AUD - Incorrect Questions 3/31
The auditor should A Accumulate misstatements identified during the audit, other than those that are clearly trivial B Accumulate uncorrected misstatements identified during the audit, other than those that are clearly trivial C Communicate on a timely basis with the appropriate level of management all uncorrected misstatements accumulated during the audit D Include in the audit documentation all uncorrected misstatements accumulated during the audit
A Accumulate misstatements identified during the audit, other than those that are clearly trivial The auditor should accumulate all (not just uncorrected) misstatements identified during the audit, other than those that are clearly trivial. The auditor should communicate on a timely basis with the appropriate level of management all (not just uncorrected) misstatements accumulated during the audit. The auditor should request management to correct those misstatements. The auditor should include in the audit documentation all (not just uncorrected) misstatements accumulated during the audit and whether they have been corrected. The auditor should also include in the audit documentation related to evaluation of misstatements identified: The amount below which misstatements would be regarded as clearly trivial The auditor's conclusion about whether uncorrected misstatements are material, individually or in the aggregate, and the basis for that conclusion
Which of the following procedures would an auditor least likely perform before the balance sheet date? A Confirmation of accounts payable B Observation of merchandise inventory C Assessment of control risk D Identification of related parties
A Confirmation of accounts payable While the confirmation of accounts receivable and the other answers are common audit procedures, confirmation of accounts payable is an extended procedure and usually occurs under unusual conditions. The greater the combined level of risk, the greater the assurance that the auditor needs from substantive tests related to a financial statement assertion. In these situations, the auditor might use confirmation procedures rather than or in conjunction with tests directed toward documents or parties within the entity. In a low-risk situation, review of post balance sheet date payments to vendors may adequately substantiate the accounts payable balance. Editor's note: During interim testing, an auditor would be more concerned with testing income statement items, since those are "as of" a year-end period, while balance sheet items are "at" a year-end period.
A disclaimer of opinion or withdrawal from the engagement is required if a written representation requested from management relating to which matter is not provided? A For preparation and fair presentation of the financial statements and for information provided and completeness of transactions B Disclosure of knowledge of fraud or suspected fraud affecting the entity involving management, employees who have significant roles in internal control, or others when fraud could have a material effect on the financial statements C Management's belief that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole D Management's belief that the significant assumptions used by it in making accounting estimates are reasonable
A For preparation and fair presentation of the financial statements and for information provided and completeness of transactions The auditor should disclaim an opinion on the financial statements or withdraw from the engagement if the auditor concludes that sufficient doubt exists about the integrity of management such that the written representations about management's responsibilities, i.e., preparation and fair presentation of the financial statements & information provided and completeness of transactions, are not reliable or management does not provide these specific representations. Editor note: US GAAS distinguish the written representations about management's responsibilities in this manner from all other requested written representations because the possible effects on the financial statements in these circumstances are not confined to specific elements, accounts, or items of the financial statements and are thus pervasive. The other answers are all the subject matter of written representations that are required, but not categorized as being about management's responsibilities. If written representations related to these and other required representations are not provided, the auditor is required to determine the possible effect on the opinion.
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? A Incompatible duties B Management override C Mistakes in judgment D Collusion among employees
A Incompatible duties While incompatible duties can be segregated and therefore controlled, the possibility of management override and collusion among employees to circumvent controls will still exist. Mistakes in judgment also cannot be controlled.
Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A Interest expense B Allowance for doubtful accounts C Accounts receivable D Accounts payable
A Interest expense Relationships involving income statement accounts, such as interest expense, tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time.
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that A Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness. B Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability. C Establishing and maintaining internal control is an important responsibility of management. D The cost of an entity's internal control should not exceed the benefits expected to be derived.
A Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness. Internal control, no matter how effective, can provide an entity with only reasonable, but not absolute, assurance of achieving an entity's financial reporting objectives. The likelihood of their achievement is affected by limitations inherent to internal control. These include the realities that human judgment in decision making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes. While the other answers are generally true statements, they are not part of the concept of reasonable assurance.
