Audit Exam #1

Inquiries with predecessor auditor should include

(1) facts that are relevant to the integrity of management; (2) disagreements with management about accounting principles, audit procedures, or other similar matters; (3) communications to those charged with governance (e.g., the audit committee) about fraud and noncompliance with laws and regulations; (4) communications to management and those charged with governance about significant deficiencies and material weaknesses in internal control; and (5) the predecessor's understanding as to the reason for the change in auditors.

60 Which result of an analytical procedure suggests the existence of obsolete merchandise? A. Decrease in the inventory turnover rate. B. Decrease in the ratio of gross profit to sales. C. Decrease in the ratio of inventory to accounts payable. D. Decrease in the ratio of inventory to accounts receivable.

A

Analytical procedures can best be categorized as A. Substantive procedures. B. Tests of controls. C. Qualitative tests. D. Budget comparisons.

A

Which of the following procedures should an auditor most likely include in the planning of an audit of financial statements? A. Determining the need for specialized skills. B. Inquiring of the client's lawyer about litigation, claims, and assessments. C. Obtaining a written representation letter from management of the client. a D. Determining whether necessary controls have been implemented.

A

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? A. Earnings per share. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Operating cycle.

A

Which audit risk components may be assessed in non quantitative terms?

All

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information? A. AICPA Codification of Statements on Auditing Standards. B. AICPA Accounting Trends and Techniques. C. PCAOB Inspection Reports. D. SEC Statement 10-K Guide.

B

An auditor's analytical procedures most likely would be facilitated if the entity A. Segregates obsolete inventory before the physical inventory count. B. Uses a standard cost system that produces variance reports. C. Corrects material weaknesses in internal control before the beginning of the audit. D. Develops its data from sources solely within the entity.

B

As the acceptable level of audit risk decreases, an auditor may A. Reduce substantive testing by relying on the assessment of the risks of material misstatement. B. Postpone the planned timing of substantive tests from interim dates to the year end. C. Eliminate the assessed level of inherent risk from consideration as a planning factor. D. Lower the assessed level of control risk from a high level to a low level.

B

Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed A. Prior to beginning the actual audit work. B. After the auditor has obtained an understanding of existing internal control. C. After reviewing the activities of the board of directors. D. When the audit engagement letter is prepared.

B

If not already done to form an overall conclusion, the auditor should perform analytical procedures relating to which of the following transaction cycles? A. Payroll. B. Revenue. C. Purchasing. D. Inventory.

B

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that A. Involves an estimate. B. Exists because of nonstatistical sampling performed by the auditor. C. Arises from a flaw in the accounting system. D. Arises from a routine calculation.

B

It would not be appropriate for the auditor to initiate discussion with the audit committee concerning A. The extent to which the work of internal auditors will influence the scope of the audit. B. Details of the procedures that the auditor intends to apply. C. The extent to which change in the company's organization will influence the scope of the audit. D. Details of potential problems that the auditor believes might cause a qualified opinion.

B

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be A. Considered in the evaluation of audit findings in the current year. B. Disclosed by the client in the current-year financial statements. C. Retested during the current-year tests of controls. D. Removed from the prior-year summary because they were immaterial.

B

Which of the following actions should be taken by a CPA who has been asked to audit the financial statements of a company whose fiscal year has ended? A. Inform the client of the need to express an adverse opinion because of the late engagement date. B. Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion. C. Inform the client of the need to express a qualified opinion because of the late engagement date. D. Request a signed management representation letter before accepting the engagement.

B

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? A. They often replace the tests of controls that are performed to assess control risk. B. They usually use financial and nonfinancial data aggregated at a high level. C. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor. D. They are often used to develop an auditor's preliminary judgment about materiality.

B

An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes: A. Management's responsibility for errors and the illegal activities of employees that may cause material misstatement. B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors.

C

Audit planning for an initial audit most likely includes A. Determining the opinion to be expressed. B. Obtaining an engagement letter prepared by the auditee. C. Performing procedures involving opening balances. D. Selecting a sample of invoices for comparison with shipping reports.

C

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time. B. Internal control activities requiring the segregation of duties are subject to management override. C. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.

C

Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business? A. Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate. B. Verify commission expense by multiplying sales revenue by the company's standard commission rate. C. Verify interest expense, which includes imputed interest, by multiplying noncurrent debt balances by the year-end prevailing interest rate. D. Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year.

C

Which of the following statements most likely would be included in an engagement letter from an auditor to a client? A. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement. B. The CPA firm is responsible for ensuring that the client complies with applicable laws. C. The CPA firm will involve information technology specialists in the performance of the audit. D. The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

C

Which of the following types of risks most likely would increase if accounts receivable are confirmed 3 months before year end? A. Inherent. B. Control. C. Detection. D. Business.

C

A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

D

A precondition for an audit most likely is not present when management A. Limits the predecessor auditor's response to inquiries. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in accordance with the applicable reporting framework.

D

An auditor assesses the risks of material misstatement because they A. Are relevant to the auditor's understanding of the control environment. B. Provide assurance that the auditor's materiality levels are appropriate. C. Indicate to the auditor where inherent risk may be the greatest. D. Affect the level of detection risk that the auditor may accept.

D

Audit plans should be designed so that A. Most of the required procedures can be performed as interim work. B. The risks of material misstatement are assessed at a sufficiently low level. C. The auditor can make constructive suggestions to management. D. The audit evidence gathered supports the auditor's conclusions.

D

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the A. Timing of the audit. B. Costs and benefits of gathering evidence. C. Financial statements as a whole. D. Financial statement assertions.

D

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? A. Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed. B. Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions. C. Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company's profitability. D. 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.

D

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. B. Procedures to be undertaken to discover litigation, claims, and assessments. C. Pending legal matters to be included in the inquiry of the client's attorney. D. Timing of inventory observation procedures to be performed

D

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year? A. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of the acceptance of the engagement. B. An expectation of the effectiveness of internal control. C. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern. D. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

D

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? A. Obtaining a written representation letter from the client's management. B. Examining documents to detect noncompliance with laws and regulations having a material effect on the financial statements. C. Considering whether the client's accounting estimates are reasonable in the circumstances. D. Determining the extent of involvement of the client's internal auditors.

D

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

D

For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent As Risk Assessment Procedures As Substantive Procedures To Assist in Forming an Overall Conclusion

RISK & CONCLUSION