AUD1

Which of the following procedures does a CPA usually perform when reviewing the financial statements of a nonissuer? A.Make inquiries of management concerning restrictions on the availability of cash balances. B.Communicate deficiencies in the design of internal control to the entity's audit committee. C.Examine trend analysis to determine the appropriateness of the CPA's assessment of detection risk. D.Evaluate management's plans for dealing with negative trends and financial difficulties

A. Make inquiries of management concerning restrictions on the availability of cash balances.

Which of the following matters is included in a typical comfort letter? A.Negative assurance on whether unaudited condensed financial information complies in form with the accounting requirements of the SEC. B.An opinion on whether any fraud risk factors indicate significant incentive and opportunity relating to fraudulent financial reporting. C.Positive assurance on whether there has been any change in capital stock or long-term debt since the date of the audited financial statements. D.An opinion on whether the entity's internal control components are operating as designed in achieving their stated objectives.

A. Negative assurance on whether unaudited condensed financial information complies in form with the accounting requirements of the SEC.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the A.Sales journal to the shipping documents. B.Shipping documents to the cash receipts journal. C.Cash receipts journal to the customer's purchase orders. D.Customer's purchase orders to the sales journal.

A. Sales journal to the shipping documents.

An auditor of a nonissuer may not issue a qualified opinion when A.The auditor lacks independence with respect to the entity. B.Management prevents the auditor from observing the entity's inventory. C.The entity omits the statement of cash flows from its financial statements. D.The auditor's report refers to the work of an actuary.

A. The auditor lacks independence with respect to the entity.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? A.There are unusual discrepancies between the entity's records and confirmation replies. B.Management enforces strict budgetary controls over the entity's departmental supervisors. C.Cash transactions are electronically processed and recorded, leaving no paper audit trail. D.The monthly bank reconciliation ordinarily includes several large outstanding checks.

A. There are unusual discrepancies between the entity's records and confirmation replies.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should A.Verify the account balance by inspecting the client's bank statements and cash receipt records. B.Select at random a different account for confirmation that is approximately the same size. C.Request the client's management to document the matter in the management representation letter. D.Explain to the client that the request will most likely cause the auditor to disclaim an opinion.

A. Verify the account balance by inspecting the client's bank statements and cash receipt records.

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's auditing practice? A.Acceptance of a client relationship. B.Professional skepticism of management. C.Computer information processing. D.Efficiency of organizational structures

A.Acceptance of a client relationship.

Which of the following procedures would a CPA most likely include in planning a financial statement audit? A.Determine the extent of involvement of the client's internal auditors. B.Ask the client's lawyer if contingencies have been recorded in conformity with GAAP. C.Obtain a written representation letter from the client's management. D.Scan the client's journals and ledgers to identify any unusual transactions.

A.Determine the extent of involvement of the client's internal auditors.

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice? A.Engagement performance. B.Risk analysis. C.Safeguarding of assets. D.Information processing.

A.Engagement performance.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A.Management displays a significant disregard for regulatory authorities. B.There is a lack of turnover of employees in the accounting department. C.Monthly bank reconciliations usually include several deposits in transit. D.Equipment is usually sold at a loss before being fully depreciated.

A.Management displays a significant disregard for regulatory authorities.

An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely would reduce the A.Planned reliance on the prescribed control. B.Assessed level of control risk. C.Planned reliance on substantive tests. D.Tolerable rate of deviations.

A.Planned reliance on the prescribed control.

Which of the following sampling methods would an auditor use to estimate a numerical measurement of a population, such as the dollar value of inventory? A.Variable sampling. B.Discovery sampling. C.Attribute sampling. D.Random-number sampling

A.Variable sampling.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A.Verify inventory pledged under loan agreements by confirming the details with financial institutions. B.Inquire about the current status of transactions that were recorded on the basis of preliminary data. C.Compare the financial statements being reported on with those of the prior year. D.Trace information from shipping documents to sales invoices and sales journal transactions

B. Inquire about the current status of transactions that were recorded on the basis of preliminary data.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to A.Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. B.Minimize the likelihood of associating with clients whose management lacks integrity. C.Document the matters that are required to be communicated to the audit committee. D.Enhance the auditor's understanding of the client's business and its industry.

