2015 AUD - NINJA MCQs

Comfort letters ordinarily are addressed to the client's ________ and signed by the client's ________. A. audit committee; independent accountant B. underwriter of securities; senior management C. audit committee; senior management D. underwriter of securities; independent accountant

The correct answer is D. Underwriters of securities often request the assistance of the independent accountant when issuing initial public stock offerings by requesting a comfort letter in association with unaudited financial information in a registration statement. Because a comfort letter is not an audit report, the independent accountant can only provide negative assurance ("nothing came to our attention") regarding the information in the statement.

The following information pertains to Ali Corp. as of and for the year ended December 31, 20X1: Liabilities $ 60,000 Stockholders' equity $500,000 Shares of common stock issued and outstanding 10,000 Net income $ 30,000 During 20X1, Ali's officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the stock options?

You are correct, the answer is A. During the year, the officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. Stockholders' equity would increase by the following amount: $1,000 × $8 = $8,000. Entry to record exercise of options: Dr. Cash or Accrued liability - ESOP (1,000 x $8) $8,000 Cr. Stockholders' equity $8,000 The stockholders' equity is $500,000 on December 31, 20X1. This amount reflects the exercise of the stock options. Therefore, stockholders' equity before the exercise of the stock options would be $500,000 - $8,000 = $492,000. Debt/Equity ratio prior to exercise of options: $60,000 ÷ $492,000 = 0.122 Debt/Equity ratio after exercise of options: $60,000 ÷ $500,000 = 0.12

Management Rep Letter

Written representations from management should be obtained for all financial statements and periods covered by the auditor's report. Written representations ordinarily confirm representations explicitly or implicitly given to the auditor, indicate and document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations. In practice, these representations are often referred to as the "management rep letter" or the "client rep letter." In connection with an audit of financial statements, presented in accordance with GAAP or other financial reporting framework, specific representations should be made. These specific representations should be related to the following matters: a. Financial statements: (1) Management's acknowledgment of its responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable reporting framework (2) Management's belief that the financial statements are fairly presented in conformity with the applicable reporting framework b. Completeness of information: (1) Availability of all financial records and related data (2) Completeness and availability of all minutes of stockholders, directors, and committees of directors (3) Communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices (4) Absence of unrecorded transactions c. Recognition, measurement, and disclosure: (1) Management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole (2) Management's acknowledgment of its responsibility for the design and implementation of programs and controls to prevent and detect fraud (3) Knowledge of fraud or suspected fraud involving (a) management, (b) employees who have significant roles in internal control, or (c) others where the fraud could have a material effect on the financial statements (4) Knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others (5) Plans or intentions that may affect the carrying value or classification of assets or liabilities (6) Information concerning related party transactions and amounts receivable from or payable to related parties (7) Guarantees, whether written or oral, under which the entity is contingently liable (8) Significant estimates and material concentrations known to management that are required to be disclosed in accordance with FASB ASC 275, Risks and Uncertainties (9) Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency (10) Unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed in accordance with FASB ASC 450, Contingencies (11) Other liabilities and gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450 (12) Satisfactory title to assets, liens, or encumbrances on assets, and assets pledged as collateral (13) Compliance with aspects of contractual agreements that may affect the financial statements d. Information concerning subsequent events

Which of the following controls is a processing control designed to ensure the reliability and accuracy of data processing? A. Both limit test and validity check test B. Limit test C. Validity check test D. Neither limit test nor validity check test

the answer is A. A limit test or limit check is used to edit data during input or processing to validate data. The data is above an amount, below an amount, or between two amounts. Validity controls are designed to ensure that all recorded transactions are those that should have been recorded (i.e., that the transactions are real and actually occurred and are properly documented). To ensure the reliability and accuracy of data processing, an auditor would perform both tests.

Under the Statements on Auditing Standards (SASs), the auditor should complete the assembly of the final audit file on a timely basis, but within how many days following the report release date? A. 30 days B. 45 days C. 60 days D. 90 days

Completion of the audit file under auditing standards generally accepted in the United States of America is required within 60 days following the report release date. Completion of the audit file under PCAOB standards is required within 45 days following the report release date.

Assertions

Assertions used by the auditor fall into the following categories: Assertions about classes of transactions and events for the period under audit. (1) Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity. (2) Completeness. All transactions and events that should have been recorded have been recorded. (3) Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately. (4) Cutoff. Transactions and events have been recorded in the correct accounting period. (5) Classification. Transactions and events have been recorded in the proper accounts. Assertions about account balances at the period end. (1) Existence. Assets, liabilities, and equity interests exist. (2) Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. (3) Completeness. All assets, liabilities, and equity interests that should have been recorded have been recorded. (4) Valuation and allocation. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Assertions about presentation and disclosure. (1) Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity. (2) Completeness. All disclosures that should have been included in the financial statements have been included. (3) Classification and understandability. Financial information is appropriately presented and described and information in disclosures is clearly expressed. (4) Accuracy and valuation. Financial and other information is disclosed fairly and at appropriate amounts.

Ordinarily, communications that fraud or noncompliance with laws and regulations may have occurred to parties other than the client's senior management (or the client's board of directors) is which of the following? Not part of the accountant's responsibility Would be precluded by the accountant's ethical or legal obligations of confidentiality A. I only B. II only C. Both I and II D. Neither I nor II

C The disclosure of any evidence or information that comes to the accountant's attention during the performance of compilation or review procedures that fraud or noncompliance with laws and regulations may have occurred to parties other than the client's senior management (or those charged with governance, if applicable) ordinarily is not part of the accountant's responsibility and, ordinarily, would be precluded by the accountant's ethical and legal obligations of confidentiality. Under certain circumstances, the accountant may have a duty to disclose this information to parties outside the entity, for example, in order to comply with legal and regulatory requirements, to a successor accountant, or in response to a subpoena.

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable? A. Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded B. Performing calculations to determine if the company is in compliance with debt covenants C. Sending a confirmation to the lender requesting verification of the loan's outstanding balance D. Reviewing the details of the company's loan and interest expense accounts to determine that all payments were properly recorded

The correct answer is A. Analytical procedures are the evaluation of financial information through analysis of plausible relationships among both financial and nonfinancial data. There is a plausible relationship to an average loan balance being multiplied by an interest rate and comparing the result to interest expense since interest expense is determined by multiplying a loan balance by an interest rate. Confirmation is another form of substantive procedures that is separate and distinct from analytical procedures. Calculations performed to determine compliance with debt covenants could be considered an analytical procedure on nonfinancial information but would not be useful to audit notes payable.

Which of the following elements should be encompassed by the quality control policies and procedures of an auditing firm? Acceptance and continuance of client relationships and specific engagements Relevant ethical requirements Human resources Engagement performance Monitoring

The correct answer is A. Statement on Quality Control Standards (SQCS) 7, A Firm's System of Quality Control, states that the quality control policies and procedures applicable to a firm's accounting and auditing practice should encompass the following elements: Leadership responsibilities for quality within the firm Relevant ethical requirements Acceptance and continuance of client relationships and specific engagements Human resources Engagement performance Monitoring

The extent and nature of the risk to internal control associated with IT are dependent on the nature and characteristics related to the entity's: A. information system. B. governance board. C. management. D. data.

The correct answer is A. The extent and nature of the risks to internal control associated with IT vary depending on the nature and characteristics of the entity's information system. The auditor should consider whether the entity has responded adequately to the risks arising from IT by establishing effective controls, including effective general controls upon which application controls depend. From the auditor's perspective, controls over IT systems are effective when they maintain the integrity of information and the security of the data such systems process.

Accepting an engagement to compile an entity's financial projection most likely would be inappropriate if the projection is to be included in: A. a mortgage application for the purpose of expanding the entity's facilities. B. an offering statement of the entity's initial public offering of common stock. C. a comprehensive document to be used in negotiating a new labor contract. D. a report to the audit committee that is not sent to the stockholders.

The correct answer is B. A financial projection is appropriate for limited use only. This means that it can be used by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. The following would be examples of limited use: With a mortgage application (negotiating directly with the bank) With a report to the audit committee (for use by the responsible party) With a document for negotiating a labor contract (negotiating directly with the union) A prospective financial statement included in an offering statement would have to be a financial forecast, as it is the prospective financial statement that is appropriate for use by persons with whom the entity is not negotiating directly (general use).

To obtain evidence that online access controls are properly functioning, an auditor most likely would: A. create checkpoints at periodic intervals after live data processing to test for unauthorized use of the system. B. examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction. C. enter invalid identification numbers or passwords to ascertain whether the system rejects them. D. vouch a random sample of processed transactions to assure proper authorization.

The correct answer is C. Access controls are designed to limit the use of the system and the entry to files of authorized persons. To test that online access controls are properly functioning, the auditor would enter invalid identification numbers or passwords to ascertain whether the system rejects them, thereby denying access.

