CPA Audit

Each of the following types of controls is considered to be an entity-level control, except those

regarding the company's annual stockholder meeting

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items

represented by tags were included on the listing

A client maintains perpetual inventory records in both quantities and dollars. if the assessed level of control risk is high, an auditor would probably

request the client to schedule the physical inventory count at the end of the year

A significant risk

requires special audit consideration A significant risk is an identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. The auditor is required to communicate with those charged with governance an overview of the planned scope and timing of the audit and this may include how the auditor proposes to address the significant risks, but it is not required. In exercising judgment as to whether a risk is significant, the auditor should exclude the effects of identified controls related to the risk. One of the factors the auditor considers in identifying significant risks is whether the risk is a risk of fraud, but not all significant risks are fraud risks.

When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that

restricts the use of the report because it is intended to be used solely by specific parties

Prior to the auditor's identification and assessment of the risks of material misstatement, the auditor should consider all of the following except

results of analytical procedures Which analytical procedures to be applied as risk assessment procedures, not the results of analytical procedures, should be considered prior to the identification and assessment of the risk of material misstatement (RMM). Prior to the auditor's identification and assessment of the RMM, planning includes the need to also consider, of course, the performance of risk assessment procedures other than analytical procedures.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should vouch for transactions from the

sales journal to the shipping documents

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the

sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate when the sample rate of deviation plus the allowance for sampling risk, which is the upper deviation limit, exceeds the tolerable rate, the sample results do not support the assessed level of control risk, and the auditor should reduce the planned reliance on a prescribed control.

Hemp, CPA, is auditing the financial statements of a small Colorado rural municipality. The receivable balances represent resident's delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Hemp would most likely

send positive confirmation requests

Which of the following documents are examples of audit evidence generated by the client?

shipping documents and receiving reports Shipping documents (records of goods shipped by the client) and receiving reports (records of goods received by the client) are generated by the client. Customer purchase orders and bank statements are generated externally by the client's customers and the client's financial institutions, respectively. Vendor invoices and packing slips (records of goods shipped to the client) are generated externally by the client's vendors. Bills of lading (records of receipt of goods by a shipper) are generated externally usually by common carriers used by the client. Accounts receivable confirmation requests are sent out by the auditor or the client; the confirmations are completed (generated) by the client's customers and returned directly to the auditor by the client's customers.

When determining whether related-party transactions have been properly accounted for in the financial statements, the auditor should be most concerned that

the financial statements recognize the substance of the transactions

Which of the following boards is responsible for establishing requirements for professional accountants for the International Federation of Accountants?

International Ethics Standards Board for Accountants

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for

Investigation of variances within a formal budgeting system The investigation of variances within a formal budgeting system would identify any unusual and unanticipated fluctuations in the repair and maintenance accounts when asset acquisitions are recorded there incorrectly. The segregation of [incompatible] duties is a good control; however, answer A. would not ensure that equipment acquisitions were not misclassified. Answer B. would not prevent the recording of an acquisition to the repair and maintenance accounts, nor would it serve to identify misclassifications. Answer D. would not ensure that equipment purchases were recorded properly because these invoices only represent those acquisitions which are already properly recorded as fixed assets.

What makes a financial statement assertion relevant to an audit conducted in accordance with US GAAS?

It has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated. A relevant assertion has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated, i.e., it has a meaningful bearing on whether the subject of the assertion, for example, an account, is fairly stated.

Which of the following statements is correct with respect to the auditor's consideration of an entity's ability to continue as a going concern?

It is not necessary for the auditor to design audit procedures solely to identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

Which of the following is not a documentation requirement for an engagement conducted pursuant to the standards of the PCAOB?

A complete and final set of audit documentation should be assembled for retention not more than 60 days after the report release date. A complete and final set of audit documentation should be assembled for retention not more than 45, not 60, days after the report release date. According to GAAS, not PCAOB auditing standards, the assembly of the final audit file should be completed within 60 days following the report release date. The alternative answers are all audit documentation requirements for public companies.

Regarding identified or suspected noncompliance with laws and regulations, the auditor should include in the audit documentation all of the following except

A copy of the applicable law or regulation or portion thereof violated when noncompliance is identified US GAAS does not require the inclusion of a copy of the law or regulation related to the noncompliance. Examples of documentation of findings may include copies of records or documents and minutes of discussions held.

An auditor's independence is considered impaired if the auditor has

A joint, closely-held business investment with the client that is material to the auditor's net worth A direct financial interest (business investment) always impairs an accountant's independence, regardless of materiality. Independence is impaired when a CPA holds a direct or material indirect financial interest. A loan to or from a client generally impairs independence; however, Interpretation 101-5 permits certain loans. These loans include car loans collateralized by the vehicles from financial institution clients when the loans are current as to all terms at all times and obtained under normal lending terms, requirements, and procedures. Interpretation 101-5 also permits grandfathered mortgages that are current as to all terms obtained under normal lending procedures, terms, and requirements before the institution became a client requiring independence. With a 1990 date on the mortgage in a twenty-first century question, the candidate may assume this loan meets the grandfathering requirements, if there is a better response among the answer options. Candidates may have to make similar assumptions to answer other exam questions.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

A lack of independent checks

Which of the following situations most likely represents the highest risk of a misstatement arising from the misappropriation of assets?

A large number of bearer bonds on hand

A member of the International Federation of Accountants (IFAC) may practice in a jurisdiction or belong to another professional organization that has less stringent requirements than the IESBA Code of Ethics for Professional Accountants (Code). Which set of requirements should the member follows under these circumstances?

A member of the IFAC shall not apply less stringent standards from those stated in the code unless prohibited from complying by law or regulation. A member of IFAC shall not apply less stringent standards from those stated in the code unless prohibited from complying by law or regulation. In this situation, the member shall comply with all other parts of the Code. Editor's note: When in doubt, always follow the more "stricter" standards.

Which of the following is a complete and accurate list of the walk-through procedures usually performed in an issuer's integrated audit?

Inquiry, observation, inspection of relevant documentation, re-performance of controls

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?

Integrated test facility

Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?

It is usually easier for unauthorized persons to access and alter the files

Which statement is not true about the application and other explanatory material in the codified sections of SSARS?

It may impose additional requirements. The guidance within the application and other explanatory material of a SSARS section does not, in itself, impose a requirement; however, it is relevant to the proper application of the requirements of a section. In fact, the accountant is required to have an understanding of the entire text of a SSARS section to understand its objectives and apply its requirements properly.

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar's independence?

Kar's sibling is an internal auditor employed part-time by Fort. The independence of a member or firm may be impaired because of nondependent close relatives, which includes nondependent children, siblings, etc.

Manual controls would most likely be more suitable than automated controls for which of the following?

Large, unusual, or non-recurring transactions. Human involvement is more in case of manual controls. Manual controls are suitable for large, unusual, or non-recurring transactions so that personal attention can be given to each such transaction. As these transactions are of high value (e.g. purchase of a high-value equipment), proper authorization and justification is required for entering into these transactions, which is best served by manual rather than automated controls.

When the risk of material misstatement is high, the auditor should accept _______ detection risk.

Less When the auditor believes the risk of material misstatement (RMM) is high, the auditor responds by accepting less detection risk; accordingly, the auditor requires more persuasive audit evidence. Audit risk is a function of the RMM and detection risk.RMM is the entity's risk; it exists independently of the audit. Detection risk is the auditor's risk. They are inversely related.

If a subsequent event occurs after the report date but prior to the release date of an audit report, resulting in management's revision of the financial statements of a nonissuer, then the auditor may do any of the following, except

Maintain the original date of the report and state that the opinion is limited to the financial statements as they existed prior to the subsequent event.

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure The best way a CPA firm could best provide reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards is by maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Under the AICPA Code of Professional Conduct, which of the following tax compliance services performed for an attest client relating to the preparation of a tax return would impair a CPA's independence?

Making tax payments from a client's restricted account over which the CPA has signing authority and control

Which of the following components of internal control contributes most to a strong control environment?

Management adheres to internal control policies.

During an audit of financial statements conducted in accordance with US GAAS

Management and, when appropriate, those charged with governance are required to acknowledge certain responsibilities that are fundamental to the conduct of the audit. During an audit of financial statements conducted in accordance with US GAAS, management and, when appropriate, those charged with governance are required to acknowledge certain responsibilities that are fundamental to the conduct of the audit.

An audit in accordance with US GAAS is conducted on the premise that

Management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit. Answer c., an audit in accordance with US GAAS is conducted on the premise that management and, when appropriate, those charged with governance have acknowledged [and understand] certain responsibilities that are fundamental to the conduct of the audit, i.e., responsibility (1) for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; (2) for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; and (3) to provide the auditor with access to all information of which management and, when appropriate, those charged with governance are aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters; additional information that the auditor may request from management and, when appropriate, those charged with governance for the purpose of the audit; and unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. Editor note: Because of the significance of the premise to the conduct of an audit, the auditor is required to obtain the agreement of management and, when appropriate, those charged with governance, that they acknowledge and understand that they have these responsibilities as a precondition for accepting the audit engagement. Regarding incorrect answer a., users of financial statements should be expected to understand some of the inherent limitations of an audit, but not all of the limitations; but more important, an audit is not conducted on any premise based on users' understanding. Regarding incorrect answer b., the acknowledgment by management of their responsibility for the fair presentation of the financial statements includes the responsibility for making accounting estimates that are reasonable, but the auditor does not accept that the estimates are reasonable as a premise for the audit. Regarding incorrect answer d., US GAAS does not impose responsibilities on management or those charged with governance nor does it override laws and regulations that govern their responsibilities; thus, their roles are not dictated by US GAAS.

In 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 take which of the following actions?

Perform substantive procedures for all relevant assertions related to each material class of transactions. The auditor's assessment of risk is judgmental (subjective) 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. Substantive procedures are performed in response to the planned assessed level of detection risk and used to detect material misstatements.

When considering inherent control, an auditor should be aware of the concept of reasonable assurance, which recognizes that

internal control policies and procedures may be ineffective due to mistakes in judgement and personal carelessness. Internal control, no matter how effective, can provide an entity with only reasonable, but not absolute, assurance of achieving an entity's financial reporting objectives. The likelihood of their achievement is affected by limitations inherent to internal control. These include the realities that human judgment in decision making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes. While the other answers are generally true statements, they are not part of the concept of reasonable assurance.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

inventory is complete

The Public Company Accounting Oversight Board's responsibilities include

investigation and enforcement of registered public accounting firms for violations of specified laws or professional standards

A dual-purpose test

is designed and evaluated by considering each purpose of the test separately

The risk of not detecting a material misstatement resulting from fraud

is higher than the risk of not detecting one resulting from error The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error. This is because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor. Regarding incorrect answer A., the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud (even when employees collude) because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information, or override control procedures designed to prevent similar frauds by other employees. Regarding incorrect answer B., it is nonsensical. Misappropriation (theft) of assets is a type of fraud. Regarding incorrect answer D., the risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error whether or not the error involves an omission.

Which of the following statements is correct regarding internal control?

An inherent limitation to internal control is the fact that controls can be circumvented by management override. An inherent limitation to internal control is the fact that controls can be circumvented by management override. Other limitations inherent to internal control include human failures such a faulty decision making and simple errors or mistakes. Additionally, controls can be circumvented by the collusion of two or more people. A well-designed internal control system does not ensure the achievement of an entity's control objectives nor can it be designed and operated to detect all errors and fraud; it only provides the entity with reasonable, not absolute, assurance due to these inherent limitations.

Which of the following most likely represents a has total?

810 A hash total is a numerical total with meaning only as a control. For instance, the total of social security numbers might be checked from one payroll period to another.

When a client requests a change in the terms of an audit engagement prior to the completion of the engagement,

A misunderstanding concerning the nature of the service originally requested may be considered a reasonable basis for the request. A change in circumstances that affects management's requirements or a misunderstanding concerning the nature of the service originally requested may be considered a reasonable basis for requesting a change in the audit engagement. Regarding incorrect answer A., in order to avoid confusing the reader, the report on the lower level of service should not include reference to the original audit engagement nor any procedures that may have been performed in the original audit engagement, except when the audit engagement is changed to an engagement to undertake agreed-upon procedures and, thus, reference to the procedures performed is a normal part of the report. Regarding incorrect answer B., if the auditor concludes that no reasonable justification for a change of the terms of the audit engagement exists and is not permitted by management to continue the original audit engagement, the auditor should withdraw from the engagement (when possible under applicable law or regulation), not disclaim an opinion. The auditor should also communicate the circumstances to those charged with governance; and determine whether any obligation, either legal, contractual, or otherwise, exists to report the circumstances to other parties, such as owners, or regulators. Regarding incorrect answer, D., the auditor should not agree to a change in the terms of the audit engagement when no reasonable justification for doing so exists—the auditor is not required to comply with all requests.

Record count

A record count is a count of the number of records in a batch or file or similar group

Which of the following would least likely appear in an auditor's engagement letter?

A statement that, after performing preliminary procedures, the auditor will discuss the other procedures considered necessary to complete the engagement Answer D., the auditor would not promise to discuss the specific procedures to be performed during the audit. (However, the auditor is required to include the objective and scope of the audit in the written agreement to the terms of the engagement.) Answers A. and B., fees/billing arrangements and the request for management's acknowledgment of the agreement, respectively, are examples of matters that are not required to be included, but may be included. Answer C. is the only answer alternative that is required to be included in the written agreement as to the terms of an audit engagement. Such reference may include a description of the types of reports to be issued; of course, the auditor need not describe the type of opinion expected to be expressed. A related statement that circumstances may arise in which a report may differ from its expected form and content is also required. Other items, in addition to answers A. and B., that are not required, but may be referenced in an engagement letter include: (1) elaboration of the scope of the audit, including reference to applicable legislation, regulations, US GAAS, and ethical and other pronouncements of professional bodies to which the auditor adheres; (2) the form of any other communication of results of the audit engagement; (3) arrangements regarding the planning and performance of the audit, including the composition of the audit team; (4) the expectation that management will provide written representations; (5) the agreement of management to make available to the auditor draft financial statements and any accompanying other information in a timely fashion; (6) the agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements that may affect the financial statements; (7) arrangements concerning the involvement of other auditors or specialists; (8) arrangements concerning the involvement of internal auditors and other staff of the entity; (9) arrangements to be made with the predecessor auditor, if any, in the case of an initial audit; (10) any restriction of the auditor's liability when not prohibited; (11) any obligations of the auditor to provide audit documentation to other parties; (12) additional services to be provided; and (13) a reference to any further agreements between the auditor and the entity.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting>

A strained relationship between management and the current or predecessor auditor is one of the risk factors related to fraudulent financial reporting, categorized as an attitude or rationalization.

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's auditing practice?

Acceptance of a client relationship Elements of a System of Quality control include: *Tone at the top (leadership responsibilities for quality within the firm) *Ethical requirements (independence) * Acceptance and continuance of client relationships & specific engagements *human resources * monitoring *Engagement performance

Quality control, as referred to in Statements on Quality Control Standards (SQCS), applies to a CPA firm's responsibilities for its system of quality control for its

Accounting and auditing practice

Which of the following internal control procedures is not usually performed in the vouchers payable department?