The Public Company Accounting Oversight Board's responsibilities include A Investigation and enforcement of registered public accounting firms for violations of specified laws or professional standards. B Investigation of violations committed by registered public accounting firms; enforcement is left to the Securities and Exchange Commission (SEC). C Final approval of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms established by the SEC. D Registration of companies that issue publicly traded securities.
A Investigation and enforcement of registered public accounting firms for violations of specified laws or professional standards. The Public Company Accounting Oversight Board's (PCAOB) responsibilities include investigation and enforcement of registered public accounting firms for violations of specified laws or professional standards; they do not rely on the Securities and Exchange Commission (SEC) to take enforcement or disciplinary action. The SEC approves auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms established by the PCAOB, not vice versa. The PCAOB registers accounting firms, not the companies audited by the accounting firms.
Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of substantive analytical procedures? A Whether the data was processed in an IT system or in a manual accounting system B Whether there were controls over the preparation of the data C Whether the data used was comparable D Whether the data was obtained from independent sources outside the entity or from sources within the entity
A Whether the data was processed in an IT system or in a manual accounting system Whether the data was processed in an IT system or in a manual accounting system generally would not influence the auditor's consideration of the reliability of data for purposes of analytics. The reliability of data is influenced by its source and nature and is dependent on the circumstances under which it is obtained. Accordingly, the following are relevant when determining whether data is reliable for purposes of designing substantive analytical procedures: (1) the source of the information available, e.g., information may be more reliable when it is obtained from independent sources outside the entity; (2) the comparability of the information available, e.g., broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialized products; (3) the nature and relevance of the information available, e.g., whether budgets have been established as results to be expected rather than as goals to be achieved; and (4) controls over the preparation of the information that are designed to ensure its completeness, accuracy, and validity.
Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities? A A CPA in public practice providing advisory services B A CPA in public practice providing auditing and other attestation services C A CPA not in public practice D All CPAs
B A CPA in public practice providing auditing and other attestation services A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. In providing all other services, a member should maintain objectivity and avoid conflicts of interest. A member need not be independent when providing advisory services. Members not in public practice cannot maintain the appearance of independence; however, they have the responsibility to maintain objectivity in rendering professional services.
According to US GAAS, when the auditor of the group financial statements is assuming responsibility for the work of component auditors, for a component that is significant due to its individual financial significance to the group, the group engagement team, or a component auditor on its behalf, should perform A Analytical procedures at the group level B An audit using component materiality C An audit of one or more account balances, classes of transactions, or disclosures relating to the likely significant risks of material misstatement of the group financial statements D Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements
B An audit using component materiality For a component that is significant due to its individual financial significance to the group, the group engagement team, or a component auditor on its behalf, should perform an audit of the financial information of the component, adapted as necessary to meet the needs of the group engagement team, using component materiality. Regarding incorrect answer A., for components that are not significant components, the group engagement team should perform analytical procedures at the group level. Regarding incorrect answers C. and D., these plus answer a. are the options, one or more of which, that should be performed for a component that is significant not due to its individual financial significance but because it is likely to include significant risks of material misstatement of the group financial statements due to its specific nature or circumstances.
An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is A Appropriate for the environment in which the entity operates B Consistently applied from prior periods C Evaluated and appropriately applied based on generally accepted accounting principles D Appropriate for the debt security being valued
B Consistently applied from prior periods Consistency is generally a desirable quality in financial information but may be inappropriate if circumstances change. Introduction of an active market for a particular class of asset or liability may indicate that the use of discounted cash flows to estimate the fair value of such asset or liability is no longer appropriate. Thus, consistency of valuation model for the debt securities for which active trading market was introduced in the current year will not be relevant for the auditor to consider the appropriateness of the valuation model. The auditor should validate criteria to see whether the valuation model is: Appropriate for the environment in which the entity operates. Evaluated and appropriately applied based on generally accepted accounting principles. Appropriate for the debt security being valued. It is unnecessary to check whether the new valuation model has been consistently applied from prior periods. This is a go-forward strategy.