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence? A. All direct and indirect financial interests B. Only direct financial interests C. Only direct and material indirect financial interests D. Only material financial interests

The correct answer is C. Independence is impaired when a CPA of a public company will acquire any direct or material indirect financial interest in the client while the professional engagement is being performed.

As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA: A. may not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole. B. may not audit only Maxim's balance sheet if Maxim is a nonissuer. C. may audit only Maxim's balance sheet if the CPA disclaims an opinion on the other financial statements. D. may audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited.

The correct answer is D. An audit opinion can only be expressed if based on audit evidence, which includes information contained in the accounting records underlying the financial statements and other information. Therefore, the CPA may audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited.

The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should use: A. stratified sampling. B. variable sampling. C. discovery sampling. D. attribute sampling.

The correct answer is D. In the review of client invoices for billing errors, the auditor is performing tests of controls over the billing process. The auditor defines the characteristic or evidence of the control (e.g., the mathematical accuracy of the invoice) and examines the sample for this characteristic or attribute. The deviation rate refers to the number of exceptions to this expected characteristic found, that is, the number of times the control failed. The evaluation of deviations from the characteristic is attribute sampling. Stratified and variable sampling are used in the substantive testing of account balances and details of transactions. Discovery sampling is a form of attribute sampling where the auditor expects the rate of occurrence of a characteristic to be zero. This type of sampling is designed to uncover at least one occurrence.

Invoice # Product Quantity Unit Price --------- ------- -------- ---------- 201 F10 150 $ 5.00 202 G15 200 10.00 203 H20 250 25.00 204 K35 300 30.00 Which of the following most likely represents a hash total? A. FGHK80 B. 4 C. 204 D. 810

The correct answer is D. Hash totals are an input control. They are a nonsense total; for example, the sum of the digits of an invoice number. A hash total is similar to a control total and is used to verify processing (or output) compared to input. In this example, the hash total is the sum of the invoice numbers (201 + 202 + 203 + 204).

Which of the following statements is correct regarding the liability of a CPA for services performed? A. A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. B. A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances. C. A CPA's liability for negligence extends only to the client and no further. D. A CPA's liability for fraud extends only to the client and no further.

The correct answer is A. A CPA is required to exercise due care when preparing tax returns or other accounting work. The CPA is held only to the standards of reasonable care and competence and does not have the duty to be infallible.

Elements of a Compilation Report

The basic elements in the report are as follows: a. Title b. Addressee c. Introductory paragraph (1) Identify the entity (2) State that the financial statements have been compiled (3) Identify the financial statements that have been compiled (4) Specify the date or period covered by the financial statements (5) Include a statement that the accountant has not audited or reviewed the financial statements and, accordingly, does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework d. A statement regarding management's responsibility for the financial statements and internal control e. A statement that the accountant's responsibility is to conduct the compilation in accordance with SSARSs issued by the AICPA f. Signature of the accountant g. Date of the accountant's report

A CPA is engaged to examine an entity's financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue: A. an adverse opinion. B. a pro forma opinion. C. a qualified opinion. D. an unmodified opinion with an emphasis-of-matter paragraph.

The correct answer is A. Qualified opinion In the accountant's opinion, the prospective financial statements depart from AICPA presentation guidelines (such as failure to disclose significant accounting policies). Adverse opinion There is a measurement departure, an unreasonable assumption, or a limitation on the scope of the practitioner's examination that prohibits the issuance of an unmodified opinion. Departure from AICPA presentation guidelines is because the presentation fails to disclose assumptions that appear to be significant. One or more significant assumptions do not provide a reasonable basis for the forecast. Disclaimer of opinion The accountant was precluded from applying one or more procedures considered necessary in the circumstances in order to express any opinion.

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: A. engagement letter. B. working papers. C. engagement letter and working papers. D. None of the answer choices are correct.

The correct answer is B. Before accepting an engagement, a successor auditor is required to, with client permission, make inquiries of the predecessor auditor. The successor auditor should also request that the client authorize the predecessor auditor to allow a review of the predecessor auditor's working papers. It is not necessary to review the engagement letter.

A customer intended to order 100 units of product Z96014, but incorrectly ordered nonexistent product Z96015. Which of the following controls most likely would detect this error? A. Check digit verification B. Record count C. Hash total D. Redundant data check

The correct answer is A. A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry. In this situation, the difference is one digit at the end of an identification code (4 versus 5). Based on the algorithm or formula involved, the check digit verification process would have detected this error.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets? A. A large number of bearer bonds on hand B. A large number of inventory items with low sales prices C. A large number of transactions processed in a short period of time D. A large number of fixed assets with easily identifiable serial numbers

The correct answer is A. A large number of bearer bonds on hand represents the highest risk of a misstatement arising from misappropriations of assets. The incorrect answer choices are various schemes of fraudulent financial reporting: A large number of inventory items with low sales prices suggests a scheme to underreport the value of inventory. A large number of transactions processed in a short period of time suggests a scheme to falsely inflate revenue. A large number of fixed assets with easily identifiable serial numbers suggests a scheme to record nonexistent fixed assets.

To which of the following individuals would the auditor direct fraud-related inquiries? Employees with varying levels of authority within the entity, including, for example, entity personnel with whom the auditor comes into contact during the course of the audit in obtaining an understanding of the entity's systems and internal control, in observing inventory or performing cutoff procedures, or in obtaining explanations for fluctuations noted as a result of analytical procedures External legal council Operating personnel not directly involved in the financial reporting process The entity's banking institution A. I and III B. I, II, and IV C. II, III, and IV D. I, II, III, and IV

The correct answer is A. According to AU-C 240.A19, the auditor should use professional judgment to determine those others within the entity to whom inquiries should be directed and the extent of such inquiries. In making this determination, the auditor should consider whether others within the entity may be able to provide information that will be helpful to the auditor in identifying risks of material misstatement due to fraud. Examples of individuals within the entity to whom the auditor may wish to direct fraud related inquiries include the following: Employees with varying levels of authority within the entity, including, for example, entity personnel with whom the auditor comes into contact during the course of the audit in obtaining (a) an understanding of the entity's systems and internal control, (b) in observing inventory or performing cutoff procedures, or (c) in obtaining explanations for fluctuations noted as a result of analytical procedures Operating personnel not directly involved in the financial reporting process Employees involved in initiating, recording, or processing complex or unusual transactions—for example, a sales transaction with multiple elements, or a significant related party transaction In-house legal counsel

When an accountant is engaged to report on subject matter or presentation based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions, he or she should do which of the following? A. Restrict the report because it may be misunderstood by those who are not adequately informed of the basis, assumptions, or purpose of the presentation B. Issue a standard compilation or review report on the entity's financial statements and an agreed-upon procedures report on the subject matter or contractual or regulatory presentation C. Issue a standard compilation or review report on the entity's financial statements and disclaim an opinion on the subject matter or contractual or regulatory presentation D. Modify the standard compilation or review report for use of a comprehensive basis of accounting other than generally accepted accounting principles

The correct answer is A. If a report is issued on subject matter or presentations based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions, the basis, assumptions, or purpose of the presentation are developed for, and directed only to, the parties to the agreement or regulatory agency responsible for the provisions. As such, the accountant will restrict the use of the report. Aside from the inclusion of an additional restricted use paragraph, a standard compilation and review report may be issued in connection with this type of engagement.

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent's internal controls? A. Review reports on internal control placed in operation and its operating effectiveness produced by the agent's own auditor B. Review prior-year workpapers to determine whether the number of transactions processed by the agent has materially increased C. Perform an audit on the internal control function of the agent D. Perform tests of controls on a sample of the audited firm's transactions through the agent

The correct answer is A. If a service organization initiates, executes, and processes transactions in the user organization's accounting system, it may not be practical or possible for the user organization to implement its own controls over these activities and their effect on the financial statements. The auditor is still responsible for obtaining an understanding of the entity's internal control and for assessing the risk of material misstatement; therefore, in certain circumstances, the auditor must obtain information about the internal controls of the service organization. The auditor may obtain information about the service organization's controls over the services provided to the user organization through sources such as user manuals, system overviews, technical manuals, the contract between the two entities, or reports by service auditors, internal auditors, or regulatory authorities. A service auditor's report on internal control placed in operation at the service organization and its operating effectiveness would be the most efficient manner for obtaining information; no testing or auditing of the service organization is involved. The number of transactions processed during the year would not give the auditor any information about the transfer agent's internal controls.

In reviewing accounting estimates prepared by management, the auditor should: perform retrospective review of prior-period estimates to determine a possible bias. test assumptions that are not considered sensitive or otherwise significantly affected by judgments. A. I only B. II only C. Both I and II D. Neither I nor II

The correct answer is A. Review accounting estimates for biases and evaluate whether the circumstances producing bias, if any, represent a risk of material misstatement due to fraud. In performing this review, the auditor should...perform a retrospective review of management's judgments and assumptions related to significant accounting estimates reflected in the financial statements of the prior year. Estimates selected for review should include those that are based on highly sensitive assumptions or are otherwise significantly affected by judgments made by management.