Accounting for unused prenumbered purchase orders and receiving reports

Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?

Activity logs that indicate failed transactions Logs with failed transactions are examined to determine whether the corrected transactions were eventually executed and to detect attempts of unauthorized system use. Proper file backup is a recovery issue. Message authentication and hardware security modules are security issues.

The profession's ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee, and it is apparent at the time of the representation that the

Actual fee would be substantially higher ET 502-2 provides," Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest and are prohibited. "A prohibited activity is one that contains a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee, or fee range when it is likely at the time of representation that such fees would be substantially increased and the prospective client was not advised of such likelihood.

According to US GAAS, the auditor's opinion on the financial statements

Addresses whether the financial statements are presented fairly The auditor's opinion on the financial statements addresses whether they are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. Such an opinion is common to all audits of financial statements and enhances the degree of confidence that intended users can place on the financial statements. Regarding incorrect answers A., C., and D., the auditor's opinion does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity.

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 of the following types of opinion should the practitioner issue?

Adverse

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures. One of the techniques involved in this approach makes use of

An integrated test facility

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure

Affects management's financial statement assertions In an audit of financial statements, an auditor's primary consideration is whether, and how, a specific control prevents, or detects and corrects, material misstatements in relevant assertions related to classes of transactions, account balances, or disclosures. Management's philosophy and operating style are elements of the control environment that would influence policies and procedures, but are not the auditor's primary consideration. Whether controls provide adequate safeguards over access to assets is not relevant to all controls (as is answer B.) nor is it the auditor's primary consideration. The enhancement of management's decision making processes is not an auditor's primary consideration (Editor's note: The key phrase in this question is audit of financial statements, so by assessing which of these answer choices most closely relates to the financial statements will help in knocking off at least one of these answer choices.).

The auditor is required to communicate each of the following items to those charged with governance, except

All control deficiencies detected during the course of the audit. The auditor is required to communicate each of the following items to those charged with governance: An overview of the planned scope and timing of the audit. The auditor's responsibilities to complete the audit in accordance with Generally Accepted Auditing Standards (GAAS). Any significant findings from the audit. The auditor would never bring up all control deficiencies detected during the audit. That would be impractical and a waste of time. However, if there is a pattern of control deficiencies that are significant deficiencies or material weaknesses, the auditor would bring that forward. (A), (B) and (D) are incorrect because an auditor is required to communicate these items to those charged with governance

According to US GAAS, all of the following matters should be communicated by the group engagement team to those charged with governance of the group except

All internal control deficiencies that are relevant to the group The group engagement team should communicate to group management and those charged with governance of the group material weaknesses and significant deficiencies in internal control that are relevant to the group; not all internal control deficiencies. In addition to the other answer alternatives, the group engagement team should also communicate the following matters to those charged with governance of the group: (1) an overview of the type of work to be performed on the financial information of the components, including the basis for the decision to make reference to the audit of a component auditor in the audit report on the group financial statements and(2) fraud or suspected fraud involving group management, component management, employees who have significant roles in group-wide controls, or others in which a material misstatement of the group financial statements has or may have resulted from fraud.

According to the PCAOB, each of the following statements is true with respect to the auditor's responsibility to communicate material weaknesses in internal control over financial reporting, except:

All such weaknesses must be communicated in writing to all stockholders. The following communication is required: All such weaknesses must be communicated in writing to the audit committee. All such weaknesses must be communicated in writing to management. All such weaknesses must be communicated prior to the issuance of the auditor's report on internal controls over financial reporting.

The authoritative body designated to promulgate standards that provide performance and reporting guidance for preparation of financial statements, compilations engagements and reviews of the unaudited financial statements of a nonissuer is the

America Institute of Certified Public Accountants (AICPA) Statements on Standards for Accounting and Review Services (SSARS) are issued by the AICPA's Accounting and Review Services Committee, the senior technical committee of the Institute designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer. Just as how the audit reports refer to GAAS or PCAOB, Audit and Compilation reports refer to SSARS as promulgated by the AICPA. Reading sample compilation and review reports will help jog your memory here

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to

Amounts concerning related-party transactions

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review, except

An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team The audit firm may grant permission to the client to use the audit report only after the engagement quality reviewer provides concurring approval of issuance. According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review: Identification of the engagement quality reviewer and others who assisted the reviewer. Identification of the documents reviewed by the engagement quality reviewer and others who assisted the reviewer. The date on which the engagement quality reviewer provided concurring approval of issuance. The only item that is not included in engagement quality review documentation are the instances of fraud identified by the audit team.

Governmental performance audit objectives vary widely and may include assessments of: I. Internal Control II. Compliance II. Prospective Analyses

Performance audit objectives vary widely and include assessments of program effectiveness, economy, and efficiency; internal control; compliance; and prospective analyses. These overall objectives are not mutually exclusive.

All of the following are likely to be examples of an unreasonable justification for a request to change the terms of an audit engagement to a lower level of assurance prior to the completion of an audit except

An audit is no longer needed to meet the requirements of membership in a trade organization the entity plans to join. When an audit is no longer needed to meet the membership requirements of a trade organization is an example of a change in circumstances that affects management's requirements and may be considered a reasonable basis for requesting a change in the audit engagement. The auditor is required to consider the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement. A change request may not be considered reasonable if the change appears to relate to information that is incorrect, incomplete, or otherwise unsatisfactory. Under these circumstances, if management asks for the audit engagement to be changed to a lower level of assurance to avoid a qualified opinion or a disclaimer of opinion, such a request for a change in engagement may not be considered reasonable.

US GAAS are written in the context of

An audit of financial statements by an auditor US GAAS are written in the context of an audit of financial statements by an auditor. Regarding incorrect answer B., US GAAS are to be adapted as necessary in the circumstances when applied to audits of other historical financial information; however, they are written in the context of an audit of financial statements. Regarding incorrect answer C., US GAAS do not address the responsibilities of the auditor that may exist in legislation or regulations. Such responsibilities may differ from those established in US GAAS. (Accordingly, although the auditor may find aspects of US GAAS helpful in such circumstances, it is the responsibility of the auditor to ensure that the audit is conducted in compliance with all relevant legal, regulatory, or professional obligations.) Regarding incorrect answer D., US GAAS are written in the context of an audit in accordance with financial statements of an entity that is a nonissuer. Audits of issuers are conducted in accordance with auditing standards promulgated by the Public Company Accounting Oversight Board.

According to US GAAS, all of the following statements about interpretive publications are true, except

An auditor is not required to consider applicable interpretive publications in planning and performing an audit. An auditor is required to consider [should consider] applicable interpretive publications in planning and performing an audit. The other answer alternatives are all true statements. Editor Note: Regarding answer A., interpretive publications are not auditing standards. They are recommendations on the application of US GAAS in specific circumstances, including engagements for entities in specialized industries. Regarding answer C., an interpretive publication is issued under the authority of the ASB after all ASB members have been provided an opportunity to consider and comment on whether it is consistent with US GAAS. Regarding answer D., although interpretive publications are not auditing standards, auditing interpretations of US GAAS, a type of interpretive publication, are included in the codification of US GAAS. Auditing interpretations of US GAAS immediately follow the related AU section and have been assigned the same section number preceded by the number 9. (Not all AU sections have auditing interpretations of US GAAS.) Interpretive publications include: auditing interpretations of US GAAS (included in the codification of US GAAS following the related AU section); exhibits to US GAAS (included in the codification of US GAAS following the application and explanatory materials portion of AU sections); and auditing guidance in AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position.

Which of the following statements best describes an auditor's responsibility for detecting errors and fraud?

An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that would cause the financial statements to be materially misstated. An auditor conducting an audit in accordance with US GAAS has a responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements as a whole are free of material misstatement, whether caused by fraud or error.

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements in an audit conducted in accordance with US GAAS?

An auditor's responsibility for audited financial statements is confined to the expression of the auditor's opinion.

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies and material weaknesses identified during an audit of financial statements?

An auditor's written communication on deficiencies in internal control should include a restriction on the use of the communication.

Which of the following presumptions is correct about the reliability of audit evidence?

An effective internal control structure provides more assurance about the reliability of audit evidence. Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. Information obtained directly, not indirectly, from outside sources would provide the most reliable evidence. The auditor may find it necessary to rely on audit evidence that is persuasive rather than conclusive. The reliability of audit evidence refers to its source and nature and is dependent on the individual circumstances under which it is obtained.

Which of the following situations would not impair objectivity, integrity, or independence with respect to an audit client?

An out-of-town client takes the audit engagement team out to dinner at a renowned local restaurant. When gifts or hospitality are offered that a reasonable and informed third party would consider trivial and inconsequential, a professional accountant in public practice may conclude that the offer is made without the specific intent to influence decision making or to obtain information. In such cases, the professional accountant in public practice generally may conclude that any threat to compliance with the fundamental principles is at an acceptable level. The hospitality of an out-of-town client taking the audit engagement team out to dinner at a renowned local restaurant generally would be considered trivial. Rarely would overnight trips or season tickets be considered trivial.

In an integrated audit of a nonissuer, each of the following identifies an inherent limitation to internal control, except

An override of internal controls by a low-level employee. Internal control only provides reasonable assurance that entity-specific objectives will be achieved. Inherent limitations that can result in the breakdown of internal control include: Competence - Human errors like mistakes or misjudgments by the company personnel. Obsolescence - Change in the operating environment may result in existing internal control becoming obsolete, requiring a modification in internal control to suit the new operating environment. Collusion - Though there may be segregation of duties, collusion between personnel may circumvent internal control. Override by management - Management has the ability to override internal control. Cost constraints: The cost of internal control should not exceed the benefits expected to be derived. Override by management and not by a low-level employee is an inherent limitation of controls. Low-Level employees wouldn't be able to override effective controls.

According to US GAAS, when the auditor of the group financial statements is assuming responsibility for the work of component auditors, for components that are not significant components, the group engagement team should perform

Analytical procedures at the group level

In performing interviews and examining documents related to preliminary work in a financial statement audit of a non-issuer, 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. The auditor has identified a business risk associated with plans for a new product line. The auditor should analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for this risk of material misstatement at various levels of the audit.

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Approving a summary of hours each employee worked during the pay period Having the department supervisor approve a summary of hours each employee worked during the pay period would be most likely to help in the prevention or detection of a payroll fraud. The other answer alternatives are examples of improper segregation of duties.

US GAAS

Are developed and issued in the form of Statements on Auditing Standards US GAAS are developed and issued in the form of Statements on Auditing Standards (SAS). The AICPA's Auditing Standards Board develops and issues standards in the form of SAS through a process that includes deliberation in meetings open to the public, public exposure of proposed SAS, and a formal vote. Regarding incorrect answer A., they do not address the responsibilities of the auditor that may exist in legislation, regulation, or otherwise, in connection with, for example, the offering of securities to the public. Regarding incorrect answer B., US GAAS do not override laws or regulations that govern an audit of financial statements. (In certain audit engagements, the auditor also may be required to comply with other auditing requirements in addition to US GAAS.) Regarding incorrect answer D., US GAAS are codified into AU sections; not SAS sections.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for? Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included. One step in assuring this is the periodic reconciliation of prenumbered purchase orders, receiving reports, and vouchers.

Which of the following matter does an auditor usually communicate to management?

Arrangements involving a predecessor auditor. Communication with the predecessor auditor is mandatory in a new client relationship. Client permission is needed as the client would need to authorize the predecessor to discuss confidential information and audit documentation with the new auditor. The auditor needs to communicate to the management for arrangements involving communicating with predecessor auditor.

An auditor encounters significant difficulties during an audit that are likely to lead to a modified opinion. When would it be most appropriate for the auditor to communicate those difficulties to the audit committee?

As soon as is practicable during the course of the engagement. An auditor should communicate all significant issues encountered during the audit to the audit committee as well as to those charged with governance as soon as is practicable during the course of the engagement. All required audit committee communications should be made in a timely manner and prior to the issuance of the audit report. The auditor should not wait until the last day of fieldwork to communicate with the audit committee. The auditor would not be aware of significant difficulties encountered during an audit during the engagement acceptance process.

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

Attributes

All of the following are true about documentation for an audit of a nonissuer, except

Audit documentation should be retained for a period no shorter than five years from the date of the audit report.

According to US GAAS, interpretive publications include all of the following except:

Auditing guidance included in AICPA Audit Risk Alerts An AICPA Audit Risk Alert is an example of another auditing publication; not an interpretive publication. The other answer alternatives are three of the four types of interpretive publications. The only interpretive publication not included among the answer alternatives is exhibits to US GAAS. Editor's note: Don't get too hung up trying to remember these exact publications; they're designed to just keep you on your toes (i.e. just read through the interpretive publications in the text and retain whatever you're able to).

In addition to the opinion on the financial statements, the auditor's responsibilities in an audit in accordance with US GAAS, include all of the following except

Authentication of documents The auditor is neither trained as nor expected to be an expert in the authentication of documents. All of the other answer alternatives are true. Regarding answer B., these other communication and reporting responsibilities may be to users, management, those charged with governance, or parties outside the entity. These responsibilities may be established by US GAAS or by applicable law or regulation.

Which of the following is most likely to be a response to the assessed risk of material misstatement at the assertion level?

Inspecting certain assets The physical observation and/or inspection of assets are examples of procedures performed in response to the assessed risk of material misstatement at the assertion level, i.e., the assertion of existence. The other answer alternatives are overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level rather than the assertion level (the assertion level is at a more specific level of testing than the financial statement level and hence a more thorough procedure is required)

For which of the following judgements may an external auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

Because the external auditor has sole responsibility for the audit opinion expressed, the external auditor is required to make the significant judgments in the audit engagement. Significant judgments include, but are not limited to, the following: (1) assessing the risks of material misstatement; (2) evaluating the appropriateness of management's use of the going concern assumption and whether substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time; (3) evaluating the sufficiency of tests performed; (4) evaluating significant accounting estimates; and (5) evaluating the adequacy of disclosures in the financial statements and other matters affecting the external auditor's report.

According to US GAAS, an entity may prepare its financial statements in accordance with which of the following frameworks? I. General-purpose framework II. Special-purpose framework

Both I and II Both - the financial statements may be prepared in accordance with either a general-purpose framework (a financial reporting framework designed to meet the common financial information needs of a wide range of users); or a special-purpose framework (a financial reporting framework, other than GAAP, which is a cash, tax, regulatory, contractual; or another basis of accounting). The cash basis, tax basis, regulatory basis, and other basis of accounting (all of these, except for the contractual basis) are commonly referred to as other comprehensive basis of accounting (OCBOA).

The external auditor is allowed to use I. The work of the internal audit function to obtain audit evidence II. Internal auditors to provide direct assistance

Both I and II The external auditor may use (I.) the work of the internal audit function to obtain audit evidence and/or (II.) internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor. Editor Note: US GAAS does not require the external auditor to use the work of the internal auditors; it remains the external auditor's decision to establish the overall audit strategy. However, the external auditor is required to obtain an understanding of the internal audit function.

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Interest expense Relationships involving income statement accounts, such as interest expense, tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time.

