AUD Questions

What phrase is associated with the Qualified Opinion paragraph?

"Except for"

Before accepting an engagement to compile or review the financial statements of a nonissuer, what inquiry should the successor accountant consider making to the predecessor accountant?

"How would you describe the integrity of the owner?"

In the audit of a nonissuer, what is correct regarding the use of external confirmations to obtain audit evidence?

A factor for an auditor to consider when designing confirmation requested is the assertion being tested

A successor auditor discovers a possible misstatement in a client's financial statements reported on by a predecessor auditor. What action should the successor auditor take next?

Ask the client to arrange a meeting of the predecessor auditor, management, and the successor auditor to discuss the matter

Which type of sampling allows an auditor to quantify sampling risk?

Attribute sampling

For audits of nonissuers, which paragraph states that the audit is GAAS and which paragraph states that the financial statements are GAAP?

Auditor's Responsibility = Audit is GAAS Opinion = Financial Statements are GAAP

When should disagreements with management be communicated to those charged with governance?

Disagreements with management should be communicated to those charged with governance even if the issue has been satisfactorily resolved

An auditor's engagement letter most likely would include ____.

Management's acknowledgement of its responsibility for maintaining effective internal control

Can a compilation be relied upon to disclose errors, fraud, or illegal acts? Y/N

No

When is independence required under SSAE?

Independence is always required under SSAE

How are major programs determined during the audit?

Major programs are determined by the auditor using a "risk based approach", they are not determined by management

Before reissuing a company's prior-year review report, an accountant becomes aware of information that may have a material effect on the prior year's financial statements. What action would be the most appropriate for the accountant to take?

Make inquiries to determine how the information will affect the prior year financial statements

An overall response to address a high-assessed risk of material misstatement at the financial statement level of a nonissuer may include:

Providing more supervision of the audit team

What opinions result from scope limitations?

Qualified or disclaimer of opinion are the results of scope limitaitons

What does quality control apply to?

Quality control applies to auditing, attestation, and accounting and review services

What is the primary purpose of reviewing conflict of interest statements signed by members of management?

To identify transaction with related parties

If the business environment is experiencing a recession, the auditor would focus increased attention on which account?

Allowance for doubtful accounts (It is likely that customers will default on payments owed during a recession)

Which two risks are the subrisks of Risk of Material Misstatement?

Inherent Risk and Control Risk

Faulty human judgment is what type of risk?

Inherent risk

A company's management provided its auditors with information concerning litigation, claims, and assessments. What is the auditor's primary means of corroborating management's information?

Inquiring of company's outside counsel

Which audit procedure should be combined with other audit procedures when testing the operating effectiveness of controls?

Inquiry

Which auditing technique combines fictitious and real data without the client being aware of the process?

Integrated Test Facility

Integrated audits may be performed for who?

Integrated audits = nonissuers (not required though)

Interim testing increases/decreases the risk that the auditor will not detect material misstatements in the financial statements?

Interim testing INCREASES the risk that the auditor will not detect material misstatements in the financial statements

The auditor uses a working trial balance that contains separate columns for _________.

Reclassifications and adjustments

What is the first step an auditor should take when they become aware of a material departure from GAAP?

Recommend that the client revise the financial statements to conform to GAAP (If the financial statements are not revised then the auditor may consider modifying the report, and if the modification is inadequate the auditor should withdraw from the engagement)

When a material misstatement is discovered, what is the effect on detection risk and the extent of substantive procedures?

The acceptable level of detection risk decreases, and the extent of substantive procedures increases

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that what is met?

The prospective financial statements include a summary of significant assumptions

What information should a practitioner include in the standard report on an examination of prospective financial statements?

The prospective results might not be achieved

An accountant's compilation report on a financial projection that does NOT contain a range should include a statement that:

There will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected

What are Generalized Audit Software Packages (GASPs)?

They allow the auditor to perform tests of controls and substantive tests directly on the client's system. They do not require the auditor to have technical knowledge.

How should control deficiencies in internal controls be communicated?

They must be communicated to management ONLY either orally or in writing. Communication should be made within 60 days of the report release date for nonissuers or before the report release date for issuers.

What objective is achieved when an auditor decides to employ classical variable sampling?

To determine the inventory quantities on hand

What is the equation involving sample deviation rate and tolerable deviation rate?

Tolerable deviation rate - Allowance for sampling risk > Sample deviation rate OKAY TO USE Tolerable deviation rate - Allowance for sampling risk < Sample deviation rate NOT OKAY TO USE

Tracing = ____ assertion Vouching = ____ assertion

Tracing = Completeness Vouching = Existence

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

Treasurer (The treasurer does not perform duties that are incompatible with authorizing write-offs since he or she is usually not involved with sales transactions or recordkeeping. The answer is not Accounts Receivable because that would cause an improper segregation of duties)

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of _______.

Understandability and Classification, and Existence

If the auditor finds a material misstatement and brings it to the attention of the client and the client agrees to address and fix the issue promptly, what opinion should be given?

Unmodified opinion

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

Valuation and allocation

When an auditor expresses an adverse opinion on the financial statements, the auditor should issue a report on compliance only if:

When an auditor has expressed an adverse opinion or disclaimer of opinion on the financial statements, the auditor should issue a report on compliance only when instances of noncompliance are identified. Negative assurance is not provided in this report.

When should the auditor choose to apply substantive tests to balance sheet accounts at an interim period?

When inherent risk and control risk are low

When should the group engagement partner make reference to the component auditor?

When the auditor is unable to review the work of the component auditor they must reference their work, this is because normally the auditor would assume responsibility but is now unable to assume the responsibility of that data because they were unable to review it

What is the Parallel Simulation method?

When the auditor reprocesses some or all of the live data and compares it to the client's data

What is the Test Data method?

When the auditor tests the client's system offline

When are contingent fees allowed and not in violation of the Contingent Fees Rule?

When the fees are tax matters based on the results of judicial proceedings or the findings of governmental agencies (i.e. IRS)

When should an auditor perform substantive tests as of an interim date?

When the risk of material misstatement is low because interim testing increases the risk that the auditor will not detect material misstatements in the financial statements

When should positive confirmations be used for AR?

When there are large individual accounts When there are expected errors or items in dispute When internal controls are weak

When is stratified sampling best to be used?

When there is a lot of variation among items in the population

When can a program-specific audit be done in place of a single audit?

When there is only ONE federal assistance program AND no financial statement audit is required

What is negative assurance?

When we can assume something is true because there is no evidence to the contrary

What is positive assurance?

When we can confirm information is true because it is backed up by data and/or documentation

If a service auditor is unable to obtain a written assertion from the service organization's management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to:

Withdraw from the engagement unless prohibited by law

When materiality of the financial statements as a whole is revised, is it possible that materiality of individual transactions need to be revised as well? Y/N

YES, when materiality of the financial statements as a whole are revised then it is entirely possible that specific transactions will need materiality revised as well

May the accountant have a duty to disclose to the SEC when the client reports an auditor change?

Yes

As the acceptable level of detection risk decreases, an auditor may change the ______.

nature of substantive tests from a less effective to a more effective procedure

What is the name of the item the auditor should be looking for to assist in identifying related party transactions?

"Guarantee" (Guarantees are commonly provided by and for related parties)

When a question on the exam says that the CPA wants to gain assurance that something is "valid", this is another way of saying we are testing what?

"Valid" = Existence

The standard accountant's report issued after reviewing the financial statements of a nonissuer in accordance with SSARS should state that:

Accountant is not aware of any material modifications that should be made to the financial statements for them to be in conformity with GAAP

A departure from GAAP results in what opinion?

Adverse opinion

According to the US Department of Labor (DOL), an auditor of an employee benefit plan would be considered independent if:

An actuary associated with the auditor's firm renders services to the plan

What are embedded audit modules?

An application program collects transaction data for the auditor. The auditor MUST be involved with the program design

What is the most likely sequence of events an auditor might follow in considering internal control?

