January 2016 Audit

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An auditor should ordinarily add an explanatory paragraph to the auditor's report to identify a material matter related to what two reasons.

PCAOB Auditing Standard No. 6 identifies 2 specific matters that affect the auditor's evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements (i.e., a "restatement").

Southwest is involved only in medical services and has not diversified its operations. Is this a strength or weakness or neither?

Neither

Does this increase or decrease the effect of material mistatement? During December 20X1, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.

Neither 13. (N) The amount of insurance coverage would have little impact on the risk of material misstatement.

What are two specific matters that affect the auditor's evaluation of consistency of financial statements?

Is a review of interirm financial information of a publicly held company follow PCAOB or SSARS standards?

PCAOB

When adding an alert to restrict the auditor's report, the auditor should place the alert where?

The alert to restrict the distribution of the auditor's report is presented at the end of the auditor's report.

AS #7 requires the engagement quality reviewer to evaluate the significant judgments and conclusions of the engagement team by what two things?

(1) holding discussions with the engagement partner and other members of the engagement team; and (2) reviewing the engagement's audit documentation. The engagement quality reviewer is not expected to direct inquiries to client personnel or perform audit verification procedures to corroborate account balances, such as analytical procedures or tests of details. Hence, D is the correct answer.

What do likely mistatements result from?

(1) Differences in judgment between management and the auditor relating to accounting estimates that the auditor considers unreasonable or inappropriate, or (2) Estimated misstatements based on the extrapolation from a sample to the population.

When there is a change in accounting principle, the auditor is required to evaluate 4 matters. What are they?

(1) whether the newly adopted principle is GAAP; (2) whether the method of accounting for the effect of the change conforms to GAAP; (3) whether the disclosures related to the change are adequate; and (4) whether the company has justified that the alternative accounting principle is GAAP. Hence, it is not true to suggest that the change must be authorized by those charged with governance.

Does the following statement increase or decrease the risk of material misstatement? The internal auditor reports to the controller and the controller reports to Mead.

(I) The risk of material misstatement increases when the internal auditor reports to top management rather than to the audit committee because it is less likely that the internal auditor will be able to objectively perform the function.

Does the following statement increase or decrease the risk of material misstatement? During December 20X1, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.

(N) The amount of insurance coverage would have little impact on the risk of material misstatement.

Which of these are fraud risk factors? 1. Branch management authority 2. Government regulation 3. Company profitability 4. Demand for product 5. Interest rates 6. Availability of mortgage funds 7. Involvement of principal shareholder in management 8. Branch manager compensation 9. Internal audit reporting relationship 10. Accounting department turnover 11. Continuing audit relationship 12. Internal controls over accounting estimates 13. Response to proposed accounting adjust-ments 14. New unprofitable branch 15. New computer system

1, 8 , 12, 14

What is a debit memorandum?

1. A document given to an account holder which states that the account balance has been decreased as a result of factors other than a cash withdrawal or a written check being cashed in. Debit memorandums can arise as a result of bank service charges or bounced check fees.

1. Size of a PPS sample is not based on the estimated variation of audited amounts. 2. PPS sampling results in a stratified sample. 3. Individually significant items are automatically identified. 4. PPS sampling results in a smaller sample size when numerous small misstatements are expected. 5. If no misstatements are expected, PPS sampling will usually result in a smaller sample size than classical variables sampling methods. 6. One does not need a book value for individual items to evaluate a PPS sample. 7. A PPS sample eliminates the need to project results to the overall population. 8. PPS sampling is "preferred" by the professional standards. tems 9 and 10 refer to the following information: Tolerable misstatement $ 50,000 Sample size 100 Expected misstatement $ 10,000 Recorded amount of accounts receivable $300,000 True False 9. The sampe interval is $500. 10. Increasing the expected misstatement to $10,000 will increase the sample size.

1. True 2. True 3. True 4. False 5. True 6. False 7. False 8. False 9. False 10. True Question 9. The sample interval is $500. The correct answer is False. The sampe interval is the recorded amount divided by sample size: $300,000 / 100= $3,000

In evaluating the reasonableness of an accounting estimate, an auditor concentrates on key factors and assumptions that are what four factors?

1. significant to the accounting estimate; 2. sensitive to variations; 3. deviations from historical patterns; and 4. subjective and susceptible to misstatement and bias. .

4. Is it right to say that there would be no detection risk if we didn't have an audit? 5. Auditors simply assess detection risk rather than restrict it, right?

4. (Yes) Detection risk is a function of the audit and its procedures. If there is no audit there is no measure of detection risk. 5. (No) This is backwards. Auditors restrict detection risk through the performance of more substantive procedures. Auditors assess inherent risk and control risk.

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should A. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. B. State whether PDC's controls were suitably designed to achieve the retailer's objectives. C. Identify PDC's controls relevant to specific financial statement assertions. D. Disclose Cook's assessed level of control risk for PDC.

A A report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum.

The clarified SSARSs applicable to preparation engagements (AR-C 70) do not apply to the following engagements, except for A. Preparing financial statements to be presented alongside a personal financial plan. B. Preparing financial statements for submission to taxing authorities. C. Preparing financial statement in connection with litigation services. D. Assisting with preparing financial statements by performing bookkeeping services.

A AR-C 70 does, in fact, apply to engagements to prepare financial statements to be presented ;alongside a personal financial plan. However, AR-C 70 does not apply to an engagement to prepare financial statements as part of a written personal financial plan prepared by the accountant. The key word here is "alongside" a personal financial plan. https://www.aicpa.org/research/standards/compilationreview/downloadabledocuments/ar-c-00070.pdf

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the A. Completeness of recorded investment income. B. Classification between current and noncurrent portfolios. C. Valuation of marketable equity securities. D. Existence of unrealized gains or losses in the portfolio.

A Analytical procedures could be used to ascertain the reasonableness of the completeness of recorded investment income. The auditor uses analytical procedures to develop an expectation of investment income. This figure is then compared to recorded investment income and significant differences are investigated further.

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)? A. An auditor should report on the scope of the auditor's testing of compliance with laws and regulations. B. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable. C. An auditor should report recommendations for actions to correct problems and improve operations. D. An auditor should determine the extent to which the entity's programs achieve the desired results.

A Financial statement audits in accordance with Government Auditing Standards require the following reports: 1) an audit report; 2) a report on internal control; 3) a report on compliance with laws, regulations, and the provisions of contracts or grant agreements. The compliance report would identify the scope of the auditor's testing of compliance with laws and regulations.

The International Federation of Accountants (IFAC) is a global standard-setting body in all of the following areas, except for A. Accounting standards. B. Auditing standards. C. Ethics standards. D. Educational standards.

A IFAC is not the global "accounting" standard-setter -- the IASB is.

In building an electronic data interchange (EDI) system, what process is used to determine which elements in the entity's computer system correspond to the standard data elements? A. Mapping. B. Translation. C. Encryption. D. Decoding.

A In an EDI system, a standard format is adopted. Mapping is the process by which the elements in the client's computer system are related to the standard data elements.

What is an integrated test facility?

A computer assisted audit technique in which client personnel unknowingly process a set of test data, the proper results of which are already known

What is test data?

A computer assisted audit technique in which the auditor uses the client's application program to process, off-line, a set of test data for which the proper results are already known

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate A. The type of opinion expressed previously. B. That the CPA did not update the assessment of control risk. C. The reasons for the change from an audit to a review. D. That the audit report should no longer be relied on.

A In these circumstances, AICPA standards require the accountant to add a separate paragraph to the review report stating (1) that the prior period's financial statements were audited; (2) the date of the previous report; (3) the type of opinion expressed; (4) the reasons for any modification of the report; and (5) that no auditing procedures were performed after the date of the previous report.

Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system? A. Preventive controls are generally more important than detective controls in EDI systems. B. Control objectives for EDI systems are generally different from the objectives for other information systems. C. Internal controls in EDI systems rarely permit control risk to be assessed at below the maximum. D. Internal controls related to the segregation of duties are generally the most important controls in EDI systems.

A Preventive controls are controls that attempt to deter problems before they occur. Detective controls are controls that discover problems after they occur. In an EDI system, the emphasis would be on preventive controls rather than on detective controls, due to the volume and speed of processing. Waiting to discover problems could result in an unacceptable loss of millions of dollars.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of A. Valuation or allocation. B. Completeness. C. Existence or occurrence. D. Rights and obligations.

A Testing credit approval before shipping goods to customers tests the valuation assertion. This test addresses the collectibility of accounts receivable.