When responding to the assessed risk of material misstatement (RMM), an auditor is required to document: Overall responses to address the assessed RMM at the financial statement level and further audit procedures performed Linkage of those procedures with the assessed RMM at the relevant assertion level

Both I and II The auditor should document both I and II as follows, with more detail provided for I than included in the question: (I.) Overall responses to address the assessed RMM at the financial statement level and the nature, extent, and timing of the further audit procedures performed and (II.) Linkage of those procedures with the assessed RMM at the relevant assertion level. The auditor should also include in the audit documentation: (1) results of the audit procedures, including the conclusions when such conclusions are not otherwise clear; (2) if the auditor plans to use audit evidence about the operating effectiveness of controls obtained in previous audits, the conclusions reached about relying on such controls that were tested in a previous audit; (3) the basis for any determination not to use external confirmation procedures for accounts receivable when the account balance is material; and (4) demonstration that the financial statements agree or reconcile with the underlying accounting records.

Which explanation best describes how an auditor determines (as required by US GAAS) if a financial statement assertion is relevant for each significant class of transactions, account balance, and disclosure?

By determining the source of likely potential misstatements in each significant class of transactions, account balance, and disclosure Identifying relevant assertions includes determining the source of likely potential misstatements in each significant class of transactions, account balance, and disclosure. Attributes indicating the potential relevance of an assertion include the nature of the assertion; volume of transactions or data related to the assertion; and the nature and complexity of the systems, including the use of information technology (IT), by which the entity processes and controls information supporting the assertion.

Which of the following is most likely to be a response to the assessed risk of material misstatement at the assertion?

Inspecting certain assets The physical observation and/or inspection of assets are examples of procedures performed in response to the assessed risk of material misstatement at the assertion level, i.e., the assertion of existence. The other answer alternatives are overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level rather than the assertion level (the assertion level is at a more specific level of testing than the financial statement level and hence a more thorough procedure is required)

Which of the following factors most likely would be considered an inherent limitation to an entity's internal control?

Collusion of employees in circumventing internal controls Internal control only provides reasonable assurance that entity-specific objectives will be achieved. Inherent limitations that can result in the breakdown of internal control include: Competence - Human errors like mistakes or misjudgments by the company personnel. Obsolescence - Change in the operating environment may result in existing internal control becoming obsolete, requiring a modification in internal control to suit the new operating environment. Collusion - Though there may be segregation of duties, collusion between personnel may circumvent internal control. Override by management - Management has the ability to override internal control. Cost constraints: The cost of internal control should not exceed the benefits expected to be derived.

Before accepting an engagement for an initial audit, the auditor should request management to authorize the predecessor auditor to respond fully to the auditor's inquiries. Which of the following matters would be most likely to be the subject of the auditor's inquiry?

Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity

Before accepting an engagement for an initial audit, the auditor should request management to authorize the predecessor auditor to respond fully to the auditor's inquiries. Which of the following matters would be the most likely to be the subject of the auditor's inquiry?

Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity Such inquiries should relate to matters that will assist the auditor in determining whether to accept the engagement. Inquiries about communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity would be the most likely matter of those given to be subject to the auditor's inquiry for this purpose. Regarding incorrect answer A., subsequent events that occurred after the predecessor's audit report was issued would be covered in the current audit period. Regarding incorrect answers C. and D., opening balances and consistency of accounting policies are, of course, matters of interest to the auditor; however, the timing of such procedures is more flexible, i.e., they may, but are much less likely to occur prior to acceptance of the engagement.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Compare financial information with nonfinancial operating data During the planning phase of a financial statement audit a CPA would most likely compare financial information with nonfinancial operating data. This is an example of an analytical procedure. Analytical procedures are required during the planning phase. The latest date of the period coved by the lawyer's response to an auditor's inquiries should be as close as possible to the date of the auditor's report, thus, it is not likely these inquiries would be made during the planning phase. Cutoff tests of cash receipts and disbursements as well as the recalculation of the prior year's accruals and deferrals are procedures performed during the gathering-evidence phase of the audit rather than the planning phase.

Which of the following procedures would an auditor generally perform regarding subsequent events?

Compare the latest available interim financial statements with the statements audited

During the initial planning phase of an audit, a CPA most likely would not

Discuss the nature, timing, and extent of the audit procedures with the client's management. Coordination and scheduling are done with the client during the initial phase of an audit. However, the auditor does not divulge complete details of the audit to preserve the effectiveness of an audit. When discussing matters included in the overall audit strategy or audit plan, care is required in order not to compromise the effectiveness of the audit because discussing the nature and timing of detailed audit procedures with management may compromise the effectiveness of the audit by making the audit procedures too predictable. Obtaining a general understanding of the client's industry, business; applying analytical procedures for risk assessment purposes and determining materiality is all done during planning.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results Analytical procedures, such as comparing the financial statements to anticipated results, are used as risk assessment procedures during the planning phase of an audit to provide the basis for planning further audit procedures. Inquiry of the client's legal counsel about pending litigation is an audit procedure that would be performed near the end of the engagement. (It is preferable that the legal counsel's response be as close to the date of the audit report as is practicable to avoid the need to obtain updated information.) Even if the inquiry (as opposed to the date of the response) occurs earlier in the audit, it is unlikely to be made during the planning (risk assessment) phase. A related activity, i.e., obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework, is actually best performed very early in the planning phase (prior to the auditor's identification and assessment of the risks of material misstatement), but this is different than the substantive audit procedure known as the letter of inquiry. Answer C. is a substantive audit procedure that would be performed during the audit engagement to support management's assertion of completeness. When performing risk assessment procedures to obtain an understanding of controls that are relevant to the audit, the auditor evaluates the design of those controls and determines whether they have been implemented. This is different than answer D. which is an example of testing the operating effectiveness of a control. Testing the operating effectiveness of a control is a substantive procedure (tests of controls) performed during the audit as a response to the auditor's assessment of the risks of material misstatement. Editor Note: Analytical procedures are also used as substantive procedures during the audit to detect material misstatements at the assertion level and near the end of the audit to assist the auditor when forming an overall conclusion on the financial statements.

Which of the following characteristics distinguishes computer processing from manual processing?

Computer processing virtually eliminates the occurrence of computational error normally associate with manual processing

Which of the following procedures would an auditor most likely perform during the overall review stage of an audit of an entity's financial statements?

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud. Considering whether audit results affect the assessment of fraud risk is an overall review stage procedure. Auditors obtain assurance from the entity's attorney, verify clerical accuracy, and test the operating effectiveness of controls during the evidence gathering stage of the audit.

According to the ethical standards of the profession, a CPA's independence would most likely be impaired if the CPA

Contracted with a client to supervise the client's office personnel Serving in any capacity equivalent to that of a member of management during the period covered by the financial statements is considered to impair independence. A CPA ordinarily may accept a de minimis gift from a client, become a member of a trade association that is a client, or serve as a cofiduciary for an estate or trust with a client bank.

Which of the following is a definition of control risk?

Control risk is the risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. The risk that the auditor will not detect a material misstatement refers to detection risk, not control risk. The risk that the auditor's assessment of internal controls will be at less than the maximum level is not a risk—the use of risk assessment procedures and tests of controls may appropriately result in such a conclusion. The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures refers to inherent risk, not control risk.

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

General "General" controls best describe procedures to ensure appropriate systems software acquisition General controls are policies and procedures that help define and support many applications, including the company's information systems.

When commenting in a comfort letter on information other than audited financial statements, an auditor should

Describe the criteria specified by the requesting party When commenting in a comfort letter on information other than audited financial statements, the auditor should describe the criteria specified by the underwriter or other requesting party. The auditor should not make the statements or use the terms (which are of uncertain meaning; they are not universally understood) described in the other answer alternatives.

An auditor assesses the risk of material misstatement at the assertion level to

Determine further audit procedures The risk of material misstatement (RMM) at the assertion level is assessed in order to determine the nature, extent, and timing of further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence enables the auditor to express an opinion on the financial statements at an acceptably low level of audit risk.

As a condition for accepting any engagement to be performed in accordance with SSARS, an accountant is required to do all of the following, except

Determine if the accountant is independent of the entity The determination of independence is not required for all SSARS engagements. A review required independence of the entity. Although a compilation does not require independence of the entity. Although a compilation does not require independence, it does require a determination about whether the accountant is independent because the report should be modified if independence is impaired. An engagement to prepare financial statements does not require independence nor its determination.

If, during the audit, the auditor concludes that the materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, or disclosures) is inappropriate and thus revises materiality levels, the auditor is required to

Determine whether it is also necessary to revise performance materiality and whether the nature, timing, and extent of the further audit procedures remain appropriate, but only when the materiality for the financial statements taken as a whole is lowered

Which of the following procedures would an auditor most likely include in developing the overall audit strategy of a financial statement audit?

Determining the extent of involvement of the client's internal auditors Of the procedures listed, an auditor is most likely to determine the extent of involvement of the client's internal auditors in developing the overall audit strategy of a financial statement audit. A representation letter from the client's management (and, when appropriate, those charged with governance) is obtained at the end of an audit, not the beginning—it should be as of the date of the audit report on the financial statements. Examining documents and considering the reasonableness of estimates are procedures performed during the audit.

According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?

Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider Rule 301 states that a member in public practice will not disclose confidential information obtained in the course of the professional engagement without the consent of the client except to comply with: a validly issued and enforceable subpoena or summons; applicable laws and government regulations; professional practice review procedures under AICPA or state CPA society or Board of Accountancy authorization; or to initiate a complaint with the professional ethics division or trial board of the AICPA or other appropriate investigative or disciplinary body. Although answers "c" and "d" are confidential information, they fall within the exempt categories, and do not require consent. Answer "b" is not confidential, and therefore does not require consent either. Only answer "a" is both confidential and not listed as a specific exemption; thus requiring client consent.

Which of the following should an auditor do when control risk is assessed at the maximum level?

Document the assessment. Assessed risks and the basis for those assessments should be documented whether or not control risk is assessed at the maximum level. Regarding incorrect answer a., there is a direct relationship between control risk and substantive testing, thus if control risk is high the auditor should perform more, not fewer, substantive tests of details. If the auditor assesses control risk at the maximum level there is no point in performing more tests of controls. Documenting a control structure more extensively because it is not functioning well is nonsensical. Editor note: If the auditor is assessing the control risk as high, there isn't validation to test controls since the auditor has concluded that the controls aren't reliable. As such, the auditor should supplement the lack of control testing with more substantive tests of details.

An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?

Document the auditor's understanding of internal controls.

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to

Document the details of the disagreement with the conclusion reached QC 90.14(2)(d) addresses consultation policies and procedures and recommends designating individuals as specialists to serve as authoritative sources, and defining their authority in consultative situations. A procedure to implement this objective would be to provide procedures for resolving differences of opinion between personnel and specialists and to require documentation of the considerations involved in the resolution of differences of opinion.

In order to respond to the increased risks that could be present in the initial audit of an entity, an external auditor should consider the assignment of

Due to an increased level of risk that is present in the initial audit of an entity auditor will assign more experienced staff or those with specialized skills i.e. assign external audit personnel with appropriate levels of capabilities and competence. Senior Management, accounting personnel, and internal audit personnel are the client's internal management and the auditor will not assign them in response to the increased level of risk.

In the context of the entity's applicable legal and regulatory framework,

Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides no assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed

The concept of materiality would be least important to an auditor when considering the

Effects of a direct financial interest in the client on the CPA's independence Independence will be considered to be impaired if during the period of the professional engagement, or at the time of expressing an opinion, the member or the member's firm had or was committed to acquire any direct or material indirect financial interest in the enterprise. In other words, if a direct financial interest exists, materiality is not a factor.

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

Employment of the CPA's spouse as a client's internal auditor ET 101-1 states that independence is impaired if a spouse's employment is in a position where the spouse's activities are audit sensitive, and specifically mentions internal auditors.

A document in an auditor's working papers includes the following statement: "Because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk that some material misstatements may not be detected exists, even though the audit is properly planned and performed in accordance with US GAAS." The above passage is most likely from a(an)?

Engagement letter The agreed-upon terms of the audit engagement should be documented in an audit engagement letter (or other suitable form of written agreement) and should include a statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS. The required elements of the terms of the engagement are: (1) the objective and scope of the audit; (2) the responsibilities of the auditor; (3) the responsibilities of management; (4) a statement regarding the inherent limitations of an audit (see this question's quote); (4) identification of the applicable financial reporting framework for the preparation of the financial statements; (6) reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content. Editor's note: Get comfortable with the engagement letter by reading a sample letter in the course text (repetition is key here).

Which of the following bodies promulgates standards for audits of federal financial assistance recipients?

Governmental Accountability Office The standards for audits of federally assisted programs may be found in the publication of the US Government Accountability Office (GAO) entitled Government Auditing Standards. The Governmental Accounting Standards Board (GASB) establishes financial accounting principles for state and local government entities. The Financial Accounting Standards Board (FASB) establishes GAAP. The Governmental Auditing Standards Board does not exist.

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?

Establish policies to ensure that the audit work meets applicable professional standards. The best answer is to establish policies to ensure that the audit work meets applicable professional standards. Compliance with the Sarbanes-Oxley Act is too limited; is not applicable to all firms; and does not encompass the AICPA's quality control standards. The other answers are not on point. GAAS require a firm of independent auditors to adopt a system of quality control in conducting an audit practice. Thus, a firm should establish quality control policies and procedures to provide it with reasonable assurance that its personnel comply with GAAS in its audit engagements. Further, the AICPA's quality control standards require that a CPA firm establish a system of quality control designed to provide the firm with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partners issue reports that are appropriate in the circumstances. A system of quality control consists of policies designed to achieve these objectives and the procedures necessary to implement and monitor compliance with those policies.

The primary objective of an auditor when considering the acceptance of an initial audit engagement of a nonissuer is to

Establish whether the preconditions for an audit are present. Before accepting any audit engagement, there are certain preconditions for an audit that must be satisfied. The auditor must consider the following preconditions before accepting the audit: Determine whether the audit team is competent to perform the audit and is complying with all ethical and independence requirements. Assess the client's auditability. This would include determining if the financial statements and records are adequate and also the attitude and integrity of the client. Perform an inquiry with the predecessor auditor regarding the integrity of the management and any issues the predecessor might have faced during the audit. Document terms and conditions of the entity in an engagement letter. An agreement of the audit plan will be done after acceptance. The auditor would withdraw from the engagement and not limit responsibility if management fails to provide written representations. Management need not rely on the auditor's testing of internal controls; rather, the auditor will assess whether to rely upon (or not) on internal controls during the planning phase after the acceptance of the audit engagement.

Which of the following procedures would be most effective in reducing attestation risk?

Examination of evidence

An auditor's responsibility to express an opinion on the financial statements of a public company is

Explicit in the basis for opinion paragraph of the auditor's standard report

Which of the following is a prospective financial statement for general use upon which an accountant may appropriately report?

Financial forecast Prospective financial statements are for either general use or limited use. General use of financial statements refers to use of the statements by persons with whom the responsible party is not negotiating directly, for example, in an offering statement of an entity's debt or equity interests. Because recipients of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party's knowledge and belief, the expected results. Thus, only a financial forecast is appropriate for general use.