An auditor performs tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so

Where are you likely to see the responsibilities of management listed out?

An engagement letter should include the responsibilities of management

Comparing current-year balances to prior-year balances is what type of procedure?

Analytical procedure

Increase in variability during the year = _________ in sample size

Increase in variability during the year = Increase in sample size

Reduced control risk = ___________ sample size

Reduced sample size

What standards are applicable for a compilation of a nonissuer?

SSARS

What is the equation for the Upper Deviation rate?

Sample Deviation Rate + Allowance for Sampling Risk ---------------------------------- Upper Deviation Rate

What is the relationship between the PCAOB and the SEC?

The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers

Management should address written representations about a firm's annual audit to whom?

The auditor

If the auditor finds that controls are not operating effectively during a test of controls, what are the two options the auditor has?

The auditor can either test alternative controls or respond to the assessed risk of material misstatement with more reliable and extensive substantive procedures

What is unique about the Risk of Material Misstatements (and it's subrisks)?

The auditor cannot do anything to change the risk (However, the auditor can change their assessment of the risk or their reliance on the controls)

Who are the only individuals that get notified of any identified fraudulent activity?

The auditor only notifies the client's senior management and those charged with governance

What happens when written assertion is not obtained and the client is not the responsible party?

The report may be issued but its use should be restricted

The audit work of an assistant should be reviewed to determine whether it was adequately performed and to evaluate whether:

The results are consistent with the conclusions to be presented in the auditor's report

Manual controls are better than automated controls when _____.

There are large, unusual, or nonrecurring transactions

What is the main purpose of dual purpose tests?

They increase audit efficiency (unlike substantive tests, dual purpose tests are not required)

What is a Type 1 report vs a Type 2 report?

Type 1 report: Design only Type 2 report: Design and operating effectiveness

What control objective is achieved by reviewing and testing control procedures over physical inventory count?

Verification of existence of inventory

In the inventory cycle, what is a Test Count that is done by a CPA?

When the CPA tests counts of certain items to verify that the client's count is correct. A test of controls is good because it checks off multiple assertions

When is it acceptable that an auditor makes use of a specialist who has a contractual relationship with the client?

When the auditor evaluates the effect of the relationship on the specialist's objectivity

What is the earliest date an auditor can date the audit report?

When the auditor has obtained sufficient appropriate audit evidence to support an opinion

Under government audit standards, when control risk has been assessed at the maximum level for assertions related to computerized information systems that materially impact the financial statements, the auditor should document: 1. The basis for assessing control risk at the maximum 2. The planned audit procedures designed to reduce audit risk 3. Management's acknowledgement of the assessed level of risk

1 and 2 only

A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in _____.

A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in ESTIMATE. (If it is a change in principle, then a modified opinion would be given)

When an independent CPA is associated with the financial statements of an issuer but has not audited or reviewed such statements, the appropriate form of report to be issued must include:

A disclaimer of opinion

What is reasonable assurance?

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

What is the auditor's primary means of obtaining corroboration of information furnished by management concerning litigation, claims, and assessments?

A letter of audit inquiry to the client's lawyer

Financial statements for a year ended 12/31 are required to be adjusted if what even takes place in January?

A major customer files for bankruptcy

What are Critical Audit Matters (CAMs)?

A matter that was communicated to the audit committee and relates to material accounts/disclosures in the financial statements and involved especially challenging/subjective/complex judgement

What edits are made to an audit report if prepared with the framework of another country but distributed inside the United States?

A normal US style report with an Emphasis of Matters paragraph identifying the framework, a reference to the notes, indicating that the framework differs from US GAAP

What type of assurance is provided by special reports?

A positive opinion MAY be rendered in some types of special reports

A report issued on significant deficiencies in internal control noted during a financial statement audit of a nonissuer should contain what

A restriction on the use of the report, an indication that the purpose of the audit was to report on the financial statements, and the definition of material weaknesses

How much assurance is provided for a review vs for a compilation?

A review has limited assurance A compilation has no assurance

What must be done before a comfort letter may be issued

A review of interim financial information is required

If an auditor cannot obtain audited financial statements that are immaterial, what must be issued?

A scope limitation

To what degree is a significant deficiency related to a material weakness?

A significant deficiency is less severe than a material weakness

Management's written representation to the auditor in connection with a governmental audit would most likely include

A statement that management has disclosed any communications from grantors concerning possible noncompliance

When an accountant compiles the financial statements of a nonissuer in accordance with SSARS, the accountant's report should include:

A statement that the accountant does not express an opinion on the financial statements

When an accountant compiles a client's financial statements accompanied by supplemental information, what is required of the accountant's separate report on the supplemental information?

A statement that the information has been compiled from information that is the representation of management without audit or review

What is a dual purpose test?

A test of controls done concurrently with a test of details

When do lawsuits, audit fees, and credit card fees each separately impair independence?

A threatened/likely lawsuit impairs independence, audit fees that are overdue by more than one year impair independence, and credit card fees in excess of $10,000 impair indendence

SSARS includes reviews of nonissuers AND what?

SSARS also includes the reviews of unaudited financial statements (SSAEs cover all other types of reviews)

In planning an audit, the auditor's knowledge about the design of relevant internal control activities should be used to A. Identify the types of potential misstatements that could occur. B. Assess the operational efficiency of internal control. C. Determine whether controls have been circumvented by collusion. D. Document the assessed level of control risk.

A. Identify the types of potential misstatements that could occur.

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's auditing practice? A. Acceptance of a client relationship. B. Professional skepticism of management. C. Computer information processing. D. Efficiency of organizational structures.

A. Acceptance of a client relationship.

Which of the following matters does an auditor usually communicate to management? A. Arrangements involving a predecessor auditor B. Indications of adverse key financial ratios C. An agreement regarding preliminary materiality thresholds D. Identification of recurring operating losses

A. Arrangements involving a predecessor auditor

Which of the following factors would most likely influence the form and extent of the auditor's documentation of an entity's internal control environment? A. Complexity and size of the entity B. Amount of audit work performed at an interim date C. Amount of audit work performed by the internal auditor D. Results of verifying material account balances

A. Complexity and size of the entit

Which of the following procedures would a CPA most likely include in planning a financial statement audit? A. Determine the extent of involvement of the client's internal auditors. B. Ask the client's lawyer if contingencies have been recorded in conformity with GAAP. C. Obtain a written representation letter from the client's management. D. Scan the client's journals and ledgers to identify any unusual transactions.

A. Determine the extent of involvement of the client's internal auditors.

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice? A. Engagement performance. B. Risk analysis. C. Safeguarding of assets. D. Information processing.

A. Engagement performance.

Which of the following levels would most likely address the risk of material misstatement by the auditor's consideration of an entity's control environment? A. Financial Statements B. Disclosures C. Classes of transactions D. Specific account balances

A. Financial Statements

Which of the following statements is correct with regard to management use of a broker's quotation to support a fair value estimate? A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation. B. A broker's quotation that is based on a cash flow methodology CANNOT be accepted C. The auditor is NOT required to obtain an understanding of the broker's methodology for obtaining the fair value estimate D. A broker's quotation that is based on a combination of methodologies CANNOT be accepted

A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation.

Which of the following procedures does a CPA usually perform when reviewing the financial statements of a nonissuer? A. Make inquiries of management concerning restrictions on the availability of cash balances. B. Communicate deficiencies in the design of internal control to the entity's audit committee. C. Examine trend analysis to determine the appropriateness of the CPA's assessment of detection risk. D. Evaluate management's plans for dealing with negative trends and financial difficulties.

A. Make inquiries of management concerning restrictions on the availability of cash balances.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A. Management displays a significant disregard for regulatory authorities. B. There is a lack of turnover of employees in the accounting department. C. Monthly bank reconciliations usually include several deposits in transit. D. Equipment is usually sold at a loss before being fully depreciated.