Wilson, CPA, completed the field work of the audit of Abco's December 31, 2009, financial statements on March 6, 2010, at which time Wilson believed that sufficient appropriate audit evidence had been obtained to support the auditor's opinion. However, a subsequent event requiring adjustment to the 2009 financial statements occurred on April 10, 2010, and came to Wilson's attention on April 24, 2010, which preceded the issuance of the audit report on Abco's 2009 financial statements. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated A. March 6, 2010. B. April 10, 2010. C. April 24, 2010. D. Using dual dating.

A The Professional Standards indicate that, "The auditor's report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. When a subsequent event occurs requiring adjustment of the financial statements but no disclosure is made, the report will still be dated when sufficient appropriate audit evidence had been obtained, that is, March 6, 2010.

The audit program usually cannot be finalized until the A. Consideration of the entity's internal control structure has been completed. B. Engagement letter has been signed by the auditor and the client. C. Significant deficiencies have been communicated to the audit committee of the board of directors. D. Search for unrecorded liabilities has been performed and documented.

A The audit program documents the auditing procedures to be performed. It cannot be finalized until consideration of the entity and its environment, including internal control, has been completed. Recall that the auditors are required to obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to plan the audit and allow determination of the nature, timing, and extent of the tests to be performed. Thus, knowledge of the internal control structure is needed for the auditor to select the auditing procedures and decide when and how extensively to perform them.

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate? A. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated. B. Document the conclusion that the errors do not cause the financial statements to be misstated, but do not summarize uncorrected errors in the audit documentation. C. Summarize the uncorrected errors in the audit documentation, but do not document whether the errors cause the financial statements to be misstated. D. Do not summarize the uncorrected errors in the audit documentation, and do not document a conclusion about whether the uncorrected errors cause the financial statements to be misstated.

A The auditor is allowed to "pass" on aggregated errors that are not material. This analysis and conclusion must be documented in the audit documentation.

PCAOB Auditing Standard No. 12, "Identifying and Assessing Risks of Material Misstatement," states that the auditor should perform all of the following as risk assessment procedures, except for A. Incorporating a degree of unpredictability in planned audit procedures. B. Obtaining an understanding of the company and its environment. C. Performing analytical procedures. D. Inquiring of the audit committee, management, and others within the company about the risks of material misstatement.

A The auditor should incorporate a degree of unpredictability in planning audit procedures, but this is considered an "overall response" to the risks of material misstatement, not a "risk assessment procedure."

An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file? A. Economic order quantity. B. Warehouse location. C. Date of last purchase. D. Quantity sold.

A The auditor's primary objective in reviewing the perpetual inventory file is to verify the financial statement assertions pertaining to inventory. As a result, the auditor would focus on such fields as warehouse location, date of last purchase, and quantity sold. The auditor would be LEAST interested in economic order quantity, which is not relevant to verifying the year-end inventory.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees' use of cash registers and tapes. B. Inquire about employees' access to recorded but undeposited cash. C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.

A The cardinal rule regarding cash receipts is to ensure that they are recorded. By requiring employees to record all sales in the cash register and to give customers the cash register tape evidencing the sale, companies can ensure that all cash sales are recorded (the completeness of cash receipts for cash sales.) The auditor can test controls by observing employees' use of cash registers and tapes.

Which of the following statements would most likely be included among the written client representations obtained by the auditor? A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. B. Management acknowledges responsibility for illegal actions committed by employees. C. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. D. Management acknowledges that there are no material weaknesses in the internal control.

A The management representations letter would appropriately include statements about the disclosure of compensating balances and other arrangements involving restrictions on cash balances.

A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain A. A statement of limitations on the use of the report. B. An opinion about whether management's assertion is fairly stated. C. Negative assurance that control risk has not been assessed. D. An acknowledgment of responsibility for the sufficiency of the procedures.

A The report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should include a statement of limitations on the use of the report. The report is intended to be used solely by the specified users and, as a result, restrictions on distribution need to be clearly stated.

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for A. Reclassification and adjustments. B. Reconciliations and tickmarks. C. Accruals and deferrals. D. Expense and revenue summaries.

A The working trial balance is very similar to the worksheet. It begins with the balances per the client's trial balance, provides columns for audit adjustments and reclassifications, and ends up with the audited balances per the financial statements.

Jo is a member in public practice who is very wealthy and has no individual investments that are material to her. Which of the following investments would impair Jo's independence? A. Jo owns 3% of a diversified mutual fund and is on her firm's attest team for that fund. B. Jo owns 4% of a diversified mutual fund and is on her firm's attest team for ABC Co., whose shares are in the mutual fund's portfolio of stocks. C. Jo owns 2% of an undiversified mutual fund that has ABC Co. stock in its portfolio (and Jo is on her firm's attest team for ABC). D. All three of the choicies provided.

A There would be an impairment here, for Jo owns a direct though immaterial interest in the audit client: the mutual fund.

Which of the following topics represents a primary difference between U.S. auditing standards relative to International Standards on Auditing? A. Reporting on internal control in an integrated audit for a public company. B. Subsequent events. C. Related party issues. D. Responsibilities for detecting fraud in a financial statement audit.

A U.S. auditing standards (associated with requirements under the Sarbanes-Oxley Act) address internal control reporting in connection with an "integrated audit," but International Standards on Auditing do not address the topic of an "integrated audit."

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities. B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date. C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. D. A designated member of the board of directors controls the securities in a bank safe-deposit box.

A Utilizing an independent trust company to hold the securities is the best control among those listed to safeguard against the loss of the securities. It keeps physical possession of the securities away from employees with other potentially conflicting responsibilities.

What is a credit memorandum?

A document issued to a buyer by a seller in cases where purchased products are not delivered, or are returned by the buyer, which indicates a debt owed to the buyer for the value of the returned or undelivered goods. A credit memorandum may be settled by a transfer of money from the seller to the buyer, or through the purchase of an equal value of goods from the seller. Also called a credit memo or a credit note. Read more: http://www.businessdictionary.com/definition/credit-memorandum.html#ixzz40jgHe3Zx

What is kiting?

A scheme whereby a check drawn on one bank is deposited in another bank, but the disbursement is not recorded on a timely basis, resulting in an overstatement of cash

What is lapping?

A scheme whereby a current receipt of cash is stolen. To prevent detection, a subsequent receipt is applied to the previously unrecorded customer account

What is parallel simulation?

A technique by which the auditor reprocesses some or all of the client's live data (using the auditor's own software) and then compares the results with the client's files

When is positive assurance given for comfort letters?

A. CPA's independence B. Compliance as to form of the financial statements with the SEC Act, assuming the financial statements are audited. 1. If the financial statements are not audited, negative assurance on complaince as to form is given

Which firms must have a majority of their financial interests owned by CPAs? I. Attest firms. II. Firms that identify themselves as "Members of the AICPA."

A. I only. Attest firms must be majority owned by CPAs. B. II only.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of ___________

A. Valuation or allocation. Inquiries of production and sales personnel to identify possible obsolete or slow-moving inventory will enable the auditor to determine if the inventory is correctly valued. This procedure is a test for the valuation or allocation assertion.

What are identified as significant engagement deficiencies?

AS #7 identifies the following as "significant engagement deficiencies": when (1) the engagement team failed to obtain sufficient appropriate evidence; (2) the engagement team reached an inappropriate overall conclusion; (3) the engagement report is not appropriate; or (4) the firm is not independent of its client. Since B, C, and D are specifically identified as significant engagement deficiencies, A is the correct answer. If management's accounting estimates are unreasonable, it constitutes a GAAP departure, not a deficiency in the performance of the audit engagement.

Where would we find the following statement? The sufficiency of these procedures is solely the responsibility of the specified parties.

Agreed-Upon Procedures Report

What is an embedded audit module?

An embedded audit module is a program inserted into the client's system to capture designated transactions, such as large or unusual transactions, for later review by the auditor.

What kind of audit procedure is this? The auditor scanned the repairs and maintenance account for unusually large amounts.

Analytical

What are you doing when you are searching for large, significant, unusual balances?

Analytical procedures

Where would we see the following statement? Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated and an identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is complete.

Audit Inquiry Letter to Lawyers 2. The auditor is required to send a letter to the company's attorney. The attorney's letter will corroborate information provided by management concerning litigation, claims, and assessments. This sentence is from the letter sent to the lawyer requesting information. A sample letter appears in the Lawyer's Letters lesson.

Decision tables differ from program flowcharts in that decision tables emphasize A. Ease of manageability for complex programs. B. Logical relationships among conditions and actions. C. Cost benefit factors justifying the program. D. The sequence in which operations are performed.

B A decision table presents in tabular form the conditions and alternative actions related to making a particular decision. It emphasizes logical relationships (decision rules) among the conditions and actions.