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the

Financial statement assertions Once the audit strategy has been established, the auditor is able to start the development of a more detailed audit plan [audit programs] to address the various matters identified in the audit strategy, taking into account the need to achieve the audit objectives. The documentation of the audit plan via audit programs should include descriptions of the nature, extent, and timing of planned further audit procedures at the relevant assertion level. The other answer alternatives are all considerations of the procedures necessary to satisfy the audit objectives. Editor Note: The audit plan should also describe the nature and extent of the planned risk assessment procedures and other planned audit procedures that are required to be performed so that the engagement complies with GAAS.

A recurring audit is an audit engagement

For an existing audit client for whom the auditor performed the preceding audit A recurring audit is an audit engagement for an existing audit client for whom the auditor performed the preceding audit.

Why does GAAS establish two categories of laws and regulations?

GAAS requires a different auditing approach for each category because the auditor has different responsibilities for each.

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor may consider obtaining written management representations acknowledging that management has

Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements The auditor should assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in the entity's financial statements. The auditor may consider obtaining written representation from management regarding the completeness of management's identification of applicable laws and regulations. The other items listed are not required.

Regarding communication with the client,

If matters required by US GAAS are communicated with a person with management responsibilities who also has governance responsibilities, the matters need not be communicated twice.

All of the following describe conditions which require the auditor to refuse a proposed audit engagement (that is not required by law or regulation) except

In an initial audit, management does not authorize contact with the predecessor auditor. Correct answer d., if management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should inquire about the reasons and consider the implications of that refusal in deciding whether to accept the engagement. However, the auditor is not precluded by this circumstance from accepting the engagement. (Editor Note: Before accepting an engagement for an initial audit, including a reaudit engagement, the auditor should request management to authorize the predecessor auditor to respond fully to the auditor's inquiries regarding matters that will assist the auditor in determining whether to accept the engagement.)

According to US GAAS, all of the following statements about other auditing publications are true, except

In determining whether another auditing publication is appropriate to the circumstances of the audit, the auditor should first consider the degree to which the issuer or author is recognized as an authority on auditing matters. Answer B. does not describe what is considered first when determining if a publication is appropriate. If the publication is relevant, the auditor may presume that it is appropriate if another auditing publication is published by the AICPA and has been reviewed by the AICPA Audit and Attest Standards staff. The criteria in answer B. for determining whether a publication is appropriate is only applicable when a publication has not been reviewed by the AICPA. Only in this case would the auditor consider the degree to which a publication is recognized as being helpful in understanding and applying US GAAS and the degree to which the issuer or author is recognized as an authority on auditing matters. All of the other answer alternatives are true statements. Editor Note: Other auditing publications are defined as publications other than interpretive publications. Examples include AICPA auditing publications not defined as interpretive publications; auditing articles in professional journals; textbooks; continuing professional education programs; and other instructional materials.

During an audit an internal auditor may provide direct assistance to an external auditor in Obtaining an understanding of internal control Performing tests of controls Performing substantive tests

In performing an audit, the external auditor may request direct assistance from the internal auditors including assistance in obtaining an understanding of internal control or in performing tests of controls or substantive tests (so long as the external auditor adequately oversees the work performed by the internal auditors in these respective areas).

An initial audit engagement is an engagement

In which the financial statements for the prior period were either not audited or were audited by a predecessor auditor An initial audit engagement is one in which either the financial statements for the prior period were either not audited or audited by a predecessor auditor. The other answer alternatives are false statements.

Regarding written communication of significant deficiencies and material weaknesses identified in an audit of financial statements, the auditor should

Include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects The auditor should include in the auditor's written communication of significant deficiencies and material weaknesses a description of the significant deficiencies and material weaknesses and an explanation of their potential effects. In explaining the potential effects of the significant deficiencies and material weaknesses, the auditor need not quantify those effects. The potential effects may be described in terms of the control objectives and types of errors the control was designed to prevent, or detect and correct; or in terms of the risk of misstatement that the control was designed to address. The purpose of the communication is to report matters to management and those charged with governance that merit their attention in meeting their responsibilities; not how it relates to the audit. Thus, the auditor should not communicate their effect on the auditor's overall risk assessment. The auditor may also include in the written communication suggestions for remedial action on the deficiencies, management's actual or proposed responses, and a statement about whether the auditor has undertaken any steps to verify whether management's responses have been implemented.

For audit procedures related to the inspection of significant contracts or agreements, the auditor should

Include abstracts or copies of those contracts or agreements in the audit documentation For audit procedures related to the inspection of significant contracts or agreements, the auditor should include abstracts (summaries) or copies of those contracts or agreements in the audit documentation. The auditor should include abstracts or copies of those contracts or agreements in the audit documentation whether or not they would be needed by an experienced auditor. The question pertains to audit procedures related to the inspection of significant contracts or agreements; not controls to maintain the confidentiality of stored audit documentation. Retention of the originals of significant contracts or agreements by the auditor is not plausible.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?

Incompatible duties While incompatible duties can be segregated and therefore controlled, the possibility of management override and collusion among employees to circumvent controls will still exist. Mistakes in judgment also cannot be controlled.

Which of following is not one of the five fundamental principles of the International Federation of Accountant's Code of Ethics for Professional Accountants?

Independence The five fundamental principles that the International Ethics Standards Board for Accountants (IESBA) requires professional accountants to comply with per the IESBA Code of Ethics for Professional Accountants are integrity; objectivity; professional competence and due care; confidentiality; and professional behavior.

An auditor's written communication regarding significant deficiencies and material weaknesses identified during a financial statement audit should

Indicate that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements but not to express an opinion on the effectiveness of the entity's internal control

Which of the following factors most likely would cause an accountant not to accept an engagement to compile the financial statements of a non-issuer?

Indications that reports of asset misappropriation are not investigated by management. Prior to accepting any engagement including compilation engagements, the accountant should, amongst other pre-engagement activities, make an assessment of the client's integrity and the attitude of management. If the management lacks integrity, it would cause the accountant to not accept the engagement. Indications that reports of asset misappropriation are not investigated by management would raise serious concerns about the integrity of the management, which would preclude the accountant from accepting the engagement.

Which of the following is an example of an inherent risk that an auditor should consider

Inherent Risk (IR) is susceptibility of a relevant to a material misstatement. Factors in the entity and its environment influence IR If entity's inventory becomes obsolete rapidly due to technology, IR ↑ for inventory If entity lacks sufficient working capital, IR ↑ for several assertions If entity in a declining industry with many business failures, IR ↑ for several assertions Technological developments that may render inventory obsolete is an example of an inherent risk that an auditor should always consider.

The risk of material misstatement at the assertion level consists of which of the following sets of two components?

Inherent risk and control risk At the assertion level, the risk of material misstatement (RMM) consists of (1) inherent risk, the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls, and (2) control risk, the risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. Editor Note: The RMM is the risk that the financial statements are materially misstated prior to the audit. It exists at both the overall financial statement level and the assertion level. (RMM at the overall financial statement level refers to those risks that relate pervasively to the financial statements as a whole and potentially could affect many assertions.) Regarding the incorrect answers: The RMM is a part of audit risk. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was

Initially concealed by a forged document Evidence that a deviation was covered up in a fraudulent manner would require the auditor to consider the implications of the deviation more closely. Answers a., b., and c. give no causes for added concern.

Which of the following procedures regarding inventory would be performed by an accountant during a nonissuer's review engagement?

Inquiring of company personnel about excess or obsolete inventory Review engagement, as per SSARs, provide limited assurance with regards to Financial Statements. A review is less in scope than an audit. The accountant is required to perform just inquiry and analytical procedures but is not required to perform any test of controls or substantive procedures. Obtaining an understanding of the entity's internal control over inventory and observing the client's year-end physical inventory count is a test of controls and substantive procedure and would not be performed by an accountant during a nonissuer's review engagement. The auditor is not required to perform a risk assessment in a nonissuer's review engagement.

Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly, other audit procedures are performed in combination with inquiries. Which procedure combined with inquiry generally provides the least assurance?

Inquiry and observation Inquiry and observation generally may provide the least assurance of these alternatives because an observation is pertinent only at the point in time at which it is made.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices. The fact that management is interested in maintaining the entity's earnings trend by using aggressive accounting practices indicates that management may have an incentive to engage in fraudulent financial reporting also. Stock transactions of management or the board of directors are not ordinarily considered fraud risk factors. Aggressive financial forecasts as opposed to conservative financial forecasts would be considered a fraud risk factor. In other words, answer choices A. through C. are traditional practices by management/board of directors, while using aggressive accounting policies to maintain earnings would be a strong indicator of fraudulent financial reporting.

Which of the following statements would most likely appear in an auditor's engagement letter?

Management is responsible for making all financial records and related information available to us. The agreed-upon "written" terms of the audit engagement should include the following management responsibilities: Preparation & fair presentation of Financial Statements Design, implementation, and maintenance of Internal Control over financial reporting Providing the auditor with access to all relevant financial records, any related information requested and to persons within the entity as the auditor determines necessary Providing written representations to the auditor The other three statements are not likely to be included in the engagement letter.

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Management is unwilling to permit inquiry of its legal counsel. The refusal of a client to allow necessary communications with a lawyer is a scope limitation that usually results in a disclaimer of opinion; knowing that an audit could not be performed, a CPA could not accept the engagement. A CPA need not understand a client's operations and industry when accepting an engagement if the CPA reasonably can expect to gain an appropriate understanding. Recurring operating losses do not prohibit audit completion. An inquiry of the predecessor auditor is a necessary is a necessary procedure because the predecessor auditor may be able to provide information that will assist the successor auditor in determining whether to accept the engagement. However, their view of the predecessor auditor's working papers assists the successor auditor in the planning of the engagement. Furthermore, although the predecessor auditor should ordinarily permit the success or auditor to review the working papers, the extent, if any, to which a predecessor auditor permits access to working papers is a matter of judgement.

When obtaining an understanding of an entity's internal control, an auditor should determine if the control has been implemented because

Management may establish appropriate controls but not enforce compliance with them When obtaining an understanding of an entity's internal control, an auditor determines if the control has been implemented because management may establish appropriate procedures, but not enforce compliance with them. Regarding incorrect answer A., when the controls are not documented by the entity the auditor can still determine if they exist and have been implemented. Further, undocumented controls do not speak to the reason for determining if a control has been implemented. Regarding incorrect answer B., the implementation of a control whose costs exceed its benefits would not affect the auditor's determination of a control's implementation. Incorrect answer C. relates to the design of a control, not its implementation. It also alludes to why the design of a control is considered before its implementation—assessing the implementation of a control that is not effectively designed is of little use. (Editor Note: An improperly designed control AND/OR a control that is not operating effectively may represent a significant deficiency or material weakness in the entity's internal control.)

A deficiency in internal control exists when misstatements of the financial statements may occur and not be prevented detected, or corrected on a timely basis by

Management or employees in the normal course of performing their assigned functions.

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?

Management's assessment of the effectiveness of internal control over financial reporting Each required annual report of an issuer must contain an internal control report stating it is the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It must also contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Each public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by management of the issuer.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement?

Management's unwillingness to make all financial records available to the CPA Prior to accepting an audit engagement, the auditor should, amongst other pre-engagement activities, make an assessment of the client's auditability. This would include whether the financial reporting framework is acceptable, whether accounting records will be available, and adequate and also assessing the integrity and attitude of the management. In case the prospective client is unwilling to make all financial records available to the CPA, he/she may choose not to accept the new audit engagement. The following would not cause a CPA to reject a new engagement: Management's reputation for failing to provide schedules to prior auditors on a timely basis. The auditor is required to communicate with the predecessor auditor before accepting a new audit engagement. It is not mandatory to review the predecessor's audit work papers before such acceptance. Lack of understanding of the prospective client's operations and industry is not a prerequisite to accepting a new audit engagement. It can be obtained on a timely basis before the commencement of the audit procedures.

Based on new information gained during an audit of a non-issuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. in this circumstance, which of the following statements is accurate?

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to

Minimize the likelihood of associating with clients whose management lacks integrity. A system of quality control is in a CPA firm to meet its responsibilities to offer professional services that conform to professional standards. The primary reason quality control policies are used in a CPA firm is to minimize the likelihood of associating with clients whose management lacks integrity. Quality control policies and procedures within the CPA firm would not provide reasonable assurance that the personnel is adequately trained to fulfill their responsibilities in order to decide to accept or continue a client relationship, document the matters that are required to be communicated to the audit committee, or enhance the auditor's understanding of the client's business and its industry.

A CPA is required to comply with the provisions of Statments on Standards for Accounting and Review Services for the preparation of financial statements when: I. Performing general bookkeeping services II. Consulting on accounting matters

No, No The SSARS guidance on the preparation of financial statements is not applicable when an accountant merely assists in preparing financial statements. Mere assistance can involve providing bookkeeping services or advising (consulting) on accounting matters such as preparing or proposing certain adjustments. The determination of whether this SSARS guidance is applicable is based on the services the client requests the accountant to perform and the accountant's exercise of professional judgement.

An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of the audit committee, except

Nonaudit services to perform financial information systems design and implementation The Sarbanes-Oxley Act of 2002 prohibits an auditor performing financial information systems design and implementation, even if the audit committee approves of the services to an issuer audit client; this is deemed to impair independence. Minor services will not impair independence and do not require pre-approval. These include relatively small revenue services, services approved prior to completion of the audit, and services that the issuer did not recognize as needing audit committee approval.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes

Which of the following procedures would an auditor most likely include in establishing the overall audit strategy of a financial statement audit?

Obtain an understanding of the entity's risk assessment process The entity's risk assessment process is part of its internal control. Gaining an understanding of the entity's internal control is the first of these four procedures to be performed in an audit and is an example of a matter considered in establishing the overall audit strategy. The auditor identifies specific activities designed to prevent fraud when considering relying on internal control. The other two options are substantive procedures performed during the audit.

The sampling unit in a test of controls pertaining to existence of payroll transactions ordinarily is a(an)

Payroll register entry Assertions about existence deal with whether assets or liabilities of the entity exist at a given date. In this case, the auditor would consider the recorded transactions in the payroll register. The clock card or time ticket would provide evidence for the completeness assertion, not whether payroll transactions recorded actually occurred (the existence assertion). The employee personnel record would not provide evidence on whether payroll transactions recorded actually occurred, but only provide a summary of those transactions recorded.

Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements?

Performing professional responsibilities with the highest sense of integrity In the absence of identified or suspected non-compliance, the auditor is not required to perform audit procedures regarding the entity's compliance with laws and regulations. However, Auditor should obtain a general understanding of the following: * Legal & regulatory framework applicable to the entity and its industry or sector * How the entity is complying with that framework Hence, Audit engagement team members should remain alert for evidence of non-compliance by performing professional responsibilities with the highest sense of integrity.

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

Postpone the planned timing of substantive tests from interim dates to the year-end Performing principal substantive tests at an interim date rather than as of the balance sheet date potentially increases the risk that misstatements that may exist at the balance sheet date will not be detected. Therefore, postponing the planned timing of substantive tests from interim dates to the year-end decreases detection risk.