A. Management displays a significant disregard for regulatory authorities.

Which of the following matters is included in a typical comfort letter? A. Negative assurance on whether unaudited condensed financial information complies in form with the accounting requirements of the SEC. B. An opinion on whether any fraud risk factors indicate significant incentive and opportunity relating to fraudulent financial reporting. C. Positive assurance on whether there has been any change in capital stock or long-term debt since the date of the audited financial statements. D. An opinion on whether the entity's internal control components are operating as designed in achieving their stated objectives.

A. Negative assurance on whether unaudited condensed financial information complies in form with the accounting requirements of the SEC.

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 to 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

A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should A. Obtain a letter of representation from the former client's management. B. Make inquiries of the former client's attorney regarding pending litigation. C. Review the former client's records to verify its compliance with debt and loan agreements. D. Consider whether there is substantial doubt about the former client's ability to continue as a going concern.

A. Obtain a letter of representation from the former client's management.

An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely would reduce the A. Planned reliance on the prescribed control. B. Assessed level of control risk. C. Planned reliance on substantive tests. D. Tolerable rate of deviations.

A. Planned reliance on the prescribed control.

Which of the following is a sampling risk that is associated with the efficiency of an audit? A. Risk of assessing control risk too high B. Risk of incorrect acceptance C. Inherent risk D. Detection risk

A. Risk of assessing control risk too high

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the A. Sales journal to the shipping documents.B. Shipping documents to the cash receipts journal.C. Cash receipts journal to the customer's purchase orders.D. Customer's purchase orders to the sales journal.

A. Sales journal to the shipping documents.

If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end? A. Tests of details for the entire year under audit B. Tests of details of activity during the period since the interim testing date C. Reconciliation of year-end balances to interim balances D. Substantive analytical procedures of the period since the interim testing date

A. Test of details for the entire year under audit

An auditor of a nonissuer may not issue a qualified opinion when A. The auditor lacks independence with respect to the entity. B. Management prevents the auditor from observing the entity's inventory. C. The entity omits the statement of cash flows from its financial statements. D. The auditor's report refers to the work of an actuary.

A. The auditor lacks independence with respect to the entity.

What is the relationship between material weaknesses and significant deficiencies?

All material weaknesses are significant deficiencies (aka the square), but not all significant deficiencies are material weaknesses (aka the rectangle)

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A. The entity's industry is experiencing declining customer demand. B. Employees who handle cash receipts are not bonded. C. Bank reconciliations usually include in-transit deposits. D. Equipment is often sold at a loss before being fully depreciated.

A. The entity's industry is experiencing declining customer demand.

The spouse of a covered member of an accounting firm is in a permitted employment situation at an attest client and participates in the client's employee stock ownership plan. According to the AICPA Code of Professional Conduct, which of the following actions is required of the spouse when beneficial financial interests are distributed? A. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained. B. The spouse must hold the shares for a minimum of 30 days after the right to dispose is obtained. C. The spouse must serve as a trustee for the share-based compensation arrangement to receive put options as part of the compensation arrangement. D. The spouse must not exercise any put option to require the employer to repurchase the beneficial financial interests until after 30 days from receipt.

A. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? A. There are unusual discrepancies between the entity's records and confirmation replies. B. Management enforces strict budgetary controls over the entity's departmental supervisors. C. Cash transactions are electronically processed and recorded, leaving no paper audit trail. D. The monthly bank reconciliation ordinarily includes several large outstanding checks.

A. There are unusual discrepancies between the entity's records and confirmation replies.

Which of the following sampling methods would an auditor use to estimate a numerical measurement of a population, such as the dollar value of inventory? A. Variable sampling. B. Discovery sampling. C. Attribute sampling. D. Random-number sampling.

A. Variable sampling.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should A. Verify the account balance by inspecting the client's bank statements and cash receipt records. B. Select at random a different account for confirmation that is approximately the same size. C. Request the client's management to document the matter in the management representation letter. D. Explain to the client that the request will most likely cause the auditor to disclaim an opinion.

A. Verify the account balance by inspecting the client's bank statements and cash receipt records.

Which of the following is a requirement for an audit of both an issuer's and a nonissuer's financial statements? A.The auditor is required to assess the risk of fraud. B.The auditor is required to refer to a recognized control framework in performing theaudit of internal control over financial reporting. C.The auditor is required to express an opinion on the effectiveness of the company'sinternal control over financial reporting. D.The auditor is required to assess the effectiveness of management's

A.The auditor is required to assess the risk of fraud.

What is the Audit Risk equation?

AR = IR x CR x DR

What is the name of the rule that tells auditors to give clients paperwork when requested and that audit work should be done in a timely manner?

Acts Discreditable Rule

A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which opinion should the practitioner issue?

Adverse opinion

Which paragraph contains the phrase "Do not present fairly"?

Adverse opinion paragraph

Which report under SSAE always has restricted use?

Agreed-upon procedures always have restricted use

The AICPA Code of Professional Conduct includes which of the following as discreditable acts? 1. Failure to return client records upon request 2. Negligence in preparing client records 3. Failure to file a personal tax return on a timely basis

All 3 are discreditable acts

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting:

An inspection

When are analytical procedures required?

Analytical procedures are required during planning and as a final review (use of analytical procedures as a substantive test is optional)

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit

what is auditors responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?

Apply limited procedures to the information (This is to determine that it is consistent with the basic audited financial statements, also the auditor would add an other matter paragraph to the report)

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. What action would the auditor most likely take?

Audit the prior year inventory using alternative substantive procedures

In which of the following engagements would a practitioner provide limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date? A. A compilation of a financial projection B. A review of pro forma financial information C. An examination of management's discussion and analysis D. An audit of condensed interim financial information

B. A review of pro forma financial information

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Influence the design of internal control

A report including the following language "This report is intended solely for the information and use of the board of directors and management of X Company, and is not intended to be and should not be used by anyone other than the specified parties." This report would most likely relate to which of the following engagements? A. A report on a specified element in a financial statement, where that element is prepared in accordance with the tax basis of accounting B. A report on the client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements C. A report on financial statements prepared on the cash basis of accounting D. A report on an examination of a financial forecast

B. A report on the client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements (A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language)

Which of the following should a practitioner include in an agreed-upon procedures report? A. Negative assurance about whether the subject matter is fairly stated based on the criteria. B. All findings from application of the agreed-upon procedures. C. The statement that "Nothing came to my attention that caused me to believe that the subject matter is not presented based on the criteria." D. Positive assurance about whether the subject matter is fairly stated based on the criteria.

B. All findings from application of the agreed-upon procedures.

Which of the following factors most likely would be considered an inherent limitation to an entity's internal control? A. The ineffectiveness of the entity's audit committee. B. Collusion of employees in circumventing internal controls. C. The lack of resources to monitor internal controls. D. The complexity of the entity's electronic order processing system.

B. Collusion of employees in circumventing internal controls.

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that A. Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records. B. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate. C. When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk. D. Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.

B. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order, the auditor ordinarily would replace the voided purchase order with another if the voided purchase order A. Represents office equipment ordered and never received. B. Has been properly voided in the normal course of business. C. Represents office equipment ordered and canceled before being processed by the vendor. D. Has been electronically deleted from the purchase order file.

B. Has been properly voided in the normal course of business.

Which of the following factors most likely would cause an accountant not to accept an engagement to compile the financial statements of a nonissuer? A. A lack of segregation of duties in the entity's accounting and payroll departments. B. Indications that reports of asset misappropriation are not investigated by management. C. The entity's intention to omit from the financial statements substantially all of the disclosures required by GAAP. D. Management's acknowledgment that the financial statements will be included in a written personal financial plan.

B. Indications that reports of asset misappropriation are not investigated by management.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A. Verify inventory pledged under loan agreements by confirming the details with financial institutions. B. Inquire about the current status of transactions that were recorded on the basis of preliminary data. C. Compare the financial statements being reported on with those of the prior year. D. Trace information from shipping documents to sales invoices and sales journal transactions.