Section 407 of SOX Title IV, "Disclosures of Audit Committee Financial Expert," dictates that: A. each issuer disclose whether or not the audit committee is comprised of at least one member who is a financial expert. B. the SEC will review disclosures made by issuers. C. issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations. D. each issuer disclose whether or not they have adopted a code of ethics for senior financial officers.

The correct answer is A. Section 407 of the Sarbanes-Oxley Act (SOX) dictates that each issuer disclose whether or not the audit committee is comprised of at least one member who is a financial expert. Financial experts are persons who: have an understanding of GAAP and financial statements, are experienced in the preparation or auditing of financial statements and the application of accounting principles, are experienced with internal accounting controls, and have an understanding of audit committee functions.

The GAO standards list several threats to independence. The threat of self-interest is defined as: A. a financial or other interest that will inappropriately influence the auditor's judgment or behavior. B. when an auditor will not appropriately evaluate the results of a previous judgment made or service performed by an auditor. C. when an auditor will, as a result of political, ideological, social, or other convictions, promote a position to the point that objectivity is compromised. D. when, due to a long or close relationship with management or other personnel, the auditor will be too sympathetic or accepting of work.

The correct answer is A. The Government Accountability Office (GAO) has identified several types of circumstances that could lead to threats of independence, including the following: Self-interest—the threat that a financial or other interest will inappropriately influence judgment Self-review—the threat that an auditor will not properly evaluate the results Bias—the threat that an auditor will promote a position where objectivity is compromised Familiarity—the threat that a close relationship will impact objectivity =-=- Threats to independence (circumstances that could impair independence) may be created by a wide range of relationships and circumstances. At a minimum, auditors should evaluate the following broad categories of threats to independence when threats are being identified and evaluated: a. Self-interest threat: the threat that a financial or other interest will inappropriately influence an auditor's judgment or behavior. b. Self-review threat: the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit. c. Bias threat: the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective. d. Familiarity threat: the threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective. e. Undue influence threat: the threat that external influences or pressures will impact an auditor's ability to make independent and objective judgments. f. Management participation threat: the threat that results from an auditor's taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit. g. Structural threat: the threat that an audit organization's placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization's ability to perform work and report results objectively.

Which of the following best describes a CPA's engagement to report on an entity's internal control over financial reporting? A. An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control B. An audit engagement to render an opinion on the entity's internal control C. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control D. A consulting engagement to provide constructive advice to the entity on its internal control

The correct answer is A. The attestation standards define an attest engagement as "one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party." A consulting engagement to provide constructive advice to the entity on its internal control would not provide any assurance.

Who determines the manner, form, and extent with which to document risks identified and related controls evaluated? A. The auditor B. The audited entity's management C. The audited entity's governance board D. A combination of the auditor and the audited entity's management and governance board

The correct answer is A. The manner in which items related to risks identified and controls are documented is for the auditor to determine using professional judgment. The form and extent of this documentation are influenced by the nature, size, and complexity of the entity and its environment, including its internal control; the availability of information from the entity; and the specific audit methodology and technology used in the course of the audit.

The practitioner's report on agreed-upon procedures on an entity's compliance with specified requirements should include which of the following? A. Identification of the responsible party B. A statement that the practitioner believes the agreed-upon procedures provides a reasonable basis for his or her opinion C. Negative assurance that control risk has not been assessed D. A representation regarding the sufficiency of the procedures

The correct answer is A. The practitioner's report on agreed-upon procedures on an entity's compliance with specified requirements should contain an identification of the responsible party. The report should not include any form of negative assurance, opinion, or representation regarding the sufficiency of the procedures.

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the "Yellow Book")? A. An auditor should report on the scope of the auditor's testing of internal controls. B. All instances of abuse, waste, and mismanagement should be reported to the audit committee. C. An auditor should report the views of responsible officials concerning the auditor's findings. D. Internal control activities designed to detect or prevent fraud should be reported to the inspector general.

The correct answer is A. The second additional reporting standard for financial statement audits in accordance with Government Auditing Standards is that the report on the financial statements should either describe the scope of the auditors' testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests, or it should refer to a separate report containing that information. The other three statements are fieldwork standards for performance audits. Government Auditing Standards 4.17

Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to: A. the entity's principal stockholder, to the exclusion of the other stockholders. B. potential stockholders in an offering statement. C. a financial institution in a loan application. D. a state or federal regulatory agency.

The correct answer is B. A practitioner should not consent to the use of his or her name in conjunction with a financial projection that he or she believes will be distributed to those who will not be negotiating directly with the responsible party, for example, in an offering statement of an entity's debt or equity interests, unless the projection is used to supplement a financial forecast.

Which of the following statements represents a quality control requirement under Government Auditing Standards? A. A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place. B. A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit. C. An external quality control review of a CPA's practice should include a review of the workpapers of each government audit performed since the prior external quality control review. D. A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.

The correct answer is B. A quality control requirement under Government Auditing Standards requires a CPA seeking to enter into an audit contract to provide the CPA's most recent external quality control review report to the party contracting for the audit. According to GAS 3.106, information in peer review reports may be relevant to decisions on procuring audits. Therefore, audit organizations seeking to enter into a contract to perform an audit in accordance with GAGAS should provide the following to the party contracting for such services when requested: a. The audit organization's most recent peer review report b. Any subsequent peer review reports received during the period of the contract

Which of the following representations should not be included in a report on internal control related matters noted in an audit? A. Significant deficiencies related to the internal control design exist, but none is deemed to be a material weakness. B. There are no significant deficiencies in the design or operation of the internal control. C. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit. D. The auditor's consideration of the internal control would not necessarily disclose all significant deficiencies that exist.

The correct answer is B. AU-C 265.16 states: "The auditor should not issue a written communication stating that no significant deficiencies were identified during the audit." The auditor can report on significant deficiencies in the written communication with those charged with governance even if none is a material weakness. The report would state that "we did not identify any deficiencies in internal control that we consider to be material weaknesses." Nothing prevents the auditor from including additional information in the communication, including any corrective follow-up action recommended or other matters the auditor believes would be of benefit to the entity. The auditor's report would describe the purpose of the consideration of internal control (as a basis for designing the audit procedures in order to express an opinion on the financial statements) and the inherent limitations of internal control. The report should contain a statement that the "consideration of internal control was...not designed to identify all deficiencies in internal control that might be [material weaknesses or material weaknesses or significant deficiencies] and therefore, [material weaknesses or material weaknesses or significant deficiencies] may exist that were not identified." (AU-C 265.A38)

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? A. Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts. B. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. C. Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions. D. Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.

The correct answer is B. AU-C 520.A10 states, "Relationships in a stable environment are usually more predictable than relationships in a dynamic or unstable environment. Relationships involving income statement accounts 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 of a point in time."

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

The correct answer is B. Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Because a standard cost system is a budgeted unit cost system designed to alert management when actual costs of production differ from expected costs, the plausible relationships the auditor looks for in analytical procedures have already been established in a standard cost system. Therefore, an auditor's analytical procedures most likely would be facilitated if the entity uses a standard cost system that produces variance reports.

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

The correct answer is B. Analytical procedures performed as part of the planning phase of the audit usually use data aggregated at a high level. For example, the auditor may be comparing the receivables balance at the end of the current year to the receivables balance at the end of last year. These comparisons are intended to provide a broad indication about the extent to which the accounts or transactions may require additional audit procedures (if the results were not as expected). Analytical procedures can be used as substantive tests, but not as tests of controls. Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Analytical procedures assist the auditor in planning the nature, timing, and extent of other auditing procedures, but do not assist with the preliminary judgment about materiality.

Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit? Pell reviews Smith's workpapers and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements. Pell is unable to review Smith's workpapers; however, Pell's inquiries indicated that Smith has an excellent reputation for professional competence and integrity. A. I only B. II only C. Both I and II D. Neither I nor II

The correct answer is B. If two or more auditors examine a portion of a client's financial statements, the decision must be made as to who the principal auditor is. Normally the auditor who has examined the major portion of the financial statements is the principal auditor, and he or she will issue the audit opinion. If the principal auditor is able to satisfy himself about the quality of another auditor's work and is willing to take responsibility for that work, no mention of the other auditor is necessary. The type of opinion (unmodified, qualified, adverse, or disclaimer of opinion) is not relevant. However, if the principal auditor is unable to satisfy himself about the quality of the other auditor's work, reference quality of other auditor is made and a clear separation of responsibilities is described in the audit opinion.

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

The correct answer is B. In an agreed-upon procedures engagement, the auditor is employed to perform certain procedures. The readers of this attestation report need to know exactly what was performed. The best way for the auditor to make the reader aware of the auditor's actions is to list the procedures performed in the attestation report.