B. Minimize the likelihood of associating with clients whose management lacks integrity.

Which of the following factors most likely would heighten an auditor's concern about the risk of material misstatement arising from the misappropriation of assets? A.There is a potential for bias in the preparation of accounting estimates. B.The entity's fixed assets lack ownership identification. C.Management recently adopted new accounting principles. D.The entity recently experienced rapid growth in revenue

B. The entity's fixed assets lack ownership identification.

Which of the following factors most likely would be considered an inherent limitation to an entity's internal control? A.The ineffectiveness of the entity's audit committee. B.Collusion of employees in circumventing internal controls. C.The lack of resources to monitor internal controls. D.The complexity of the entity's electronic order processing system.

B.Collusion of employees in circumventing internal controls.

In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that A.Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records. B.Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate. C.When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk. D.Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.

B.Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.

An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order, the auditor ordinarily would replace the voided purchase order with another if the voided purchase order A.Represents office equipment ordered and never received. B.Has been properly voided in the normal course of business. C.Represents office equipment ordered and canceled before being processed by the vendor. D.Has been electronically deleted from the purchase order file

B.Has been properly voided in the normal course of business.

Which of the following factors most likely would cause an accountant not to accept an engagement to compile the financial statements of a nonissuer? A.A lack of segregation of duties in the entity's accounting and payroll departments. B.Indications that reports of asset misappropriation are not investigated by management. C.The entity's intention to omit from the financial statements substantially all of the disclosures required by GAAP. D.Management's acknowledgement that the financial statements will be included in a written personal financial plan.

B.Indications that reports of asset misappropriation are not investigated by management.

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(an) A.Disclaimer of opinion about the fair presentation of Modern's financial statements. B.List of the procedures performed (or reference thereto) and Mill's findings. C.Opinion about the effectiveness of Modern's internal control activities concerning royalty payments. D.Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

B.List of the procedures performed (or reference thereto) and Mill's findings.

Which of the following procedures would an auditor most likely perform before the balance sheet? date? A.Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor. B.Obtain an understanding of the client's internal control activities. C.Determine whether there are any liens or encumbrances on assets that have been pledged as collateral. D.Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations.

B.Obtain an understanding of the client's internal control activities.

A CPA was engaged to calculate the rate of return on a specified investment according to an agreed-upon formula and verify that the resultant percentage agrees to the percentage in an identified schedule. The CPA's report on these agreed-upon procedures should contain A.An opinion about the fairness of the agreed-upon procedures. B.A separate paragraph describing the effectiveness of the internal controls. C.A disclaimer of responsibility for the sufficiency of those procedures. D.A disclaimer of opinion on the fair presentation of the financial statements.

C. A disclaimer of responsibility for the sufficiency of those procedures.

During an engagement to compile the financial statements of a nonissuer, an accountant becomes aware that management had stated land at appraised value and that, if GAAP had been followed, both the land account and stockholders' equity would have been decreased by $1 million, a material amount. The accountant decides to modify the standard compilation report because management will not revise the financial statements. Under these circumstances, the accountant should A.Issue either an adverse opinion or a qualified opinion, depending on materiality, because of the departure from GAAP. B.Add a separate paragraph to the accountant's report that restricts the distribution of the financial statements to "internal use only." C.Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements. D.Add a separate paragraph to the accountant's report that explains the underlying purpose of recording assets at historical cost.

C. Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements.

Which of the following activities is not an element of a CPA firm's quality control system to be considered in establishing quality control policies and procedures? A.Deciding whether to accept or continue a client relationship. B.Selecting personnel for advancement who have the necessary qualifications. C.Assessing a client's ability to establish effective internal controls. D.Monitoring the effectiveness of professional development activities.