B. Inquire about the current status of transactions that were recorded on the basis of preliminary data.

Mills, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mills' report on these agreed-upon procedures should A. Disclaimer of opinion about the fair presentation of Modern's financial statements. B. List of the procedures performed (or reference thereto) and Mills' findings. C. Opinion about the effectiveness of Modern's internal control activities concerning royalty payments. D. Acknowledgment that the sufficiency of the procedures is solely Mills' responsibility.

B. List of the procedures performed (or reference thereto) and Mills' findings.

A registered accounting firm must adhere to all of the following during an audit of an issuer except for which of the following: A. Describe the scope of the internal control testing performed B. Maintain audit documentation for at least five years C. Provide a second partner review of each audit report D. Monitor independence from issuers who are audit clients

B. Maintain audit documentation for at least five years. The registered accounting firm must maintain audit documentation for at least seven years (Note, the registered accounting firm must provide a concurring or second partner review of each audit report)

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to A. Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. B. Minimize the likelihood of associating with clients whose management lacks integrity. C. Document the matters that are required to be communicated to the audit committee. D. Enhance the auditor's understanding of the client's business and its industry.

B. Minimize the likelihood of associating with clients whose management lacks integrity.

Which of the following procedures would an auditor most likely perform before the balance sheet? A. Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor. B. Obtain an understanding of the client's internal control activities. C. Determine whether there are any liens or encumbrances on assets that have been pledged as collateral. D. Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations.

B. Obtain an understanding of the client's internal control activities.

During the compilation of a client's financial statements, an accountant comes to believe that the financial statements are materially misstated. The accountant should A. Allow the client to decide whether modifications are needed to properly present the financial statements. B. Obtain the additional or revised information needed to correct the financial statements. C. Limit any investigation of the potential misstatements to inquiries of the client. D. Perform no additional procedures.

B. Obtain the additional or revised information needed to correct the financial statements.

Which of the following events most likely would indicate the existence of related party transactions? A. Insuring the lives of key executives and listing the entity as beneficiary. B. Selling real estate at a price that differs significantly from its appraised value. C. Making a loan with specific scheduled terms for repayment of the funds. D. Granting stock options to key executives at favorable prices.

B. Selling real estate at a price that differs significantly from its appraised value.

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions? A. There are significant differences between the entity's forecasted financial statements and the financial statements to be audited. B. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management. C. There have been substantial inventory write-offs just before the year end in each of the past four years. D. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.

B. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

Which of the following, discovered during an audit, most likely would raise a question concerning possible illegal acts? A. Related party transactions, although properly disclosed, were pervasive during the year. B. The entity prepared several large checks payable to cash during the year. C. Material internal control weaknesses previously reported to management were not corrected. D. The entity was a campaign contributor to several local political candidates during the year.

B. The entity prepared several large checks payable to cash during the year.

Which of the following factors most likely would heighten an auditor's concern about the risk of material misstatement arising from the misappropriation of assets? A. There is a potential for bias in the preparation of accounting estimates. B. The entity's fixed assets lack ownership identification. C. Management recently adopted new accounting principles. D. The entity recently experienced rapid growth in revenue.

B. The entity's fixed assets lack ownership identification.

Which of the following cognizant agencies is most likely to be assigned to an auditee? A. The federal agency that is located with in the auditee's region B. The federal agency that provides the most funding to the auditee C. An independent federal agency that does NOT provide funding to the auditee D. A preselected federal agency whose sole purpose is to monitor single audits

B. The federal agency that provides the most funding to the auditee

What is the "top-down approach" used during an audit of internal control over financial reporting?

Begin by understanding the overall risks to internal control over financial reporting at the financial statement level

Which is following is appropriate for limited use in an examination, financial forecasts or financial projections?

Both financial forecasts and financial projections are appropriate for limited use

An accountant is engaged to perform compilation services for a new client in an industry with which the accountant has no previous experience. How should the accountant obtain sufficient knowledge of the industry to perform the compilation service?

By consulting AICPA guides, industry publications, or individuals knowledgeable about the industry

A CPA was engaged to calculate the rate of return on a specified investment according to an agreed-upon formula and verify that the resultant percentage agrees to the percentage in an identified schedule. The CPA's report on these agreed-upon procedures should contain A. An opinion about the fairness of the agreed-upon procedures. B. A separate paragraph describing the effectiveness of the internal controls. C. A disclaimer of responsibility for the sufficiency of those procedures. D. A disclaimer of opinion on the fair presentation of the financial statements.

C. A disclaimer of responsibility for the sufficiency of those procedures.

An auditor decides not to perform tests of the operating effectiveness of controls surrounding receivables. Which one of the following is not likely to be a reason for this decision? A. Due to the lack of a paper audit trail, it is not possible for appropriate control tests to be performed B. The design of controls surrounding accounts receivable is inadequate C. A very material error is noted in the accounts receivable account D. It would be faster to do extensive substantive testing of the year end receivables balance than it would be to test the related controls

C. A very material error is noted in the accounts receivable account (An error in the receivables balance is not definitive evidence that controls are not working. The auditor would need to evaluate the situation surrounding the error to determine its cause)

During an engagement to compile the financial statements of a nonissuer, an accountant becomes aware that management had stated land at appraised value and that, if GAAP had been followed, both the land account and stockholders' equity would have been decreased by $1 million, a material amount. The accountant decides to modify the standard compilation report because management will not revise the financial statements. Under these circumstances, the accountant should A. Issue either an adverse opinion or a qualified opinion, depending on materiality, because of the departure from GAAP. B. Add a separate paragraph to the accountant's report that restricts the distribution of the financial statements to "internal use only." C. Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements. D. Add a separate paragraph to the accountant's report that explains the underlying purpose of recording assets at historical cost.

C. Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements.

Which of the following individuals would be considered a predecessor auditor? A. A client's accounting employee who audits the company's branches, subsidiaries, or other outlying locations from the company's home office. B. A client's accounting employee responsible for the preparation of the company's financial statements. C. An independent CPA who was engaged to perform, but did not complete an audit of financial statements. D. An independent CPA who is considering accepting an engagement to audit financial statements.

C. An independent CPA who was engaged to perform, but did not complete an audit of financial statements.

Which of the following activities is not an element of a CPA firm's quality control system to be considered in establishing quality control policies and procedures? A. Deciding whether to accept or continue a client relationship. B. Selecting personnel for advancement who have the necessary qualifications. C. Assessing a client's ability to establish effective internal controls. D. Monitoring the effectiveness of professional development activities.

C. Assessing a client's ability to establish effective internal controls.

Which of the following fraudulent activities most likely could 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. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

An accountant is reporting on comparative financial statements that include year 1 and year 2 as part of a review engagement for a nonissuer. Current management was not in place until halfway through year 2. At the completion of the year 2 review, the accountant should obtain representations from management that cover A. The second half of year 2, but no other periods, from current management. B. Year 1, but not year 2, from current management. C. Both year 1 and year 2 from current management. D. Year 1 and the first half of year 2 from prior management and the second half of year 2 from current management.

C. Both year 1 and year 2 from current management.

Which of the following services provides the LEAST assurance regarding the fairness of financial statements? A. Review B. Audit C. Compilation D. Attestation

C. Compilation

In order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, an auditor should establish a A. Materiality for the group financial statements that is lower than the component materiality. B. Materiality for the group financial statement that exceeds prior-year materiality for the group financial statements. C. Component materiality that is lower than the materiality for the group financial statements. D. Component materiality that is equal to the materiality for the group financial statements.

C. Component materiality that is lower than the materiality for the group financial statements.

In the integrated audit of an issuer, an auditor has identified entity-level controls that are important to the conclusion as to whether the company has effective internal control over financial reporting. Each of the following is an example of an entity-level control, except A. Controls over the period-end financial reporting process. B. The company's risk assessment process. C. Controls over the completeness of deposited cash. D. Controls over management override.