According to the SEC, which of the following best describes a non-audit service that, when jointly provided with the audit of an issuer, would result in the accountant's loss of independence?

Preparing the client's footnote disclosure of significant accounting policies. Preparing the client's footnote disclosure of significant accounting policies is an accounting service that is not an acceptable non-audit service as it leads to a self-review threat. As such, it will impair independence. The Sarbanes-Oxley Act of 2002 prohibits registered public accounting firms from providing the following non-audit services to an audit client that issues publicly traded securities: bookkeeping, financial information system design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing services, management functions or human resources, broker or dealer investment advisor or investment bank services, and legal and expert services. Tax Return preparation is an acceptable non-audit service that an accountant can perform, with preapproval of the audit committee of the board of directors, during the audit of an issuer. Therefore, preparing the audit client's tax return will not impair auditor independence. Providing a comfort letter in regard to the client's meeting the debt covenant requirements and Issuing a report on management's assessment of the client's internal controls are acceptable non-audit services. This would not impair auditor independence.

Whose signatures should be included in the management representation letter to the auditor?

President and chief financial officer

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. Under the Independence Standards Board Statement 1 (ISB 1) the auditor must disclose, in writing, to the audit committee, all relationships between the auditor and its related entities and the client entity and its related entities that, in the auditor's judgment, may be considered to bear on independence. Editor's note: Remember, if it's not documented, it means it wasn't done!

According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and

Prior to the issuance of the audit report According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and prior to the issuance of the audit report; not the date of the audit report. (Per GAAS and sometimes per PCAOB auditing standards, the issuance of the audit report is termed the release of the audit report, as in the audit report release date. Under both sets of standards, this is when the auditor grants the entity permission to use the audit report in connection with the issuance of the entity's financial statements.) Unless otherwise specified, required audit committee communications can be done orally or in writing. An auditor may communicate to only the chair of the audit committee if done in order to communicate matters in a timely manner during the audit. However, the auditor should communicate such matters to the entire audit committee prior to the issuance of the audit report.

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions?

Professional judgment. The auditor must obtain sufficient and appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. While evaluating sufficiency and appropriateness of audit evidence, an auditor considers various factors like his understanding of the entity and its environment, experience gained during previous audits, the likelihood of previous misstatements, reliability of the evidence, etc. But ultimately, the auditor must use his professional judgment to evaluate the sufficiency and appropriateness of audit evidence.

According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:

Prosecute suspected criminal violations by registered public accounting firms. Although the PCAOB has been entrusted with wide-ranging powers under SOX in relation to auditors of issuers, it does not have the authority to prosecute suspected criminal violations by registered public accounting firms; this power is limited to the courts. The SEC has oversight authority over the PCAOB. Like the SEC, the PCAOB does not prosecute suspected criminal violations but relays information to other government agencies that do so. The PCAOB provides independent oversight of public accounting firms providing audit services—setting standards as well as registering, investigating, and disciplining auditors.

According to US GAAS, the purpose of an audit of financial statements is to

Provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework According to US GAAS, the purpose of an audit of financial statements is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.

Part of an auditor's process of establishing whether the preconditions for an audit are present, involves obtaining management's acknowledgement of its responsibility for all of the following except

Providing the auditor with access to key persons within the entity who have been authorized by management or those charged with governance to be involved in the audit To establish whether the preconditions for an audit are present, the auditor should obtain the agreement of management that it acknowledges and understands its responsibility to provide the auditor with unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence; the auditor should not be limited to a list of employees authorized by the client.

In assessing the competence of internal auditors, an external auditor would be most likely to obtain information about the

Quality of the internal auditors' working paper documentation If the external auditor plans to use the work of the internal audit function in obtaining audit evidence, one of the procedures the external auditor may perform to evaluate their competence is to review their work program and working papers. Information about the influence of management on the scope of their duties and any policies limiting their communication with the audit committee bear on the assessment of their objectivity rather than their competence. Information about the entity's ability to continue as a going concern would not provide information about their competence either. Editor Note: The external auditor is required to reperform some of the body of work of the internal audit function that the external auditor intends to use in obtaining audit evidence. Other procedures regarding the evaluation of their competence may include making inquiries of appropriate individuals within the internal audit function and/or observing procedures performed by the internal audit function.

According to US GAAS, to express an opinion, the auditor obtains reasonable assurance about whether the financial statements are free from material misstatement. Obtaining reasonable assurance directly relates to all of the following except

Recognizing that circumstances may exist that cause the financial statements to be materially misstated.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts

Related to the planning of an audit, the auditor should include in the audit documentation all of the following, except

Records of discussions with management related to planning activities, including the agreed upon dates for their delivery of requested data. The auditor is not required to document the discussions with management related to planning activities, including the agreed upon dates for their delivery of requested data (although being proactive in this sense is encouraged in practice). The other answer alternatives include all the required documentation related to planning.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

Reevaluate the risk of fraud, and design alternate tests for the related transactions

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

Relevant ethical requirements Relevant ethical requirements is one of the elements that should be addressed by a firm's system of quality control. Answer (a) is not an element of a system of quality control. Answers (b) and (d) would be associated with auditing requirements and procedures.

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Repairs and maintenance

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

Representation of a non-attest client in an IRS examination. The AICPA code of professional conduct stipulates that a CPA can represent a non-attest client in an IRS examination for a commission or a contingent fee. Contingent fees are fees that are dependent upon the finding or result obtained. Under the AICPA Code of Professional Conduct, contingent fees are specifically prohibited for audits and reviews of financial statements or examinations of prospective financial statements. In addition, a member in public practice is prohibited from preparing an original or amended tax return or claim for a tax refund for a contingent fee for any client. However, contingent fees are permitted where they are based on amounts fixed by courts or other public authorities (e.g., representing a client in an examination of a tax return by IRS agent). The CPA cannot perform (A), (C) and (D) without: Violating income tax prep rules (preparation of an original income tax return). The CPA must have pre-determined fees for tax returns, with no commissions or contingent fees. Violating income tax prep rules (preparation of an amended income tax return). It is permissible to amend income tax returns, but not for a contingent fee or commissions. Impairing independence (performing consulting services for audit clients).

According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?

Representing a client in an IRS examination of the client's federal income tax return Rule 302 states that a member in public practice shall not offer or render services under an agreement whereby the fee is contingent upon the findings or results. Specified services include an audit or review of a financial statement, a compilation of a financial statement when the member reasonably might expect that a third party will use the statement, an examination of prospective financial information; or preparing an original or amended tax return or claim for a tax refund. Contingent fees in certain tax matters are permitted, including: a member representing a client in an examination by a revenue agent of the client's federal or state income tax return; a member representing a client in connection with obtaining a private letter ruling, filing an amended return based on a tax issue that is the subject of a test case involving a different taxpayer or on which the taxing authority is developing a position.

Both the AICPA's Statements on Auditing Standards and the PCAOB's auditing standards limit the period of evaluation by an auditor of an entity's ability to continue as a going concern to 12 months from the date of the financial statements. The International Standards on Auditing differ in that they

Require that it be at least 12 months from the date of the financial statements, but do not limit it to 12 months

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

Review detail and test significant travel entertainment expenses

An engagement quality review and concurring approval of issuance are required for engagements (conducted pursuant to the standards of the PCAOB) to perform audits and for engagements to

Review interim financial information An engagement quality review and concurring approval of issuance are required for each audit engagement and for each engagement to review interim financial information conducted pursuant to the standards of the Public Company Accounting Oversight Board (PCAOB).

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end. The lack of misstatements at the interim date would not cause the auditor to increase the assessment of control risk. The auditor most likely would review supporting documents for new large balances and evaluate significant changes in year-end balances. Without an increase in the assessment of control risk, additional extensive procedures, such as sending confirmations to new customers and reviewing subsequent cash collections are unlikely. If the auditor planned to resend confirmations for any customer balances remaining at year-end when interim confirmations returned from these same customers appeared reasonable, it is unlikely that the auditor would plan to confirm accounts receivable as of an interim date.

According to the PCAOB's auditing standard for engagement quality reviews, the reviewer should evaluate the significant judgements that relate to engagement planning, including all of the following except

Review the engagement completion document and confirm with the engagement partner that there are no significant unresolved matters Reviewing the engagement completion document and confirming with the engagement partner that there are no significant unresolved matters is not a significant judgment related to engagement planning; this function generally is done in the review stage. Considering recent engagement experience with the company is a task appropriate to the planning stage. Considering the company's business and recent activity is a task appropriate to the planning stage. Considering materiality is a task appropriate to the planning stage.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Review the letter of inquiry to legal counsel for information about litigation

Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?

Select more effective substantive tests When an auditor concludes that there is a high risk of material misstatement (RMM) the most appropriate course of action is to select more effective substantive tests. The auditor's selection of audit procedures is based on the RMM. The higher the auditor's assessment of risk, the more reliable and relevant is the audit evidence sought by the auditor from substantive procedures.

Which of the following procedures is performed is performed first for unreturned positive confirmations of accounts receivable?

Sending second requests for confirmation of accounts of accounts receivable

When are services provided by a service organization relevant to the audit of a user entity's financial statements?

Services provided by a service organization are relevant to the audit of a user entity's financial statements when those services and the controls over them affect the user entity's information system, including related business processes, relevant to financial reporting and thus to the audit. Although it is likely that services and the controls over them affect the user entity's information system when the service organization's information systems are integrated with those of the user entity, this is not the best answer.A written agreement does not mean that the services provided are relevant to the audit.Even when services provided are integral to an entity's business operations, they may not be relevant to the audit.

Which of the following items most likely would be included in the engagement letter prepared by an auditor?

Services to be provided in addition to the audit. The agreed-upon terms of the audit engagement should be documented in an audit engagement letter or other suitable forms of written agreement. The required elements of the terms of the engagement are: Elaboration of the scope of the audit, including reference to applicable legislation, regulations, US GAAS, and ethical and other pronouncements of professional bodies to which the auditor adheres The form of any other communication of results of the audit engagement Arrangements regarding the planning and performance of the audit, including the composition of the audit team The expectation that management will provide written representations; The agreement of management to make available to the auditor draft financial statements and any accompanying other information in a timely fashion The agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements that may affect the financial statements Arrangements concerning the involvement of other auditors or specialists Arrangements concerning the involvement of internal auditors and other staff of the entity Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit Any restriction of the auditor's liability when not prohibited Any obligations of the auditor to provide audit documentation to other parties Additional services to be provided in addition to the audit. A reference to any further agreements between the auditor and the entity. Drafts of account confirmations sent to financial institutions; meeting dates, attendance, and topics at a board of directors' meeting, and lists of current and previous lawyers retained by the entity is not something that would be in the engagement letter between the auditor and the client.

The use of which of the following word(s) in the IESBA Code of Ethics for Professional Accountants imposes a requirement?

Shall

Which of the following terms used in the Statements on Auditing Standards indicates a presumptively mandatory requirement?

Should. US GAAS uses the word "should" to indicate a presumptively mandatory requirement. If US GAAS includes a procedure that the auditor should consider, the consideration of the procedure is a presumptively mandatory requirement, while carrying out the procedure is not. Whether the auditor performs the procedure is based upon the outcome of the auditor's consideration and the auditor's professional judgment. US GAAS uses the word "must" to indicate an unconditional requirement; not a presumptively mandatory requirement. The words "could" and "consider" are used to describe procedures included in the application and other explanatory material of a standard. Although such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of that section.

Which of the following best describes what is meant by the term US generally accepted auditing standards?

Systematic guidelines that ensure audit accuracy and measure the quality of auditor performance Generally accepted auditing standards (GAAS) are a set of systematic guidelines used by auditors when conducting audits on companies' financial statements, ensuring the accuracy, consistency, and verifiability of auditors' actions and reports. GAAS measures the quality of the auditor's performance of audit procedures.

When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

Test data are processed by the client's computer programs under the auditor's control.

In connection with an audit of a nonissuer, the auditor would ordinarily use an engagement letter to

Specify any arrangements concerning the involvement of the company's internal auditors on the audit. The terms of the engagement should be documented in an audit engagement letter or other suitable forms of a written agreement. An engagement letter would contain arrangements concerning the involvement of other auditors, specialists, auditors, and other staff of the entity. The required elements of the terms of the engagement are: The objective and scope of the audit. The responsibilities of the auditor. The responsibilities of management A statement regarding the inherent limitations of an audit (see this question's quote).Identification of the applicable financial reporting framework for the preparation of the financial statements. Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content. Contingent fees are fees that are dependent upon the finding or result obtained. Under the AICPA Code of Professional Conduct, contingent fees are specifically prohibited so this wouldn't be included in an engagement letter. Due to the inherent limitations of an audit, an unavoidable risk exists that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS so this wouldn't be included in an engagement letter. An auditor of a non-Issuer would not perform compilation services because it will impair the auditor's independence, so this wouldn't be included in an engagement letter.

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

Statements on Standards for Attestation Engagements The Statements on Standards for Attestation Engagements are applicable to engagements to issue an assertion about subject matter that is the responsibility of another party. In an attest service, the practitioner is engaged to issue a report on subject matter or on an assertion about the subject matter which in this case is the square footage of the warehouse, that is the responsibility of another party, in this case, the management. Option (A) is incorrect as The Statements on Auditing Standards provide guidance for audits of Financial Statements and reviews of interim Financial Statements when the corresponding annual Financial Statements are expected to be audited by the same auditor. Option (C) is incorrect as The Statements on Standards for Accounting and Review Services are applicable to engagements to compile and review Financial Statements. Option (D) is incorrect as The Statements on Standards for Consulting Services provide guidance for a wide array of services with little relation to financial statements, including information technology selection and implementation, support services, and business plan preparation.

An auditor decides to perform substantive tests on a client's property and equipment balance as of an interim date. The auditor has not obtained evidence about the operating effectiveness of relevant controls. What additional work must be performed to extend the audit conclusions from the interim date to the balance sheet date?

Substantive procedures for the period between the interim date and the balance sheet date.

Regardless of the assessed risks of material misstatement, an auditor would perform some

Substantive tests to restrict detection risk for material transaction classes Regardless of the assessed risk of material misstatement, the auditor should design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure. The auditor should perform tests of controls when the auditor's risk assessment includes an expectation of the operating effectiveness of controls or when it is not possible or practicable to reduce detection risk at the relevant assertion level to an acceptably low level with audit evidence obtained from substantive procedures alone. Analytical procedures are required to be used in the planning stage of the audit (and the final review stage); however, they would not be performed to verify the design of internal control procedures. A dual-purpose test is a procedure that is designed to test both the operating effectiveness of the controls and details of the same transaction; this is efficient, but not required.

In an integrated audit of a non-issuer, which of the following is the responsibility of an 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 senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Tests of controls and tests of details

Which of the following represents an inherent limitation of internal controls?

The CEO can request a check with no purchase order. One of the inherent limitations of internal control is the inappropriate management override of controls. An example of this would be if the CEO can request a check with no purchase order. The other answer alternatives describe weaknesses in internal control, but they are not inherent limitations. Inherent limitations are intrinsic—the incorrect answers are examples of failures in internal control that can be remedied.

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?