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in: A. both the auditor's responsibility paragraph and notes to the financial statements. B. the auditor's responsibility paragraph. C. the notes to the financial statements. D. None of the answer choices are correct

The correct answer is B. It is not appropriate for the scope of the audit to be explained in a note to the financial statements, since the description of the audit scope is the responsibility of the auditor and not that of the client.

Of which of the following matters is a management representation letter required to contain specific representations? A. Length of a material contract with a new customer B. Information concerning fraud by the CFO C. Reason for a significant increase in revenue over the prior year D. The competency and objectivity of the internal audit departmen

The correct answer is B. Knowledge of any fraud or suspected fraud affecting the entity involving management or others where the fraud could have a material effect on the financial statements, including any communications received from employees, former employees, or others is a specific representation required in the management representation letter. The incorrect answer choices (length of a material contract with a new customer, reason for a significant increase in revenue over the prior year, and the competency and objectivity of the internal audit department) are not specific representations required in the management representation letter.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? A. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed B. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal C. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list D. Inquire about the entity's credit-granting policies and the consistent application of credit checks

The correct answer is B. One of the substantive procedures to test for sales transactions is to reconcile subsidiary ledgers to control accounts. To test for the completeness assertion, the auditor would determine if all information in the individual customer accounts is reflected in the control accounts. All shipping documents should be accompanied by a sale. By comparing the shipping documents that have not been recorded in the sales journal, an auditor can determine if the completeness of sale transactions has occurred or not and make the necessary appropriate adjusting journal entries, if necessary.

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil's current ratio? A. Refinancing a $30,000 long-term mortgage with a short-term note B. Purchasing $50,000 of merchandise inventory with a short-term account payable C. Paying $20,000 of short-term accounts payable D. Collecting $10,000 of short-term accounts receivable

The correct answer is B. Original current ratio: Current assets $90,000 1 Current ratio = ------------------- = ----------- = --- Current liabilities $180,000 2 To improve its current ratio, Gil Corp. must produce either a net proportionate increase to its current assets or a net proportionate decrease to its current liabilities. While purchasing $50,000 of merchandise inventory with a short-term account payable increases both current assets and current liabilities by the same amount ($50,000), the proportionate increase is greater for current assets, thus improving the current ratio: $90,000 + $50,000 $140,000 14 28 1 23 ------------------ = -------- = -- = -- > - or -- $180,000 + $50,000 $230,000 23 46 2 46 (the beginning current ratio) This is greater than the original current ratio of 0.5%, so the current ratio improved in this situation. Refinancing a $30,000 long-term mortgage with a short-term note increases current liabilities. Paying $20,000 of short-term accounts payable decreases current assets (cash paid). The decrease to current assets is proportionately more than the decrease to current liabilities. Both of the transactions make the current ratio worse. Collecting $10,000 of short-term accounts receivable has no net effect; cash is increased, but accounts receivable is decreased.

Which of the following steps should an auditor perform first to determine the existence of related parties? A. Examine invoices, contracts, and purchasing orders B. Request a list of related parties from management C. Review the company's business structure D. Review proxy and other materials filed with the SEC

The correct answer is B. The audit procedure, with regard to related party transactions, consists of four steps (see FASB ASC 850-10-50): 1. Determine the existence of related parties. 2. Identify transactions with related parties. 3. Examine the transactions as to their business purpose, substance, extent, and effect on financial statements. 4. Be certain the following regarding material related party transactions are disclosed: (a) The nature of the relationship(s) (b) Description of transactions (c) Dollar volume of transactions (d) Amounts due from or to related parties and terms, if relevant

Which of the following statements is correct about an auditor's required communication with those charged with governance? A. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. B. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. C. Disagreements with management about the application of accounting principles are required to be communicated in writing to those charged with governance. D. Weaknesses in internal control previously reported to those charged with governance are required to be communicated to those charged with governance after each subsequent audit until the weaknesses are corrected.

The correct answer is B. The auditor is required to communicate to those charged with governance certain matters related to the conduct of the audit. The matters to be communicated include: the auditor's responsibility under generally accepted auditing standards, an overview of the planned scope and timing of the audit, and significant findings from the audit, including: the auditor's views about qualitative aspects of the entity's significant accounting practices, significant difficulties encountered during the audit, uncorrected misstatements, disagreements with management, management's consultation with other accountants, and significant issues discussed, or subject to correspondence, with management.

The understanding with the client regarding a financial statement audit generally includes which of the following matters? A. The expected opinion to be issued B. The responsibilities of the auditor C. The contingency fee structure D. The preliminary judgment about materiality

The correct answer is B. The auditor should establish an understanding with the client regarding the services to be performed for each engagement, including the objectives of the engagement, responsibilities of both management and the auditor, and limitations of the engagement. It would be inappropriate for the auditor to establish an understanding with the client regarding the expected opinion to be issued, a contingency fee structure, or a preliminary judgment about materiality.

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the: A. balance sheet is presented in a prescribed form of an industry trade association. B. scope of the inquiry and analytical procedures has not been restricted. C. balance sheet is not to be used to obtain credit or distributed to creditors. D. specialized accounting principles and practices of Dover's industry are disclosed. Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the: A. balance sheet is presented in a prescribed form of an industry trade association. B. scope of the inquiry and analytical procedures has not been restricted. C. balance sheet is not to be used to obtain credit or distributed to creditors. D. specialized accounting principles and practices of Dover's industry are disclosed.

The correct answer is B. The scope of the inquiry and analytical procedures may not be restricted in order to issue a review report for a client. An engagement to audit only one financial statement is not a scope limitation. Therefore, the CPA may issue the review report on the balance sheet alone, not reporting on statements of income, retained earnings, and cash flows, as long as the scope of the inquiry and analytical procedures has not been restricted. An accountant may, if requested, issue a review report on one financial statement and not on the other related financial statements if the scope of inquiry and analytical procedures has not been restricted.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to: A. apply the planned substantive tests prior to the balance sheet date. B. perform the planned auditing procedures closer to the balance sheet date. C. increase the assessed level of control risk for relevant financial statement assertions. D. decrease the extent of auditing procedures to be applied to the class of transactions.

The correct answer is B. When an auditor lowers the amount of tolerable misstatement, a more careful audit is planned to detect small misstatements. Of the items listed above, only "perform the planned auditing procedures closer to the balance sheet date" results in a more careful audit. The other choices result in a less careful audit.

When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued? A. The standard compilation report may be issued, regardless of independence. B. A compilation report with negative assurance may be issued. C. A compilation report with special wording that notes the accountant's lack of independence may be issued. D. A compilation report may be issued if the engagement is upgraded to a review.

The correct answer is C. AR 80.21 states that when the accountant is not independent, the following should be included as the last paragraph of the report: "I am (we are) not independent with respect to XYZ Company." A compilation expresses no assurance on the financial statements, so a compilation report with negative assurance would not be issued. The accountant must be independent to perform a review engagement; therefore, the engagement would not be upgraded to a review if the accountant were not independent with respect to the entity.

Which of the following types of engagements is not permitted under the professional standards for reporting on an entity's compliance? A. Agreed-upon procedures on compliance with the specified requirements of a law B. Agreed-upon procedures on the effectiveness of internal controls over compliance with a law C. Review on compliance with specified requirements of a law D. Examination on compliance with specified requirements of a law

The correct answer is C. AT 601.07 states that "a practitioner should not accept an engagement to perform a review of an entity's compliance with specified requirements or about the effectiveness of an entity's internal control over compliance or an assertion thereon." A practitioner should not accept an engagement to perform a review of an entity's compliance with specified requirements or about the effectiveness of an entity's internal control over compliance or an assertion thereon.

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct? A. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client. B. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member. C. A member whose practice is primarily bankruptcy discloses a client's name. D. A member uses a records retention agency to store clients' records that contain confidential client information.

The correct answer is C. Because it would cause damage to the reputation of a company, any disclosure of a client company name by a CPA specializing in bankruptcy procedures is a violation of client confidentiality under the AICPA Code of Professional Conduct (ET 301).

After determining that a related party transaction has, in fact, occurred, an auditor should: A. add a separate paragraph to the auditor's standard report to explain the transaction. B. perform analytical procedures to verify whether similar transactions occurred but were not recorded. C. obtain an understanding of the business purpose of the transaction. D. substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction.

The correct answer is C. FASB ASC 850-10 specifies the requirements for related party disclosures. As part of a GAAS audit, the auditor must perform procedures to identify related party transactions and should obtain an understanding of the business purpose, nature, and extent of the transaction and any affect on the financial statements. If related party transactions are significant or extensive, the auditor may want to emphasize this fact by adding a separate, emphasis-of-matter paragraph to the auditor's standard report. However, the auditor is not obligated to add such a paragraph if the disclosure in the financial statements is adequate. It is generally not possible for the auditor to substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction. Accordingly, there should be no representation made that the related party transactions were consummated on terms equivalent to an arm's-length transaction, unless such a representation can be substantiated. Analytical procedures are generally not effective in the identification of related party transactions.