An auditor's program to examine long-term debt most likely would include steps that require A Comparing the carrying amount of the debt to its year-end market value B Correlating interest expense recorded for the period with outstanding debt C Verifying the existence of the holders of the debt by direct confirmation D Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt
B Correlating interest expense recorded for the period with outstanding debt An auditor's program to examine long-term debt should include a step where the auditor reconciles interest expense with debt outstanding during the year (period). This step would provide information as to the completeness and valuation of the account balance. The auditor is not concerned with the year-end market value of the debt. The auditor would not verify the existence of the holders of the debt by direct confirmation. Outstanding balances, terms, and conditions are confirmed with the credit grantor or independent trustee. The search for unrecorded liabilities would generally be made by scanning cash disbursements made in the period following the balance sheet date. Also, the accounts payable subsidiary ledger would not likely provide evidence as to long-term liabilities.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A Detect kiting activities that may otherwise not be discovered B Corroborate information regarding deposit and loan balances C Provide the data necessary to prepare a proof of cash D Request information about contingent liabilities and secured transactions
B Corroborate information regarding deposit and loan balances Confirmation is undertaken to obtain evidence about financial assertions made by management. When audit evidence can be obtained from knowledgeable independent sources outside an entity, it provides greater assurance of reliability. Answers a., c., and d. represent audit procedures that may be performed and evidence that can be obtained as a by-product of receiving the standard confirmation; however, they do not represent the primary purpose for obtaining the confirmation.
An auditor requests a client to send letters of audit inquiry to attorneys who have been consulted concerning litigation, claims, and assessments. The primary reason for this request is to obtain A The attorneys' assurance that litigation, claims, and assessments that are probable of assertion are properly accounted for B Corroboration of the information furnished by management concerning litigation, claims, and assessments C A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcomes D The opinion of an expert whether any loss contingencies are possible,probable,or remote
B Corroboration of the information furnished by management concerning litigation, claims, and assessments The primary reason for a letter of audit inquiry to the client's attorneys is to obtain corroboration of the information furnished by management concerning litigation, claims, and assessments. The attorney's legal expertise is sought by the auditor, not the assurance that matters are properly accounted for. The letter of inquiry should address two lists; one comprised of pending or threatened litigation, claims, and assessments; and the other, unasserted claims and assessments that would, if asserted, have a reasonable possibility of an unfavorable outcome. The pending matters list is not limited to those that management believes have a reasonable possibility of an unfavorable outcome. And although an attorney's response does include addressing the description of matters and the evaluation of their likely outcome, the primary reason for the auditor's request is to corroborate management's information. The attorney is asked to evaluate the likelihood of an unfavorable outcome, not give an opinion using the terms possible, probable or remote.
In the context of the entity's applicable legal and regulatory framework, A Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides only limited assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed B Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides no assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed C Due to the inherent limitations of an audit an audit performed in accordance with US GAAS provides only reasonable assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed D Ordinarily, the further removed noncompliance is from the events and transactions reflected in the financial statements, the more likely the auditor is to become aware of, or recognize, the noncompliance.
B Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides no assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides no assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed. Ordinarily, the further removed noncompliance is from the events and transactions reflected in the financial statements, the less (not more) likely the auditor is to become aware of, or recognize, the noncompliance.
Given the external auditor's sole responsibility for the audit opinion expressed, when using the work of the internal audit function, the external auditor should A Limit the use of internal auditors to the testing of controls B Evaluate whether the use of internal auditors will result in the external auditor still being sufficiently involved in the audit C Put all instructions to internal auditors in writing D Limit the use of internal auditors to working on accounting estimates because these are not, by definition, exact measurements
B Evaluate whether the use of internal auditors will result in the external auditor still being sufficiently involved in the audit Answer b., the external auditor should evaluate whether, in the aggregate, using the work of the internal audit function in obtaining audit evidence to the extent planned, together with any planned use of internal auditors to provide direct assistance, would result in the external auditor still being sufficiently involved in the audit, given the external auditor's sole responsibility for the audit opinion expressed.