The CPA authorizes client transactions and reports them to management. Under the AICPA Code of Professional Conduct, authorization of client transactions will impair independence as it is a management function performed by the auditor. Options (A), (B) and (C) are incorrect because these are functions that do not require an auditor to make decisions on behalf of the management. Recording transactions in accordance with classifications determined by management, preparing financial statements from a trial balance prepared by management or posting adjusting entries prepared by management to the trial balance are not decision making functions and hence do not impair the auditor's independence.

According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?

The CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity. As long as membership in a club is essentially a social matter, independence of the member's firm would not be considered to be impaired because such equity or debt ownership is not considered to be a direct financial interest. ET 191-91 states that independence is considered impaired if a lease meets the criteria of a capital lease as defined by GAAP and independence is not considered impaired if a lease meets the criteria of an operating lease as long as the terms and conditions are comparable with other leases of a similar nature and all amounts are paid in accordance with the terms of the lease. The independence of the member would be considered impaired whether or not the direct financial interest is placed in a blind trust. The client's guarantee of the CPA's loan creates a material indirect financial relationship between the CPA and the client.

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?

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

The external auditor should determine whether the work of the internal audit function can be used in obtaining audit evidence by evaluating all of the following except

The amount of judgment involved in performing the planned audit procedures

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion on a public company's financial statements without an explanatory paragraph?

The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion.

Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client, except:

The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation

According to US GAAS, an auditor is associated with financial information when

The auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS. According to US GAAS, an auditor is associated with financial information when the auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS.

Which of the following is a requirement for an audit of both an issuer's and a non-issuer's financial statements?

The auditor is required to assess the risk of fraud.

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?

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

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations

Which of the following statements is false in regard to an audit of internal control over financial reporting conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB)?

The auditor may rely upon the judgments of others regarding the sufficiency of evidence. Judgments about evidence sufficiency and other factors affecting the opinion must be the auditor's. The other statements are true.

Which of the following statements is correct about actions taken after the documentation completion date?

The auditor must not make any deletions to audit documentation before the end of the specified retention period. The documentation has to be retained for at least 5 years from report release date as per SAS rules for non-issuers and for at least 7 years as per PCAOB rules for issuers. After the documentation completion date, the auditor should not delete or discard audit documentation until the specified retention period expires.

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?

The auditor selecting inappropriate auditing procedures

Which of the following statements is correct regarding the auditor's responsibility to detect errors and fraud?

The auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. An auditor conducting an audit in accordance with US GAAS has a responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements as a whole are free of material misstatement, whether caused by fraud or error. The auditor should design and execute an audit that will provide reasonable assurance and not complete assurance that the financial statements are free of material errors or fraud. Reasonable assurance is acceptable because there are inherent limitations of an audit, some of which cannot be cured by further audit procedures mainly due to efficiency and practicality. The auditor's opinion provides reasonable and not absolute assurance that the financial statements are free of material errors or fraud. The auditor is responsible for detecting material misstatements resulting from management fraud.

Regarding the auditor's communication responsibilities related to fraud or suspected fraud,

When management is involved in the fraud or suspected fraud the auditor should communicate these matters to those charged with governance and discuss with them the nature, timing, and extent of audit procedures necessary to complete the audit.

Which statement regarding the auditor's risk assessment of material misstatement due to fraud is not true?

The auditor should evaluate whether each assessed risk due to fraud is a significant risk There is no need for the auditor to evaluate whether each assessed risk due to fraud is a significant risk; thus, answer D. is the correct answer, ie, the only statement not true. The auditor should treat all of them as significant risks (answer C.) and, accordingly, obtain an understanding of the entity's related controls, including the evaluation of whether such controls have been suitably designed and implemented to mitigate such fraud risks. Answers A., and B. are also true statements. Regarding answer A., the auditor's risk assessment of material misstatement due to fraud should be ongoing throughout the audit, following the initial assessment. Regarding answer B., when identifying and assessing the risks of material misstatement (RMM) due to fraud, the auditor should, based on a presumption that risks of fraud exist in revenue recognition, evaluate which types of revenue, revenue transactions, or assertions give rise to such risks. (If the auditor has concluded that this presumption is overcome in the circumstances of the engagement, the auditor should include in the audit documentation the reasons for that conclusion.)

According to PCAOB auditing standards, all of the following statements are true about the terms of an audit engagement, except

The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee and management annually. According to PCAOB auditing standards, the auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee annually. The auditor is not required to provide it to management.

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

The auditor's allowable risk of assessing control risk too low when planning an audit sample for a test of controls, the auditor should consider the auditor's allowable risk of assessing control risk too low, not too high. The auditor also should consider the relationship of the sample to the objective of the test of controls; the maximum rate of deviations from prescribed controls that would support the planned assessed level of control risk; and characteristics of the population, i.e., the items comprised by the account balance or class of transactions of interest. Preliminary judgment about materiality levels and the level of detection risk are considerations for planning a sample for a substantive test of details.

Under which of the following circumstances would an auditor most likely issue either a qualified or a disclaimer of opinion?

The client's attorney refused to respond to the letter of audit inquiry

A client uses a service organization to process its payroll. Which of the following statements is correct regarding the user auditor's use of the service auditor's report on internal controls placed in operation?

The client's auditor can use the service auditor's report as audit evidence for the client's internal controls. A client uses a service organization to process its payroll. The service organization's auditor has written a report on internal controls in operation. Service auditor report will assist the user auditor in gaining an understanding of the internal control structure of the user, to the extent it depends on the service organization's work. The client's auditor can use the service auditor report as audit evidence for the client's (user's) internal controls.

Which of the following factors would least likely affect the quantity and content of an auditor's working papers?

The content of the representation letter

Which of the following best describes the earliest date for an auditor's report?

The date the auditor has obtained sufficient appropriate evidence to support the opinion.

The auditor is unable to obtain absolute assurance that the financial statements as a whole are free from material misstatement because of the inherent limitations of an audit. According to US GAAS, the principal inherent limitations of an audit arise from all of the following except

The depth of the auditor's understanding of the entity Answer C., the depth of the auditor's understanding of the entity, is not the source of an inherent limitation of an audit. This is controlled by the auditor—the auditor is required to exercise professional judgment to determine the extent of the required understanding of the entity. The principal inherent limitations of an audit arise from the other answer alternatives. Editor Note: See expanded explanations of the following in the text under the definition of reasonable assurance regarding the sources of the inherent limitations of an audit.

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

The entity declines to provide the accountant with a signed representation letter. A CPA must obtain a representation letter from management to complete a review. If a CPA becomes aware of a departure from GAAP (such as a lack of justification for a change in accounting principles) in the financial statements, the CPA should consider whether the departure can be adequately disclosed by modifying the standard report. An accountant may review financial statements prepared in accordance with a basis of accounting other than GAAP, such as the income tax basis. A CPA may issue a review report on one financial statement and not on other related financial statements if the scope of the CPA's inquiries and analytical procedures has not been restricted.

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?

The entity's fixed assets lack ownership identification. If an entity's fixed assets lack ownership identification, it would increase the risk of material misstatement arising from the misappropriation of assets. Bias in the preparation of accounting estimates, adoption of new accounting principles, and rapid revenue growth would heighten the risk of material misstatements arising from financial reporting and not from misappropriation of assets.

If audit data analytics are used for risk assessment procedures, which of the following statements is true with regard to evidence or findings obtained from the analytics?

The evidence/findings can be used in any other audit procedure

Quality control policies and procedures that are established to decide whether to accept a new client should provide the CPA firm with reasonable assurance that

The likelihood of associating with clients whose management lacks integrity is minimized One of the elements of a system of quality control is the acceptance and continuance of client relationships and specific engagements. Addressing this includes establishing policies and procedures designed to provide a firm with reasonable assurance that it will accept or continue relationships with clients only when it has considered the integrity of the client, including the identity and business reputation of the client's principal owners, key management, related parties, and those charged with its governance; and the risk associated with providing professional services in the particular circumstances. A firm's duty to the public may come into play within this element of quality control in the consideration of the withdrawal from an engagement under certain circumstances, but generally not in regard to the acceptance of a new client. However, the public interest is directly addressed in two other elements of a quality control system: relevant ethical requirements and engagement performance. Whether the client will meet any agreed-upon obligations such as the timely completion of schedules would probably not yet be known when the acceptance of a new client is being considered and is unlikely to be a factor in any event. Nor is it a quality control issue. Prior to the acceptance of a new client, the auditor can only try to ascertain if there will be sufficient corroborating evidence. Although this would be a consideration in whether to accept a new client and it could be posed that having personnel capable of making this judgment is part of this element of quality control, it is not as important an issue as the integrity of the client.

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider I. The likely rate of deviations II. The allowable risk of assessing control risk too high

The likely rate of deviations In determining the sample size to test authorization of sales returns, the auditor should consider * Tolerable rate of deviations * estimated deviation rate * allowable risk of assessing control risk too low In the given options only the expected deviation rate will be considered. The allowable risk of assessing control risk too high will not be considered.

Which of the following correctly identifies the deadline for the completion of audit documentation of a nonissuer?

Within 60 days after the report release date. A complete and final set of audit documentation should be assembled for retention no more than 45 days after the report release date. According to GAAS, the assembly of the final audit file of a non-issuer should be completed within 60 days following the report release date. The compilation, assembly, and deletion of superseded documentation refers to the archival of audit working papers, which must be done within 60 days of the audit report release date.

The establishment of the overall audit strategy, includes all of the following activities except

The nature, timing, and extent of planned further audit procedures at the relevant assertion level The detailed audit plan, not the overall audit strategy, includes a description of the nature, timing, and extent of planned further audit procedures at the relevant assertion level. In addition to the other answer alternatives, in establishing the overall audit strategy, the auditor should consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts; consider the results of preliminary engagement activities; and, when applicable, consider whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant.

If a non-issuer refuses to give permission to the auditor to communicate with its external legal counsel, then the auditor should modify which of the following?

The opinion in the auditor's report.

Which of the following is a control procedure that most likely could help prevent employee payroll fraud?

The personnel department promptly sends employee termination notices to the payroll supervisor. By promptly notifying the payroll supervisor of employee terminations, the personnel department would avoid a terminated employee from continuing to be paid. Unclaimed payroll checks should be forwarded to the Treasurer's office. Salary rates should be controlled in the personnel office. Total hours should be determined and approved prior to getting to the payroll department.

Which of the following is not a factor a CPA firm should take into consideration when deciding whether to undertake or continue client relationships and engagements?

The possibility of the existence of related party transactions The standards require that a firm's quality control policies and procedures regarding the acceptance and continuance of clients and engagements take answers b., c., and d. into consideration. In the absence of evidence to the contrary, related party transactions should not be assumed to be outside of the ordinary course of business. The auditor is concerned with complying with GAAS to identify related party transactions and determining that they are accounted for and disclosed according to GAAP. b - The client's integrity c - The firm's ability to perform the engagement d - The firm's ability to comply with legal and ethical requirements

When developing the audit strategy and audit plan for an issuer, the auditor should evaluate whether the following matters are important to the company's financial statements and internal control over financial reporting and, if so, how they will affect the auditor's procedures, except for

The response to the auditor's letter of audit inquiry to the client's lawyer for the current audit

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on the substantive testing sample size if all other factors remain constant?

The sample size would be lower. A CPA has decided to reduce control risk, so the substantive testing sample size would be lower. The CPA has reduced control risk and can afford a higher detection risk and will be satisfied with a smaller, less time-consuming sample size during substantive testing. With lower control risk, an auditor can afford a higher detection risk and use a smaller sample size.

A service organization provides processing services for a client's sales orders. Which of the following 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 service organization provides processing services for a client's sales orders. Information most relevant when gathering data for the report on internal controls is the accounts receivable balances as the service organization provides processing services for a client's sales orders. Information related to the client's sales manager review of accounts receivable, information related to the client's data clerk making unauthorized changes to customer prices, or information related to the client's credit department and their development of credit limits would not provide information about the service organization's internal controls.

The auditor should develop an audit plan that includes a description of all of the following except

The terms of the engagement The terms of the engagement should be documented in an audit engagement letter or other suitable form of written agreement; not described in the audit plan. Moreover, reaching this understanding is a preliminary engagement activity. The detailed audit plan focuses on the audit procedures. The other answer alternatives comprise all the required elements of an audit plan.

Which of the following is a primary purpose of audit documentation?

To support that the audit was performed in accordance with GAAS. Audit documentation refers to working papers or audit files developed during the audit. It is a principal record of audit procedures performed, evidence obtained, exceptions found, and conclusions reached. The auditor should prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: The nature, timing, and extent of the audit procedures performed to comply with US GAAS and applicable legal and regulatory requirements; The results of the audit procedures performed and the audit evidence obtained; and Significant findings or issues arising during the audit, the conclusions reached, and significant professional judgments made in reaching those conclusions. Ultimately, the primary purpose of audit documentation is to support that the audit was performed in accordance with GAAS.

Which of the following best describes the preconditions for an audit?

The use by management of an acceptable financial reporting framework in the preparation and fair presentation of the financial statements and the agreement of management and, when appropriate, those charged with governance, to the premise on which an audit is conducted The preconditions for an audit are the use by management of an acceptable financial reporting framework in the preparation and fair presentation of the financial statements and the agreement of management and, when appropriate, those charged with governance, to the premise on which an audit is conducted. Incorrect answer B. is the overview of the premise on which an audit is conducted; the acceptance of this premise by management and, when appropriate, those charged with governance is one of the preconditions for an audit. Incorrect answers C. and D. are two of the responsibilities included in that premise on which an audit is conducted. Editor Note: The other management responsibilities included in that premise are responsibility for (1) the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; (2) to provide the auditor with (in addition to answer D.) additional information that the auditor may request from management and, when appropriate, those charged with governance for the purpose of the audit; and (3) unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Primary differences between International Standards on Auditing (ISA) and Public Company Accounting Oversight Board (PCAOB) auditing standards include all of the following except

There are significant differences per PCAOB auditing standards vs. ISA regarding requirements for written representations from management. There are no substantive differences per PCAOB auditing standards vs. ISA regarding requirements for written representations from management.

Which of the following statements should not be included in a written communication regarding significant deficiencies and material weaknesses identified in an audit of financial statements?

There were no significant deficiencies identified during the audit.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They may use financial and nonfinancial data aggregated at a high level.

In planning an audit, an auditor should document in the working papers the auditor's risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present?

Those risk factors identified.

The element of the audit planning process most likely to be agreed upon with management before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the timing of inventory observation procedures to be performed. Evidence to be gathered to provide a sufficient basis for the auditor's opinion is solely a matter of auditor judgment. The procedures to be undertaken to discover litigation, claims, and assessments are determined by the auditor. Pending legal matters to be included in the inquiry of the client's attorney are more likely to be discussed after implementation of the audit strategy.

The overall objectives of the auditor, in conducting an audit of financial statements in accordance with US GAAS, include all of the following except

To adequately plan the work and properly supervise any assistants To adequately plan the work and properly supervise any assistants is not part of the overall objectives of the auditor. The overall objectives of the auditor, in conducting an audit of financial statements, are to (1) obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and (2) report on the financial statements, and communicate as required by US GAAS, in accordance with the auditor's findings.

