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.
Answer: C
Which of the following would most likely not be included in the evidence mix for an integrated audit of a public company's financial statements and internal control over financial reporting?A) sophisticated internal controls B) extensive substantive analytical procedures C) extensive tests of details of balances D) low inherent risk
Answer: C
Which of the following would the auditor expect to find in the client's management representation letter? A) management's recommendations for internal control effectiveness improvements B) management's plans for improving product quality C) management's compliance with contractual arrangements that impact the financial statements D) management's goals for improving earnings per share
Answer: C
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. C) the client with the CPA's recommendations for improving any part of the client's business. D) a summary of the auditor's observations that resulted from the auditor's special study of internal control.
Answer: C
With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A) controller B) president C) accounts receivable clerk D) vice president of sales
Answer: C
5) Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control? A) inquiry B) observation C) confirmation D) inspection
Answer: C confirmation
Which deficiency exists if a necessary control is missing or not properly implemented? A) control B) significant C) design D) operating
Answer: C design
1) When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be A) tracing .B) vouching. C) performing a walkthrough D) testing controls.
Answer: C performing a walkthrough
Describe three computer auditing techniques available to the auditor.
Answer: Computer auditing techniques available to the auditor are: • Test data approach. Using this approach, the auditors process their own test data using the client's computer system and application program to determine whether the automated controls correctly process the test data. • Parallel simulation. The auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files. The purpose is to determine the effectiveness of automated controls and to obtain evidence about electronic account balances. • Embedded audit module. Using this approach, the auditor inserts an audit module into the client's application system to identify specific types of transactions.
Distinguish between contingent liabilities and commitments
Answer: Contingent liabilities are potential future obligations to an outside party for an unknown amount resulting from activities that have already taken place. Commitments are agreements that an entity will hold to a fixed set of conditions in the future regardless of what happens to profits or the economy as a whole.
A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is A) identify the absence of key controls. B) consider the possibility of compensating controls. C) determine potential misstatements that could result. D) identify existing controls.
Answer: D
A(n) ________ control is a control elsewhere in the system that offsets the absence of a key control. A) significant B) alternate C) design D) compensating
Answer: D
An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally not be used? A) make inquiries of appropriate client personnel B) examine documents, records, and reports C) reperform client procedures D) inspect design documents
Answer: D
Analytical procedures A) focus on the ending balances for income statement accounts. B) are only performed during the planning stage of the audit. C) are required to be performed when auditing an account balance. D) provide substantive evidence.
Answer: D
At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the A) management letter. B) letter of inquiry. C) letters testamentary. D) management letter of representation.
Answer: D
Audit procedures related to contingent liabilities are initially focused on A) accuracy. B) completeness. C) existence. D) occurrence.
Answer: D
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee A) only if the act is immaterial. B) only if the act is material. C) only if the act is highly material. D) regardless of materiality.
Answer: D
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
Answer: D
In order to promote audit efficiency, the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly? A) substantive analytical procedures B) risk assessment procedures C) tests of controls D) tests of details of balances
Answer: D
It is generally possible for small companies to have all of the following except for A) adequate documents and records. B) physical controls over assets. C) competent, trustworthy personnel. D) internal auditors.
Answer: D
Presentation and disclosure related audit objectives would be performed in which phase of the audit process? A) plan and design audit approach B) perform audit tests for controls and transactions C) perform analytical procedures and tests of balances D) complete the audit and issue the audit report
Answer: D
Tests of controls, either manual or automated, may include the following types of evidence and procedures. Which of these procedures is not the same as those procedures used to obtain an understanding of internal controls? A) Make inquiries of appropriate client personnel. B) Examine documents, records, and reports. C) Observe control-related activities. D) Reperform client procedures.
Answer: D
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for A) contingent liabilities .B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events.
Answer: D
The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time A) beginning with the balance sheet date and ending with the date of the auditor's report. B) beginning with the start of the fiscal year under audit and ending with the balance sheet date. C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.
Answer: D
The standard inquiry to the client's attorney should be prepared on A) plain paper (no letterhead) and be unsigned. B) lawyer's stationery and signed by the lawyer. C) auditor's stationery and signed by an audit partner. D) client's letterhead and signed by a company official.
Answer: D
There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including A) to evaluate the performance of inexperienced personnel. B) to make sure that the audit meets the CPA firm's standard of performance. C) to counteract the bias that often enters into the auditor's judgment. D) all of the above.