When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on I. Recommendations for actions to improve operations II. The scope of the auditor's tests of compliance with laws and regulations A I only B II only C Both I and II D Neither I nor II
B II only In an audit in accordance with Governmental Auditing Standards, an auditor is required to report on the auditor's test of the entity's compliance with applicable laws and regulations. Among the basic elements of such a report is a statement that the standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Recommendations for actions to improve operations are a side-benefit of an audit, but are not required.
Pell, CPA decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc., a public company. Smith, CPA audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit? I. Pell reviews Smith's working papers and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements. II. Pell is unable to review Smith's working papers; however, Pell's inquiries indicate 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
B II only Pell, the principal auditor, should make reference to Smith's audit per situation II only. So, what is relevant to whether or not Pell should reference Smith? In situation I, Pell is able to become satisfied as to Smith's work [audit] and has decided to assume responsibility for Smith's audit (insofar as that work relates to the Pell's expression of an opinion on the financial statements taken as a whole); thus, Pell would not reference Smith in the audit report because to do so may cause a reader to misinterpret the degree of responsibility being assumed. In situation II, Pell was not able to review Smith's workpapers, i.e., become satisfied as to Smith's audit. This is required if Pell is to assume responsibility for Smith's audit; thus, as the other requirements have been met, Pell should share responsibility with Smith and reference Smith in the audit report.
Which of the following statements about audit sampling risks is correct for a nonissuer? A Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. B Nonsampling risk can arise because an auditor failed to recognize misstatements. C Sampling risk is derived from the uncertainty in applying audit procedures to specific risks. D Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
B Nonsampling risk can arise because an auditor failed to recognize misstatements. Nonsampling risk arises from issues unconnected with sampling, such as failing to recognize misstatements. Sampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. The risk derived from the uncertainty in applying audit procedures to specific risks and the possibility of selecting audit procedures that are not appropriate to achieve the specific objective are unconnected with sampling.
Regarding the testing of controls: A If audit evidence is obtained during an interim period, the auditor is not required to obtain additional evidence for the remaining period unless there have been significant changes. B The auditor should obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control. C If deviations from controls upon which the auditor intended to rely are detected, the auditor should perform substantive procedures instead. D The auditor should evaluate the operating effectiveness of controls based on tests of controls without consideration of misstatements detected by substantive procedures. In designing and performing tests of controls, the auditor should obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control.
B The auditor should obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control. Regarding incorrect answer c., if deviations from controls upon which the auditor intends to rely are detected, the auditor should make specific inquiries to understand these matters and their potential consequences (not just simply switch to performing substantive procedures). The auditor should also determine if the tests on controls already performed will suffice. If not, the auditor should determine if either additional tests of controls or substantive procedures are needed to address the potential risks of misstatement.
Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed? A Gross margin information regarding the client's industry B Confirmations of receivables verifying account balances C Client records documenting the use of computer programs D Anticipated results documented in budgets or forecasts
C Client records documenting the use of computer programs When a client entity has documentation regarding the use of computer programs, it illustrates an effective internal control. Answer B. is a substantive procedure. Answers A. and D. are analytical procedures.
An IT input control is designed to ensure that A Only authorized personnel have access to the computer area. B Machine processing is accurate. C Data received for processing are properly authorized and converted to machine readable form. D Electronic data processing has been performed as intended for the particular application.
C Data received for processing are properly authorized and converted to machine readable form. Input controls are designed to provide reasonable assurance that data received by IT have been properly authorized, converted into machine readable form and identified as well as that data has not been lost, added, duplicated, or otherwise improperly changed. Answer (A) describes an access control. Answer (B) describes an output control. Answer (D) describes a processing control.
Which of the following activities would be most helpful to a CPA in deciding whether to accept a new audit client? A Reviewing industry benchmarking data. B Considering the client's compensation methods. C Evaluating the CPA's ability to properly service the client. D Evaluating the most recent peer review of the client's previous auditor. .
