AUD - Incorrect Questions 4/3
Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to A Customers who have credit or zero balances with the client. B Responses that were mailed rather than faxed to the auditor. C Accounts receivables that have been classified as uncollectible. D Payments mailed to the client that have not been recorded.
D Payments mailed to the client that have not been recorded. An exception is a response that indicates a difference between the information requested to be confirmed, or contained in the entity's records, and the information provided by the confirming party. As such, if payments are mailed to the client that have not been recorded, there would be a difference between the recorded balance and the actual balance leading to an exception.
An accountant's report on a review of pro forma financial information should include a A Statement that the entity's internal control was not relied on in the review B Disclaimer of opinion on the financial statements from which the pro forma financial information is derived C Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur D Reference to the financial statements from which the historical financial information is derived
D Reference to the financial statements from which the historical financial information is derived The practitioner's report on pro forma financial information should include reference to the financial statements from which the historical financial information is derived. The statement in answer a. should not be made in any review engagement.
An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation? A The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement. B The accountant should disclose the lack of independence in the accountant's compilation report. C The accountant should withdraw from the engagement. D The accountant should compile the pro forma financial statements but should not provide a compilation report.
(Got right but get it down) B The accountant should disclose the lack of independence in the accountant's compilation report. A CPA does not have to be independent to perform a compilation engagement, but a separate paragraph should be added to the report that discloses the lack of independence. Additionally, the CPA may include the reasons for the lack of independence in the same paragraph. The disclosure of the reason(s) is not required, but if the CPA elects to do so, all the reasons must be included.
When an accountant compiles a client's financial statements accompanied by supplemental information, which of the following is a required element of the accountant's separate report on the supplemental information? A A statement that the information has been compiled from information that is the representation of management without audit or review. B A list of the procedures performed by the accountant during the compilation. C A statement that the accountant did not become aware of any material modifications that should be made to the information. D A confirmation of the independence of the accountant with respect to the information presented.
A A statement that the information has been compiled from information that is the representation of management without audit or review. When supplementary information accompanies financial statements and the accountant's compilation report thereon, the accountant should clearly indicate the degree of responsibility, if any, the accountant is taking with respect to such information in either, an other-matter paragraph in the compilation report on the financial statements, or a separate report on the supplementary information. The other-matter paragraph or the separate report on the supplementary information should state the following: The information is presented for purposes of additional analysis and is not a required part of the basic financial statements; The information is the representation of management; and The information was subject to the compilation engagement, however, the accountant has not audited or reviewed the information and, accordingly, does not express an opinion, a conclusion, nor provide any assurance on such information. (B) is incorrect because the accountant does not list out the procedures performed in a compilation report.
The auditor's knowledge about the design of relevant internal control policies and procedures primarily assists the auditor in A Identifying the types of potential misstatements that could occur B Assessing the operational efficiency of the internal control C Determining whether controls have been circumvented by collusion D Documenting the assessed level of control risk
A Identifying the types of potential misstatements that could occur The auditor primarily uses the the knowledge about the design of relevant internal control policies and procedures [gaining an understanding of internal control] to (1) identify types of potential misstatements and factors that affect the risks of material misstatement; and (2) in designing the nature, extent, and timing of further audit procedures.
The introductory paragraph of an auditor's report of a public company contains the following sentences:We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences A Indicate a division of responsibility B Assume responsibility for the other auditor C Are an improper form of reporting D Require a departure from an unqualified opinion
A Indicate a division of responsibility These sentences indicate a division of responsibility. When the principal auditor decides to make reference to the audit of the other auditor, the audit report should indicate clearly, in the introductory, scope, and opinion paragraphs, the division of responsibility as between that portion of the financial statements covered by his or her own audit and that covered by the audit of the other auditor. The report should disclose the magnitude of the portion of the financial statements audited by the other auditor. If the principal auditor decides to assume responsibility for the work of the other auditor insofar as that work relates to the principal auditor's expression of an opinion on the financial statements taken as a whole, no reference should be made to the other auditor's work or report. Thus answer b. is incorrect.