US GAAS use two categories of professional requirements

To describe the degree of responsibility it imposes on auditors US GAAS use two categories of professional requirements, identified by specific terms (unconditional and presumptively mandatory), to describe the degree of responsibility it imposes on auditors. Regarding incorrect answers A. and B., the terms are unconditional (not conditional; not mandatory) and presumptively mandatory. Regarding incorrect answer C., the auditor must comply with an unconditional requirement in all cases in which such requirement is relevant and with a presumptively mandatory requirement in all cases in which such requirement is relevant except in rare circumstances in which the auditor may judge it necessary to depart.

When developing the group audit plan, the group engagement team is required

To determine whether the audit report on the group financial statements will make reference to the audit of each component auditor

An audit in accordance with US GAAS is conducted on the premise that management and, when appropriate, those charged with governance have certain responsibilities which they acknowledge and understand. Which of the following is the most accurate description of one of these areas of responsibility?

To provide the auditor with access to all information that is relevant to the financial statements and any additional information that the auditor may request for the purpose of the audit include: records, documentation, and other matters; and any additional information that the auditor may request

The auditor of a nonissuer would most appropriately use Reperformance to obtain audit evidence for which of the following purposes?

To test the operating effectiveness of a bank reconciliation control. An auditor would perform Reperformance for the test of controls and do recalculation of the test of details. As such, to obtain audit evidence for the operating effectiveness of a bank reconciliation control, an auditor would reperform controls. The auditor would do recalculation for the following test of details: To test whether the amount of FICA tax withheld from an employee's paycheck is appropriate. To determine whether the aging categories on the aged accounts payable trial balance are accurate. To determine the mathematical accuracy of the extended cost amount shown on an invoice sent to a customer.

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

Transactions selected for testing are not supported by proper documentation. The auditor most likely would consider whether material misstatements exist when transactions selected for testing are not supported by proper documentation. Reduced emphasis on meeting earnings projections would be a factor decreasing the likelihood of earnings overstatements and assets (the most frequent misstatement). Having the board of directors make major financing decisions would decrease the incentive for management to use questionable reporting by reducing the amount of management's responsibility. Significant deficiencies previously communicated to management may not have been corrected because of an unfavorable cost-benefit relationship.

Services provided by a service organization are relevant to the audit of a user entity's financial statements when those services and the controls over them affect the user entity's information system, including related business processes, relevant to financial reporting. A user auditor should consider a service organization's services a part of an entity's information system if they affect any of the following except

Transactions that are specifically authorized by the entity, such as the processing of checking account transactions by a bank or the processing of securities transactions by a broker US GAAS regarding service organizations do not apply to services that are limited to processing an entity's transactions that are specifically authorized by the entity, such as the processing of checking account transactions by a bank or the processing of securities transactions by a broker. Nor do they apply to the audit of transactions arising from an entity that holds a proprietary financial interest in another entity, such as a partnership, corporation, or joint venture, when the partnership, corporation, or joint venture performs no processing on behalf of the entity. In addition to the other answer alternatives, a service organization's services are part of a user entity's information system, including related business processes, relevant to financial reporting if these services affect any of the following: (1) the related accounting records, supporting information, and specific accounts in the user entity's financial statements that are used to initiate, authorize, record, process, and report the user entity's transactions; this includes the correction of incorrect information and how information is transferred to the general ledger; the records may be in either manual or electronic form; (2) How the user entity's information system captures events and conditions, other than transactions, that are significant to the financial statements; and (3) controls surrounding journal entries, including nonstandard journal entries used to record nonrecurring, unusual transactions, or adjustments.

Which of the following statements is true regarding an auditor's communications with a predecessor auditor prior to engagement acceptance?

US GAAS provides a list of matters that may be subject to the auditor's inquiry of the predecessor auditor. Matters subject to the auditor's inquiry of the predecessor auditor prior to engagement acceptance may include: (1) information that might bear on the integrity of management; (2) disagreements with management about accounting policies, auditing procedures, or other similarly significant matters; (3) communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity; (4) communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control; (5) the predecessor auditor's understanding about the reasons for the change of auditors. Regarding incorrect answer A., specific inquiries are not required. Regarding incorrect answer C., if management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should inquire about the reasons and consider the implications of that refusal in deciding whether to accept the engagement. The auditor is not automatically precluded from accepting the engagement. Regarding incorrect answer D., if the predecessor auditor provides no response or a limited response, the auditor should evaluate the predecessor auditor's response, or consider the implications, in determining whether to accept the engagement. Again, the auditor is not automatically precluded from accepting the engagement.

Which of the following constitutes a potential risk associated with the use of information technology in an entity's internal control structure?

Unauthorized changes to systems Unauthorized changes to systems constitute a potential risk associated with the use of information technology in an entity's internal control structure. Changes to information systems not approved are a big red sign of future risk exposure. Use of information technology will not reduce the ability to monitor the entity's activities. The facilitation of additional analyses would help protect against risk, not expose it. A reduction in the circumvention of controls will help protect against potential risk as well.

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?

Unrecorded sales at year-end

Which of the following activities most likely would detect whether payroll data were altered during processing?

Use test data to verify the performance of edit routines. With test data, the auditor can readily compare actual results to anticipated results. Monitoring distribution wouldn't detect data alteration. Source documents could be correctly approved and data could be later altered in processing without impact on the source documents. Segregation of duties discourages fraud, but not unintentional mistakes. Further, approval of hardware and software specifications are not necessarily the most critical functions to segregate in the IT area.

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?

Variable sampling During substantive testing, variable sampling is used, which refers to examining a sample of items from a population to determine if the individual account balance stated in dollar terms or other numerical values are materially correct. Attribute sampling and discovery sampling are used in a test of controls and determine what percentage of them contains a particular attribute. It cannot be used to estimate a numerical measurement of population. Random number sampling also does not provide numerical value. Numbered documents or transactions are selected through the use of random number tables or computer software.

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by

a manager or partner who has a comprehensive knowledge of the client's business and industry

According to US GAAS, regarding materiality considerations in group audits

a threshold for misstatements is determined in addition to component materiality

A primary objective of analytical procedures used in the final review stage of an audit is to

assist the auditor in evaluating the overall financial statement presentation

In testing the existence assertion for an asset, an auditor ordinarily works from the

accounting records to the supporting evidence In testing the existence assertion for an asset, the auditor would start with the accounting records themselves to determine that the assets recorded on the client's books do exist. Further evidence of the asset existence would then be found in the supporting evidence. Editor's note: The key word in this question is "assertion". When testing assertion, you wouldn't necessarily go to/from the financial statements, but rather drill-down to a more specific level, such as going from the accounting records to the supporting evidence.

Completeness assertion

all transactions that should gave been recorded have been recorded

In an audit of a non-issuer's financial statements, projected misstatement is

an auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

An auditor's test of controls for completeness for the revenue cycle usually include determining whether

an invoice is prepared for each shipping document When testing for completeness for the revenue cycle, the auditor is checking to see that all sales have been recorded. Tracing ("up the house") from a shipping document to an invoice tests that goods that were shipped were also invoiced. The auditor would also need to confirm that the invoice was recorded. Testing receivables to see if they were collected subsequent to the year-end is done to determine if there was proper cutoff. Checking to see that each invoice is supported by a customer purchase order and that credit memos are properly authorized is testing for occurrence (validity).

An auditor would least likely use computer software to

assess IT control risk After obtaining an understanding of the client's IT controls, the auditor must assess control risk for the IT portion of the client's internal control. Assessing control risk is the process of evaluating the effectiveness of an entity's internal control policies and procedures in preventing or detecting material misstatements in the financial statements. Procedures to judge the effectiveness of internal control design would include inquiries, observations, and inspections. One would not need computer software to accomplish this task. Gaining access to client data files, preparing spreadsheets, and constructing parallel simulations would all make use of computer software. Editor's note: Remember the keyword in the question, least likely.

The acceptable level of detection risk is inversely related to the

assurance provided by substantive tests Detection risk relates to substantive audit procedures and is managed by the auditor's response to the risk of material misstatement (RMM). For a given level of audit risk, detection risk should bear an inverse relationship to the RMM at the relevant assertion level. As the RMM increases, the level of detection risk that can be accepted by the auditor decreases (and the need for the assurance provided by substantive tests increases). Likewise, as the RMM decreases, the level of detection risk that can be accepted by the auditor increases. (However, the auditor should perform substantive procedures for all relevant assertions related to material classes of transactions, account balances, and disclosures regardless of the assessed level of risk.) Regarding incorrect answer B., the risk of misapplying audit procedures is a part of detection risk. Regarding incorrect answer C., the preliminary judgment about materiality levels provides a basis for, i.e., is made prior to, the auditor's identification and assessment of the RMM. Thus, as detection risk is set by the auditor in response to the RMM, the setting of the preliminary materiality levels is unrelated to detection risk. Moreover, the judgment about what constitutes a material misstatement is not related to the determination of the degree of risk the auditor is willing to accept that a material misstatement will be undetected. Regarding incorrect answer D., the risk of failing to discover material misstatements during an audit is detection risk.

The expected population deviation rate of client billing misstatements is 2%. The auditor has established a tolerable rate of 3%. In the review of client invoices the auditor should use

attribute sampling

The date of the representation letter should be as of the date of the

audit report

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

auditor

During an audit of a nonissuer, if the terms of a related party transaction are found to be materially inconsistent with the explanations provided by management, an auditor should

consider the reliability of management's explanations and representations on other significant matters

Which of the following statements correctly describes 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 A top-down approach begins at the financial statement level and with the auditor's understanding of the overall risks to ICFR. The auditor then focuses on entity-level controls and works down to significant accounts and disclosures and their relevant assertions.

Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed?

client record documenting the use of computer programs When a client entity has documentation regarding the use of computer programs, it illustrates an effective internal control.

The primary source of information to be reported about litigation, claims, and assessments is the

client's management

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

completeness

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of

completeness

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

confirmation

Which of the following procedures would an auditor least likely perform before the balance sheet date?

confirmation of accounts payable While the confirmation of accounts receivable and the other answers are common audit procedures, confirmation of accounts payable is an extended procedure and usually occurs under unusual conditions. The greater the combined level of risk, the greater the assurance that the auditor needs from substantive tests related to a financial statement assertion. In these situations, the auditor might use confirmation procedures rather than or in conjunction with tests directed toward documents or parties within the entity. In a low-risk situation, review of post balance sheet date payments to vendors may adequately substantiate the accounts payable balance. Editor's note: During interim testing, an auditor would be more concerned with testing income statement items, since those are "as of" a year-end period, while balance sheet items are "at" a year-end period.

The overall attitude and awareness of those charged with governance concerning the importance of internal control usually is reflected in its

control environment

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

cost of goods sold

The permanent (continuing) file of an auditor's working papers most likely would include copies of the

debt agreements permanent files contain items of continuing interest, such as debt agreements, internal control flowcharts, and articles of incorporation. The other items are of temporary interest only.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would

decrease detection risk Detection risk has an inverse relationship to control risk. Therefore, if an auditor decides to increase the assessed level of control risk from the originally planned level, in order to achieve an equivalent overall level of risk, detection risk must be decreased. Editor's note: Think about it like algebra: IR (inherent risk) X CR (control risk) = DR (detection risk). In order to maintain a consistent RMM after increasing CR, you would have to decrease DR.

In obtaining an understanding of an entity's internal controls that are relevant to the audit an auditor is required to obtain knowledge about the

design of the controls

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error exist is referred to as

detection risk detection risk is the risk that audit procedure will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when in fact such a misstatement does not exist. Editor's note: A tip here is that sampling was not performed, but a substantive test was. Therefore, choices A and C could be eliminated, giving you a 50% chance to correctly answer this question. Furthermore, inherent risk relates to an auditor's judgment prior to the commencement of testing, so that answer could have been eliminated as well.

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that

deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate

stratification

dividing population into subsets (called strata) within each of which an independent sample is selected

The likelihood of assessing control risk too high is the risk that the sample selected to test controls

does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment

the risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

effectiveness of the audit

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to

estimate whether the dollar amount of inventory is reasonable Generally, variables sampling involves the determining of proper dollar value of the sampled items and makes inferences about the fairness of the amounts reported in the financial statements. Variables sampling typically involves deciding whether the dollar value of an account is reasonable. Generally, attributes sampling involves the determination of the rate of occurrence of some characteristic in a population. Proper prices, the number of misstatements, or proper recording are attributes. The other answer choices seem to test whether an outcome of a section of inventory is correct or not.

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

examining an analysis of inventory turnover

inherent risk and control risk differ from detection risk in that they

exist independently of the financial statement audit Inherent risk and control risk exist independently of the financial statement audit. They are the entity's risks and cannot be changed at the auditor's discretion. Detection risk is the risk that an auditor will not detect a material misstatement—it, not inherent risk or control risk, can arise from the misapplication of auditing procedures. All three risks can be assessed in quantitative terms, such as percentages, or nonquantitative terms, such as high, medium, or low risk.

A deficiency in internal control

exists when a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

expenditures for property and equipment have not been charged to expense the repairs and maintenance accounts are analyzed by an auditor in obtaining evidence regarding the completeness of fixed assets, since there is the possibility that items were expensed that should have been capitalized.

If the auditor is precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance with laws and regulations that may be material to the financial statements has, or is likely to have, occurred, the auditor should

express a qualified opinion or disclaim an opinion on the financial statements

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the

financial statement assertions

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

individual invoices

Regarding written communication of significant deficiencies and material weaknesses identified in an audit of financial statements, the auditor should

include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects. The auditor should include in the auditor's written communication of significant deficiencies and material weaknesses a description of the significant deficiencies and material weaknesses and an explanation of their potential effects. In explaining the potential effects of the significant deficiencies and material weaknesses, the auditor need not quantify those effects. The potential effects may be described in terms of the control objectives and types of errors the control was designed to prevent, or detect and correct; or in terms of the risk of misstatement that the control was designed to address. The purpose of the communication is to report matters to management and those charged with governance that merit their attention in meeting their responsibilities; not how it relates to the audit. Thus, the auditor should not communicate their effect on the auditor's overall risk assessment. The auditor may also include in the written communication suggestions for remedial action on the deficiencies, management's actual or proposed responses, and a statement about whether the auditor has undertaken any steps to verify whether management's responses have been implemented.

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of

incorrect rejection The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control. The risk of assessing control risk too low is just the opposite. The risk of incorrect acceptance is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated.

If an auditor of a non-issuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of timesheets, then the auditor would most appropriately

increase the assessed risks of material misstatement If an auditor of a non-issuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of timesheets, then the auditor would most appropriately increase the assessed risks of material misstatement. An unexpectedly high number of deviations indicate a higher risk of material misstatement. Because of this, the auditor will increase the assessed risks of material misstatement.