C Evaluating the CPA's ability to properly service the client. The most helpful activity to a CPA in deciding whether to accept a new audit client is to evaluate the CPA's ability to properly service the client. A CPA should evaluate his own ability to properly service the client. Specifically, the CPA should check if he has the ability to meet reporting deadlines (considering factors like timing and complexity of the engagement and the availability of audit staff). (D) is incorrect because while the peer review of the client's previous auditor might give an insight in the performance of the previous auditor, it is not of much help in deciding whether to accept a new client or not.
Which of the following is an inherent limitation of internal control? A Incompatible duties B Lack of segregation of duties C Faulty human judgment D Lack of an audit committee
C Faulty human judgment Internal control, no matter how well designed and operated, can provide an entity with reasonable, but not absolute, assurance about achieving an entity's financial reporting objectives. The likelihood of achievement is affected by limitations inherent to internal control. These include the realities that human judgment in decision making can be faulty. Regarding the incorrect answers, an inherent quality is part of the very nature of something and thus is not considered alterable as are incompatible duties or lack of segregation of duties (the phrases incompatible duties and lack of segregation [or separation] of [incompatible] duties are used interchangeably in the professional literature to describe the same condition); or the lack of an audit committee.
The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA A Assessed the accounting principles used and significant estimates made by management. B Has no responsibility to update the CPA's report for events and circumstances occurring after the report's date. C Is not aware of any material modifications that should be made to the financial statements. D Believes that there will usually be differences between the projected and actual results.
C Is not aware of any material modifications that should be made to the financial statements. A review engagement is substantially less in scope than an audit, the objective of which is the expression of an opinion. Accordingly, the standard review report in accordance with SSARS expresses only limited assurance on the financial statements. It states that the CPA is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with US GAAP. (A) is incorrect because assessing the appropriateness of accounting principles and evaluating the reasonableness of significant estimates made by management is in the domain of an audit and not a review. A review mainly includes applying analytical procedures to management's financial data and making inquiries of the entity's management.
An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to A Repurchase the entity's stock at a price below its book value B Issue stock options to key executives C Lease rather than purchase operating facilities D Accelerate the due date of an existing mortgage
C Lease rather than purchase operating facilities Possible plans to mitigate the adverse effects of future conditions and events may include: reducing or delaying expenditures such as leasing instead of purchasing operating facilities; increasing ownership equity; and borrowing money or restructuring debt. Issuing stock options would only cost the company money if they were exercised rather than mitigate the situation.
An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity's business. Other than the procedures previously applied to the historical financial statements, the accountant is required to # Reevaluate the entity's internal control over financial reporting Determine that the computations of the proforma adjustments are mathematically correct A Yes Yes B Yes No C No Yes D No No
C No Yes Other than the procedures applied to the historical financial statements, the procedures the practitioner should apply to the assumptions and pro forma adjustments for either an examination or a review engagement are as follows.... "determine that computations of pro forma adjustments are mathematically correct and that the pro forma column reflects the proper application of those adjustments to the historical financial statements." Reevaluating the entity's internal control over financial reporting is not a required procedure.
Which of the following describes a difference between a service auditor's type 1 report and a type 2 report? A A type 2 report includes written assertions by management of the service organization as of a specified date while those in the type 1 report cover a specified period. B Only the type 1 report includes a description of the service organization's system by management of the service organization. C Only the type 2 report includes an assertion by management of the service organization related to the operating effectiveness of the service organization's controls. D Only the type 1 report includes an assertion by management of the service organization related to the suitability of the design of the service organization's controls.
C Only the type 2 report includes an assertion by management of the service organization related to the operating effectiveness of the service organization's controls. Only the type 2 report includes an assertion by management of the service organization related to the operating effectiveness of the service organization's controls. A type 1 report includes written assertions by management of the service organization as of a specified date while those in the type 2 report cover a specified period; not vice versa. Both types of reports, not just the type 1 per answers B. and D., include a description of the service organization's system (which includes control objectives) and assertions related to the suitability of the design of the service organization's controls related to the control objectives.