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. There is a lack of interest by management in maintaining an earnings trend. B. Computer hardware is usually sold at a loss before being fully depreciated. C. Management had frequent disputes with the auditor on accounting matters. D. Monthly bank reconciliations usually include several large checks outstanding.

The correct answer is C. Fraudulent financial reporting is usually committed by management to deceive financial statement users. It may be accomplished by manipulation or falsification of accounting records or supporting documents; misrepresentation or omission of a financial statement element or transaction; or the intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. Frequent disputes with the auditor regarding the latter could indicate that management has the intent to misstate the financial statements. According to AU-C 240.15, discussion among key audit team members should include "known external and internal factors affecting the entity that may create an incentive or pressure for management or other to commit fraud, provide the opportunity for fraud to be perpetrated, and indicate a culture or environment that enables management or others to rationalize committing fraud...."

The auditor would normally concentrate on which of the following key factors and assumptions in evaluating the reasonableness of an estimate? A. Lack of relative significance of the accounting estimate B. That the estimate has little susceptibility to misstatement and biasness C. Consideration of the historical experience of the entity in making past estimates as well as the auditor's experience in the industry D. That the entity has established an audit committee to oversee the audit function

The correct answer is C. In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are: significant to the accounting estimate, sensitive to variations, deviations from historical patterns, and subject and susceptible to misstatement and bias. The auditor should consider the historical experience of the entity in making past estimates, as well as the auditor's experience in the industry.

When an auditor requests information from marketing, sales, or production personnel, which of the following would the auditor request? Production strategies Compliance with laws and regulations Sales trends Application of accounting policies A. I only B. I and II C. I and III D. I, II, and IV

The correct answer is C. Marketing, sales, and production personnel may discuss matters such as changes in the entity's marketing strategies, sales trends, production strategies, or contractual arrangements with the entity's customers. AU-C 315.A6

In auditing the financial statements of Star Corp., Land, CPA, discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should: A. notify Star's audit committee and stockholders that the prior year's financial statements cannot be relied on. B. request Star to reissue the prior year's financial statements with the appropriate revisions. C. notify Tell about the information and make inquiries about the integrity of Star's management. D. request Star to arrange a meeting among the three parties to resolve the matter.

The correct answer is D. For Land to be assured the issue will be properly resolved, a meeting, set up by management, of all three parties may be necessary for complete understanding. Notifying stockholders and reissuing prior year's financial statements would be premature and inappropriate. Inquiring about the integrity of Star's management with Tell should have occurred at the engagement acceptance.

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling? A. An estimate of the standard deviation of the population's recorded amounts is not required. B. The auditor rarely needs the assistance of a computer program to design an efficient sample. C. Inclusion of zero and negative balances generally does not require special design considerations. D. Any amount that is individually significant is automatically identified and selected.

The correct answer is C. Probability-proportional-to-size (PPS) sampling excludes zero and negative balances in its sample selections and in evaluating results. Therefore, classical variables sampling would have an advantage over PPS sampling because variables sampling does not require special design considerations for inclusion of zero and negative balances. That is, PPS sampling would require a special design to include negative and zero balances while variables sampling would not. In probability-proportional-to-size (PPS) sampling, the strategy is to randomly select individual dollars from a population and then audit the balances, transactions, or documents—called logical units—that include the individual dollars selected. You must determine sample size in advance to use PPS. Thus, if the auditor has decided to sample only 100 customer accounts from the accounts receivable balance of $1.5 million described in section 3326.69 and to use systematic selection, the sampling interval is 15,000 ($1,500,000 ÷ 100). With one random start, you would select every fifteen-thousandth dollar in the population. Thus, every customer account with a balance of $15,000 or more will be selected. In projecting the error rate in a PPS sampling plan to the population, the auditor would take the ratio of the sampling interval to the recorded amount of the sampling unit and apply that resulting ratio to the error found to exist in the sample. For example, using the numbers from section 3326.70, if a sampling unit with a recorded amount of $3,000 was found to have an audited amount of $2,600, the following projection of that error to the population would be made. The sampling unit's recorded amount is $3,000 and the sampling interval is $15,000. Thus, the sampling unit is 1/5 ($3,000 ÷ $15,000) of the sampling interval. In this case the error discovered by the auditor is $400 ($3,000 sampling unit - $2,600 audited amount). This error projected to the population would be $2,000 ($400 × 5).

Requirements of GAGAS for auditors and audit firms include all of the following except: A. 80 hours of CPE in governmental auditing every two years for those auditors who spend at least 20% of their time on these audits. B. a system of quality control that includes independence, legal, and ethical requirements. C. an external peer review every other year. D. human resources policies and procedures.

The correct answer is C. The Government Accountability Office (GAO) requires auditors who spend 20% or more of their time performing government audits to have 80 hours of CPE every two years directly related to government auditing (also called "Yellow Book" hours). Adding, on top of that requirement, state requirements for tax and ethics hours, government auditors have a heavy education requirement. A firm that performs government audits must have a system of quality control in place to assure compliance with professional standards and legal and ethical requirements. The quality control system should address, among other areas, human resources policies and procedures. An external peer review is required at least once every three years.

For uncorrected misstatements, the auditor should document all of the following, except: A. all misstatements accumulated during the audit and whether they have been corrected. B. the amount below which misstatements would be regarded as clearly trivial. C. the size and nature of the misstatement. D. the auditor's conclusion about whether uncorrected misstatements are material, individually or in the aggregate, and the basis for that conclusion.

The correct answer is C. The auditor should include in the audit documentation: the amount below which misstatements would be regarded as clearly trivial; all misstatements accumulated during the audit and whether they have been corrected; and the auditor's conclusion about whether uncorrected misstatements are material, individually or in aggregate....

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client? A. The member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children, holds significant stock ownership in a client entity. B. The member's spouse qualifies because of geographical residence to belong to a client's credit union, and all transactions with the credit union are conducted under normal operating practices. C. The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth. D. The member belongs to a client golf club that requires members to acquire a share of the club's debt securities.

The correct answer is C. According to Rule 101 (Independence) of the AICPA Code of Professional Conduct, independence will be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. Although the bonds are not material in relation to the member's total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client. Independence is not violated if a member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children because the member is the children's guardian, but is not a trustee of the estate held in trust for the children. Independence is not impaired by membership in a client credit union. According to an AICPA ethics ruling, as long as the membership in the golf club is essentially a social matter, the covered member's association with the golf club would not impair independence because the debt ownership is not considered to be a direct financial interest.

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor: A. desires to disclose the specialist's findings, which imply that a more thorough audit was performed. B. makes suggestions to management that are likely to improve the entity's internal control. C. corroborates another specialist's findings that were consistent with management's assertions. D. adds an emphasis-of-matter or other-matter paragraph to the auditor's report to emphasize an unusually important subsequent event.

The correct answer is D. The only time the auditor should refer to the work or findings of a specialist in the audit report would be if reference to the specialist's findings clarifies an emphasis-of-matter or other-matter paragraph (such as for an unusually important subsequent event) or facilitates an understanding of a departure from an unmodified opinion. The auditor does not want to imply that a more thorough audit was performed (than was performed by an auditor not making reference to a specialist). Moreover, mention of the specialist in the auditor's report could be confused as a division of responsibility. Suggestions to management for strengthening internal control would not be placed in the audit report. They would be reported in a separate communication to those charged with governance along with any significant deficiencies or material weaknesses.

Which of the following is not a quality control policy or procedure related to the review of work performed by other engagement team members? A. The work has been performed in accordance with professional standards and regulatory or legal requirements. B. Appropriate consultations have taken place and the resulting conclusions have been documented and implemented. C. The nature, timing, and extent of work performed is appropriate and without need for revision. D. Summarization of findings from the firm's annual inspection

The correct answer is D. A review may include consideration of whether, for example: the work has been performed in accordance with professional standards and applicable regulatory and legal requirements, significant findings and issues have been raised for further consideration, appropriate consultations have taken place and the resulting conclusions have been documented and implemented, the nature, timing, and extent of work performed is appropriate and without need for revision, the work performed supports the conclusions reached and is appropriately documented, the evidence obtained is sufficient and appropriate to support the report, and the objectives of the engagement procedures have been achieved. QC 10.A35 Summarization of findings from the firm's annual inspection is a monitoring activity, not engagement performance.

A weakness in internal control over recording retirements of equipment may cause an auditor to: A. inspect certain items of equipment in the plant and trace those items to the accounting records. B. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. C. trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. D. select certain items of equipment from the accounting records and locate them in the plant.

The correct answer is D. A weakness in internal control over recording retirements of equipment means that it may be possible for a piece of equipment to be retired and thus no longer physically present but still be recorded in the entity's books as held by the entity. To investigate whether there are any instances of this, an auditor would select certain records and verify whether those assets actually exist.

Which of the following is a false statement regarding restrictions on the use of an accountant's compilation or review report on subject matter or presentations based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions? A. Accountant's reports on subject matter or presentations prepared in conformity with an OCBOA are ordinarily not restricted regarding use. B. If an accountant issues a single combined report covering both subject matter or presentations that require a restriction and subject matter or presentations that do not ordinarily require a restriction, use of the combined report should be restricted to the specified parties. C. Where required by law or regulation, a separate restricted-use report may be included in a document that also contains a general-use report. D. If an accountant issues a document including both a separate restricted-use report and a general-use report, both reports should be restricted to the specified parties.

The correct answer is D. AR 80.34 and AR 90.41 state that "if the accountant issues a single combined report covering both (a) subject matter or presentations that require a restriction on use to specified parties and (b) subject matter or presentations that ordinarily do not require such a restriction, the use of a single combined report should be restricted to the specified parties."

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue an audit report: A. with a qualified opinion. B. with an unmodified opinion with reference to footnote disclosure. C. with a disclaimer of opinion. D. on special-purpose financial statements.

The correct answer is D. An entity's compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements is specifically listed as a special report in AU-C 800.04 and .07. If Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis, a qualified opinion, an unmodified opinion with reference to footnote disclosure, or a disclaimer of opinion would not be appropriate.

Disclosure of possible fraud to parties other than a client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? To the SEC when the client reports an auditor change To a successor auditor when the successor makes appropriate inquiries To a government funding agency from which the client receives financial assistance A. I and II B. I and III C. II and III D. I, II, and III

The correct answer is D. Disclosure of possible fraud may be reported to supervisory authorities. Three of these parties are (1) the SEC when the client reports an auditor change, (2) a successor auditor in response to appropriate inquiries, and (3) a government funding agency from whom the client receives financial assistance. The recommendation for the auditor is to receive legal advice. Thus, "Yes" is the appropriate answer to disclosure to each of these parties.

Feedback, feedforward, and preventive controls are important types of control systems and procedures for an accounting information system. Which of the following is in the correct order of feedback, feedforward, and preventive control systems? A. Inventory control, capital budgeting, and cash budgeting B. Cash budgeting, cost accounting variances, and separation of duties C. Cost accounting variances, separation of duties, and cash planning D. Cost accounting variances, cash budgeting, and organizational independence

The correct answer is D. Feedback, feedforward, and preventive control systems are all controls and procedures implemented in an attempt to keep actions within certain desired parameters. Feedback is information provided about an action that has already occurred and may be used to help adjust future actions. Feedforward is information provided that attempts to predict future outcomes and may be used to adjust future actions. Preventive control systems are systems that prevent certain actions from occurring. The question provides many examples of each of these. The question asks you to identify which set can be matched to the order of feedback, feedforward, and preventive control systems. Only one alternative provides three examples in the order of feedback (cost accounting variances), feedforward (cash budgeting), and organizational independence (preventive control system).

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the: A. timing of audit procedures. B. cost-benefit of gathering evidence. C. selected audit techniques. D. financial statement assertions.

The correct answer is D. In designing a written audit plan, specific audit objectives should be established. Audit objectives are related primarily to financial statement assertions, which can be classified according to the following broad categories: Occurrence Completeness Accuracy Cutoff Classification Existence Rights and obligations Completeness Valuation and allocation AU-C 315.A114 Audit procedures that will achieve the audit objectives are detailed in the audit plan. The timing of audit procedures and the cost-benefit of gathering evidence are considered in audit planning. Audit techniques are selected in performing the audit work.

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are: A. consistent with prior periods. B. similar to industry guidelines. C. objective and not susceptible to bias. D. deviations from historical patterns.

The correct answer is D. In evaluating the reasonableness of an accounting estimate, the auditor focuses on the key factors and assumptions that are deviations from historical patterns. Also of concern to the auditor are key factors and assumptions that are significant, sensitive to variations, and subjective and susceptible to misstatement and bias. Estimates are more likely to be reasonable if they are consistent with prior periods, similar to industry guidelines, and objective and not susceptible to bias.

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? A. As the population size doubles, the sample size should increase by about 67%. B. The sample size is inversely proportional to the expected error rate. C. There is no relationship between the tolerable error rate and the sample size. D. The population size has little or no effect on the sample size.

The correct answer is D. Population size is not an important factor in determining sample size for attribute sampling. The population size has little or no effect on the sample size. Tolerable error rate and the expected error rate are important factors in determining sample size.

Section 406 of SOX Title IV, "Code of Ethics for Senior Financial Officers," dictates that: A. it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer. B. any person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security or is a director or an officer of the issuer must file statements required by SOX and the SEC. C. each annual report filed with the SEC contain an internal control report. D. each issuer disclose whether or not they have adopted a code of ethics for senior financial officers.

The correct answer is D. Section 406 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that each issuer disclose whether or not they have adopted a code of ethics for senior financial officers. Any change in or waiver of the code of ethics for senior financial officers requires immediate disclosure. Section 402 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer. Section 403 requires disclosures from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to Section 12 of the Securities Exchange Act of 1934. Section 404 requires that an internal control report be filed with each annual report. Management must acknowledge responsibility for establishing and maintaining adequate internal control.

In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? A. Tests of key controls to determine whether they are effective B. Expanded substantive testing to identify relevant controls C. Analytical procedures to determine the need for specific controls D. Risk assessment procedures to evaluate the design of relevant controls

The correct answer is D. The auditor should obtain an understanding of internal control relevant to the audit. In obtaining such an understanding, the auditor should evaluate the design of those controls and determine whether they have been implemented by performing procedures in addition to inquiry of the entity's personnel.

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments? A. Inspect checks included with the client's cutoff bank statement B. Obtain a letter of representations from the client's underwriter of securities C. Apply ratio analysis on the current year's liability accounts D. Read the file of correspondence from taxing authorities

The correct answer is D. The auditor should perform procedures to identify possible litigation, claims, and assessments (LCA) by: discussing with management the policies and procedures that management uses for identifying, evaluating, and accounting for LCA; obtaining a list of all LCA from management, along with assurance that all LCA have been disclosed; and examining documents in the client's possession that would contain information concerning LCA. The only answer choice that represents a source of information that could reveal outstanding litigation, claims, and assessments to the auditor is reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.

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

The correct answer is D. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the timing of inventory observation procedures to be performed. This is a timing and scheduling issue appropriate to the planning stage. What constitutes sufficient evidence; procedures to be undertaken to discover litigation, claims, and assessments; and what pending legal matters should be included in the inquiry of the client's attorney are less likely to be issues discussed and agreed upon with the client.

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should: A. determine the effects of the departures from GAAP and issue a special report on the financial statements. B. express a disclaimer of opinion on the financial statements and advise the board of directors that the financial statements should not be relied on. C. inform management that a review of the financial statements cannot be completed and request a change from a review to a compilation engagement. D. withdraw from the engagement and provide no further services concerning these financial statements

The correct answer is D. The objective of a review is to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in accordance with GAAP. When an accountant determines the financial statements contain one or more departures from GAAP, the first action is to ask management to revise the financial statements. If management refuses, the next action is to consider modifying one or more paragraphs to illustrate the departure and disclose the dollar effects. If a modified report is not sufficient to express the deficiencies, the accountant should withdraw from the engagement.

Effective policies and procedures ask that the auditor adequately plan the work and properly supervise any assistants. These policies and procedures are ordinarily interpreted to require: A. thorough review of the existing safeguards over access to assets and records. B. limited review of the indications of employee fraud and noncompliance with laws and regulations. C. objective review of the adequacy of the technical training and proficiency of firm personnel. D. critical review of the judgment exercised at every level of supervision.

The correct answer is D. The planning and supervision standard is ordinarily interpreted to require critical review of the judgment exercised at every level of supervision. The first standard of fieldwork requires that the evidence gathering phase of the audit examination be planned and properly supervised. A system of quality controls should be in place that gives reasonable assurance that standards of quality are maintained within the firm with regard to supervision. Policies and procedures for the conduct and supervision at all organization levels should exist to provide reasonable assurance that the work performed meets the firms' standards of quality. This would require critical review of the judgment exercised at every level of supervision.

Before accepting an engagement to audit a new client, a CPA is required to obtain: A. an assessment of fraud risk factors likely to cause material misstatements. B. an understanding of the prospective client's industry and business. C. the prospective client's signature to a written engagement letter. D. the prospective client's consent to make inquiries of the predecessor, if any.

The correct answer is D. The professional code of conduct precludes an auditor from disclosing confidential information obtained in an audit unless the client consents. The prospective client must authorize the predecessor auditor to respond to any inquiries from the successor.