Of which of the following matters is a management representation letter required to contain specific representations? A. Length of a material contract with a new customer. B. Information concerning fraud by the CFO. C. Reason for a significant increase in revenue over the prior year. D. The competency and objectivity of the internal audit department.

B A management representation letter routinely includes a statement pointing out that senior management has no knowledge of any fraud or suspected fraud involving management, which includes the CFO.

Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that A. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted. B. All information included in the financial statements is the representation of the management of the entity. C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

B A review includes a statement that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. A review report would not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted. The review report indicates that a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.

PCAOB Auditing Standard No. 18 (Related Parties) specifically requires an auditor of a public company to communicate with the audit committee about a variety of related-party matters. Each of the following is required to be communicated with the audit committee, except A. The auditor's evaluation of the company's identification and financial reporting treatment of related-party relationships and transactions. B. Management's justification for engaging in transactions with a related party instead of arm's-length transactions with unrelated parties. C. Related-party relationships or transactions with parties discovered by the auditor that were previously undisclosed to the auditor. D. Related-party transactions identified by the auditor that appear to lack an appropriate business purpose.

B AS No. 18 does not require the auditor to communicate with the audit committee about management's justification for engaging in transactions with a related party instead of with an unrelated party. Indeed, the company should have an appropriate process established to authorize and approve transactions with related parties, which presumably informs the audit committee as necessary.

An auditor testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the A. Existence of unrealized gains or losses in the portfolio. B. Completeness of recorded investment income. C. Classification between current and non-current portfolios. D. Valuation of marketable equity securities.

B Analytical procedures would be effective and efficient in evaluating the completeness of recorded investment income. For example, notes receivable could be multiplied by an average interest rate to determine the amount of interest income that should have been recorded for the year.

If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is A. Not independent and, therefore, may not be associated with the financial statements. B. Not independent and, therefore, may not issue a review report. C. Not independent and, therefore, may issue a review report, but may not issue an auditor's opinion. D. Independent because the financial interest is immaterial and, therefore, may issue a review report.

B Any direct financial interest, regardless of materiality, results in a lack of independence for the accountant. Performance of a review requires independence, so the accountant would not be permitted to accept a review engagement in this case.

Interpretive publications include all of the following, except for A. Appendices to Statements on Auditing Standards. B. Articles in the AICPA's Journal of Accountancy. C. Auditing guidance included in AICPA Audit and Accounting Guides. D. Auditing interpretations of the Statements on Auditing Standards.

B Articles in the Journal of Accountancy have no authoritative status, and would be classified as other auditing publications.

An auditor may report on condensed financial statements that are derived from a complete set of audited financial statements only if the auditor A. Expresses an unqualified opinion on the audited financial statements from which the condensed financial statements are derived. B. Indicates whether the information is consistent in all material respects in relation to the complete financial statements. C. Determines that the condensed financial statements include all the disclosures necessary for the complete set of financial statements. D. Presents the condensed financial statements in comparative form with the prior year's condensed financial statements.

B Condensed financial statements are not GAAP financial statements but a shortened and summarized version. As a result, the auditor must report on condensed financial statements with different wording. Specifically, the auditor must indicate whether the information is consistent in all material respects in relation to the complete (GAAP) financial statements.

Which of the following statements is correct concerning statistical sampling in tests of controls? A. As the population size increases, the sample size should increase proportionately. B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate. C. There is an inverse relationship between the expected population deviation rate and the sample size. D. In determining tolerable rate, an auditor considers detection risk and the sample size.

B Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate because each failure to apply a control does not necessarily result in a misstatement.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably A. Increase the extent of tests of controls of the inventory cycle. B. Request that the client schedule the physical inventory count at the end of the year. C. Insist that the client perform physical counts of inventory items several times during the year. D. Apply gross profit tests to ascertain the reasonableness of the physical counts.

B If the assessed level of control risk is high, an auditor would request that the client schedule the physical inventory count at the end of the year. As the assessed level of control risk increases, acceptable detection risk will decrease, causing the auditor to increase the items tested, test at year end rather than at interim, and perform more tests.

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on an entity's internal control over financial reporting in an integrated audit for a nonissuer? A. The auditor anticipates relying on the entity's internal control in a financial statement audit. B. Management presents its written assertion about the effectiveness of the entity's internal control over financial reporting. C. The practitioner is the continuing auditor who previously has audited the entity's financial statements. D. Management agrees not to present the auditor's report on internal control in a general-use document to stockholders.

B In order for a practitioner to accept an attest engagement to examine and report on an entity's internal control over financial reporting, management must provide a written assertion about the effectiveness of internal control in a report that accompanies the auditor's report. (AT 501)

Members may properly: I. Advocate on behalf of audit clients. II. Advocate on behalf of tax clients. A. I only. B. II only. C. I and II. D. Neither I nor II.

B Members may advocate on behalf of tax and advisory service clients, although they should never stretch the bounds of performance standards, go beyond sound and reasonable professional practice, or compromise their credibility.

Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should A. Express an unmodified opinion with a separate emphasis-of-matter paragraph. B. Disclaim an opinion on the financial statements. C. Express an adverse opinion on the financial statements. D. Express an unmodified opinion with a separate other-matter paragraph.

B Morris should disclaim an opinion because of the pervasiveness of the scheme and the nature of the items involved. Although the auditor was not precluded by the client from obtaining sufficient evidence to evaluate the impact of the illegal bribes on the financial statements, the fact that they could not ascertain whether senior management was involved is a critical deficiency.

An auditor should ordinarily add an explanatory paragraph to the auditor's report to identify a material matter related to A. A change in reporting entity resulting from a specific transaction or event. B. A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted. C. A change in classification in previously issued financial statements. D. All of the above.

B PCAOB Auditing Standard No. 6 identifies 2 specific matters that affect the auditor's evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements (i.e., a "restatement"). A change in accounting principle may be at management's discretion or it may be mandated by a change in accounting standards that eliminates an accounting alternative that was previously accepted, but no longer is.

According to PCAOB Auditing Standard No. 4, a "stated control objective" is best described as A. The specific control objective that management has failed to identify and which, therefore, constitutes a material weakness. B. The specific control objective identified by management that, if achieved, would result in the material weakness no longer existing. C. A strategic objective of those charged with governance. D. The related internal control activities that make it probable that the auditor can assess control risk as low.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including A. Inquiry and analytical procedures. B. Reperformance and observation. C. Comparison and confirmation. D. Inspection and verification.

B Tests of controls directed toward effectiveness or operation of a control would ordinarily include inquiries, inspections of documents, observation, and reperformance of the application of a control. Thus, both reperformance and observation are used by an auditor to assess control risk.

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to A. Report on financial statements that the CPA generated through the use of computer software. B. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. C. Provide the client with a financial statement format that does not include dollar amounts. D. Audit financial statements that the client prepared for use in another country.

B The attestation standards must be followed when reviewing MD&A prepared pursuant to SEC requirements. The standards apply to both an examination and a review of MD&A. They do not apply to engagements involving the provision of recommendations to improve MD&A.

1. Management makes assertions regarding the recognition, measurement, presentation, and disclosure of information in the financial statements ______. Is this implicit, explicit, both, or neither?

Both 1. Management is responsible for the preparation of financial statements that fairly reflect the entity and its operations. Through the financial statements, management is making assertions (explicitly and implicitly) about the recognition, measurement, presentation and disclosure of financial information. The correct answer is BOTH.

Which of the following statements is correct about an auditor's required communication with an entity's audit committee (or those charged with governance)? A. Any matters communicated to the entity's audit committee (or those charged with governance) also are required to be communicated to the entity's management. B. The auditor is required to inform the entity's audit committee (or those charged with governance) about significant errors discovered by the auditor and subsequently corrected by management. C. Disagreements with management about the application of accounting principles are required to be communicated in writing to the entity's audit committee (or those charged with governance). D. All weaknesses in the internal control structure previously reported to the entity's audit committee (or those charged with governance) are required to be communicated to the audit committee after each subsequent audit until the weaknesses are corrected.

B The auditor is required to communicate the following to the audit committee (or those charged with governance): Significant accounting policies, management judgments and accounting estimates, significant audit adjustments, disagreements with management, consultation with other accountants, and difficulties encountered in performing the audit. Thus, significant errors discovered by the auditor, and subsequently corrected by management, would have to be communicated to the audit committee (or those charged with governance).

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor A. Is required to disclose the contractual relationship in the auditor's report. B. Should assess the risk that the actuary's objectivity might be impaired. C. Is not permitted to rely on the actuary because of a lack of independence. D. Should communicate this matter to the audit committee as a significant deficiency.