In which of the following paragraphs of the audit report of a public company does an auditor communicate the nature of the engagement and the specific financial statements covered by an audit? A Basis for Opinion paragraph B Critical Audit Matters Paragraph C Opinion paragraph D Explanatory paragraph
C Opinion paragraph An auditor communicates the specific financial statements covered by the audit in the opening sentence of the Opinion paragraph of the audit report for a publicly-traded company.
Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit? A The entity announced that the internal audit function would be eliminated after the balance sheet date. B The audit committee chairperson unexpectedly resigned during the year under audit. C The chief financial officer waived approvals on all checks to one vendor to expedite payment. D The frequency of accounts payable check runs was changed from biweekly to weekly.
C The chief financial officer waived approvals on all checks to one vendor to expedite payment. The chief financial officer's willingness to override the internal controls reveals a management philosophy that values meeting goals higher than working within established procedures. Little time would be saved by adhering to approval procedures at most entities, indicating, at best, poor organization regarding the transactions. Elimination of the internal audit function, in itself, doesn't indicate that controls are now inadequate, although this is a second-best answer. As the audit committee chair is unlikely to have been in a position to commit a disreputable act with regard to the entity under audit, the chair's resignation probably doesn't indicate personal misconduct. If an audit committee chair resigned in protest of entity misconduct, the chair likely would have informed the auditor directly of the reasons for the resignation. Check-run frequency rarely affects the quality of internal controls.
Regarding materiality considerations A It is not practicable to design audit procedures to detect misstatements that could be material solely because of their nature; thus, the auditor does not make qualitative considerations. B Auditors are aware that most users of financial statements have limited backgrounds in accounting. C The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. D Risk and materiality are mainly considered during the planning phase of an audit.
C The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. Although it is not practicable to design audit procedures to detect misstatements that could be material solely because of their nature (that is, qualitative considerations), the auditor considers not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements. One of the assumptions auditors make about financial statement users is that they have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence. Materiality and audit risk are considered throughout the audit.
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may A Not believe that the bank is obligated to verify confidential information to a third party B Sign and return the form without inspecting the accuracy of the client's bank reconciliation C Not have access to the client's cutoff bank statement D Be unaware of all the financial relationships that the bank has with the client
D Be unaware of all the financial relationships that the bank has with the client The AICPA Standard Form to Confirm Account Balance Information With Financial Institutions is designed to substantiate information that is stated on the confirmation request; the form is not designed to provide assurance that information about accounts not listed on the form will be reported. The bank employee completing the form may be unaware of all the financial relationships that the client has with the bank and the request may not ask specifically about all the financial relationships, thus the usefulness of the confirmation in providing evidence for financial statement assertions may be limited. Responding to bank confirmation requests is a normal activity for a bank. It would be unlikely that a bank employee would not believe that the bank is obligated to verify confidential information to the third party, especially as the confirmation request is signed by the client authorizing the bank to release the information to the auditor. The bank would not have access to the client's bank reconciliation and thus would not inspect its accuracy. The bank does have access to the client's cutoff bank statements, but that information is not used by the bank to confirm year-end balances.
Which of the following procedures would an auditor generally perform regarding subsequent events? A Inspect inventory items that were ordered before the year-end but arrived after the year-end. B Test internal control activities that were previously reported to management as inadequate. C Review the client's cutoff bank statements for several months after the year-end. D Compare the latest available interim financial statements with the statements being audited.
D Compare the latest available interim financial statements with the statements being audited. Subsequent events are events that occur after the balance sheet date. Such changes affect the interim report for the following year. By comparing the latest available interim financial information with the financial statements being reported upon, an auditor may identify the occurrence of subsequent events.
Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? A Establish procedures that comply with the standards of the Sarbanes-Oxley Act. B Use attributes sampling techniques in testing internal controls. C Consider inherent risk and control risk before determining detection risk. D Establish policies to ensure that the audit work meets applicable professional standards.