C. Controls over the completeness of deposited cash.

Audit evidence is obtained by the auditor when performing all of the following, except when: A. Completing a risk assessment B. Performing substantive procedures C. Determining the sample size D. Reviewing the previous audit

C. Determining the sample size

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because A. All accounts do not have an equal opportunity to be selected for confirmation. B. Accounts unconfirmed may have already been written off as uncollectible. C. Few responses may occur because more effort is required of recipients. D. Accounts actually confirmed may not be representative of the population.

C. Few responses may occur because more effort is required of recipients.

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer? A. Make inquiries of management about actions taken at board of directors' meetings. B. Study the relationships of financial statement elements expected to conform to predictable patterns. C. Identify internal control activities that are likely to prevent or detect material misstatements. D. Compare the financial statements with anticipated results in budgets and forecasts.

C. Identify internal control activities that are likely to prevent or detect material misstatements.

A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services is limited to presenting A. Accounting data that conforms with a special purpose framework other than GAAP. B. Unaudited financial statements that omit substantially all required GAAP disclosures. C. Information in the form of financial statements that is the representation of management. D. Supplementary financial information that has been subjected to inquiry and analytical procedures.

C. Information in the form of financial statements that is the representation of management.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. Management reputation for failing to provide schedules to prior auditors on a timely basis. B. The CPA's inability to review the predecessor auditor's working papers. C. Management's unwillingness to make all financial records available to the CPA. D. The CPA's lack of understanding of the entity's operations and industry.

C. Management's unwillingness to make all financial records available to the CPA.

A user auditor of a nonissuer should perform which of the following procedures to obtain audit evidence related to the operating effectiveness of a service organization's controls when the risk assessment includes an expectation that the controls are operating effectively? A. Obtaining the user organization's representation regarding the effectiveness of the service organization's controls. B. Obtaining and reading a Type 1 report, if available. C. Obtaining and reading a Type 2 report, if available. D. Performing substantive tests at the service organization.

C. Obtaining and reading a Type 2 report, if available.

During a review of a nonissuer, does the accountant: A. Perform audit procedures B. Evaluate internal controls C. Perform analytical procedures

C. Perform analytical procedures

According to rules issued under the Sarbanes-Oxley Act, which of the following nonaudit services is an accounting firm permitted to provide for an issuer audit client without impairing the accounting firm's independence? A. Providing an expert opinion in order to advocate the client's interest in litigation. B. Providing an expert opinion in order to advocate the client's position in a regulatory investigation. C. Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client. D. Providing legal services to the client in a foreign jurisdiction.

C. Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client.

Which of the following internal control activities would not be effective for detecting misstatements of inventory item pricing schedules? A. Segregation of duties between customer invoicing and inventory valuation. B. Comparison of sales invoices to price lists on a test basis. C. Review of vendor lists for fictitious vendors in the system. D. Comparison of groups of items to sales reports and subsequent investigation of unusual variances.

C. Review of vendor lists for fictitious vendors in the system.

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonissuer's financial statements? A. The accountant expresses no assurance on the financial statements. B. The accountant should obtain a written management representation letter. C. The accountant need not obtain an understanding of internal control. D. The accountant must be independent in fact and appearance.

C. The accountant need not obtain an understanding of internal control.

Subsequent to the issuance of the audit report for the final year of a three-year contract, a fact is discovered that may have affected the final year's report. Which of the following actions is the auditor required to take? A. The auditor is not required to do anything because the auditor was discharged for reasons other than professional misconduct after the audited financial statements were issued. B. The auditor is not required to do anything because once the auditor has reported on audited financial statements, the auditor has no responsibility to carry out any retrospective review of the workpapers or show the effect of any newly discovered facts on them. C. The auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report. D. The auditor is required to reissue the auditor's report and to reference discovery of the fact.

C. The auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report.

Which situation would constitute an improper segregation of duties related to payroll? A. The treasurer signs paychecks, distributes them, and holds any unclaimed checks B. The payroll department, which computes and records payroll information, also prepares the paychecks C. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department D. The personnel department, which authorizes new hires, is also responsible for approving annual pay rate increases

C. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department (Approving timesheets is an authorization function, which should be separated from custody of assets)

During a review of financial statements, an accountant decides to emphasize a matter in the review report. Which of the following is an example of a matter that the accountant would most likely want to emphasize? A. Other entities in the same industry have recently changed from LIFO to FIFO B. The IRS has notified the entity that it intends to audit income tax returns for prior years C. The entity has had significant transactions with related parties D. The entity has had significant tax expenses as a result of a new tax law

C. The entity has had significant transactions with related parties

In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would A. Confirm with those members of management as to whether they are actually option holders. B. Verify the existence of option holders in the issuer's payroll and human resources records. C. Trace the authorization for the options granted to the board of directors' approval. D. Review the public records of the SEC to determine whether the options were properly reported.

C. Trace the authorization for the options granted to the board of directors' approval.

What are the special purpose frameworks?

Cash basis and modified cash basis Tax basis Regulatory basis Contractual basis Other basis

What information is included in the Other Matters paragraph?

Change in Audit opinion Restrict the use of the report Prior Financial Statements audited by predecessor and prior report is not presented Comparative financial statements and current year is audited and prior year was not audited Material inconsistency in the other information Report on supplemental information Refer to required supplemental information Report on compliance included in Auditor's Report

What wording is changed when we give a disclaimer of opinion?

Change the wording in the intro to "we were engaged..."

According to the AICPA Code of Professional Conduct, what records must a CPA return to the client when requested?

Client-provided records, even if fees are due to the CPA for the engagement and are unpaid

What procedures should the auditor generally perform regarding subsequent events in relation to interim financial statements?

Compare the latest interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited

What type of engagement is an accountant allowed to perform when there is a lack of independence?

Compilation DOES NOT need independence

When should an auditor report on comparative financial statements between financial statements that omit substantially all disclosures required by GAAP with standard financial statements?

Compiled financial statements that omit substantially all GAAP disclosures are not comparable to financial statements including such disclosures. The accountant should not issue a report in this situation

Verifying that all sales have been recorded is completeness/existence?

Completeness

A practitioner has examined a client's compliance with debt covenants associated with a bank loan and is ready to issue a report. What standards apply to the report?

Compliance attestation standards

What needs to be done for a Rights and Obligations test for Inventory by the CPA?

Confirm that inventory held offsite is accounted for at year end Confirm inventory in transit at year end should be properly accounted for based on shipping terms Confirm that consigned goods on hand are excluded form the physical inventory count/that consigned goods being held by consignees are included in the physical inventory count

What are the most reliable type of evidence and why?

Confirmations are among the most reliable types of evidence, as they constitute external evidence sent directly to the auditor

What is true about accounts receivable confirmations?

Confirmations may be based on single transactions rather than entire customer balances

Which component of internal control would be considered the foundation for the other components?

Control environment

What is controlled processing vs. controlled reprocessing in the parallel simulation method?

Controlled processing = The auditor observes actual processing run and compares it to expected results Controlled reprocessing = The auditor uses an archived copy to reprocess transactions

When dealing with cutoff, we care more about documents before year end/after year end?

Cutoff = BEFORE year end

In which of the following situations would an auditor who is rendering an audit opinion on the financial statements of an employee benefit plan that will be filed with the Department of Labor be considered independent? A. The auditor's spouse has obtained an immaterial direct financial interest in the employee benefit plan. B. The auditor obtained a material indirect financial interest in the employee benefit plan. C. A member of the auditor's firm was an investment advisor to the employee benefit plan during the period of professional engagement but was not providing services as of the date of the opinion. D. A member of the auditor's firm was a voting trustee of the plan in a prior year but has since disassociated from the plan and did not participate in auditing the financial statements of the plan.

D. A member of the auditor's firm was a voting trustee of the plan in a prior year but has since disassociated from the plan and did not participate in auditing the financial statements of the plan.