If prior-period compiled financial statements have been restated and the predecessor accounting firm decides not to reissue its report, the successor accounting firm A May be engaged to reissue the prior-period report. B May not be engaged to reissue the prior-period report. C Must disclose the prior-period misstatements in the introductory paragraph of its current-year report. D Must issue a combined report of both the prior-period and current-period financial statements.
A May be engaged to reissue the prior-period report. When prior-period financial statements have been restated, the predecessor accountant would normally reissue his or her report. If the predecessor decides not to reissue his or her report, the successor accountant may be engaged to report on the financial statements for the prior year. If the predecessor accountant does not reissue his or her report and the successor accountant is not engaged to report on the prior year financial statements, the successor accountant should indicate in the introductory paragraph of his or her compilation or review report that a predecessor accountant reported on the financial statements of the prior period before restatement.
Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? A New convertible bonds are issued to expand the company's product line. B A loss is reported on uncollectible accounts of an acknowledged distressed customer. C A fixed asset used in operations is sold at a substantial profit. D Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.
A New convertible bonds are issued to expand the company's product line. Subsequent events, for which conditions existed at the balance sheet date, require adjustment to the financial statements. Events for which condition did not exist at the balance sheet date, but still represent important information, should be disclosed. Issue of new convertible bonds after the calendar year-end, but before the audit report date is an event for which conditions did not exist at the balance sheet date. The information is important enough, for which disclosure needs to be made. (B) is incorrect because adjustments are normally required for significant events known prior to or at the balance sheet date. A loss reported on uncollectible accounts receivable as a result of a customer's distressed financial condition would be indicative of conditions existing at the balance sheet date, thereby calling for an adjustment of the financial statements before their issuance.
When should the auditor make the written communication of significant deficiencies and material weaknesses to management and those charged with governance? A No later than 60 days following the audit report release date B No later than 30 days following the audit report release date C No later than 60 days following the audit report date D No later than 30 days following the audit report date
A No later than 60 days following the audit report release date
In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and A Observe the segregation of duties concerning personnel responsibilities and payroll disbursement B Inspect evidence of accounting for prenumbered payroll checks C Recompute the payroll deductions for employee fringe benefits D Verify the preparation of the monthly payroll account bank reconciliation
A Observe the segregation of duties concerning personnel responsibilities and payroll disbursement Observing the segregation of duties concerning personnel responsibilities and payroll disbursement is a common audit procedure relating to the existence or occurrence assertion for payroll transactions. Inspecting evidence of accounting for prenumbered payroll checks would provide evidence related to the completeness assertion. Recomputing the payroll deductions for employee fringe benefits would provide evidence related to the valuation and the rights and obligations assertions. An auditor would likely review payroll checks and bank reconciliations to determine that all checks were cashed as part of obtaining evidence for the existence or occurrence assertion and not just verify the preparation of the monthly payroll account bank reconciliation.
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? A Preliminary judgments about materiality levels B The amount of bad debt write-offs in the prior year C The size of the intercompany receivable balance D The auditor's allowable risk of assessing control risk is too low
A Preliminary judgments about materiality levels When planning a particular sample for a substantive test of details, such as subsequent cash receipts, the auditor should consider (1) the relationship of the sample to the relevant audit objective; (2) preliminary judgments about materiality levels; (3) the auditor's allowable risk of incorrect acceptance; and (4) characteristics of the population, that is, the items comprising the account balance or class of transactions of interest. The amount of bad debt write-offs from the prior year would not be appropriate to consider to detect information about subsequent cash receipts. The size of the intercompany receivable balance is not related to subsequent cash receipts. The risk of assessing control risk too low (the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control) relates to sampling risk in performing tests of controls rather than a substantive test of details as described in this question.
Mill Co. uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tape are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of this tape most likely would be a A Report showing exceptions and control totals B Printout of the updated inventory records C Report showing overdue accounts receivable D Printout of the sales price master file
A Report showing exceptions and control totals The computer process has built-in edit checks to generate exceptions and control totals. Edit checks performed on batch processed data verify if each individual entry is appropriate and generates a list of rejected transactions for review by control clerk. Edit checks ordinarily create an output file of rejected transactions. The most likely output of edit checks is the creation of a report showing exceptions and control totals. (D) is incorrect because a printout of the sales price master file represents information that is input into the computer system as a basis for the edit checks.