Answer: D
There is a direct relationship between the ________ transaction-related audit objective and the ________ balance-related audit objective. A) occurrence; existence B) timing; cutoff C) posting and summarization; detail tie-in D) all of the above
Answer: D
What type of test is used to obtain the most types of evidence? A) substantive tests of transactions B) tests of controls C) risk assessment tests D) tests of details of balances
Answer: D
When determining what type of report to issue on internal control under Section 404, A) an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered. B) a scope limitation requires the auditor to disclaim an opinion on internal controls. C) if the auditor gives a qualified opinion on the financial statements, they must give a qualified opinion on internal controls. D) a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.
Answer: D
When identifying audit objectives and existing controls, A) audit objectives are identified for classes of transactions, account balances, and presentation and disclosure. B) the auditor identifies controls to satisfy each objective. C) it is helpful for the auditor to use the five control activities as reminders of controls. D) all of the above.
Answer: D
When testing manual or automated controls, A) automated controls are always subject to random error or manipulation. B) automated controls cannot be altered by making a change to the software application. C) when there are effective general controls and automated application controls, the auditor will need to select a larger sample size of transactions to verify. D) the extent of testing depends on whether it is a manual or automated control.
Answer: D
Which of the following is an accurate statement regarding presentation and disclosure? A) Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes. B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events. C) Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum. D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
Answer: D
Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.
Answer: D
Which of the following is not a reason why the auditor requests that the client provide a letter of representation? A) Professional auditing standards require the auditor to obtain a letter of representation. B) It impresses upon management its responsibility for the accuracy of the information in the financial statements. C) It provides written documentation of the oral responses already received to inquiries of management. D) It determines the type of opinion the auditor will issue on the financial statements.
Answer: D
Which of the following is not considered a commitment? A) agreements to purchase raw materials B) pension plans C) agreements to lease facilities at set prices D) Each of the above is a commitment.
Answer: D
Which of the following is not one of the categories of items included in the letter of representation? A) subsequent events B) completeness of information C) recognition, measurement, and disclosure D) materiality
Answer: D
Which of the following is ordinarily designed to detect material dollar errors on the financial statements? A) tests of controls B) analytical review procedures C) computer controls D) tests of details of balances
Answer: D
Which of the following is true regarding the relationship between tests of controls and procedures to obtain an understanding? A) In obtaining an understanding of internal control, the procedures to obtain an understanding are applied to all controls identified during that phase. B) Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding. C) Procedures to obtain an understanding are performed only on one or a few transactions .D) All of the above are correct.
Answer: D
Which of the following statements regarding the letter of representation is not correct? A) It is prepared on the client's letterhead. B) It is addressed to the CPA firm. C) It is signed by high-level corporate officials, usually the president and chief financial officer. D) It is optional, not required, that the auditor obtain such a letter from management.
Answer: D
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor? A) discovery of the inclusion of material nonexistent sales B) discovery of the failure to write off material obsolete inventory C) discovery of the omission of a material footnote D) discovery of management's intent to increase selling prices in the future
Answer: D
Which of the following would not be considered further audit procedures? A) tests of controls B) analytical procedures C) tests of details of balances D) risk assessment procedures
Answer: D
Which phase(s) of the audit uses inquiries of clients as a type of evidence? A) plan and design B) tests of controls and substantive tests of transactions C) completion of the audit and issuance of the audit report D) all of the above
Answer: D
Describe some audit procedures commonly used to search for contingent liabilities.
Answer: Inquire of management in writing or orally about the possibility of unrecorded contingent liabilities; review current and previous years' internal revenue agent reports for income tax settlements or assessments or disagreements; review the minutes of directors' and stockholders' meetings; analyze legal expense and review legal invoices and statements; obtain a letter from each major attorney performing major legal services regarding pending litigation or other contingent liabilities; review audit documentation for any indication of potential contingencies like loan guarantees; examine letters of credit in force and obtain confirmations for used and unused letter of credit balances.
Name four types of evidence which the auditor uses to obtain an understanding of the design and implementation of controls.
Answer: Inspection; inquiries of client personnel; observation of employees performing control processes; and reperformance by tracing one or a few transactions through the accounting system from the start to the finish.
Auditors should obtain an understanding of IT general controls. Name four procedures which the auditor should employ to document their understanding of IT general controls.
Answer: Interview key IT personnel and key users; examine IT system documentation such as flowcharts; examine user manuals; examine program change request procedures; examine system testing results; review detailed questionnaires completed by IT staff.
The accounting standards require management to evaluate an entity's ability to continue as a going concern within one year after the date the financial statements are issued. Describe the two steps management is required to perform in performing this evaluation.