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review, except: A. Identification of the engagement quality reviewer and others who assisted the review B. Identification of the documents reviewed by the engagement quality reviewer and others who assisted the reviewer C. The date on which the engagement quality reviewer provided concurring approval of issuance D. An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team

D. An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team

If an auditor has issued an adverse opinion on a complete set of financial statements, the auditor is precluded from expressing which of the following in an audit report on a single financial statement of the nonissuer entity? A. An adverse opinion. B. A disclaimer of opinion. C. A qualified opinion. D. An unmodified opinion.

D. An unmodified opinion.

If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first A. Communicate the lack of independence to the appropriate regulatory authority. B. Disclose the lack of independence to the nonissuer's management and consider revising the audit report. C. Withdraw from the engagement when permissible under law or regulation. D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.

D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.

In selecting an appropriate sample for a substantive test, the auditor most likely would stratify the population if the A. Auditor suspects that management fraud has occurred during the year. B. Desired assessed level of control risk is less than the prior year. C. Technique to be used is attribute sampling. D. Auditor plans to give greater representation to large recorded amounts.

D. Auditor plans to give greater representation to large recorded amounts.

Which of the following procedures would an auditor generally perform regarding subsequent events? A. Inspect inventory items that were ordered before the year end but arrived after the year end. B. Test internal control activities that were previously reported to management as inadequate. C. Review the client's cutoff bank statements for several months after the year end. D. Compare the latest available interim financial statements with the statements being audited.

D. Compare the latest available interim financial statements with the statements being audited.

When assessing an internal auditor's objectivity, an independent auditor should A. Perform tests of controls to determine whether significant internal control activities are properly maintained. B. Analyze the risk factors that relate to misstatements arising from the misappropriation of assets. C. Review the internal auditor's reports to verify that the conclusions reached are consistent with the procedures performed. D. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions.

D. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions.

For a performance audit in accordance with GAGAS, if certain pertinent information is excluded from the audit report due to the confidential or sensitive nature of the information, then the auditor should do which of the following? A. Issue a disclaimer. B. Issue a qualified report. C. Remove all reference to the information from the retained audit documentation. D. Disclose in the report that certain information has been omitted and the reasons that make the omission necessary.

D. Disclose in the report that certain information has been omitted and the reasons that make the omission necessary.

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of several leases that should be capitalized, but are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should A. Issue an adverse opinion because of the departure from GAAP. B. Express no assurance of any kind on the entity's financial statements. C. Emphasize that the financial statements are for limited use only. D. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

D. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

If an auditor includes an emphasis-of-matter paragraph to draw users' attention to a matter relevant to the users' understanding of the financial statements of a nonissuer, then the auditor should A. Indicate in the audit report that the emphasis-of-matter paragraph is required by law or regulation. B. Notify the appropriate regulatory authority if the auditor's opinion was modified on the basis of the matter. C. Modify the introductory paragraph to direct the reader to the emphasis-of-matter paragraph. D. Include the paragraph immediately after the opinion paragraph in the audit report.

D. Include the paragraph immediately after the opinion paragraph in the audit report.

An auditor should restrict the use of the auditor's communication related to the audit of a nonissuer's financial statements by including an alert when the written communication A. Discloses material weaknesses in internal control that elevate the risk of misstatements in the financial statements. B. Documents a financial risk that the auditor discussed with those charged with governance on previous audit engagements. C. Describes a potential change in accounting methods and its potential effect on the results of operations and financial position. D. Is based on measurement or disclosure criteria that the auditor determined to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria.

D. Is based on measurement or disclosure criteria that the auditor determined to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria.

Which of the following statements would most likely appear in an auditor's engagement letter? A. Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets. B. We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements. C. Management agrees to correct all deficiencies in internal control activities identified by us. D. Management is responsible for making all financial records and related information available to us.

D. Management is responsible for making all financial records and related information available to us.

An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP A. Is required to be included only in the auditor's report. B. Is required to be included only in the notes to the financial statements. C. Is required to be included both in the notes to the financial statements and the auditor's report. D. Need not be quantified and included in either the notes to the financial statements or the auditor's report.

D. Need not be quantified and included in either the notes to the financial statements or the auditor's report.

Prior to commencing the compilation of financial statements of a nonissuer, an accountant is required to A. Verify that the financial information supplied by the entity agrees with the books of original entry. B. Perform preliminary analytical procedures to identify accounts that may represent specific risks relevant to the engagement. C. Make inquiries of management concerning the entity's procedures used in adjusting and closing the books of account. D. Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity's industry.

D. Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity's industry.

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 receivable 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.

In searching for unrecorded liabilities, an auditor most likely would examine the A. Cutoff bank statement for deposits recorded in the books, but not by the bank. B. Details of accounts receivable confirmations that are classified as "exceptions". C. Files of purchase requisitions for items ordered just before the year end. D. Receiving reports for items received before year end, but not yet recorded.

D. Receiving reports for items received before year end, but not yet recorded.

An accountant has been engaged to compile a nonissuer's financial statements that contain several misapplications of accounting principles and unreasonable accounting estimates. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard compilation report is not adequate to communicate the deficiencies. Under these circumstances, the accountant should A. Disclaim an opinion on the financial statements and advise the board of directors that the financial statements should not be relied upon. B. Inform management that the engagement can proceed only if distribution of the accountant's compilation report is restricted to internal use. C. Determine the effects of the deficiencies and add a separate paragraph to the compilation report that describes the deficiencies and their effects. D. Withdraw from the compilation engagement and provide no further services concerning these financial statements.

D. Withdraw from the compilation engagement and provide no further services concerning these financial statements.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. The audit committee's approval of the initial selection of accounting principles. B. A lack of competition in the entity's industry, accompanied by increasing profit margins. C. Management's disclosure of unresolved litigation and contingent liabilities. D. Year-end adjustments by the entity that significantly affect financial results.

D. Year-end adjustments by the entity that significantly affect financial results.

Decrease in risk of acceptance = ____________ in sample size

Decrease in risk of acceptance = Increase in sample size

What circumstance requires modification of the accountant's report on a review of interim financial information of a publicly held entity prepared on the basis of GAAP?

Departures from GAAP lacking adequate disclosure require modification of the review report

Reporting standards for financial auditors under Government Auditing Standards differ from reporting standards under Generally Accepted Auditing Standards (GAAS) in that Government Auditing Standards require the auditor to:

Describe the scope of the auditor's tests of compliance with laws and regulations

An auditor most likely would apply analytical procedures in the overall review stage of an audit to:

Determine whether additional audit evidence may be needed (In performing analytical procedures as an overall review, the auditor determines whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit, and may decide that additional audit procedures are warranted. In addition, the auditor may identify unusual or unexpected balances not already noted during the audit, which would also require the application of further auditing procedures)

After the balance sheet date, an auditor's client suffers a material loss from a decline in value of marketable securities. What action should the auditor advise the client to take?

Disclose the material loss in the financial statements to assure that the financial statement are not misleading

When would the auditor most likely make a preliminary judgment about materiality?

During the planning stage

Performing a test of controls is associated with what operation of controls?

Effective operation of controls

Analytical procedures used in planning an audit should focus on _____.

Enhancing the auditor's understanding of the client's business

How does the auditor perform a completeness test for AP?

Ensure the AP listing agrees to the general ledger Obtain a sample of vendor statements and agree to the vendor accounts Perform a search for unrecorded liabilities

When are representation letters required under SSARS?

Everything under SSARS always requires a representation letter (preparations, compilations, reviews of nonissuers)

What is the result for each of the following: Examination? Review? Agreed-upon procedures?

Examination: Opinion Review: Conclusion Agreed-upon procedures: List of Findings

How much assurance is provided for each of the following: Examination? Review? Agreed-upon procedures?

Examination: Positive assurance Review: Negative assurance Agreed-upon procedures: No assurance

What are included under SSAES?

Examinations, reviews of issuers, and agreed-upon procedures

A scope limitation resulting in a qualified opinion requires modification to which paragraphs?