An auditor's written communication regarding significant deficiencies and material weaknesses identified during a financial statement audit should A Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses B Indicate that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements but not to express an opinion on the effectiveness of the entity's internal control C Include a paragraph describing management's assertion concerning the effectiveness of internal control D Indicate that the deficiencies should be disclosed in the annual report to the entity's shareholders
B Indicate that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements The written communication regarding significant deficiencies and material weaknesses identified during a financial statement audit should include sufficient information to enable those charged with governance and management to understand the context of the communication. The communication should: (1) include a statement that indicates that the purpose of the audit was for the auditor to express an opinion on the financial statements; (2) state that the audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control; (3) state that the auditor is not expressing an opinion on the effectiveness of internal control; (4) state that the auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified; (5) include the definition of the term material weakness and, when relevant, the definition of the term significant deficiency; (6) include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects; and (7) include an appropriate alert that restricts its use. (If an entity is required to furnish the auditor's written communication to a governmental authority, a specific reference to the governmental authority may be included in the paragraph that restricts its use.)
Mammoth Co. plans to present comparative financial statements for the years ended December 31, year 5, and year 6, respectively. Brown, CPA, audited Mammoth's financial statements for both years and plans to report on the comparative financial statements on March 1, year 7. Brown's audit is subject to the requirements of the Public Company Accounting Oversight Board (PCAOB). Mammoth's current management team was not present until January 1, year 6. What period of time should be covered by Mammoth's management representation letter? A January 1, year 5, through December 31, year 6 B January 1, year 5, through March 1, year 7 C January 1, year 6, through December 31, year 6 D January 1, year 6, through March 1, year 7
B January 1, year 5, through March 1, year 7 Issues such as who should sign the letter, the period to be covered by the letter, and when an updated letter should be obtained are the same as in a financial statement audit under GAAS. If comparative financial statements are reported on, the written representations obtained at the completion of the most recent audit should address all periods being reported on. The representations should be made as of the date of the auditor's report. If current management was not present during all periods covered by the auditor's report, the auditor should nevertheless obtain written representations from current management on all such periods. Editor's note: It's always a good idea with lengthy questions like these, to first read the question stem, and then to read the question to identify the correct answer. If you had done this, you would have known the answer to be choice b. even before going into the answer choices!
An accountant who determines, during the performance of a review engagement, that the accountant's independence is impaired A Should withdraw from the engagement and provide no further services with respect to those financial statements B May perform a compilation engagement on those financial statements C Should add an other-matter paragraph to the review report disclosing why the engagement could not be completed and include an alert that restricts the use of the report D Should add an emphasis-of-matter paragraph to the review report disclosing why the engagement could not be completed and include an alert that restricts the use of the report
B May perform a compilation engagement on those financial statements Nothing prohibits an accountant who is unable to complete a review engagement due to a determination that the accountant's independence is impaired from performing a compilation engagement on those financial statements.
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer's financial statements without impairing independence? A Planning and issuing an opinion in favor of the tax treatment of an aggressive tax position B Reviewing a proposed transaction and informing the client of the tax consequences C Providing consultations under a contingency fee arrangement D Preparing tax returns for an individual in a financial oversight reporting role during the audit period
B Reviewing a proposed transaction and informing the client of the tax consequences A public accounting firm is not independent if the firm provides: any non-audit service to the audit client related to marketing, planning, or opining in favor of the tax treatment of, a confidential transaction or an aggressive tax position transaction; during the period of engagement, any tax service to a person in a financial reporting oversight; during the audit period any service or product to the audit client for a contingent fee or a commission. Reviewing a proposed transaction and informing the client of the tax consequences would not impair independence.