In response to an increase level of assessed risk of material misstatement, an auditor of a nonissuer would generally

increase the emphasis on professional skepticism when gathering and evaluating audit evidence with the audit team If the assessed risk of material misstatement is high, the auditor would have to reduce the acceptable level of Detection Risk to keep audit risk to an acceptably low level. This would be done by altering the Nature, Extent, and Timing of audit procedures to reduce the audit risk to an acceptably low level by doing the following: Nature: Alter the type of Audit Evidence required. Change the audit staff to have a more experienced team. Enhance the type and level of review, and supervision of the audit team. Increase the professional skepticism exercised in the audit. Increase the focus on the test of detail rather than the test of controls. Extent: Increase the number of samples. Timing: Incorporate a level of surprise in the timing of the audit procedure Perform more testing at year-end than in the interim.

According to the PCAOB's Engagement Quality Review standard, an engagement quality reviewer must have competence, integrity, objectivity, and

independence The engagement quality reviewer must be independent of the company, perform the engagement quality review with integrity, and maintain objectivity in performing the review. The engagement quality reviewer must possess the level of knowledge and competence related to accounting, auditing, and financial reporting required to serve as the engagement partner on the engagement under review.

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the department of Labor (DOL), the selected auditor must be

independent for purposes of examining financial information required to be filed annually with the DOL

According to US GAAS, an auditor's professional judgment

is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or by sufficient appropriate audit evidence

Management is in a unique position to perpetrate fraud because of management's ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Risk of Management override

is presumed to be present in all entities Although the level of risk of management override of controls (override risk) will vary from entity to entity, the risk is, nevertheless, present in all entities. Risk of Management override is a significant presumptive risk and is presumed to be present in all audits and therefore need not be considered by the auditor to determine if it is present. This means that answer A is correct and answer B is not.

Regarding the auditor's consideration of compliance with laws and regulations, the auditor

is required to obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry in which the entity operates and how the entity is complying with that framework

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also

is responsible for mailing the checks A control for cash disbursements is for the person who signs the checks to compare them to supporting documents, cancel the documents, and to mail the checks. The person who signs checks should have access to the supporting documents in order to validate their legitimacy. Reconciliation of the monthly bank statement is a control that should be done by a person independent of cash transactions. Checks should not be returned or given to anyone with cash disbursement responsibilities. (Editor note: Think about this, if you were a check signer for an organization, wouldn't you want to see some documentation that "backs up" the check you're signing for?)

Performance materiality

is the auditor's acknowledgement that the aggregate of uncorrected and undetected misstatements may exceed set materiality levels. Performance materiality is defined as the amounts or amounts (not one amount) set by the auditor at less than (not higher) materiality for the financial statements as a whole. The auditor should determine performance materiality for purposes of assessing the risks of material misstatements and determining the nature, timing, and extent of further audit procedures.

In planning an audit, an auditor established materiality at $40,000. The auditor received an attorney's letter indicating that it was probable that each of the three

lawsuits would be settled for $30,000. Which of the following actions should the auditor take? Ask the client to record the liability for the three contingencies.

The audit working paper that reflect the major components of an amount reported in the financial statements is the

lead schedule working papers for each asset, liability, and equity account begin with a lead schedule summarizing the account's balance per the general ledger, and then showing adjusting and reclassification entries, and the final balance per audit. The lead schedule also includes the auditor's conclusion about whether the account is stated fairly.

When the risk of material misstatement is high, the auditor should accept ______ detection risk.

less When the auditor believes the risk of material misstatement (RMM) is high, the auditor responds by accepting less detection risk; accordingly, the auditor requires more persuasive audit evidence.Audit risk is a function of the RMM and detection risk.RMM is the entity's risk; it exists independently of the audit. Detection risk is the auditor's risk. They are inversely related.

For which of the following matters should an auditor obtain written representations

management's compliance with contractual agreements that may affect the financial statements

What is the term for an internal control deficiency such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis?

material weakness A material weakness is a deficiency or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The various standards don't use the term material deficiency.

Each of the following is an ethical principle that should guide the work of the auditors in the conduct of audits under government auditing standards, except

materiality Materiality is not an ethics principle. The AICPA Code of Professional Conduct outlines public interest, integrity, and confidentiality as principles. The IFAC Code of Ethics for Professional Accountants outlines public interest, integrity, and confidentiality as principles. Responsibility and confidentiality both encompass "proper use of government information."

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to

measure the sufficiency of the audit evidence obtained

Electronic data interchange (EDI)

method of conducting routine business transactions, such as inventory purchases. It relies on standardized guidelines that everyone can use. Distributed processing is an allocation of various processing tasks to various business divisions, with some tasks centralized and some decentralized. Electronic mail (email) refers to the electronic transmission of messages, including attached files from programs unrelated to the email software. A time-sharing center rents time on a central computer to several entities, with each entity having remote input and output devices. To each entity, it seems as if it is the only one using the system.

The fourth standard of reporting requires the auditor's report for a public company's financial statements to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent

misinterpretations regarding the degree of responsibility the auditor is assuming

When should the auditor make the written communication of significant deficiencies and material weaknesses to management and those charged with governance?

no later than 60 days following the audit report release date

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

obtain additional evidence regarding the valuation of inventory

Prior to commencing the compilation of financial statements of a non-issuer, an accountant is required to

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

Prior to using the internal auditors to provide direct assistance, the external auditor should perform all of the following procedures except

obtain written acknowledgement from the entity that the internal auditors will complete the work assigned to them by the external auditor by the agreed upon dates

When there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, according to US GAAS, the auditor should

obtain written representations from management about management's related plans

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any proper documentation?

performance of audit tests on a continuous basis

An emaphphasis-of-matter paragraph in an audit report prepared in accordance with US GAAS

refers to a matter appropriately presented or disclosed in the financial statements that is of such importance that it is fundamental to users' understanding of the financial statements

Which of the following internal control procedures most likely would be used to maintain accurate inventory records?

periodic inventory counts are used to adjust the perpetual inventory records Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period. Periodically comparing goods on hand with perpetual inventory records would assist in identifying potential errors.

Which of the following internal control procedures most likely would justify a reduced assessed level of control risk concerning property, plant and equipment acquisitions?

periodic physical inspection of property, plant and equipment by the internal audit staff

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

potentially increases the risk that errors that exist at the balance sheet date will not be detected

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

precision

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

preliminary judgments about materiality levels When planning a particular sample for a substantive test of details, such as subsequent cash receipts, the auditor should consider (1) the relationship of the sample to the relevant audit objective; (2) preliminary judgments about materiality levels; (3) the auditor's allowable risk of incorrect acceptance; and (4) characteristics of the population, that is, the items comprising the account balance or class of transactions of interest. The amount of bad debt write-offs from the prior year would not be appropriate to consider to detect information about subsequent cash receipts. The size of the intercompany receivable balance is not related to subsequent cash receipts. The risk of assessing control risk too low (the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control) relates to sampling risk in performing tests of controls rather than a substantive test of details as described in this question.

substantive procedures

procedures performed by auditor and not the entity

Once the auditor determines that a deficiency, or a combination of deficiencies, in internal control is not a material weakness, the auditor should consider whether

prudent officials, having knowledge of the same facts and circumstances, would likely reach the same conclusion

In assessing the competence of the internal audit function, an external auditor most likely would obtain information about the

quality of the internal auditors' working paper documentation The quality of the internal audit function's documentation reflects on their competence. The other answers are related to their objectivity. Editor's note: The two key words to remember regarding internal auditors as it pertains to the CPA Exam are: objectivity and competence. Competence relates to the core ability to perform the function, and objectivity relates to how impartial the internal auditors are in relation to the organization they work for.

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?

read the file of correspondence from taxing authorities

Prior to evaluating the effect of uncorrected misstatements, the auditor should

reassess materiality to confirm whether it remains appropriate in the context of the entity's actual financial results

Risks of material misstatement at the financial statement level

refer to risks that relate pervasively to the financial statements as a whole and potentially affect many assertions

An other-matter paragraph that is included in an audit report prepared in accordance with US GAAS

should not address circumstances when the auditor has other reporting responsibilities that are in addition to the auditor's responsibility under US GAAS to report on the financial statements An other matter paragraph should not address circumstances when the auditor has other reporting responsibilities that are in addition to the auditor's responsibly under US GAAS to report on the financial statements (these other reporting responsibilities should be addressed in a separate section in the audit report that should be subtitled in a manner appropriate to its content).

For recurring audits, when the auditor concludes that the terms of the preceding engagement need not be revised for the current engagement, the auditor

should remind management of the terms orally or in writing, but if done orally, the reminder should be documented The auditor may remind management of the terms of the engagement in writing or orally. A written reminder might be a letter confirming that the terms of the preceding engagement will govern the current engagement. If the reminder is oral, audit documentation may include with whom the discussion took place, when, and the significant points discussed.

Mailing disbursement checks and remittance advices should be controlled by the employee who

signs the checks last

When a CPA examines a client's projected financial statements, the CPA's report should

state that the CPA performed procedures to evaluate management's assumptions When a CPA examines a projection, the CPA should express an opinion on whether the assumptions provide a reasonable basis for the projection given the hypothetical assumptions. The standard report includes language such as the following in the scope paragraph, ... included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection.

Which of the following statements is most accurate regarding sufficient and appropriate documentation?

sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed

Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet?

testing the data used to arrive at the fair value of the interest rate swap contract

Regarding the auditor's reference to the auditor's external specialist in the audit report,

the auditor should not refer to the work of the specialist in an audit report containing an unmodified opinion.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

the combined assessed level of inherent risk and control risk relative to accounts receivable is low

An auditor may decide to increase the risk of incorrect rejection when

the cost and effort of selecting additional sample items is low

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that

the deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

According to the IFAC Code of Ethics for Professional Accountants, audit teams are required to be independent of the audit client during the engagement period and during which other period?

the period covered by the financial statements Like the AICPA Code of Professional Conduct, the IFAC Code of Ethics for Professional Accountants require the auditor to be independent of the client during the period covered by the financial statements and the engagement period. The other responses are longer periods than required.

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if

the population has highly variable recorded amounts

For which of the following responses in a legal letter would an auditor most likely qualify the audit opinion for a scope limitation?

the response specifically excludes information on a pending legal matter because of publicity concerns The letter of inquiry is to be prepared by management and sent by the auditor. It requests that the entity's external legal counsel communicate directly with the auditor. Through a letter of inquiry, an auditor requests the entity's legal counsel to inform the auditor of any litigation, claims, assessments, and unasserted claims that the counsel is aware of and also the counsel's assessment of the outcome of the litigation, claims, and assessments, and an estimate of the financial implications, including costs involved. A letter of inquiry to the entity's legal counsel is the auditor's primary means of obtaining corroboration of the information provided by management concerning material litigation, claims, and assessments. An external legal counsel's refusal to furnish the information requested in an inquiry letter may cause a scope limitation of the audit sufficient to preclude an unmodified opinion. However, the lawyer can limit his scope of responses in the following situations without qualifying the audit for scope limitation. A lawyer may appropriately limit their response to matters to which they have given substantive attention in the form of legal consultation or representation without causing scope limitation. A lawyer may be unable to respond concerning the likelihood of an unfavorable outcome of litigation, claims, and assessments or the amount or range of potential loss, because of inherent uncertainties. This would not cause scope limitation. The lawyer also may be asked to estimate, in dollar terms, the potential amount of loss or range of loss in the event of an unfavorable outcome. However, if the attorney is unable to provide a reasonable estimate of a probable loss, it would not be considered a scope limitation. Publicity concerns are not valid reasons for the entity's external legal counsel's refusal to furnish the information requested in an inquiry letter and may cause a scope limitation of the audit sufficient to preclude an unmodified opinion

Audit risk is a function of

the risk of material misstatement and detection risk Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is a function of

the risk of material misstatement and detection risk Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risk of material misstatement (RMM) and detection risk. The RMM is the risk that the financial statements are materially misstated prior to the audit. This consists of two components at the assertion level: (1) inherent risk, which is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls; and (2) control risk, which is the risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. It is a function of the effectiveness of an audit procedure and of its application by the auditor, i.e., an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.

which of the following factors would the auditor not explicitly consider when determining sample size in an attribute sample for a test of controls?

the tolerable misstatement is a factor in determining the sample size for the test of details and not a factor for determining the sample size in the test of control

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

there are unusual discrepancies between the entity's records and confirmation replies. Unusual discrepancies between the entity's records and confirmation replies from external parties would indicate misstatements on financial states either due to fraud or error. Strict budgetary controls over the entity's departmental supervisors would reduce the risk of material misstatement. Electronically processed transactions will not have a paper trail. However, this doesn't imply misstatements in financial statements. The monthly bank reconciliation ordinarily includes several large outstanding checks that will also not indicate misstatements in financial statements.

An accountant's compilation report on a financial forecast should include a statement that

there will usually be differences between the forecasted and actual results

Critical audit matters

they are included in the audit report of an issuer entity they are communicated to the audit committee

What is the primary objective of using stratification as a sampling method in auditing?

to decrease the effect of variance in the total population the primary objective of using stratification as a sampling method in auditing is to decrease the effect of variance in the total population.

What is a service auditor's responsibility, if any, with regard to other information presented in a document containing management's description of its system and the service auditor's report?

to read the other information in order to identify material inconsistencies or misstatements. The service auditor should read other information, if any, included in a document containing management's description of the service organization's system and the service auditor's report to identify material inconsistencies. While reading if he became aware of an apparent misstatement of fact in the other information he should discuss the matter with management and take further appropriate action

In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would

trace the authorization for the options granted to the board of director's approval.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the

trust company has no direct contact with the entity responsible for maintaining investment accounting records.

It is primarily important for the auditor to obtain an understanding of the nature of an entity in order to be able to

understand the classes of transactions, account balances, and disclosures to be expected in the financial statements

The primary responsibility of a bank acting as registrar of capital stock is to

verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation the primary responsibility of a registrar of capital stock is to verify that securities are properly issued, recorded, and transferred

The user auditor should apply the same procedures with respect to the services provided by a subservice organization as a service organization when the user auditor plans to use a type 1 or type 2 report that

was prepared using the carve out method If the user auditor plans to use a type 1 or a type 2 report that excludes the services provided by a subservice organization, i.e., was prepared using the carve-out method instead of the inclusive method, and those services are relevant to the audit of the user entity's financial statements, the same US GAAS requirements imposed on the user auditor that are applicable to the service organization are applicable to the subservice organization. None of the other answers describe situations that require this response by the user auditor. Regarding incorrect answer A., the absence of complementary controls does not; as such controls may not be applicable. Regarding incorrect answer C., the user auditor may use a service auditor's report to support the user auditor's understanding of the service organization or, in the case of a type 2 report, as audit evidence that controls at the service organization are operating effectively. When a type 1 or 2 report is used to support the user auditor's understanding and the description of the service organization's system is as of a date or for a period that precedes the beginning of the period under audit, the user auditor may perform procedures to update the information in a type 1 or type 2 report to remedy this matter. Regarding incorrect answer D., a service auditor should be independent of the service organization, but the service auditor need not be independent of the user entity.

Which of the following statements is correct with regard to the consideration of materiality when an auditor is planning and performing a financial statement audit of an issuer?

when determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods

Regarding materiality

when determining materiality, one factor that may affect the identification of an appropriate benchmark is its relative volatility

An auditor of a nonissuer should request that management provide written representations regarding uncorrected misstatements in the financial statements that state

whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole