Final Exam practice 2
A report on a nonissuer's internal control based on a separate examination of internal control should include a statement indicating that 1) Because there are inherent limitations in internal control, misstatemetns may occur and not be detected 2) Projections of the evaluation of internal control to future periods are subject to the risk that the internal control may become inadequate 3) The report is intended solely for the information and used of the audit committee, management, and other specified parties
I and II Each of the first two statements would be included in the inherent limitations paragraph of the report. The third statement, indicating restricted use, would not be included as there is no restriction on the use of this report ( A report on internal control matters noted during an audit would, however, include a restricted use paragraph)
Which of the following are sanctions that my be imposed by the PCAOB? Financial penalties Suspention or revocation of PCAOB registration Required continuing professional education courses
I,II, and III The Board can impose any sanctions it approves, including financial penalties, suspension or revocation of PCAOB registration and required CPE courses
In an engagement related to a nonissuer, an auditor discovers several significant deficiencies in internal control, one of which is deemed to be a material weakness which of the following is true.
If internal control was evaluated as part of an audit, the audiot must restrict use of the report on internal control If internal control was evaluated as part of an audit, the auditor must restrict use of the report on internal control
Which of the following procedures generally would not be performed in a review of a public entity's interim financial statements?
Inquire of the client's attorney is generally not required.
Which of the following is not true about the fie components of internal control?
A auditor is required to classify relevant controls into one of the five component categories The auditor is not required to classify relevant controls into one of the five component categories, but rather should use the component categories as useful framework for identifying and evaluating controls.
Which of the following best describes a difference between a complication of prospective financial statements and a examination of prospective financial statements?
A compilation does not contemplate the auditor providing any form of assurance whereas an examination does include assurance. In an examination engagement, an auditor provides positive assurance regarding whether the statements are presented in conformity with AICPA guidelines, and whether the underlying assumptions provide a reasonable basis for the financial statements. In a compilation engagement, no assurance is provided.
Which of the following is true about quality control standards?
A firm that does not have an adequate system of quality control may still have complied with professional standards on a specific engagement. Even a firm that has inadequate quality control procedures may still have complied with professional standards on any given engagement.
In which case would an unmodified opinion not be appropriate?
A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements.
An auditor provides positive assurance in all of the following reports except:
A report on compliance with contractual or regulatory requirements related to audited financial statements Negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements.
Management's written representation to the audito in connection with a governmental audit would most likely include:
A statement that management has disclosed any communications from grantos concerning possible non compliance. The management letter will include a statement that management has disclosed any communications from grantors concerning possible noncompliance.
A special report on financial statements prepared on the cash basis of accounting should include:
A statement that the audit was conducted in accordance with generally accepted auditing standards A special report on financial statements prepared on the cash basis of accounting should include, in the auditor's responsibility paragraph, a statemetn that the audit was conducted in accordance with generally accepted auditing standards.
Adam, CPA, is a staff accountant assigned to audit both the cash account and the fixed asset account for one of his clients. The cash account had many transactions that occurred during the year, while fixed asset account had very few transactions during the year. Both accounts were audited by Adam's firm last year, and were found to be fairly stated. Which of the following accurately describes the strategies that would likely be applied to these accounts?
Adam would likely focus on the ending balance for cash but would focus more on the transactions that occurred during the year for fixed assets Since there are many transactions affecting the cash account, it is more efficient to focus on the ending balance. Fixed assets, on the other hand, had only a few transactions, so it would make sense to simply audit the transactions that occurred, and then use them to adjust the beginning (audited) balance.
Procedures performed by an internal auditor can be used to: Help the external auditor understand internal control Provide direct assistance to external auditor by performing substantive tests Provide direct assitance to the external auditor by performing tests of controls
All of the above Internal auditors may assist the external auditor in obtaining an understanding of internal control or in performing tests of controls or substantive tests
Which of the following is the most likely sequence of events an auditor might follow in considering internal control?
An audit performs tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so. An auditor may choose to perform tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.
Which of the following is true about modifications to the independent auditor's unmodified opinion report?
An auditor would modify the same paragraphs when rendering either a qualified opinion due to a departure from GAAP or a qualified opinion due to a scope limitation. A qualified opinion due to a scope limitation and a qualified opinion due to a GAAP departure require a paragraph preceding the opinion paragraph titled "Basis for Qualified opinion.
Which of the following would not be considered an attest engagement subject to attestation standards?
An engagement to review the financial statements of a nonpublic company Attest engagements covered under SSAE specifically exclude services performed in accordance with Statements on Standards for Accounting and REview Services. Since a review of a nonpublic company's financial statements is conducted under SSARS, it is not subject to attestation standards.
An uncertainty may result in
An unmodified opinion, a qualified opinion, An adverse opinion, and disclaimer of opinion. An uncertainty may result in an unmodified opinion if management's analysis is supported and properly recorded or disclosed. An uncertainty for which the auditor's is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statemetn are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinon would result.
An auditor notes that retained earniong includes an amount appropriate in accordance with a loan covenant. Which procedures would the auditor use to audit retained earnings?
Analyze the retained earnings account since the last audit The auditor should analyze the retained earnings account since the last audit. Generally this is fairly easy to do, since there are not very many direct entries to retained earnings. (appropriations represent restrictions on the amount that can be paid as dividends, not a segreation of actual cash funds, the the bank would be unable to confirm appropriation amounts.
Which of the following is not true about audit documentation?
Audit documentation should include a seprate page for each material account balance or transaction class There is no requirement that documentation related to each material account balance or transaction class be included on a separate page. In fact. It is common for related accounts to be audited and documented together
Kent industries acticipates that its sales revenue will grow by 5% during the coming year based on historical returns but also believes there is a lisght chance for 20% growth if a new product that is currently being developed is launched during the year. Kent's amanagement has prepared two sets of financial statements, one based on 5% growth and the other based on 10% growth, in an effort to plan for the future. Giacomo, CPA, has been hired to examine both sets of financial statements. WHich of the follwoing is true regarding giacomo's two reports/
Both the report on the 10% growth financial statement and the report on the 5% growth financial statements are appropriate for limited use Note that the 5% growth financial statemetns are a financial forecast (based on expected results) whereas the 10% growth financial statemetns are a financial projection (Based on the hypothetical release of the new product) Both should include a statemetn that the results might not be achieved
Jacob informs you that improper revenue recognition has also been identified as a fraud risk for this engagement. Which of the following would not be an appropriate response.
Confirm deposit cash received from material sales transactions with the appropriate bank Generally speaking, specific deposits would not be confirmed with the bank. Bank statements, deposit tickets, cash receipts listings, and remittance advice should provide sufficient evidence regarding these deposits
Which is not true about major programs?
Determination of major programs is based on management selection Major programs are determined by the auditor using a risk based approach, not by management
Which of the following would least likely be part of an auditor's procedures with respect to fair values?
Events occurring after the balance sheet date may provide audit evidence regarding year end fair value measurements, but the auditor is only responsible for eavluating such events if they occur prior to the date of the audiotrs report. The auditor would not continue review subsequent events once the audit has been completed.
Hannah, CPA, has been engageed to compile the financial statemetns of Skippity Industries, a nonpublic company, for the YEar 4, Hannah reviewed Skippity's year 3 financial statemtns. Kippity has decided to present comparative fianncial statemetns including both the YEar 3 and Year 4 financials. Which of the follwing are acceptable reporting options for Hannah?
Issue a compilation report with an extra paragraph describing the responsibility assumed for the prior period statements and including statement that no review procedures er performed after the date of the review report Issue two separate reports, a complication report for the current year and a review report for the prior year Issue a combined report, including both full reports and a statement that no review procedures were performed after the date of the review report. The accountant has three options, each of which is appropriate mentioned above
Which of the following is not true about the international COde of Ethics for assurance engagements?
It includes a set of specific rules designed to encourage compliance with the fundamental principles The international code of ethics for assurance engagement is based on a conceptual framework approach, rather than a set of specific rules
Dante, CPA, is auditing the financial statements of Crest Computing. During the previous year, Kratzke and Kratzke, CPA, audited Crest's financial statements. Crest had decided to present comparative financial statements for the current year. Which statement is true about Kratzke & Kratzke report?
Kratzke & Kratzke may reissue their report on the previous statements only after performing limited procedures to evaluate to continuing appropriateness of the report. Kratzke & Kratzke should perform limited procedures, such as reading the current statements, comparing the current and prior statements, and obtaining presentation letters from crest's management and from Dante.
karen the partner assigned to the Pembroke engagement, conducts a thorough review of the audit documentation and signs off on the audit opinion. Mark is also a partner in the firm. Which of the following best describes marks responsibility with respect to the Pembroke engagement?
Mark should review the audit documentation during the final review stage of the audit, to focus on the fair presentation of the financial statements. Such review by a a partner not otherwise involved in the audit is an example of monitoring, which is one of the elements of quality control required for audit engagements.
An audit committee should pre approve all of the following services except?
Non audit services that do not exceed five percent of total revenues Pre approval is not required for non audit services that do not exceed five percent of total revenues from the audit client during the fiscal year when services are provided, as long as the non audit services are promply brought to the attention to the audit committee and approved before the completion of the audit.
Auditing standards require that the independent auditor's report shall 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. Which of the following would be prohibited by auditing standards? None of the other actions are prohibited An auditor is hired to render an opnion on the balance sheet only The auditor disclaims an opnion on the income statement and on the statement of cash flows, but reders an unmodified opinion on the balance sheet
None of the other actions are prohibited One objective of the auditor in issuing a report is to prevent misinterpretation of the degree of responsibility assumed by the auditor. Disclaiming an opinion on one or all of the statements is acceptable, as is a limited reporting engagement in which not all of the financial statements are audited.
WHich of the following is not true about an audit of inventory?
Obtaining confirmation of inventory held at outside locations provide evidence about both the existence assertion and the valuation and allocation assertion Obtaining confirmation of inventory held at outside locations provides evidence about existence (Does inventory physically exist), but it does not provide evidence about valuation. Generally quantities are confirmed, not dollar values.
After submitting the audit report, an auditor realizes that a critical step in the audit program was not completed. No other audit procedures already performed compensated for this omission. Which of the following would be the best response?
Perform the audit steps (or suitable alternative procedures) in an attempt to determine whether the results would have affected the previously issued opinion The auditor would perform the audit procedures (or suitable alternative procedures) in an attempt to determine whether the results would have affected the previously issued opinion.
Which of the following documents should be sent to the accounts payable department?
Purchase Order yes) Sales order (no) Signed check (no)
Cyrus, CPA is the continuing auditor of TOpaz, Inc. During the current year's audit. Cyrus becomes aware of evidence that affects the previous year's statements as well as the opinion that was expressed. TOpaz is planning to present comparative financial statements that will include last year's financial statements. How should Cyrus handle this situation?
Report on both set of financial statements, updating the previous opinion of any changes that have occurred. The auditor reports on the financial statements "taken as a whole", which applies to all financial statements presented. Since the auditor's report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated.
An auditor concerned with the completeness of dividend income would most likely
Review dividend record books produced by outside service companies The auditor would likely choose a sample of companies in which the client owns stock and review dividend record books (such as Moodys') to determine whther such companies declared dividends during the year under audit.
Which of the following procedures in an auditor most likely to use to test the completeness assertion for fixed assets?
Review of large items charged to repairs and maintenance When the auditor reviews large items charged to reparis and maintenance, he/she is looking for items that may have been erroneously expensed instead of capitalized. The completeness assertion focuses on just that - tems should have been included in fixed assets but were not.
Which of the following would least likely be part of an auditor's procedures with respect to fai values?
Review subsequent events occurring after completion of the audit for evidence regarding fair value measurements as the balance sheet date Events occurring after the balance sheet date may provide audit evidence regarding year end fair value measurements, but the auditor is only responsible for evaluating such events if they occur prior to the date of the auditor's report. The auditor would not continue to review subsequent events once the audit has been completed.
Which of the following could be used to assess control risk sorrounding the purchase of fixed assets?
Select a sample of fixed asset requisitions and inspect them for proper approval Control activities should include proper authorization of purchase transactions before the commitment of resources
Which should be the auditors primary focus when considering related party transactions?
The adequacy of the client's disclosure of such transactions THe audtirps priamry concern with related party transactions is that they are properly disclosed in accordance with GAAP.
Pembroke has always had a strong system of internal control in the past, and there is no evidence during the current year of management override of controls. Which of the following statements is true?
The auditor should always address the risk of management override regardless of whether evidence of such override exists (management override is presumed to be a risk in every audit)
Which of the following represents an inappropriate segregation of duties?
The cash receipts clerk credits customer accounts when payment is received The cash receipts clerk should not have both record keeping responsibilities and custody of assets.
Which of the following constitutes a weakness in control related to the revenue cycle?
The cash receipts clerk prepares a credit memo Allowing the cash receipts clerk to prepare a credit memo constitutes an inadequate segregation of duties, because the clerk can misappropriate cash and cover the theft by issuing a credit memo.
Which of the following correctly matches a factor with the related internal control component?
The internal audit function is part of monitoring (Recording the proper monetary values of transactions is part of information and communication - Incorrect answer)
sampling risk
There is a direct relationship between population variability and sample size, so an increase in variability results in an increase in sample size. There is an inverse relationship between desired risk of incorrect acceptance and sample size so a decrease in the desired risk of incorrect acceptance will also result in an increase in sample size
Which of the following is true about the timing of predecessor/successor communications?
They can occur both before and after the auditor accepts the engagement. Before the auditor accetps a new client engagement, he or she must communicate with the predecessor auditor to obtain information that may affect his or her decision. For example, if the predecessor provides information indicating that management lack integrity, the auditor may choose to declient the engagement. After accepting an engagement the audit may choose to establish further communications with the predecessor to obtain information that has continuing accounting or auditing significance.
An auditor has been asked to assess a client's website to measure transaction integrity, information projection and disclosure of business practices. This engagement is most likely a
Webtrust engagement A webtrust engagement is one in which an auditor is asked to assess a client's website to measure transaction integrity, information protection, and disclosure of business practices. A systrust engagement is an assurance service relating to system (infrastructure, software, people, procedures and date) reliability
Which of the following ratios would most likely be used to evaluate an entity's profitability?
net income/net sales Net income divided by net sales indicates the percentage of every sales dollar that becomes profit
Which of the following is not a circumstance that may impair independence, as described in the International Code of Ethics for assurance engagements?
payment of fees for assurance services. Payment of fees for assurance services does not generally impair independence and is not listed in the international code of Ethics for assurance engagements.
in which situations should disagreements with management and significant audit adjustments be communicated to those charged with governance
the auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved. The auditor should also inform those charged with governance about significant adjustments arising from the audit, regardless of whether such adjustments were recorded by the client.