D Establish policies to ensure that the audit work meets applicable professional standards. The best answer is to establish policies to ensure that the audit work meets applicable professional standards. Compliance with the Sarbanes-Oxley Act is too limited; is not applicable to all firms; and does not encompass the AICPA's quality control standards. The other answers are not on point. GAAS require a firm of independent auditors to adopt a system of quality control in conducting an audit practice. Thus, a firm should establish quality control policies and procedures to provide it with reasonable assurance that its personnel comply with GAAS in its audit engagements. Further, the AICPA's quality control standards require that a CPA firm establish a system of quality control designed to provide the firm with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partners issue reports that are appropriate in the circumstances. A system of quality control consists of policies designed to achieve these objectives and the procedures necessary to implement and monitor compliance with those policies.
In designing written audit programs, 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
D Financial statement assertions Once the audit strategy has been established, the auditor is able to start the development of a more detailed audit plan [audit programs] to address the various matters identified in the audit strategy, taking into account the need to achieve the audit objectives. The documentation of the audit plan via audit programs should include descriptions of the nature, extent, and timing of planned further audit procedures at the relevant assertion level. The other answer alternatives are all considerations of the procedures necessary to satisfy the audit objectives. Editor Note: The audit plan should also describe the nature and extent of the planned risk assessment procedures and other planned audit procedures that are required to be performed so that the engagement complies with GAAS.
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to A Verify that payroll taxes are deducted from employees' gross pay B Determine whether internal control activities are operating effectively C Uncover fictitious employees who are receiving payroll checks D Identify potential liabilities for unpaid payroll taxes
D Identify potential liabilities for unpaid payroll taxes When reviewing payroll tax form reconciliations, an auditor is concerned with unrecorded liabilities. Analytics or review of the calculation process would be better to determine accuracy in the deductions calculation. The effective operation of internal control is determined by tests of controls. Observing check distribution, rather than reconciling tax forms, would bring fictitious employees to light.
Which of the following circumstances requires modification of the auditor's report on a review of interim financial information of a non issuer? #An uncertainty Inadequate disclosure A No No B Yes Yes C Yes No D No Yes
D No Yes The accountant's report on a review of the interim financial information should be modified for departures from the applicable financial reporting framework, which include inadequate disclosure and changes in accounting principles that are not in conformity with the applicable financial reporting framework. The existence of an uncertainty or a lack of consistency in the application of accounting principles affecting interim financial information would not require the accountant to include an additional paragraph in the report, provided that the interim financial information appropriately discloses such matters.
Which of the following internal control procedures most likely would be used to maintain accurate inventory records? A Perpetual inventory records are periodically compared with the current cost of individual inventory items B A just-in-time inventory ordering system keeps inventory levels to a desired minimum C Requisitions, receiving reports, and purchase orders are independently matched before payment is approved D Periodic inventory counts are used to adjust the perpetual inventory records
D Periodic inventory counts are used to adjust the perpetual inventory records Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period. Periodically comparing goods on hand with perpetual inventory records would assist in identifying potential errors. Answer A. addresses the valuation of the inventory. Answer B. would not identify variances in actual inventory compared to recorded amounts. Answer C. represents examples of controls necessary for the proper segregation of duties in purchasing inventory.
The auditor should determine whether uncorrected misstatements are material, individually or in the aggregate. In making this determination, one of the aspects the auditor should consider is the size and nature of the misstatements, in relation to all except which of the following? A Particular classes of transactions, account balances, or disclosures B The financial statements as a whole C The particular circumstances of their occurrence D Prior period uncorrected misstatements
D Prior period uncorrected misstatements The size and nature of misstatements in relation to prior period uncorrected misstatements is not relevant. The size and nature of the misstatements are considered in relation to all of the other answer alternatives. Regarding answer A., each individual misstatement is considered to evaluate its effect on the relevant classes of transactions, account balances, or disclosures, including whether the particular materiality level for that particular class of transactions, account balance, or disclosure, if any, has been exceeded. Editor Note: When determining whether uncorrected misstatements are material, individually or in the aggregate, the auditor should also consider the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances, or disclosures and the financial statements as a whole. The cumulative effect of immaterial uncorrected misstatements related to prior periods may have a material effect on the current period's financial statements.