Answer: Management must first evaluation whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern; if management concludes that substantial doubt is raised, management is also responsible to consider whether its plans alleviate that doubt.
Name three types of documents which auditors commonly use to obtain and to document their understanding in the audit working paper of the design of internal controls.
Answer: Narratives; flowcharts; and internal control questionnaires
With what types of contingencies might an auditor be concerned?
Answer: The auditor is generally concerned with contingencies arising from: pending litigation for patent infringement, product liability or other actions income tax disputes product warranties notes receivable discounted guarantees of obligations of others unused balances of outstanding letters of credit
In October 2013, the PCAOB Staff Audit Practice Alert No.11, titled "Considerations for Audits of Internal Control over Financial Reporting". In this Staff Audit Practice Alert, the PCAOB highlighted three common deficiencies related to audits of internal control. Name these three common deficiencies.
Answer: The failure of the auditor to understand a company's flow of transactions; auditor's lack of understanding of management review controls, a detective control designed to identify error or fraud; and the testing of system-generated data or reports.
An environmental clean-up lawsuit is pending against your client. What information about the lawsuit would you as the auditor need in order to determine the proper accounting treatment?
Answer: The first step is to determine if a contingency exists. Three conditions are required for a contingent liability to exist: (1) there is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition; (2) there is uncertainty about the amount for the future payment or impairment; and (3) the outcome will be resolved by some future event or events. Since the lawsuit meets the criteria for a contingent liability, the next step is to evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements to obtain evidence about the occurrence and right and obligations presentation and disclosure objective. Accounting standards describe three levels of likelihood of occurrence and the appropriate financial statement treatment for each likelihood as follows: a. Probable—future event likely to occur and amount can be reasonably estimated then the financial statement accounts are adjusted. If amount cannot be reasonably estimated, then a footnote disclosure is necessary. b. Reasonably possible—chance of occurring is more than remote, but less than probable. Footnote disclosure is necessary. c. Remote—chance of occurrence is slight. No disclosure is necessary.
Describe the five types of audit tests. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk.
Answer: The five types of audit tests used to determine whether financial statements are fairly stated are: risk assessment procedures, tests of controls, substantive tests of transactions, substantive analytical procedures, and tests of details of balances. Substantive tests of transactions, substantive analytical procedures, and tests of details of balances are substantive tests, whereas procedures to obtain an understanding of internal control and tests of controls are used to reduce assessed control risk. Auditors use substantive analytical procedures and tests of details of balances to satisfy planned detection risk. Substantive tests of transactions affect both control risk and planned detection risk, because they test the effectiveness of internal controls and the dollar amounts of the transactions.
Discuss the major activities and procedures performed by the auditor in the plan and design of the audit approach.
Answer: The major activities performed in the planning and design phase (Phase I) are: accept client and perform initial planning understand the client's business and industry perform preliminary analytical procedures set preliminary judgment of materiality and performance materiality identify significant risks due to fraud or error assess inherent risk understand internal control and assess control risk finalize overall audit strategy and audit plan
A proper narrative of an accounting system and the related controls should include which four characteristics?
Answer: The origin of every document and record in the system; the processing that takes place; the disposition of every document and record in the system; and an indication of the controls relevant to the control risk (including separation of duties; authorizations and approvals, and internal verification performed by the client.
Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests of details of balances. Give an example of each.
Answer: The purpose of substantive tests of transactions is to determine whether all six transaction-related audit objectives have been satisfied for each class of transactions. For example, as part of the auditor's test of the accuracy objective for sales, the auditor would compare the amount recorded in the sales journal for a sample of sales transactions with the total on the corresponding sales invoices. The purpose of tests of controls is to determine the effectiveness of both the design and operations of specific internal controls. For example, the auditor might observe for a month whether statements are mailed to all customers.The purpose of tests of details of balances is to determine the monetary correctness of the accounts to which they relate. The confirmation of accounts receivable is an example.
State the two primary types of subsequent events that require consideration by management and evaluation by the auditor, and give two examples of each type.
Answer:1. Events that occur after the balance sheet date which provide additional information to management that helps them determine the fair presentation of account balances as of the balance sheet date. Information about these events helps auditors in verifying the balances. These events have a direct effect on the financial statements and require adjustment. Examples include declaration of bankruptcy by a customer with an outstanding accounts receivable balance due to deteriorating financial condition; settlement of litigation at an amount different from the amount recorded on the books; and the disposal of equipment not being used in operations at a price below the current book value. 2. Events that have no direct effect on the financial statements but for which disclosure is required. Subsequent events of this type are events that provide evidence about conditions which did not exist at the date of the balance sheet being reported on but arose after the balance sheet date and may be significant enough to require disclosure. Examples include a decline in the market value of securities held for temporary investment or resale; issuance of bonds or equity securities; a decline in the market value of inventory as a consequence of government action barring further sale of a product; the uninsured loss of inventories as a result of fire; and a merger or an acquisition.