Which of the following bodies promulgates standards for audits of issuers (publicly traded companies)? A. Securities and Exchange Commission (SEC) B. Auditing Standards Board (ASB) C. American Institute of Certified Public Accountants (AICPA) D. Public Company Accounting Oversight Board (PCAOB)

The correct answer is D. The purpose of the PCAOB is to oversee the audits of issuers (publicly traded companies) that are subject to the securities laws. The SEC has not exercised its authority to set standards for issuers, but rather has relied on standards set by the PCAOB. The ASB, a subdivision of the AICPA, is the current standard-setting body for private companies. The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation established by the Sarbanes-Oxley Act of 2002. The purpose of the PCAOB is to oversee the audits of issuers (public companies) that are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB is not an agency or establishment of the United States government.

When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control? A. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year-end B. Inquire of the entity's outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity C. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation D. Consider the results of audit procedures performed with respect to the current year's financial statements

The correct answer is D. When performing a review of interim financial information, the accountant is required to become knowledgeable about the entity's business and its internal control in order to focus the inquiries and analytical procedures. The procedures to obtain this knowledge include the following: Reading documentation of the preceding year's audit and of reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year to the extent necessary, based on the accountant's judgment, to enable the accountant to identify matters that may affect the current-period interim financial information Reading the most recent annual and comparable prior interim period financial information Considering the results of any audit procedures performed with respect to the current year's financial statements Inquiring of management about changes in the entity's business activities Inquiring of management about the identity of, and nature of transactions with, related parties Inquiring of management about whether significant changes in internal control have occurred subsequent to the preceding annual audit or prior review of interim financial information The review does not contemplate obtaining corroborating evidence for responses to inquiries concerning litigation, claims, and assessments. The accountant is also not required to perform testing on transactions. Analytical procedures would involve comparing interim financial information with comparable information for the immediately preceding interim period (not the previous audited fiscal year-end).

Selected data pertaining to Lore Co. for the calendar year 20X1 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 What was the inventory turnover for 20X1? A. 1.2 times B. 1.5 times C. 2.0 times D. 3.0 times

irst, it is necessary to compute ending inventory: Beginning inventory $ 6,000 Purchases 24,000 ------- Goods available 30,000 Less cost of goods sold 18,000 ------- Ending inventory $12,000 Inventory Cost of Average turnover = goods sold / inventory = $18,000 / (($6,000 + $12,000) x 0.5) = $18,000 / $9,000 = 2.0 times

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards. C. The attestation standards do not permit an attest engagement to be part of a business acquisition study or a feasibility study. D. None of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards.

the answer is A. Attestation standards provide a framework for the attest function beyond historical financial statements. Generally accepted auditing standards apply to audits of historical financial statements. The fourth general attestation standard (similar to the second general standard in GAAS) requires the auditor to be independent in mental attitude. The attestation standards define an attest engagement as one in which a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party (AT 101.01). An attest engagement could be an integral part of a business acquisition or feasibility study. The first standard of fieldwork in GAAS (concerning the supervision of assistants) is also an attestation standard.

In order for a firm to designate itself as "Members of the AICPA": A. all CPA owners must be members of the AICPA. B. all owners, not just CPA owners, must be members of the AICPA. C. the majority of CPA owners must be members of the AICPA. D. the majority of all owners, not just CPA owners, must be members of the AICPA.

the answer is A. Based on Rule 505 of the AICPA's Code of Professional Conduct, a firm may only designate itself as "Members of the AICPA" when all CPA owners are members.

Which of the following characteristics of prospective financial statements would require the practitioner to include in a report on the prospective financial statements a paragraph that restricts the use and distribution of the report? A. They are considered a financial projection. B. They are considered a financial forecast. C. They contain a range of forecasted results. D. They are prepared by a practitioner who lacks independence

the answer is A. Projected, or prospective, financial statements are either financial forecasts or financial projections that include the summaries of significant assumptions and accounting policies. A financial projection report is restricted in its use and distribution. A financial forecast report may be generally distributed. A prospective financial statements report that does not contain a financial projection may be generally distributed. A general distribution forecast compilation report may be prepared by a practitioner who lacks independence.

Which of the following laws requires employers to pay covered employees (who are not otherwise exempt) at least the federal minimum wage? A. Fair Labor Standards Act B. Occupational Safety and Health Act C. Employee Retirement Income Security Act D. Comprehensive Budget Omnibus Reconciliation Act

the answer is A. The Fair Labor Standards Act law requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of 1.5 times the regular rate of pay. This act also restricts the hours that children under the age of 16 may work and forbids the employment of children in jobs deemed to be dangerous.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes: A. the auditor's responsibility for ensuring that the appropriate level of management is aware of any significant deficiencies that come to the auditor's attention. B. management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. C. the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors. D. management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

the answer is A. The engagement letter should contain information such as: the objective of the audit (an expression of an opinion on the financial statements); the fact that management is responsible for: the financial statements, establishing and maintaining effective internal control over financial reporting, identifying and ensuring that the entity complies with laws and regulations, adjusting the financial statements to correct material misstatements, making all financial records and related information available to the auditor, and providing the auditor with a letter that confirms certain representations made during the audit; the scope of the audit work to be performed (in accordance with GAAS); the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements; mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies; additional work to be performed, such as tax, consulting, or other services (if applicable); any limitations or restrictions on the scope of the study; work to be performed by the client's staff (if applicable); the basis of the auditor's fee; and the audit work schedule and estimated date of completion. This list is not inclusive, but it is illustrative of items that should be present. Items that would not be addressed in an engagement letter would be the auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors, management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern, or management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud (this is the auditor's responsibility).

An accountant agrees to the client's request to change an engagement from a review to a compilation of financial statements. The compilation report should include: A. no reference to the original engagement. B. reference to a departure from GAAS. C. scope limitations that may have resulted in the change of engagement. D. information about review procedures already performed.

the answer is A. When an engagement is changed from a review to a compilation, provided that the accountant concludes that there is reasonable justification for the change, the compilation report should not reference the original engagement, any review procedures that were already performed before the change, or any scope limitations that resulted in the change in engagement. Compilations and reviews are performed according to SSARS (Statements on Standards for Accounting and Review Services), not GAAS (generally accepted auditing standards).

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? A. Preliminary judgments about materiality levels B. The amount of bad debt write-offs in the prior year C. The size of the intercompany receivable balance D. The auditor's allowable risk of assessing control risk being too low

the answer is A. When planning a particular sample for a substantive test of details, the auditor should consider the preliminary estimates of materiality levels.

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? A. The auditor is unable to obtain the audited financial statements of a consolidated investee. B. Management does not provide reasonable justification for a change in accounting principles. C. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities. D. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements.

the answer is B. A disclaimer of opinion would be appropriate if there are scope issues significant enough to prevent the auditor from forming an opinion on the fairness of presentation of the financial statements in conformity with an applicable financial reporting framework. The only choice that does not represent a significant scope issue is "management does not provide reasonable justification for a change in accounting principles." This situation is a type of departure from an applicable financial reporting framework. The auditor should issue either a qualified opinion (expressing "an exception to the change having been made without reasonable justification") or an adverse opinion, depending on the materiality of the change.

An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take? A. Request that management engage an independent industry expert to consult with the accountant B. Accept the engagement and obtain an adequate level of knowledge about the industry C. Decline the engagement D. Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge about the industry

the answer is B. An accountant can accept a compilation engagement with no previous experience in the client's industry. The accountant is then responsible for acquiring an adequate level of knowledge of the industry's accounting principles and practices. Requesting an industry consultant to assist the accountant is not necessary. In the above scenario, the accountant is not required to decline the engagement but should accept the engagement and then obtain knowledge of industry practices and related accounting principles. The accountant does not need to postpone accepting the engagement; he or she can still accept the engagement but must acquire adequate knowledge during the compilation engagement.

Which of the following would be considered an analytical procedure? A. Examining a sample of paid vendors' invoices for proper approval by an authorized supervisor B. Developing the current year's expected net sales based on the entity's sales trend of prior years C. Projecting a deviation rate by comparing the results of a sample with the actual population characteristics D. Evaluating management's plans for dealing with the adverse effects of recurring operating losses

the answer is B. Analytical procedures are the evaluation of financial information through analysis of plausible relationships among both financial and nonfinancial data. Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.

In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management's misappropriation of assets directly to a federal inspector general when the fraudulent activities are: A. concealed by management by circumventing specific internal controls designed to safeguard those assets. B. reported to the entity's governing body and the governing body fails to make a required report to the federal inspector general. C. accompanied by fraudulent financial reporting that results in material misstatements of asset balances. D. perpetrated by several levels of management in a scheme that is likely to continue in future years.

the answer is B. Auditors are not ordinarily responsible for reporting fraud or noncompliance with laws and regulations to a party other than the entity's senior management. Specific exceptions are provided for audits of entities that receive financial assistance from a government agency (AU-C 240.A72, AU-C 250.05). In the event that the auditor reports the misappropriation of assets to the entity's governing body and the governing body fails to report to the federal inspector general, the auditor would likely be required to report the event directly to the federal inspector general.