B The auditor is required to gain an understanding of the relationship and assess the risk that the actuary's objectivity might be impaired. Impairment might occur when the client has the ability to directly, or indirectly, control or significantly influence the actuary.

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements? A. Making suggestions that are adopted about the form and content of an entity's financial statements impairs an auditor's independence. B. An auditor may draft an entity's financial statements based on information from management's accounting system. C. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor's responsibilities. D. An auditor's responsibilities for audited financial statements are not confined to the expression of the auditor's opinion.

B The auditor may provide suggestions about or draft the financial statements based on information from management's accounting system, provided that the company is not SEC regulated. SEC regulated companies must draft the financial statements themselves or use an alternate source to draft the financials. The auditors are specifically prohibited from drafting AND auditing the financials for SEC-regulated companies.

Which of the following items should be included in an auditor's report for financial statements prepared in conformity with an other comprehensive basis of accounting (OCBOA)? A. A sentence stating that the auditor is responsible for the financial statements. B. A title that includes the word "independent." C. The signature of the company controller. D. A paragraph stating that the audit was conducted in accordance with OCBOA.

B The auditor's report should include the word "independent," regardless of the financial reporting framework used in preparing the entity's financial statements.

Sue's firm was hired to audit a Reno County project that used federal grant money to attempt to create jobs for people on welfare. Sue was in charge of the audit, and her team found many questionable practices. When the chief administrator of Reno County's government heard about Sue's preliminary findings, he called her into his office and told her that her firm would lose every single audit contract it had with every single unit of Reno County government if he was not pleased with Sue's audit report. This is an example of: A. A potential personal impairment of independence. B. A potential external impairment of independence. C. A potential organizational impairment of independence. D. None of the above.

B The potential impairment threat is external, stemming from the threatened firing.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that A. Tests of controls may fail to identify procedures relevant to assertions. B. Material misstatements may exist in the financial statements. C. Specified controls requiring segregation of duties may be circumvented by collusion. D. Entity policies may be overridden by senior management.

B The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements may exist in the financial statements. The assessment of control risk combined with the assessment of inherent risk aids the auditor in identifying where material misstatements might exist in the financial statements. The auditor must then select and perform the auditing procedures necessary to detect material misstatements, if they exist.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? A. The industry and the business and regulatory environments in which the client operates. B. The degree to which information technology is used in the accounting function. C. The relationship between management, the board of directors, and external stakeholders. D. The degree to which the auditor intends to use internal audit personnel to perform substantive tests.

B The use of information technology in the accounting system greatly impacts the auditor's documentation of that system. For example, a highly automated system will result in very different documentation than a manual system.

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? A. Observation. B. Confirmation. C. Calculation. D. Inspection.

B When inventory is held in a public warehouse, the auditor would ordinarily obtain direct confirmation from the custodian.

Which of the following is not a key standard in determining whether a member has a problem regarding gifts and the threat they pose to integrity and objectivity? A. Client or firm policies were violated. B. Applicable laws or regulations were violated. C. The gifts were worth more than $25. D. The gifts were reasonable in the circumstances.

C For AICPA purposes, the amount of $25 bears no magic qualities. It would just be a small part of the several factors that must be taken into account in determining whether gifts or entertainment were "reasonable in the circumstances."

B Paragraph 16 of AS #4 states, "A stated control objective in the context of an engagement to report on whether a material weakness continues to exist is the specific control objective identified by management that, if achieved, would result in the material weakness no longer existing." C. A strategic objective of those charged with governance. D. The related internal control activities that make it probable that the auditor can assess control risk as low.

Members may properly: I. Advocate on behalf of audit clients. II. Advocate on behalf of tax clients. I and/or II or neither>

B. II only. Members may advocate on behalf of tax and advisory service clients, although they should never stretch the bounds of performance standards, go beyond sound and reasonable professional practice, or compromise their credibility.

An auditor most likely would test for the presence of unauthorized EDP program changes by running a A. Program with test data. B. Check digit verification program. C. Source code comparison program. D. Program that computes control totals.

C A comparison of the compiled object program code with the original program would reveal unauthorized program changes.

Which of the following should an auditor do when control risk is assessed at the maximum level? A. Perform fewer substantive tests of details. B. Perform more tests of controls. C. Document the assessment. D. Document the control structure more extensively.

C AICPA Professional Standards require the auditor to document the assessment of the risks of material misstatement at the financial statement level and at the relevant assertion level. That is true whether control risk is assessed at the maximum level or at less than the maximum level.

According to PCAOB auditing standards, the auditor is required to communicate, in writing, all identified material weaknesses to A. Management only. B. The audit committee only. C. Management and the audit committee. D. The appropriate level of personnel, defined as at least one level above where the problem was believed to originate.

C AS #5 (paragraph 78) states, "The auditor must communicate, in writing, to management and the audit committee all material weaknesses identified during the audit."

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged in order to support management's financial statement assertion of A. Existence or occurrence. B. Completeness. C. Presentation and disclosure. D. Valuation or allocation.

C An auditor would inspect loan documents to verify that inventories have been pledged in support of the presentation and disclosure assertions. Presentation and disclosure addresses the adequacy of disclosures related to the inventory account.

Which of the following is a step in an auditor's decision to assess control risk at below the maximum? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Perform tests of details of transactions and account balances to identify potential errors and irregularities. C. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

C An auditor's assessment of control risk at below the maximum requires identification of specific internal controls that are likely to detect or prevent material misstatements and the testing of those controls.

An auditor's report expressing an unqualified opinion on an entity's internal control over financial reporting in an integrated audit of a nonissuer should state that the A. Engagement is different in purpose and scope from obtaining an understanding of the internal control and assessing control risk as part of the audit of the financial statements. B. Auditor's opinion does not necessarily increase the reliability of the entity's financial statements unless they are audited. C. Entity maintained effective internal control over financial reporting as of a specific date. D. Auditor did not apply procedures in the engagement that duplicate those procedures previously applied in assessing control risk as part of the audit of the financial statements.

C An auditor's unqualified report on internal control would provide the opinion that the company maintained, in all material respects, effective internal control over financial reporting as of a specific date (usually year end), based on the control criteria.

Which of the following internal control procedures is not usually performed in the treasurer's department? A. Verifying the accuracy of checks and vouchers. B. Controlling the mailing of checks to vendors. C. Approving vendors' invoices for payment. D. Canceling payment vouchers when paid.

C Approval of vendor invoices for payment is usually performed in accounts payable. Such approval represents an authorization function, which should be segregated from the custodial functions typically performed by the treasurer's office.

Which of the following fraudulent activities could most likely be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may cause an overstatement of inventory balances.

C Effective internal controls include adequate segregation of duties. The failure to separate authorization of credit memos from cash handling is a segregation of duties failure in the revenue cycle.

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the A. Ability to expand operations into new product lines in the future. B. Feasibility of plans to purchase leased equipment at less than market value. C. Marketability of assets that management plans to sell. D. Committed arrangements to convert preferred stock to long-term debt.

C Evidence related to the marketability of assets that management plans to sell would mitigate an auditor's concerns about an entity's ability to continue as a going concern because the sale of assets would raise cash, a critical element of a going concern.

In auditing contingent liabilities, which of the following procedures would an auditor be most likely to perform? A. Confirm the details of outstanding purchase orders. B. Apply analytical procedures to accounts payable. C. Read the minutes of the board of directors' meetings. D. Perform tests of controls on the cash disbursement activities.

C Issues that are significant to the entity (for example, litigation issues that result in contingent liabilities) normally rise to the level of discussion by those charged with governance. The auditor routinely reads the minutes of these meetings to identify issues that have financial reporting implications, including issues related to contingent liabilities.

Which of the following is not a duty owed by a member in business? A. To be candid and truthful when communicating with an employer's external auditor. B. To correct inaccurate financial statements or entries. C. To be independent in fact and appearance. D. To decline gifts or entertainment that would violate an employer's rules or be unreasonable in the circumstances.

C Members in public practice have a duty of independence, but members in business do not.

Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? A. Grandfather-father-son record retention. B. Input and output validation routines. C. Systems documentation. D. Check digit verification.

C Systems documentation is a general control that would assist an entity whose systems analyst left in the middle of a major project. Such documentation would be prepared for each application system and would include narratives and flowcharts. It would document the work completed to date on the project (ideally) and enable an analyst to take over.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take? A. Consult with the audit committee and issue a disclaimer of opinion. B. Consult with the audit committee and issue a qualified opinion. C. Obtain additional evidence regarding the valuation of inventory. D. Obtain a statement from management supporting their inventory valuation.