The Basis for Qualified Opinion Paragraph and the Opinion Paragraph

An auditor selects a sample from the files of invoices to determine if shipping documents were prepared. This test is performed to support management's financial statement assertion of:

Existence (The auditor is testing for items that were billed, but perhaps not shipped. This test addresses the existence assertion: Did a valid sale, as evidenced by shipment of goods, really occur)

Is existence or completeness a more relevant assertion when auditing the revenue cycle?

Existence is more important because the risk that AR and sales are overstated is high

In the AEIOU mnemonic for hierarchy of evidence, what distinction should be made for E?

External evidence directly received by the auditor is more valuable than external evidence that was held by client and sent to the auditor by the client

What task can be achieved using generalized audit software?

Filtering data based on accounts receivable data recording

When writing an audit plan, the audit objectives should relate primarily to what?

Financial statement assertions

While planning an engagement to issue a report on the application of the requirements of an applicable financial reporting framework to a specific transaction of a nonissuer, a reporting accountant should obtain an understanding of the:

Form and substance of the specific transaction

What is Kiting?

Fraud where cash is recorded in two places at once

What is Lapping?

Fraud where today's theft of cash covers yesterday's theft

Single Audits include which guidelines to be followed?

GAAS and GAS (GAS is included because the federal financial assistance is from the government, GAAS is implied since it's an audit)

Single Audit uses which guidelines?

GAAS and Government Auditing Standards

GAGAS was created by which board?

GAO (GAGAS is referred to as the "Yellow Book")

Which of the following types of control best describes procedures to ensure appropriate systems software acquisition?

General

When financial statements that an accountant has compiled in accordance with Statements on Standards for Accounting and Review Services (SSARS) omit substantially all disclosures required by Generally Accepted Accounting Principles (GAAP), the accountant's report should include ______.

Information alerting readers about omission of the disclosures and notification that the omission may influence the user's conclusions about the financial statements

What disclaimer of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?

Information is furnished as a matter of courtesy without a duty to do so without responsibility, liability, or warranty, expressed or implied.

What is NOT included in a review engagement that is typically included in other engagements?

In a review engagement the auditor does not assess control risk

Where would a scope limitation be mentioned in the audit report?

In the Basis for Qualified Opinion paragraph

What should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements?

Include a paragraph after the opinion paragraph that references the required supplementary information

What edits should be made to an auditor's opinion after issuing an unmodified opinion on a compliance audit and material noncompliance that occurred after the period is discovered?

Include an other matter paragraph describing the nature of the subsequent noncompliance

What is an advantage in using classical variables sampling rather than probability proportional to size (PPS) sampling?

Inclusion of zero and negative balances generally does NOT require special design considerations

If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, the the auditor would most appropriately:

Increase the assessed risks of material misstatement

Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, the successor should:

Indicate in an other matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements

An issuer's auditor is prohibited from providing tax services to who?

The CEO

The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with SSARS should state that the CPA:

Is not aware of any material modifications that should be made to the financial statements

An accountant agreed to perform a compilation of a company's financial statements under SSARS. During fieldwork, the accountant decided to perform some analytical procedures. What would the accountant do related to the compilation engagement?

Issue a compilation report even though review procedures were performed on the engagement.

For audits of issuers vs audits of nonissuers, which audit follows which standards?

Issuers = PCAOB Nonissuers = AICPA/ASB

Odd segregation of duties situation for Accounts Payable Clerk

It is OKAY for the AP clerk to approve the invoice for payment and record payment

Whose responsibility is it to identify and account for litigation, claims, and assessments?

It is management's responsibility. The attorney does provide a professional opinion regarding the estimates, but the primary purpose of the attorney's letter is to corroborate the information provided by management

What is true about appointing the external auditor after year end?

It is permitted as long as the auditor has considered and discussed with the client any limitations that may be caused by the late appointment

Does lapping or kiting pertain to cash that is stolen upon receipt from one customer's account

Lapping

Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer's review engagement?

Making inquiries of management regarding maturities, interest rate, and collateral

The responsibility to establish, maintain and monitor internal controls belongs to the entity's ___________.

Management

What statement would an auditor most likely require management to indicate in a written representation letter obtained for an audit?

Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud

What is the difference between the auditor's responsibilities and management's responsibilities?

Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement

Those charged with governance typically includes ______.

Management of the organization

In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. What would not be relevant to this decision

Management's preference

If prior-period compiled financial statements have been restated and the predecessor accounting firm decides NOT to reissue its report, the successor account firm:

May be engaged to reissue the prior-period report

When the auditor have a nonissuer encounters a scope limitation, how is it worded in the qualified opinion paragraph?

Mention a possible effects on the financial statements, do NOT state that there is a scope limitation

Is a CPA providing non-audit services related to internal control to an audit client a violation of PCAOB independence standards?

NO, non-audit services related to internal control must be communicated to the audit committee in writing, but they are not prohibited. The potential effects of the services should be discussed with the audit committee

Should the auditor make reference to the service auditor when issuing their own opinion?

NO, when issuing their own opinion the auditor is assuming all responsibility. By referencing the service auditor a division of responsibility would be created which is not allowed when the auditor is making their own opinion

What information is always found in the introductory paragraph?

Nature of the engagement The financial statements covered by the audit The name of the entity being audited Dates covered by each financial statement

What needs to be mentioned in the audit plan?

Nature, extent, and timing of the planned risk assessment procedures and planned further audit procedures (NET), and other procedures to be performed to comply with Generally Accepted Auditing Standards (GAAS)

The phrase "...we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles." expresses what type of assurance?

Negative/limited assurance

Does preparing the audit client's tax return impair independence? Y/N

No

Does the auditor document management's acknowledgement of the assessed level of risk in an audit?

No

What affect does the client's evaluation of materiality have on the auditor's judgment about materiality?

No affect, the auditor cannot share judgment responsibility with the client

Is an auditor required to perform a test of controls

No test of controls are not required, in some cases it is inefficient to perform

Can a review report be issued if it is incomplete?

No, a review report can only be issued if it is complete

How would an auditor test controls when the control activities leave no audit trail of documentary evidence?

Observation and inquiry (The answer is not Analytical procedures and confirmation because analytical procedures and confirmation are both substantive tests of balances, not tests of controls)

Which provides more assurance for the auditor, observation of client personnel or confirmation with outside parties?

Observation of client personnel is the best

When should the auditor observe vs confirm the offsite warehouse inventory count?

Observe: When the amount is significant Confirm: When the amount is NOT significant

What does the predecessor auditor do before reissuing the prior year's audit report on the financial statements of a former client for inclusion with the successor auditor's report on comparative financial statements?

Obtain a successor auditor representation letter, review the audit documentation of the successor auditor, and compare the current period comparative financial statements with those of the prior year.

What audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Obtaining a current value appraisal of the collateral

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for:

Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework

Regarding a nonissuer's compliance with laws and regulations, an audtior performing an audit of the entity's financial statements is responsible for:

Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework

What is required in a review of annual financial statements?

Obtaining a representation letter from management, analytical review procedures, obtaining an understanding of the client's operations

When an audit firm includes a report on compliance with aspects of contractual agreements in the auditor's report on the nonissuer's financial statements, in which paragraph of the audit report should the report on compliance be included?

Other-matter paragraph

In an audit of financial statements for which an auditor's assessment of risk is judgmental and may NOT be sufficiently precise to identify all risks of material misstatement, the auditor should:

Perform substantive procedures for all relevant assertions related to each material class of transactions

What procedures would an auditor most likely use to identify unusual year end transactions?

Performing analytical procedures

What is the PRIME pneumonic for subsequent audit procedures to be performed?

Post balance sheet transactions Rep Letter Inquiry Minutes Examine interim financial statements

What are included under SSARS?

Preparations, compilations, and reviews of nonissuers

At what point should the successor auditor attempt communication with the predecessor auditor?

Prior to accepting the engagement

What are prospective financial statements vs pro forma financial statements?