State three items that should be included in a standard inquiry to the client's attorney letter.
Answer:• A list including (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had significant involvement. This list is typically prepared by management, but management may request that the attorney prepare the list. • A request that the attorney furnish information or comment about the progress of each item listed, the legal action the client intends to take, the likelihood of an unfavorable outcome, and an estimate of the amount or range of the potential loss.• A request for the identification of any unlisted pending or threatened legal actions or a statement that the client's list is complete. • A statement informing the attorney of his or her responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor.
Discuss three audit procedures commonly used to search for contingent liabilities.
Answer:• Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. Review current and previous years' internal revenue agent reports for income tax settlements. Review the minutes of directors' and stockholders' meetings for indications of lawsuits or other contingencies. • Analyze legal expense for the period under audit, and review invoices and statements from legal counsel for indications of contingent liabilities. • Obtain a letter from each major attorney performing legal services for the client as to the status of pending litigation or other contingent liabilities. Review audit documentation for any information that may indicate a potential contingency. Examine letters of credit in force as of the balance sheet date and obtain a confirmation of the used and unused balances.
List four specific matters that should be included in a client representation letter.
Answer:• Management's acknowledgment of its responsibility for preparing and fair presentation of the financial statements• Management's acknowledgement of its responsibility for the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of the financial statements• Management's acknowledgement of its responsibility for information provided and the completeness of information provided to the auditor, including access to all financial records and related data; minutes of meetings of stockholders, directors, and committees of directors, communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices• Management's acknowledgement of its responsibility to design, implement, and maintain internal controls to prevent and detect fraud; including disclosing the results of its fraud risk assessment to the auditor; including providing the auditor with information concerning fraud involving (a) management, (b) employees who have significant roles in internal control, or (c) others where the fraud could have a material effect on the financial statements• Statement from management that it has disclosed all instances of identified or suspected non- compliance with laws and regulations whose effects should be considered when preparing the financial statements• Statement from management stating that any unrecorded financial statement misstatements are immaterial to the financial statements (including a summary of those items included in or attached to the letter)• Management's acknowledgement they have disclosed information about actual or possible litigation and unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed in accordance with accounting standards• Statement from management about its belief that significant assumptions used by management in making accounting estimates are reasonable• Management's acknowledgement that they have disclosed to the auditor the identity of the entities related-party relationships and transactions of which management is aware and that management has appropriately accounted for and disclosed such relationships and transactions• Management's acknowledgement they have adjusted or disclosed in the financial statements all events occurring after the date of the financial statements that impact of fair presentation of those financial statements in accordance with accounting standards
Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering: Management's intentional failure to disclose existing contingencies, When management does not comprehend accounting disclosure requirements.
no, yes
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report? The date of the original last day of fieldwork only The date of the subsequent event only The date on which the last day of fieldwork occurred along with the date of the subsequent event
no, yes, yes
Before making the final assessment of internal control at the end of an audit, the auditor must: test controls, perform substantive test
yes and yes
To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their: likelihood and significance
yes and yes
What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel? Any pending threatened litigation with which the attorney has had significant involvement, The amount of legal fees paid by the client to the attorney
yes, no
Auditors often integrate procedures for presentation and disclosure objectives with: Tests for transaction-related objectives, Tests for balance-related objectives
yes, yes
What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities? The attorneys refuse to disclose information they consider confidential., The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities.
yes, yes
Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern? Discussions with management regarding potential financial difficulties Evaluation of management's plans to avoid bankruptcy
yes, yes
Which type of subsequent event requires consideration by management and evaluation by the auditor? Subsequent events that have a direct effect on the financial statements and require adjustment, Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required
yes, yes
In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at: low, moderate, high
yes, yes, no
When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would:Perform additional tests of controls, Decide to modify tests of details of balances
No, yes
If an auditor concludes there are contingent liabilities, then he or she must evaluate the: Materiality of the potential liability, Nature of the disclosure to be included in the financial statements.
yes, yes
Which of the following is a contingent liability with which an auditor is particularly concerned? Notes receivable discounted, Product warranties
yes, yes