C The auditor would seek to obtain the additional evidence needed to support the valuation of inventory.

After identifying related party transactions, an auditor most likely would A. Substantiate that the transactions were consummated on terms equivalent to those prevailing in arms-length transactions. B. Discuss the implications of the transactions with third parties, such as the entity's attorneys and bankers. C. Determine whether the transactions were approved by the board of directors or other appropriate officials. D. Ascertain whether the transactions would have occurred if the parties had not been related.

C The auditor's primary concern with regard to related party transactions is disclosure. After identifying related party transactions, the auditor should examine the transactions in order to determine the purpose, nature, and extent of the transactions and their effects on the financial statements. In that process, the auditor would look to see if the transactions were properly authorized by the board of directors.

Rachel is on her firm's attest team for client ABC Co. Which standards apply to gifts and entertainment? A. If Rachel receives a gift from ABC, the key question is whether or not it was "reasonable in the circumstances." B. If Rachel receives entertainment from ABC, the key question is whether or not it was "clearly insignificant" to Rachel. C. If Rachel receives a gift from ABC, the key question is whether or not it was "clearly insignificant" to Rachel. D. None of the three choices provided.

C The code applies the "clearly insignificant" standard to gifts and the "reasonable in the circumstances" standard to entertainment.

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph after the opinion paragraph that A. Justifies the reasons for departing from generally accepted accounting principles. B. States whether the financial statements are fairly presented in conformity with another basis of accounting. C. Refers to the note to the financial statements that describes the basis of accounting. D. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

C The separate explanatory paragraph should refer to the note that describes the basis of accounting.

Which of the following is an audit procedure that an auditor would most likely perform concerning litigation, claims, and assessments? A. Request that the client's lawyer evaluate whether the client's pending litigation, claims, and assessments indicate a going concern problem. B. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and assessments to which the lawyer has devoted substantive attention. C. Discuss with management the policies and procedures it has adopted for evaluating and accounting for litigation, claims, and assessments. D. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.

C This is the only correct answer. The auditor would discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.

In obtaining an understanding of a manufacturing entity's internal control structure concerning inventory balances, an auditor would most likely A. Analyze the liquidity and turnover ratios of the inventory. B. Perform analytical procedures designed to identify cost variances. C. Review the entity's descriptions of inventory policies and procedures. D. Perform test counts of inventory during the entity's physical count.

C To obtain an understanding of internal controls over inventory, an auditor would perform such tasks as making inquiries of management and staff, inspecting documents and records, and observing activities and operations. The only procedure listed which would be relevant to obtaining an understanding is to review the entity's descriptions of controls over inventory. The other choices are incorrect as they are analytical procedures or substantive testing procedures.

Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would A. Add an emphasis-of-matter paragraph to the standard auditor's report that justifies the reason for the omission. B. Refuse to accept the engagement as proposed because of the client-imposed scope limitation. C. Explain to Zag that the omission requires a qualification of the auditor's opinion. D. Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.

C When an entity omits a statement of cash flows, the auditor may accept an engagement to audit the other financial statements, but should qualify the opinion, since a statement of cash flows is required when general-purpose financial statements present financial position and results of operation.

Each of the following types of controls is considered to be an entity-level control, except those A. Relating to the control environment. B. Pertaining to the company's risk assessment process. C. Regarding the company's annual stockholder meeting. D. Addressing policies over significant risk management practices.

C The term "entity-level control" refers to those policies and procedures that have very broad implications to the achievement of an entity's control-related objectives related to operating activities, financial reporting, and compliance. However, the entity's control objectives would not generally be applicable to a company's annual stockholder meeting.

What is the following an example of? A numeric value that is computed to provide assurance that the original value has not been altered in data processing or transmission.

Check Digit

What is this an example of? An arithmetic manipulation of a numerical field that captures the information content of that field.

Check digit A check digit is a digit computed based on other digits in the data field (the arithmetic manipulation of a numerical field). It enables errors to be detected when the other digits are changed. For example, a five digit sales invoice number could consist of 4 digits with the 5th digit a mathematical computation of the previous 4. If any of the 4 digits are incorrect, the 5th digit will not compute properly and an error will be detected in the sales invoice number.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? A. Disclosing lack of segregation of duties to the external auditors during the annual review. B. Replacing personnel every three or four years. C. Requiring accountants to pass a yearly background check. D. Allowing for greater management oversight of incompatible activities.

D Closer management oversight directed specifically at such incompatible activities would be an effective approach in mitigating the risks involved.

Are consulting with experts or obtaining specialty accreditation required by exercising due care?

Consulting with experts does but not obtaining specialty accreditation

Which of the following matters is covered in a typical comfort letter? A. Negative assurance concerning whether the entity's internal control procedures operated as designed during the period being audited. B. An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984. C. Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles. D. An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

D A comfort letter typically provides an opinion (positive assurance) as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the A. Projection may NOT be included in a document with audited historical financial statements. B. Accountant's responsibility to update the projection for future events and circumstances is limited to one year. C. Projection omits all hypothetical assumptions and presents the most likely future financial position. D. Engagement does NOT include an evaluation of the support for the assumptions underlying the projection.

D A compilation is not intended to provide any assurance on the prospective financial information or the underlying assumptions.

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements, the auditor should include a A. Description of tests performed to search for material weaknesses. B. Statement of positive assurance on the structure. C. Paragraph describing the inherent limitations of the structure. D. Restriction on the distribution of the report.

D A report on internal control related conditions should include a restriction on the distribution of the report. The report should be limited to the information and the use of the audit committee, management (or those in governance), and others within the organization.

An auditor would most likely be concerned with internal control structure policies and procedures that provide reasonable assurance about the A. Efficiency of management's decision-making process. B. Appropriate prices the entity should charge for its products. C. Methods of assigning production tasks to employees. D. Entity's ability to process and summarize financial data.

D An auditor is primarily concerned with internal controls that provide reasonable assurance as to an entity's ability to prepare financial statements. As a result, the auditor would be interested in controls over the processing and summarization of financial data.

An auditor assesses control risk because it A. Is relevant to the auditor's understanding of the control environment. B. Provides assurance that the auditor's materiality levels are appropriate. C. Indicates to the auditor where inherent risk may be the greatest. D. Affects the level of detection risk that the auditor may accept.

D An auditor uses the assessed levels of control and inherent risk to establish the level of detection risk that the auditor may accept.

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. B. Expenditures for property and equipment have been recorded in the proper period. C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. D. Expenditures for property and equipment have not been charged to expense.

D Analysis of repairs and maintenance accounts is primarily performed to identify capitalizable expenditures erroneously charged to expense.

Analytical procedures used in planning an audit should focus on identifying A. Material weaknesses in the internal control structure. B. The predictability of financial data from individual transactions. C. The various assertions that are embodied in the financial statements. D. Areas that may represent specific risks relevant to the audit.

D Analytical procedures utilize historical data and relationships to predict expected balances. Analytical procedures enable the auditor to gain an understanding of the client's business and raise questions when current balances differ from expected balances. In this manner, the auditor is able to identify specific areas of risk that will need to be addressed during the audit.

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? A. Are requests for major repairs approved at a higher level than the department initiating the request? B. Are prenumbered purchase orders used for equipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Are procedures in place to monitor and properly restrict access to equipment?

D Be careful with these negatively worded questions. You are looking for the LEAST likely question pertaining to the initiation and execution of equipment transactions. A question about restriction of access to equipment does not address the initiation and execution of equipment transactions.

Tal works in the internal audit department of DEF Co. His boss, the CFO, is strongly urging Tal to recognize revenue prematurely so that DEF can make its quarterly numbers. Which of the following is true? A. Tal has a responsibility to advance the legitimate goals of DEF. B. Tal has a responsibility to accurately prepare and report information. C. Given this conflict, Tal should consider seeking advice from an independent professional advisor. D. All of the above.

D Because A, B, and C are all true, this is the best answer.

Under AICPA standards, competence to complete an engagement includes: A. The ability to supervise and evaluate work. B. Knowledge of the technical subject matter. C. The ability to research subject matter and consult with others where necessary. D. All three choices provided.

D Because all three choices are included in the AICPA's list of items included in the competence to complete an engagement, this is the best answer.

Which of the following is true regarding the relationship of the SEC and the PCAOB? A. The SEC selects the PCAOB's members. B. The SEC must approve all PCAOB rules. C. A violation of any PCAOB rule constitutes a violation of the 1934 Securities Exchange Act. D. All of the above.

D Because choices A, B, and C are all accurate, this is the best choice.

When we return noncomforming goods, is a debit memo sent or a credit memo sent to the accounting department?