Prospective: What if hypothetical situation on future financial statements Pro forma: What if hypothetical situation on historical financial statements

What should the auditor do with respect to the materiality level when new information becomes available that could require a reevaluation of the quantitative level of materiality applied?

Raise or lower the materiality level as appropriate to the situation

A former client requests a predecessor auditor to reissue an audit the prior year's audit report in connection with the issuance of comparative financial statements by the client. What is the predecessor auditor's responsibility?

Read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor

An auditor usually determines whether dividend income from publicly held investments is reasonable by computing the amounts that should have been received by referring to:

Records produced by investment services

An audit client has substantial assets held in a trust that is managed by the trust department of a bank. How should the auditor obtain information about the trust department's internal controls?

Rely on the trust department's audit report on internal controls placed in operation and their operating effectiveness

Considering only the provisions of the AICPA Code of Professional Conduct, what services may a CPA perform for a commission or contingent fee?

Representation of a nonattest client in an IRS examination

During the review of work performed for a review engagement, the supervising accountant becomes aware that information provided by management is incorrect. In this situation, the accountant should:

Request that management consider the effect of the related matters on the financial statements

A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

Restriction on the use of the report

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which transaction cycle?

Revenue (There is the presumption of revenue fraud in all audits)

What would assist an auditor in identifying related party transactions?

Review the minutes of the meetings of the board of directors and its committees

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?

Review the risk assessment of the opening balances of the financial statements

Review of interim financial statements follows what standards?

Reviews of interim financial statements follow either SAS or PCAOB

Rapid growth in an entity's operations can lead to what?

Risks relevant to financial reporting can arise

When an auditor is "expressed to make an opinion on a description of internal controls", what report are they creating?

SOC 1 Report/Type 1 Report (If the phrase was "expressed to make an opinion on a description of internal controls and tests of operating effectiveness", it would be a SOC 2 Report/Type 2 Report)

Which standards should a CPA frim apply in a review of pro forma financial information?

SSAEs

SSAEs standards are applied when _____ is reviewed. SSARS standards are applied when ________ is reviewed.

SSAEs = Review of MD&A SSARs = Preparation, compilation, or review of historical financial statements for nonissuers. Or, preparation and compilations of pro forma and prospective financial information

At the completion of an audit, who has ownership of the audit working papers?

The CPA firm that performed the audit

What happens when written assertion is not obtained and the client is the responsible party?

Scope limitation

What should an auditor do if there is a high risk of material misstatement?

Select more effective substantive tests (This is because high risk of material misstatement means lower allowed detection risk)

What would be an appropriate method to test the existence of assertion during an audit of accounts receivable?

Send confirmations to customers

What is performed first for unreturned positive confirmations?

Sending second requests for confirmation

Tracing shipping documents to entries in the sales journal provides evidence that:

Shipments to customers were properly recorded (Completeness)

For financial statement audits performed in accordance with Generally Accepted Government Auditing Standards (GAGAS), auditors should report what?

Significant deficiencies in internal control

An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should:

State in the audit report that separate reports will be issued

The advantage of statistical sampling over nonstatistical sampling is that:

Statistical sampling helps an auditor to measure the sufficiency of the audit evidence obtained

During an audit of a nonissuer's financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if:

Substantive procedures alone cannot provide sufficient appropriate audit evidence

Verifying the ending cash balance in some manner would be a test of controls/substantive test?

Substantive test

Regardless of the assessed level of control risk, an auditor would perform some:

Substantive tests to restrict detection risk for significant transaction classes

What should an auditor do when a control is used on the internet and data is not retained for a long period of time?

Test the control several times throughout the year

In an integrated audit of a nonissuer, what is the responsibility of the auditor with regard to testing controls at a company with multiple business units?

Testing controls over specific risks at business units that are material to the company's consolidated financial statements

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant's review report be modified?

The accountant should issue the review report without mentioning the change in engagement.

What describes the auditor's responsibility with respect to Statements of Auditing Standards (SASs)?

The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions

When an auditor is issuing an unmodified report on a compliance audit and becomes aware of an instance of material noncompliance occurring after the period covered by the audit, should the auditor either issue a qualified compliance report describing the subsequent noncompliance OR modify the standard compliance report to include a paragraph describing the nature of the subsequent noncompliance?

The auditor should modify the standard compliance report to include a paragraph describing the nature of the subsequent noncompliance

How does an auditor test the completeness of AR?

The auditor should obtain an aged trial balance of AR and trace the total to the general ledger control account

The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). What is correct regarding the auditor's responsibility for this supplementary financial information?

The auditor should perform limited procedures

When an auditor performs a search for unrecorded liabilities to ascertain that all payables have been recorded, should the auditor review significant payments from BEFORE the end of the year or review significant payments from AFTER the end of the year

The auditor should review significant payments from BEFORE the end of the year (The search for unrecorded liabilities focuses on identifying items that should have been but were not included in the year end payable balance. Payments made prior to year end reflect items that are no longer liabilities)

How does the auditor perform an existence test for AP?

The auditor should vouch selected amounts from the AP listing to the voucher packages. The auditor may also confirm AP.

An auditor wishes to test for overstatement of sales and understatement of expenses. Sales should be tested for _____ and expenses should be tested for _____.

The auditor will test the existence assertion for sales and the completeness assertion for expenses

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:

The auditor's risk assessment is based on the effective operation of controls

The use of the ratio estimation sampling as compared to other sampling techniques is most effective when:

The calculated audit amounts are approximately proportional to the client's book amounts

If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, what factor should the auditor assess?

The classes of transactions in the issuer's operations that are significant to the issuer's financial statements

What factor should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affect the report?

The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement

When should negative confirmations be used for AR?

The combined assessed level of inherent and control risk is low (RMM is low) A large number of small account balances are being confirmed There is no reason to expect that recipients of the requests will ignore them

A nonissuer engaged a practitioner to perform agreed-upon procedures on specified matters. The date of the practitioner's report would ordinarily be determined by the occurence of what event?

The completion of the agreed-upon procedures

What describes the effect of a contingent fee arrangement on the auditor's independence?

The contingent fee arrangement impairs independence

When should the management representation letter be dated?

The date of the management representation letter should typically be the same as the audit report

Before applying substantive tests at an interim date, the auditor should assess what?

The difficulty in controlling the audit risk

Who has more power and responsibilities in the audit, the internal or external auditor?

The external auditor has more power and responsibilities in the audit.

As part of the process of observing a client's physical inventories, an auditor should be alert to:

The inclusion of any obsolete or damaged goods because they may need to be written down or written off

The main purpose of the engagement letter is to state ________.

The objective/scope of the audit, manager's responsibilities, and auditor's responsibilities

When an auditor of a nonissuer uses the work of a specialist and references the specialist in the auditor's report, what is the result?

The opinion must be modified

If an accountant is performing a review engagement for a nonissuer and considers it necessary to communicate a matter that is not presented in the financial statements, then the accountant should include this information in which paragraph in the review report?

The other-matter paragraph

When will a practitioner disclaim an opinion on an examination of prospective financial statements?

The practitioner was not able to perform certain procedures deemed necessary

A practitioner's report on agreed-upon procedures should contain what statement?

The procedures performed were those agreed to by the specified parties identified in the report

An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may NOT do so if:

The scope of the inquiry and analytical procedures has been restricted (An accountant may issue a review report on one financial statement, such as a balance sheet, as long as the scope of the inquiry and analytical procedures has not been restricted)

A service organization provides processing services for a client's sales orders. What information is relevant when gathering data for the report on the service organization's internal controls?

The service organization's system calculates accounts receivable balances

A compnay engages a practitioner to assist the audit committee b y performing specific procedures that were agreed to by the audit committee. What is correct regarding the procedures to be performed?

The specific procedures performed should be listed in the practitioner's report to the audit committee

What is the relationship between expected deviation rate and sample size?

There is a direct relationship between expected deviation rate and sample size

What are the 5 components of internal controls?

control environment, risk assessment, control activities, information and communication, monitoring