Which of the following, if included in a CPA's standard report on audited financial statements, would be inappropriate? A Management's responsibility for the financial statement B Significant estimates made by the management C An assessment of the entity's accounting principles D The CPA's assessment of the sampling risk factors
D The CPA's assessment of the sampling risk factors The auditor's assessment of the sampling risk factors will be documented in an auditor's workpapers. It will not form part of a standard audit report. (A), (B) and (C) are incorrect, because a standard audit report contains disclosures relating to the title, addressee, introductory paragraph, management's responsibility paragraph, auditor's responsibility paragraph, auditor's opinion, Emphasis-of-matter paragraph, signature, auditor's address, and report dates as well as other reporting responsibilities such as estimates, accounting principles, etc.
Which of the following describes a weakness in accounts payable procedures? A The accounts payable clerk files invoices and supporting documentation after payment. B The accounts payable clerk manually verifies arithmetic on the vendor invoice. C The accounts payable system compares the receiving report to the vendor invoice. D The accounts payable manager issues purchase orders.
D The accounts payable manager issues purchase orders. If the accounts payable manager issues purchase orders, incompatible functions of authorization and record keeping are combined creating a weakness in internal control. A person should not be in the position to both perpetrate and conceal errors or fraud in the normal course of their duties, thus the duties of authorization, record keeping, and custody of assets should be separated. The other answer alternatives describe appropriate internal controls.
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 that the accountant has completed the required procedures.
D The date on the report should be the date that the accountant has completed the required procedures. The date on the report should be the date that the accountant has completed the required procedures. The accountant is not precluded from including a description of the reason(s) that the accountant's independence is impaired; however, if the accountant elects to do so, all the reasons should be included. The accountant utilizes information that is the representation of management. Any other procedures that the accountant might have performed as part of the compilation engagement should not be described in the report.
The establishment of the overall audit strategy, includes all of the following activities except A Identification of the characteristics of the engagement that define its scope B Determination of the reporting objectives of the engagement in order to plan the timing of the audit and the nature of the communications required C Determination of the nature, timing, and extent of resources necessary to perform the engagement D The nature, timing, and extent of planned further audit procedures at the relevant assertion level
D The nature, timing, and extent of planned further audit procedures at the relevant assertion level The detailed audit plan, not the overall audit strategy, includes a description of the nature, timing, and extent of planned further audit procedures at the relevant assertion level. In addition to the other answer alternatives, in establishing the overall audit strategy, the auditor should consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts; consider the results of preliminary engagement activities; and, when applicable, consider whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant.
Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk? A Management's attitude toward information processing and accounting departments B The organization's recruiting and hiring practices C Physical proximity of the accounting function to upper management D The suitability of the client's lines of reporting
D The suitability of the client's lines of reporting Control risk is a function of the effectiveness of the design and operation of internal control in achieving a company's objectives relevant to the preparation of the financial statements. One of the five components of internal control is the control environment. One of the elements of the control environment is a company's organizational structure. As it provides the framework for accomplishing the company's objectives, a relevant organizational structure includes considering key areas of authority and responsibility and appropriate (suitable) lines of reporting. The key to selecting the best answer was to determine which was most related to a company's organizational structure. Management's attitude and recruiting and hiring practices are not directly related to organizational structure, as is the case with lines of reporting. The physical proximity of the accounting function to upper management could be completely unrelated to organizational structure.
Financial statements prepared under which of the following special-purpose frameworks should include an other-matter paragraph restricting the use of the auditor's report? i. Cash basis ii. Regulatory basis for general use iii. Tax basis iv. Contractual basis A i and ii only B ii and iv only C i and iii only D iv only
D iv only When financial statements are prepared under the regulatory basis (specific use) or the contractual basis, the auditor's report should include an other-matter paragraph restricting the use of the auditor's report.