Debit memo

If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n) A. Adverse opinion. B. Qualified opinion with an other-matter paragraph. C. Unmodified opinion. D. Unmodified opinion with an additional explanatory paragraph.

D Failure Failure to include supplementary information required by the Governmental Accounting Standards Board would result in an unmodified opinion with an other-matter paragraph.

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

D If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer's letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements. It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion? A. Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence. B. Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests. C. Lake may refer to Cope only if Lake's report indicates the division of responsibility. D. Lake may not refer to Cope under the circumstances above.

D Lake is not allowed to refer to Cope, the auditor of the EDP service organization, in the report issued by Lake on the financial statements. Although Cope's work and report may be used by Lake in obtaining an understanding of internal control and assessing control risk for the Lake engagement, Cope did not examine any portion of the financial statements under audit and therefore cannot be responsible for any portion of the audit.

Statements on Standards for Accounting and Review Services (SSARS) identify which of the following as a "preparation" engagement? A. Typed client-prepared financial statements, without modification, as an accommodation to the client. B. Provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements. C. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements. D. Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

D Preparing the financial statements (with or without using software), whether the financial statements were based on a special purpose framework or not, would be viewed as a "preparation engagement."

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? A. When the client maintains periodic inventory records. B. When the auditor finds minimal variations in client records and test counts in prior periods. C. When total inventory has not varied more than 5% in the last five years. D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

D Remember that the auditor is verifying the existence of inventory as of year end. In order to observe inventory before or after year end, records must be available to allow the physical count to be compared to a current book balance.

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both A. Journalize entries and prepare financial statements. B. Record cash receipts and cash disbursements. C. Establish internal controls and authorize transactions. D. Perpetrate and conceal errors and irregularities.

D Segregation of duties involves the separation of the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. It is intended to reduce the opportunities for any person to be in a position to both perpetrate and conceal errors or irregularities in the normal course of his/her duties.

An advantage that using statistical sampling has over nonstatistical sampling is that statistical sampling helps an auditor to A. Minimize the failure to detect errors and irregularities. B. Eliminate the risk of nonsampling errors. C. Reduce the level of audit risk and materiality to a relatively low amount. D. Measure the sufficiency of the evidential matter obtained.

D Statistical sampling allows an auditor to: 1) design an efficient sample; 2) measure the sufficiency of the evidential matter obtained; and 3) evaluate the sample results.

Which of the following matters would an auditor most likely communicate to an entity's audit committee? A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios. B. The level of responsibility assumed by management for the preparation of the financial statements. C. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables. D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

D The application and explanatory materials section of the applicable AICPA Professional Standards comments on the auditor's responsibilities to communicate matters related to the qualitative aspects of the entity's accounting practices. Specifically, an appendix to the relevant Statement on Auditing Standards points out that the required communication may include the "effect of significant accounting policies in controversial or emerging areas (or those unique to an industry, particularly when there is a lack of authoritative material or consensus)." Although not technically a requirement, such matters would likely be communicated to those charged with governance.

At the end of year 2, a major customer filed for bankruptcy. What are the debit and credit entries for the item above?

Debit: Operating Expenses Credit: Allowance for doubtful accounts

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? A. Disagreements between the predecessor auditor and management as to significant accounting policies and principles. B. The predecessor auditor's understanding of the reasons for the change of auditors. C. Facts known to the predecessor auditor that might bear on the integrity of management. D. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

D The auditor may inquire of the predecessor auditor about issues related to the consistency of financial reporting over time, but that is not something that the auditor is required to inquire about prior to accepting the audit engagement.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? A. The planned level of control risk. B. Management's assertions that internal controls exist and are operating efficiently. C. The effectiveness of internal controls. D. The planned level of assurance at the relevant assertion level.

D The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor's substantive procedures.

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained. A. Direct access to securities in the safety deposit box is limited to only one corporate officer. B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. C. The purchase and sale of investments are executed on the specific authorization of the board of directors. D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

D The most effective control for assuring the proper custody of securities is to independently reconcile recorded balances in the investment subsidiary ledger with the physical assets per the safe deposit box. The physical existence and presence of the recorded assets will thus be verified.

Which of the following factors would least likely affect the quantity and content of an auditor's documentation? A. The condition of the client's records. B. The assessed level of control risk. C. The nature of the auditor's report. D. The content of the representation letter.

D The quantity and content of an auditor's documentation would least likely be affected by the content of the representation letter. The representation letter is prepared at the end of the audit to document management's responses to audit inquiries as well as key management assertions.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year? A. Prior years' depreciation expenses were erroneously understated. B. Current year's depreciation expense was erroneously understated. C. The estimated remaining useful lives of plant assets were revised upward. D. Plant assets were retired during the current year.

D The retirement of plant assets would result in a debit to accumulated depreciation, along with a credit to the plant assets account for the acquisition cost.

Which of the following factors would be most likely to heighten an auditor's concern about the risk of fraudulent financial reporting? A. Large amounts of liquid assets that are easily convertible into cash. B. Low growth and profitability as compared to other entities in the same industry. C. Financial management's participation in the initial selection of accounting principles. D. An overly complex organizational structure involving unusual lines of authority.

D The risk of fraudulent financial reporting is heightened by the existence of an overly complex organizational structure involving unusual lines of authority. This type of structure would make it easier to override internal controls to materially misstate the financial statements.

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor's independence? A. Promoter of a client's securities. B. Member of a client's board of directors. C. Client's general counsel. D. Advisor to a client's board of trustees.

D The role of advisor to a client's board is not forbidden by AICPA independence rules.

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? B. Are purchase requisitions prenumbered and independently matched with vendor invoices? C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

D The standard control for completeness is controlling prenumbered forms. A question, therefore, which would appear in an internal control questionnaire addressing completeness is "Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?"

Which of the following internal control procedures would most likely be used to maintain accurate inventory records? A. Perpetual inventory records are periodically compared with the current cost of individual inventory items. B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved. D. Periodic inventory counts are used to adjust the perpetual inventory records.

D The use of periodic inventory counts to adjust the perpetual inventory records ensures that the inventory records are accurate. The physical count is compared to the book amount and the necessary adjustments are made.

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test? A. Range test. B. Detail test. C. Category test. D. Reasonableness test.

D This test involves comparing an individual's current overtime per week with a comparable period for reasonableness.

Which of these is not a control environmental factors? A. Participation of those charged with governance B. Management's approach towards business risks C. Hiring and advancement policies D. Proper segration of duties

D. Proper segration of duties Look at becker CPA3021

What is the journal entry when paying a cash dividend?

DR DIvidends Paid CR Cash

Is disclosure and/or an adjusting entry required when it is reasonable possible that the company will be assessed damages?

Disclosure but no entry

Do we need a disclosure in the footnotes or the amounts acrued? DO we need to update the report datet or the legal response? 1) Letter dated March 16, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000."

Disclosure in footnotes relating to nature of litigation, but no amount disclosed Update report date

Do CPA 06709, CPA07272, CPA05353, CPA02752, CPA07602, CPA07612, CPA 06690

Do CPA 06709

The central processing unit (CPU) sends a signal to activate another hardware device, which in turn sends a signal back to the CPU. What is this an example of?

Echo Check

Which term describes the following? The central processing unit (CPU) sends a signal to activate another hardware device, which in turn sends a signal back to the CPU.

Echo check Echo checks are used when data are being transmitted from one computer to another to detect errors in transmission. It is a hardware control in which the receiving device sends the message back to the sending device so that the message can be compared to what was sent to ensure accuracy.

What is this an example of? The central processing unit (CPU) sends a signal to activate another hardware device, which in turn sends a signal back to the CPU.

Echo checks are used when data are being transmitted from one computer to another to detect errors in transmission. It is a hardware control in which the receiving device sends the message back to the sending device so that the message can be compared to what was sent to ensure accuracy.

Green, CPA, is aware that Green's name is to be included in the interim report of National Company, a publicly held entity. National's quarterly financial statements are contained in the interim report. Green has not audited or reviewed these interim financial statements. Green should request that I. Green's name not be included in the communication. II. The financial statements be marked as unaudited with a notation that no opinion is expressed on them.

Either I or II. When an accountant is associated with the financial statements of a public entity and has not audited or reviewed such statements, the accountant must either request that his/her name not be included in the communication or mark the financial statements as unaudited and include an accompanying disclaimer separately or on each statement.

What is the following an example of? Electronically initiated transactions between companies.

Electronic data interchange

An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?

Embedded audit module An embedded audit module is a program inserted into the client's system to capture designated transactions, such as large or unusual transactions, for later review by the auditor. It enables the auditor to continuously test the client's computerized information system.