An auditor is planning a test of control and expects numerous errors in the application of the control. Which approach is most appropriate? A Discovery Sampling B Sequential Sampling C Dual-Purpose Sampling D Variables Sampling
B Sequential Sampling If an auditor is planning a test of control and expects numerous errors in the application of the control then the sample size will need to be expanded through sequential, stop or go sampling--each step is conditional on the results of the previous steps. Discovery sampling is used when the auditor expects an extremely low error rate. Dual purpose sampling is used to test attributes and variable simultaneously; usually when a low error rate is expected for the application of the control. Variables sampling is concerned with the details of transactions and account balances (substantive tests) rather than a test of controls.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A Supported by a vendor's invoice B Stamped "paid" by the check signer C Prenumbered and accounted for D Approved for authorized purchases
B Stamped "paid" by the check signer By immediately stamping "paid" on the paid voucher, the check signer prevents the voucher from being paid again. While each of the items in answers A., C., and D. is a recommended practice, none prevent the voucher from being paid again.
Which of the following statements is most accurate regarding sufficient and appropriate documentation? A Accounting estimates are not considered sufficient and appropriate documentation B Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. C If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. D Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
B Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. It should be clear who reviewed specified elements of the audit work performed and when. Accounting estimates are an example of the significant findings or issues that should be documented along with the actions taken to address them and the basis for the final conclusions reached. If additional evidence is required to document significant findings or issues, the original evidence should not be deleted. Audit documentation is the property of the auditor, not the client. Note: The retention period of at least five years from the report release date is correct for non-issuers—it is seven years for issuers. After the documentation completion date, the auditor must not delete or discard audit documentation before the end of the specified retention period; any time prior to this date, the auditor may make changes to delete superseded or incorrect material.
When an auditor of a nonissuer becomes aware that one or more auditing procedures that the auditor considered necessary in the circumstances existing at the time of the audit were omitted from the audit of the financial statements, A If the auditor needs to perform a previously omitted or alternative procedure, but is unable to do so, as long as the auditor documents the attempt, the auditor has discharged his or her responsibility. B The US GAAS guidance relevant to this matter relates to the period subsequent to the audit report release date regarding when the auditor became aware of the omission. C If the auditor needs to perform a previously omitted or alternative procedure, but is unable to do so, the auditor should seek legal advice to determine the appropriate course of action. D The US GAAS guidance relevant to this matter relates to the period subsequent to the audit report date regarding when the auditor became aware of the omission.
B The US GAAS guidance relevant to this matter relates to the period subsequent to the audit report release date regarding when the auditor became aware of the omission. The relevant time period for US GAAS guidance for such omitted procedures begins subsequent to the audit report release date; not the audit report date. Incorrect answer (D): if the auditor becomes aware of the omission before the report is released, the auditor can withhold the report until the appropriate action is taken. Editor Note: It is rare for the auditor to perform new or additional audit procedures or to draw new conclusions after the date of the audit report. The guidance provides only two examples of such circumstances, i.e., this one, omitted procedures, and subsequently discovered facts.
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor? A The internal auditor has obtained the Certified Internal Auditor designation. B The audit committee reviews employment decisions related to the director of internal auditing. C The internal auditor was previously an employee of the auditor's public accounting firm. D The internal auditor attends a number of comprehensive continuing professional education courses each year.
B The audit committee reviews employment decisions related to the director of internal auditing. Level of objectivity implies the ability to perform tasks without bias, conflict of interest, undue influence. Depends on whether: Internal audit function's organizational status and relevant entity policies & procedures support the objectivity of the internal auditors Internal audit function is free of any conflicting responsibilities (e.g., managerial duties outside of the internal audit function) TCWG oversee employment decisions for internal auditors (e.g., determining pay) Any constraints/restrictions placed on the internal audit function by management or TCWG (e.g., in communicating the internal audit findings to the external auditor) Internal auditors hold professional memberships (which obligate their compliance with relevant professional standards relating to objectivity) The audit committee reviews employment decisions related to the director of internal auditing. This would be the factor that the independent auditor would consider most likely when assessing the objectivity of an internal auditor. The director of internal auditing will be playing a key role in the entity and must be professional, objective, and independent.
In an audit of financial statements prepared in accordance with a financial reporting framework generally accepted in another country, the auditor should obtain an understanding of all of the following except A The purpose for which the financial statements are prepared B The certification required by the appropriate auditing or accountancy board of the other country C The intended users of the financial statements D The steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.