Which of the following would ordinarily be considered a reasonable basis for requesting a change from an audit or review engagement to a review or compilation engagement? A change in circumstances that affects the entity's requirement for an audit (review) A misunderstanding concerning the nature of an audit, review, or compilation A. I only B. II only C. Both I and II D. Neither I nor II

the answer is C. A change in circumstances that affects the entity's requirement for an audit or a review, or a misunderstanding concerning the nature of an audit, review, or compilation would ordinarily be considered a reasonable basis for requesting a change in the engagement. A request for a change may also result from a scope restriction (imposed by the client or by the circumstances). The accountant should consider the implications of a scope restriction and evaluate the possibility that information affected by the scope restriction may be incorrect, incomplete, or unsatisfactory. The accountant ordinarily would be precluded from a change in engagement when a scope restriction is involved.

An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS). The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions? A. Withdrawn from the engagement because the entity has not been following GAAP B. Advised management to make the adjustments necessary for the account balances to conform with GAAP C. Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting D. Requested that management justify the use of the other comprehensive basis of accounting in the management representation letter

the answer is C. An accountant asked to review financial statements on a comprehensive basis of accounting (OCBOA) other than generally accepted accounting principles (GAAP) should modify the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting. An accountant is permitted to review financial statements that are prepared on a comprehensive basis of accounting other than GAAP. Financial statements are allowed to be prepared using a comprehensive basis of accounting other than generally accepted accounting principles. In order for the financial statements to be considered in appropriate form, the financial statements would need to include: a description of the OCBOA, including a summary of significant accounting policies and description of the primary differences from GAAP, and disclosures similar to those required by GAAP if the financial statements contain items similar to those included in financial statements prepared in accordance with GAAP. Management does not need to justify the use of the other comprehensive basis of accounting in the management representation letter.

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's: A. income statement only. B. statement of cash flows only. C. balance sheet only. D. statement of shareholders' equity only.

the answer is C. If the auditor is unable to form an opinion on a new client's opening inventory balances, the auditor will issue an opinion on the closing balance sheet only. This scope limitation affects the income, retained earnings, and cash flow statements, but not the balance sheet. This is because cost of goods sold cannot be verified. The auditor should issue a disclaimer of opinion on the income statement, statement of cash flows, and statement of shareholder's equity if the auditor is unable to form an opinion regarding opening inventory balances.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to: A. monitor the risk factors concerning misstatements arising from the misappropriation of assets. B. provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. C. minimize the likelihood of associating with clients whose management lacks integrity. D. document objective criteria for the CPA firm's responses to peer review comments.

the answer is C. Quality control policies and procedures should be established to help determine whether or not to accept a new client, and to minimize the likelihood of association with clients whose management lacks integrity.

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time? A. The specific matters to be included in the communication with the audit committee B. The minimum amount of misstatements that may be considered to be significant deficiencies C. The schedules and analyses that the client's staff should prepare D. The effects that inadequate controls may have over the safeguarding of assets

the answer is C. The auditor must adequately plan the work and must properly supervise any assistants. Procedures for adequate planning (prior to the start of fieldwork) would include: reviewing correspondence files, prior year's working papers, permanent files, financial statements, and auditor's reports; discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity; inquiring about current business developments affecting the entity; reading the current year's interim financial statements; discussing the type, scope, and timing of the audit with management of the entity, the board of directors, or its audit committee; considering the effects of applicable accounting and auditing pronouncements, particularly new ones; coordinating the assistance of entity personnel in data preparation; determining the extent of involvement, if any, of consultants, specialists, and internal auditors; establishing the timing of the audit work; and establishing and coordinating staffing requirements. The auditor would discuss the schedules and analyses that the client's staff should prepare when discussing general audit strategy with management prior to the start of fieldwork.

Which of the following statements is a basic element of the auditor's standard report? A. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. B. The auditor evaluated the overall internal control. C. An audit includes assessing significant estimates made by management. D. The financial statements are consistent with those of the prior period.

the answer is C. The auditor's standard report states that the financial statements present fairly, in all material respects, an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles accepted in the United States of America. It also identifies the financial statements audited in an opening paragraph, describes the nature of an audit, and expresses the auditor's opinion in a separate opinion paragraph. For an unmodified opinion, each of the following items must be satisfied: A title must include the word "independent." Financial statements identified were audited. Financial statements are the responsibility of the company's management. Auditor responsible for expression of an opinion on financial statements. Audit conducted in accordance with GAAS and should identify the United States of America as the country of origin of those standards. Audit includes examining evidence, assessing principles and significant estimates, and evaluating overall statement presentation. An opinion about whether the financial statements are presented fairly, in all material respects, in conformity with GAAP.

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: A. assessing control risk too high. B. assessing control risk too low. C. incorrect rejection. D. incorrect acceptance.

the answer is C. The risk of assessing control risk too high is the risk that the assess 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 the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. The risk of incorrect acceptance is the chance that the statistical evidence might support fair statement of a materially misstated book value. The risk of incorrect rejection is the chance that the statistical evidence might fail to support fair statement of a correct book value. Since the sampling results in this question were on tests of details, the risk would only be concerned with the risk of incorrect acceptance or the risk of incorrect rejection. The sample results concluded that the recorded balance was materially misstated, when in fact it was not materially misstated. This is an example of incorrect rejection.

Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission? A. Hash total B. Parity check C. Encryption D. Check digit

the answer is D. A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry. A check digit is a computed numeric value.

Which of the following would not be included in an accountant's documentation of a compilation of a client's financial statements? A. Discussion with the client regarding the proper presentation of gross cash flows for investment purchases B. An engagement letter C. A memo to the CFO about a potentially significant fraud revealed during compilation procedures D. A review of the segregation of duties in the cash disbursement process

the answer is D. A compilation does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of source documents; or other procedures ordinarily performed in an audit. Significant issues, such as discussing with the client the proper presentation of investment purchases, which relate to the financial statements, should be included in the documentation of a compilation. An engagement letter and written communications with management regarding fraud that came to the accountant's attention during a compilation should both be included in the documentation of a compilation.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? A. Reperforming the activities for a sample of transactions B. Performing analytical procedures using data aggregated at a high level C. Vouching a sample of transactions directly related to the activities D. Observing the entity's personnel applying the activities

the answer is D. According to AU-C 315.A69, risk assessment procedures to obtain audit evidence about the design and implementation of relevant controls include the following: Inquiry of entity personnel Observing the application of specific controls Inspecting documents and reports Tracing transactions through the information system relevant to financial reporting.

Which of the following laws requires that benefits be provided to employees after they leave a position? A. Health Insurance Portability and Accountability Act B. Family and Medical Leave Act C. Employee Retirement Income Security Act D. Comprehensive Budget Omnibus Reconciliation Act

the answer is D. The Comprehensive Budget Omnibus Reconciliation Act (COBRA) requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums.

Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A. The report should not be issued if the accountant is not independent from the entity. B. The report should include a statement indicating that the information is the representation of the accountant. C. The report should include a description of other procedures performed during the compilation. D. The date on the report should be the date of completion of the compilation.

the answer is D. The basic elements of the compilation report are as follows: A statement that the compilation has been performed in accordance with SSARS issued by the AICPA A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management A statement that the financial statements have not been audited or reviewed and that the accountant does not express an opinion on them A signature of the accounting firm or accountant The date of the compilation report (dated as of the date of completion of the compilation) The report does not include a description of the procedures performed during the compilation, and the accountant is permitted to perform the compilation even if she is not independent. In this circumstance, the report would state that the accountant is not independent.

Which of the following would an auditor most likely consider in evaluating the control environment of an audit client? A. Overall employee satisfaction with assigned duties B. The number of CPAs in the accounting department C. Management reviews of monthly financial statements D. Management's operating style

the answer is D. The control environment includes governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's internal control. The control environment sets the tone of the organization, influencing the control consciousness of its people. (AU-C 315.A71) Management operating style sets the attitudes, awareness, and actions of management over the entity's internal control. Management review of monthly financial statements and segregation of duties are control activities.

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences except: A. as a principal financial officer, principal accounting officer, controller, public accountant, or auditor. B. serving on at least one other issuer's audit committee or disclosure committee of the board of directors. C. actively supervising a principal financial officer or principal accounting officer. D. assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

the correct answer is B. "Financial expert" is defined in SOX Title IV as whether a person has, through education and experience as a public accountant or auditor or a principal financial officer, comptroller, or principal accounting officer of an issuer: an understanding of GAAP and financial statements; experience in: the preparation or auditing of financial statements of generally comparable issuers and the application of such principles in connection with the accounting for estimates, accruals, and reserves; experience with internal accounting controls; and an understanding of audit committee functions. There is no requirement that the financial expert had to obtain this experience by serving on a prior audit committee or board of directors.