What term describes the explanation below? A set of materials that identifies all significant findings or issues so that a reviewer can obtain a thorough understanding of such matters.

Engagement completion document

Where would we find the following statement? Actual results in the future may differ materially from management's present assessment of this information because events and circumstances frequently do not occur as expected.

Examination Report on Management's Discussion and Analysis

Where would we see the following statement? In our opinion, management's assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction.

Examination Report on Pro Forma Financial Information

Where would we see the the following statement? In our opinion, management's assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction.

Examination Report on Pro Forma Financial Information

Should the following be included or excluded? State that the communication is intended solely for management and external parties.

Excluded State that the communication is intended solely for the information and use of management, those charged with governance, and others within the organization and is not intended to be and should not be used by anyone other than those specified parties. If an entity is required to furnish such auditor communications to a governmental authority, specific reference to such governmental authorities may be made.

What assertion does the following address? The auditor receives an accounts receivable confirmation letter from one of the auditee's customers selected for confirmation indicating that the identified balance of the customer's account is correct as of December 31, 20X1.

Existence Confirmation efforts usually address Existence (but not always!). The auditor's receipt of an accounts receivable confirmation letter verifies that the receivable is real, i.e., it exists.

How does an accountant make the following representations when issuing the standard report for the compilation of a nonpublic entity's financial statements? The financial statements have not been audited The accountant has performed a compilation engagement on the financial statements Explicitly/Implicitly

Explicitly, Explicitly The compilation report explicitly states that the financial statements have not been audited (or reviewed) and that the accountant has performed a compilation engagement.

Which term is most applicable to management's accounting estimates that the auditor views as unreasonable?

Likely misstatements

What type of engagement is defined by the Government Auditing Standards?

Financial audits, attest engagements, and performance audits

What are Pro Forma Financial statements?

Financial statements used to demonstrate the effect of a proposed transaction or event by showing how it might have affected the historical financial statements, if it had occurred during the period covered by those statements

What are the six quality control standards?

Human resources, engegement/client acceptance and continuance, leadership responsibilities, performance of the engagement, monitoring, and ethical requirement

Which term is most applicable to management's accounting estimates that the auditor views as unreasonable?

Likely mistatements

Are consistent application of accounting principles explicit or implicit?

Implicit

When issuing an auditor's report on comparative financial statements, is consistent application of accounting principles implicit or explicit?

Implicit

What is mapping?

In an EDI system, a standard format is adopted. Mapping is the process by which the elements in the client's computer system are related to the standard data elements.

What risk does this increase? Early in year 2, the company extended its existing warranty program on certain of its major products in an effort to increase revenue.

Inherent

Creating a fictitious division or department within an entity and processing the "dummy" data along with the client's "live" data. What is this an example of?

Integrated test facility

What is the following and example of? Creating a fictitious division or department within an entity and processing the "dummy" data along with the client's "live" data.

Integrated test facility An integrated test facility is a testing technique which enables the auditor to test fictitious data in the client's system. This is done by inserting a dummy company or division into the client's computer and running the fictitious transactions against the dummy company. Testing can occur at the same time that real data are being processed.

What is a comfort letter?

It's a letter from the CPA to the named underwriter and/or certain other requesting parties (e.g. selling shareholder, sales agent, broker-dealer, financial intermediary, or buyer/seller) just before the registration of the client's securities

Is accrued expense a liability or an expense?

It's a liability.

What is an attest engagement?

It's one in which a CPA is engaged to issue an examination, review, or an agreed upon procedures report on a subject matter, or an assertion about subject matter, that is the responsibility of another party.

What is the following an example of? Hardware and software that is interconnected throughout an entity's building.

Local area network

Do we comply with SSARS when preparing financial statements of a nonissuer? HOw about preparing monthly journal entries or providing a client with software to generate financial statements or providing a blank financial statement format or template

Just when preparing financial statements of a nonissuer

Where does the following statement come from? Nothing came to our attention as a result of the foregoing procedures, however, that caused us to believe that any material modifications should be made to the unaudited condensed consolidated financial statements ... included in the registration statement, for them to be in conformity with (GAAP).

Letters for Underwriters and Certain Other Requesting Parties One of the few areas in the AICPA Auditing Standards that addresses public companies is Section AU-C 920 Letters for Underwriters and Certain Other Requesting Parties. Auditors of public companies may be asked by underwriters to issue "comfort letters." Comfort letters provide negative assurance as to whether the unaudited interim financial information complies with accounting requirements and SEC rules and regulations and as to whether any material modifications to the unaudited financial statements would be necessary for them to comply with GAAP. Information about comfort letters appears under the Other Types of Reports - Comfort Letters tab. An example of a comfort letter appears in the AICPA Professional Standards (AU-C 920) accessible on the AICPA website.

Where would we see the following statement? Nothing came to our attention as a result of the foregoing procedures, however, that caused us to believe that any material modifications should be made to the unaudited condensed consolidated financial statements ... included in the registration statement, for them to be in conformity with (GAAP).

Where would we find the following statement? The company has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral.

Management representations letter 2. The auditor is required to obtain a representation letter from management. The representation letter should address certain topics. In addition to the required representations associated with "Financial Statements" and "Information Provided," the auditor may choose to address any other matters deemed appropriate. For example, the auditor may inquire about any existing restrictions on the rights that the entity has to its assets, and document management's response to the auditor's inquiry in the management representations letter. A sample representation letter appears under tab Audit Evidence - Concepts and Standards - Management Representations Letters.

Where would we find the following statement? There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices.

Management representations letter The representation letter from management should address must address certain topics. These topics include the presence or absence of communications from regulatory agencies about problems in financial reporting practices. A sample representation letter appears under tab Audit Evidence - Concepts and Standards - Management Representations Letters.

DO nonissuers require lead partner rotation?

Must an auditor inform those charged with governance regarding disagreements with the audit staff?

Is the auditor required to communicate "the auditor's views about qualitative aspects of the entity's significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures."

No "significant findings from the audit," including the auditor's views about qualitative aspects of the entity's significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures.

An accountant who had begun an audit of the financial statements of a nonpublic entity was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the Yes/No Scope limitation that caused the changed engagement Original engagement that was agreed to

No, No An accountant who had begun an audit and was asked to change the engagement to a review because of a scope restriction would issue a review report that would NOT refer to the original engagement, to any auditing or review procedures that may have been performed, or to scope limitations resulting in the changed engagement.

An accountant has been engaged to compile the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS). Do the SSARSs require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant? Yes/No Printed on the accountant's letterhead Manually signed by the accountant

No, No The SSARSs do not require that the compilation report be printed on the accountant's letterhead or that the report be manually signed by the accountant. The compilation report requires the signature of the accountant (or firm), but that signature may be printed or manually signed. The compilation report requires the identification of the accountant's city and state, which may be accomplished by presenting the report on the accountant's letterhead; otherwise, that information may be provided in the signature block.

Is the risk of material misstatement composed of inherent risk, control risk, and detection risk?

No, just inherent risk and control risk

Does the term "audit risk" refer to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated?

No, just material mistatements

In reviewing the financial statements of a nonpublic entity, an accountant is required to modify the standard review report for which of the following matters? Yes/No Inability to assess the risk of material misstatement due to fraud Discovery of significant deficiencies in the design of the entity's internal control

No/No In performing a review, the accountant would modify the standard review report if he/she became aware of departures from the applicable financial reporting framework that were not corrected. The accountant is not required in a review to assess the risk of material misstatement due to fraud. In addition, the accountant is not required to obtain an understanding of internal control or to report significant deficiencies in the design of the entity's internal control.

In what circumstances can a predecessor auditor name a successor auditor?

Only if the predecessor auditor's practice was acquired or merged with that of the successor auditor

3) Letter dated January 20, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case was tentatively settled for $35,000."

Potential litigation settlement accrued in financial statements Update legal response

3 2) Letter dated January 10, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case was tentatively settled for $35,000, which will be covered by XYZ's insurance carrier."

Potential litigation settlement not accrued in financial statements, amount disclosed in footnotes Update legal response

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as __________

Precision

Are the following related party transactions or illegal acts? A note payable has an interest rate well below the market rate at the time at which the loan was obtained. The company has a properly documented loan but the loan has no scheduled repayment terms.

Related party transactions

When the auditor grants permission to use the auditor's report in connection with financial statements that the auditor has examined. What is this date?

Report Release date AS 3 established audit documentation retention requirements. These requirements are triggered by the report release date, the date that the auditor allows the client to use the audit report. Audit documentation must be retained for 7 years from the report release date.