B The certification required by the appropriate auditing or accountancy board of the other country The auditor is not required to have an understanding of the certification required by the appropriate auditing or accountancy board of the other country.
In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? A The prospective financial statements depart from AICPA presentation guidelines B The practitioner was not able to perform certain procedures deemed necessary C The prospective financial statements fail to disclose significant assumptions D The significant assumptions do not provide a reasonable basis for the statements
B The practitioner was not able to perform certain procedures deemed necessary If the practitioner was not able to perform certain procedures deemed necessary for an examination of prospective financial statements, the practitioner will disclaim an opinion. A practitioner will almost always disclaim an opinion when dealing with a scope limitation - i.e., an inability to perform certain procedures deemed necessary. (A) is incorrect because a practitioner would issue a qualified or adverse opinion if the prospective financial statements departed from AICPA guidelines.
Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a A Statement of positive assurance that internal control procedures designed to detect material errors and fraud were tested B Written report describing each significant deficiency observed including identification of those considered material weaknesses C Statement of negative assurance that internal control procedures not tested have an immaterial effect on the entity's financial statements D Written report describing the entity's internal control procedures specifically designed to prevent fraud, abuse, and illegal acts
B Written report describing each significant deficiency observed including identification of those considered material weaknesses GAGAS require a written report on the consideration of internal control in all audits; whereas GAAS require communication only when the auditor has noted significant deficiencies. The auditor is not required to report on the description of the entity's internal control procedures.
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 Document the assessment. Assessed risks and the basis for those assessments should be documented whether or not control risk is assessed at the maximum level If the auditor assesses control risk at the maximum level there is no point in performing more tests of controls. Documenting a control structure more extensively because it is not functioning well is nonsensical. Editor note: If the auditor is assessing the control risk as high, there isn't validation to test controls since the auditor has concluded that the controls aren't reliable. As such, the auditor should supplement the lack of control testing with more substantive tests of details.
Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified? A Testing shipping and receiving cutoff procedures B Confirming inventories at locations outside the entity's premises C Examining an analysis of inventory turnover D Tracing inventory observation test counts to perpetual listings
C Examining an analysis of inventory turnover Inventory turnover ratios measure the speed with which inventory is purchased or made and subsequently sold. Slow-moving and obsolete items have low turnover ratios. Slow-moving and obsolete items are unlikely to be shipped or received. Existence at locations outside the entity's premises occurs with slow-moving, obsolete, and current items. Slow-moving, obsolete, and current items may all be traced easily to inventory observation test counts to perpetual listings.
An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services. The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions? A Withdrawn from the engagement because the entity has not been following GAAP B Advised management to make the adjustments necessary for the account balances to conform with GAAP C Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting D Requested that management justify the use of the other comprehensive basis of accounting in the management representation letter
C Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting The review report should reflect the basis of accounting used in the corresponding financial statements. There is no requirement that financial statements be prepared in accordance with GAAP; nor must management justify the use of a comprehensive basis of accounting other than GAAP to the accountant (hence the phrase "generally accepted" accounting principles).
The definition of a subsequent event is an event A Occurring between the date of the financial statements and the audit report release date B That existed at the date of the financial statements C Occurring between the date of the financial statements and the date of the audit report D That arose after the date of the financial statements
C Occurring between the date of the financial statements and the date of the audit report A subsequent event is an event occurring between the date of the financial statements and the date of the audit report; not incorrect answer a., the audit report release date.
According to US GAAS, audit procedures performed on the consolidation process should include all of the following except A Evaluating whether all components have been included in the group financial statements B Evaluating the appropriateness, completeness, and accuracy of consolidation adjustments and reclassifications C Perform procedures to identify material instances of non-compliance D Evaluating whether any fraud risk factors or indicators of possible management bias exist
C Perform procedures to identify material instances of non-compliance The group engagement team should perform the following audit procedures on the consolidation process: Evaluating whether all components have been included in the group financial statements. Evaluate the appropriateness, completeness, and accuracy of consolidation adjustments and reclassifications and should evaluate whether any fraud risk factors or indicators of possible management bias exist. If the financial information of a component has not been prepared in accordance with the same accounting policies applied to the group financial statements, the group engagement team should evaluate whether the financial information of that component has been appropriately adjusted for purposes of the preparation and fair presentation of the group financial statements. If the group financial statements include the financial statements of a component with a financial reporting period-end that differs from that of the group, the group engagement team should evaluate whether appropriate adjustments have been made to those financial statements in accordance with the applicable financial reporting framework. The auditor is not specifically required to perform procedures to identify instances of Non-Compliance in GAAS audits.