Where would we see the following statement? In our opinion, the schedule of profit participation referred to above presents fairly, in all material respects, Paul Newman's participation in the profits of XYZ company for the year ended December 31, 20X1, in accordance with the provisions of the agreements referred to above.

Report on Audit of Financial Statements Prepared in Accordance with Special Purpose Framework

Where would we see the the following statement? In our opinion, the schedule of profit participation referred to above presents fairly, in all material respects, Paul Newman's participation in the profits of XYZ company for the year ended December 31, 20X1, in accordance with the provisions of the agreements referred to above.

Report on Audit of Financial Statements Prepared in Accordance with Special Purpose Framework

What is the following date? When the auditor grants permission to use the auditor's report in connection with financial statements that the auditor has examined.

Report release date

What is the return on equity equation?

Return on equity = Net Income / Shareholders Equity

Where would we see the following statement? The historical condensed financial statements are derived from the historical unaudited financial statements of XYZ Company, which were reviewed by us, and of ABC Company, which were reviewed by other accountants ...

Review Report on Pro Forma Financial Information A CPA may perform an engagement on pro forma financial information. This type of engagement is addressed by the attestation standards. The sentence comes from a review report on pro forma

Where does the following statement come from? The historical condensed financial statements are derived from the historical unaudited financial statements of XYZ Company, which were reviewed by us, and of ABC Company, which were reviewed by other accountants ...

What assertion is this? The company being audited has a checking account which requires that a minimum balance of $100,000 must be maintained at all times.

Rights and obligation A requirement for a compensating balance (the checking account which must maintain a minimum balance of $100,000) means that the company does not have full rights to the cash in the checking account. The assertion being addressed by the identification of this requirement is Rights and Obligations.

What is the assertion for this? The company being audited has a checking account which requires that a minimum balance of $100,000 must be maintained at all times.

Rights and obligations A requirement for a compensating balance (the checking account which must maintain a minimum balance of $100,000) means that the company does not have full rights to the cash in the checking account. The assertion being addressed by the identification of this requirement is Rights and Obligations.

What are immediate family members?

Spouses, spousal equivalents, and dependents, look on p.445 in CPA excel textbook

What are three things statistical sampling allows an auditor to do?

Statistical sampling allows an auditor to: 1) design an efficient sample; 2) measure the sufficiency of the evidential matter obtained; and 3) evaluate the sample results.

Does a SysTrust or a Webtrust provide assurance about the reliability on any defined electronic system?

Systrust

What is the following an example of? Using known errors in data to determine whether an entity's internal control will identify those errors.

Test data

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

The auditor and the client's management. The client and the auditor should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.

Are auditors allowed to draft the financial statmenets of non-SEC regulated companies? How about SEC regulated companies?

The auditor may provide suggestions about or draft the financial statements based on information from management's accounting system, provided that the company is not SEC regulated. SEC regulated companies must draft the financial statements themselves or use an alternate source to draft the financials. The auditors are specifically prohibited from drafting AND auditing the financials for SEC-regulated companies.

Ordinarily, an auditor need not count all items in the inventory. True or False

True

What is the appropriate response to the financials and to the report The client's year end is December 31, year 1 The anticipated audit report date is February 15, year 2 All amounts are material to the financial statements 2) Letter dated January 21, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1."

The second item indicates that although fees are due, no work is in progress that might require disclosure. The auditor needs to trace the fees to accounts payable to ensure that they are properly recorded. The date of the attorney's letter is January 21 - that date is too far away from the audit report date of February 15. The auditor needs to get an updated attorney's letter. Audit response (financials) - Verify amount due attorney is recorded in financial statements. Audit response (report) - Update legal response.

What is the appropriate response to the financials and to the report The client's year end is December 31, year 1 The anticipated audit report date is February 15, year 2 All amounts are material to the financial statements 3) Letter dated February 26, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss."

The third item identifies pending litigation which will require disclosure (recall it was assumed that all items were material). As neither the possibility of damages nor the amount is currently determinable, no accrual or amount disclosure will be required. The attorney's letter is dated February 26, after the planned audit report date of February 15. The date of the audit report will need to be updated. Audit response (financials) - Disclosure in footnotes relating to nature of litigation, but no amount disclosed. Audit response (report) - Update report date

What are the two categories of professional standards?

There are 2 categories of professional standards: (1) unconditional requirements; and (2) presumptively mandatory requirements.

What does AR-C 70 not apply to?

This section does not apply when an accountant prepares financial statements • and is engaged to perform an audit, review, or compilation of those financial statements, • solely for submission to taxing authorities, • for inclusion in written personal financial plans prepared by the accountant, • in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or • in conjunction with business valuation services.

True or False 1. Absent a few circumstances, there is a presumption that the auditor will confirm accounts receivable. 2. Auditors may ignore individually immaterial accounts when confirming accounts receivable. 3. The best way to evaluate the results of the confirmation process is to total the misstatements identified and to compare that total to the account's tolerable error amounts.

True/False/False

Which of the following topics represents a primary difference between U.S. auditing standards relative to International Standards on Auditing?

U.S. auditing standards (associated with requirements under the Sarbanes-Oxley Act) address internal control reporting in connection with an "integrated audit," but International Standards on Auditing do not address the topic of an "integrated audit."

The format and timing of the auditor's required communication with an issuer's audit committee is best characterized by the following: DOes it have to be in writing or can it be written or oral?

Unless otherwise specified, the communication may be written or oral.

Where would we see the the following statement? In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and subsidiaries as of December 31, 20X2 and 20X1, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Unmodified Audit Report with Reference to Component Auditor

Where would we find this? Is an emphasis of matter paragraph required? An auditor has identified an entity's change in accounting principles in the current year in relation to the prior year and has determined that the effect of the change is immaterial. No other issues have been identified.

Unmodified Report A clean opinion, i.e., an unmodified report, is issued if there are no material departures from the applicable financial reporting framework and no material scope limitations. If the auditor identifies a change in accounting principle and determines that it is immaterial, the standard financial reporting requirements related to a change in accounting principle will not apply. The auditor will also not be required to add an emphasis of matter paragraph to the audit report regarding the change. If no other problems or issues were identified, the auditor will be able to issue a clean opinion.

If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue what kind of opinion?

Unmodified opinion with an additional explanatory paragraph. Failure Failure to include supplementary information required by the Governmental Accounting Standards Board would result in an unmodified opinion with an other-matter paragraph.

What assertion is this? In evaluating the entity's recorded Goodwill, the auditor determines that an impairment has occurred which requires that a portion of the balance be written off as a loss.

Valuation and allocation The auditor has evaluated Goodwill and determined that it has been impaired. An adjusting entry is needed to record the loss and reduce the Goodwill balance. The assertion being addressed is Valuation and Allocation - the auditor is verifying that Goodwill is appropriately valued.

What is the assertion for this? In evaluating the entity's recorded Goodwill, the auditor determines that an impairment has occurred which requires that a portion of the balance be written off as a loss.

The office manager extends credit on a case-by-case basis rather than using a formal credit search and established credit limits. Is this a strength or weakness or neither?

Weakness

Does a SysTrust or a Webtrust provide assurance related to e-commerce?

WebTrust

What is the following an example of? A computer program that replicates independently by sending itself to other systems.

Worm

Is the legal response appropriately dated in the following situation? The client's year end is December 31, year 1 The anticipated audit report date is February 15, year 2 All amounts are material to the financial statements 1) Letter dated February 14, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1."

Yes since the letter is dated Feb 14 and the audit report came out on Feb 15.

Is evaluating the overall financial statement presentation a focus of analytical procedures?

Is preparing monthly journal entries for depreciation and expiration of prepaid expenses required to comply with SAS?

Is there a such thing as the service auditor approach?

Are auditors allowed to provide tax services related to contingent fees, confidential tax transactions, and aggressive tax transactions?

no , they are prohibited

Would an auditor withdraw from an engagement because there is not reasonable justification to withdraw from an engagement?

no, It would just result in a modified report.

Who are close relatives?

parents, siblings, and non-dependent children, look on p.445 in CPA excel textbook

When is negative assurance given for comfort letters?

top of A2 p. 75

Can an internal auditor help the independent CPA with obtaining an understanding of internal control?

yes

Can internal auditors provide direct assistance to an independent CPA on obtaining an understanding of internal control?

yes

Do we include the definition of the term significant deficiency in the letter to the client on internal control related matters?

yes

Does GAGAS prescribe additional standards on reporting of illegal acts?

yes

Is it right to say that there would be no detection risk if we didn't have an audit?

yes

Must a report be issued when the financial statements have been compiled?

yes

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