An auditor is engaged to report on supplementary information in relation to the financial statements as a whole that is included in a client-prepared document containing audited financial statements. Under these circumstances, the auditor has elected to report on the supplementary information in an other-matter paragraph in the audit report on the financial statements. The other-matter paragraph should A State that the presentation is a comprehensive basis of accounting other than GAAP B State that the supplementary information has not been subjected to the auditing procedures C State that the information is limited to data derived from records used to prepare the entity's financial statements D Restrict the use of the report to appropriate specified parties
C State that the information is limited to data derived from records used to prepare the entity's financial statements When an auditor is engaged to report on supplementary information that is included in a client-prepared document containing audited financial statements, the other-matter paragraph or separate report should include a statement that the supplementary information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The auditor's primarily responsibility here is to ensure that the supplementary information is consistent with the financial statements it accompanies. In addition, none of the other answers are required report elements. Regarding incorrect answer b., the report should state that the supplementary information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves and other additional procedures, in accordance with US GAAS.
Alpha, a CPA, is engaged to review the interim financial statements of a non-issuer which follows the same financial reporting framework as annual financial statements which will also be audited by Alpha. Which of the following standards should Alpha follow? A Statements on Auditing Standards (SAS) if the entity does not have an annual audit, and Statements on Standards for Accounting and Review Services (SSARS) if the entity has an annual audit B Statements on Standards for Accounting and Review Services (SSARS), irrespective of the annual audit C Statements on Auditing Standards (SAS) if the entity has an annual audit, and Statements on Standards for Accounting and Review Services (SSARS) if the entity does not have an annual audit D Statements on Auditing Standards (SAS), irrespective of the annual audit
C Statements on Auditing Standards (SAS) if the entity has an annual audit, and Statements on Standards for Accounting and Review Services (SSARS) if the entity does not have an annual audit With respect to the entity that Alpha is engaged to review if all of the following conditions are met. The review will be per the Statements on Auditing Standards (SAS). Last year Financial Statements were audited Interim Review Accountant is the latest or next annual audit accountant, AND Interim information follows the same financial framework as the annual information.
Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards? A Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements. B All of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards. C The requirement that the CPA be independent in mental attitude is included in both sets of standards. D Both sets of standards are applicable to engagements regarding financial forecasts and projections.
C The requirement that the CPA be independent in mental attitude is included in both sets of standards. The requirement that the CPA be independent in mental attitude is included in both sets of standards. Only GAAS require the CPA to report on the adequacy of disclosure in the financial statements. The attestation standards do not include a standard similar the GAAS second standard of fieldwork: "The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures." Only the attestation standards are applicable to engagements regarding financial forecasts and projections.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A Large amounts of 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 An overly complex organizational structure involving unusual lines of authority Answer D., an example of a risk factor related to misstatements arising from fraudulent financial reporting is an organizational structure that is complex or unstable, as evidenced by: (1) difficulty in determining the organization or individuals that have controlling interest in the entity; (2) overly complex organizational structure involving unusual legal entities or managerial lines of authority; and/or (3) high turnover of senior management, legal counsel, or those charged with governance. Regarding incorrect answer A., large amounts of liquid assets is an example of a risk factor related to misstatements arising from misappropriation of assets (not fraudulent financial reporting).
Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should A Consider the likelihood of assessing the risk of incorrect rejection too low B Project sampling risk at the maximum for tests covering the remaining period C Ascertain that accounts receivable are immaterial to the financial statements D Assess the difficulty in controlling the incremental audit risk
D Assess the difficulty in controlling the incremental audit risk When substantive procedures are performed at an interim date, the auditor should perform further substantive procedures or a combination of substantive procedures and tests of controls covering the remaining period to provide a reasonable basis for extending the audit conclusions to the end of the period. Interim testing increases the risk that misstatements existing at the period end will not be detected. Evaluations of in appropriate assessments of risk would not be a factor in deciding whether interim testing would be appropriate. Sampling risk need not necessarily be projected at the maximum for tests covering the remaining period. Whether or not substantive tests of accounts receivable may be performed at an interim date does not hinge on whether the balance is material to the financial statements.
The permanent (continuing) file of an auditor's working papers most likely would include copies of the A Lead schedules B Attorney's letters C Bank statements D Debt agreements
D Debt agreements Permanent files contain items of continuing interest, such as debt agreements, internal control flowcharts, and articles of incorporation. The other items are of temporary interest only.
All of the following describe conditions which require the auditor to refuse a proposed audit engagement (that is not required by law or regulation) except A A scope limitation is imposed by management or those charged with governance that would result in a disclaimer of opinion. B The preconditions for the audit are not present. C The auditor is not permitted to attach a separate audit report or reword a prescribed audit report form that is misleading. D In an initial audit, management does not authorize contact with the predecessor auditor.
D In an initial audit, management does not authorize contact with the predecessor auditor. Correct answer d., if management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should inquire about the reasons and consider the implications of that refusal in deciding whether to accept the engagement. However, the auditor is not precluded by this circumstance from accepting the engagement. (Editor Note: Before accepting an engagement for an initial audit, including a reaudit engagement, the auditor should request management to authorize the predecessor auditor to respond fully to the auditor's inquiries regarding matters that will assist the auditor in determining whether to accept the engagement.)
Regarding written communication of significant deficiencies and material weaknesses identified in an audit of financial statements, the auditor should A Include a description of the significant deficiencies and material weaknesses and an analysis of their effects, including the magnitude expressed as a percentage of the applicable accounts B Include a description of the significant deficiencies and material weaknesses and an explanation of their effect on the auditor's overall risk assessment C Not include suggestions for remedial action on the deficiencies as this may tend to overshadow the reporting of the deficiencies D Include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects
D Include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects The auditor should include in the auditor's written communication of significant deficiencies and material weaknesses a description of the significant deficiencies and material weaknesses and an explanation of their potential effects. In explaining the potential effects of the significant deficiencies and material weaknesses, the auditor need not quantify those effects. The potential effects may be described in terms of the control objectives and types of errors the control was designed to prevent, or detect and correct; or in terms of the risk of misstatement that the control was designed to address. The purpose of the communication is to report matters to management and those charged with governance that merit their attention in meeting their responsibilities; not how it relates to the audit. Thus, the auditor should not communicate their effect on the auditor's overall risk assessment.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A Confirming a sample of material accounts receivable established after year-end B Comparing the financial statements being reported on with those of the prior period C Investigating personnel changes in the accounting department occurring after year-end D Inquiring as to whether any unusual adjustments were made after year-end
D Inquiring as to whether any unusual adjustments were made after year-end One of the auditor's procedures to determine the occurrence of subsequent events that may require adjustment or disclosure is asking management if any unusual adjustments were made after year-end. For example, as an auditor you can inquire about whether the books were closed on time, and if they weren't was it because of a ton of last minute entries that weren't made, or adjustments to intercompany balances that may have an effect on a subsidiary's ability to meet certain ratios for loan covenants? Confirming a sample of accounts receivable established after year-end is usually done to determine if proper cutoff was made.
According to PCAOB auditing standards, all of the following statements are true about the terms of an audit engagement, except A If the auditor cannot establish an understanding of the terms of the audit engagement with the audit committee, the auditor should decline to accept, continue, or perform the engagement. B The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee annually. C The understanding of the terms of the engagement should include the communication of the objectives of the audit and both management's and the auditor's responsibilities. D The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee and management annually.
D The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee and management annually. According to PCAOB auditing standards, the auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee annually. The auditor is not required to provide it to management.