C. Assessing a client's ability to establish effective internal controls.

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because A.All accounts do not have an equal opportunity to be selected for confirmation. B.Accounts unconfirmed may have already been written off as uncollectible. C.Few responses may occur because more effort is required of recipients. D.Accounts actually confirmed may not be representative of the population.

C. Few responses may occur because more effort is required of recipients.

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonissuer's financial statements? A.The accountant expresses no assurance on the financial statements. B.The accountant should obtain a written management representation letter. C.The accountant need not obtain an understanding of internal control. D.The accountant must be independent in fact and appearance.

C. The accountant need not obtain an understanding of internal control.

In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would A.Confirm with those members of management as to whether they are actually option holders. B.Verify the existence of option holders in the issuer's payroll and human resources records. C.Trace the authorization for the options granted to the board of directors' approval. D.Review the public records of the SEC to determine whether the options were properly reported

C. Trace the authorization for the options granted to the board of directors' approval.

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer? A.Make inquiries of management about actions taken at board of directors' meetings. B.Study the relationships of financial statement elements expected to conform to predictable patterns. C.Identify internal control activities that are likely to prevent or detect material misstatements. D.Compare the financial statements with anticipated results in budgets and forecasts.

C.Identify internal control activities that are likely to prevent or detect material misstatements.

A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services is limited to presenting A.Accounting data that conforms with a special purpose framework other than GAAP. B.Unaudited financial statements that omit substantially all required GAAP disclosures. C.Information in the form of financial statements that is the representation of management. D.Supplementary financial information that has been subjected to inquiry and analytical procedures.

C.Information in the form of financial statements that is the representation of management. AUD

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A.Management reputation for failing to provide schedules to prior auditors on a timely basis. B.The CPA's inability to review the predecessor auditor's working papers. C.Management's unwillingness to make all financial records available to the CPA. D.The CPA's lack of understanding of the entity's operations and industry.

C.Management's unwillingness to make all financial records available to the CPA.

According to rules issued under the Sarbanes-Oxley Act, which of the following nonaudit services is an accounting firm permitted to provide for an issuer audit client without impairing the accounting firm's independence? A.Providing an expert opinion in order to advocate the client's interest in litigation. B.Providing an expert opinion in order to advocate the client's position in a regulatory investigation. C.Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client. D.Providing legal services to the client in a foreign jurisdiction.

C.Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client.

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions? A.There are significant differences between the entity's forecasted financial statements and the financial statements to be audited. B.The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management. C.There have been substantial inventory write-offs just before the year end in each of the past four years. D.The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.

C.There have been substantial inventory write-offs just before the year end in each of the past four years.

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.

When assessing an internal auditor's objectivity, an independent auditor should A.Perform tests of controls to determine whether significant internal control activities are properly maintained. B.Analyze the risk factors that relate to misstatements arising from the misappropriation of assets. C.Review the internal auditor's reports to verify that the conclusions reached are consistent with the procedures performed. D.Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions

D. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions

Which of the following statements would most likely appear in an auditor's engagement letter? A.Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets. B.We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements. C.Management agrees to correct all deficiencies in internal control activities identified by us. D.Management is responsible for making all financial records and related information available to us

D. Management is responsible for making all financial records and related information available to us.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to A.Customers who have credit or zero balances with the client. B.Responses that were mailed rather than faxed to the auditor. C.Accounts receivable that have been classified as uncollectible. D.Payments mailed to the client that have not been recorded.

D. Payments mailed to the client that have not been recorded.

In searching for unrecorded liabilities, an auditor most likely would examine the A.Cutoff bank statement for deposits recorded in the books, but not by the bank. B.Details of accounts receivable confirmations that are classified as "exceptions". C.Files of purchase requisitions for items ordered just before the year end. D.Receiving reports for items received before year end, but not yet recorded.

D. Receiving reports for items received before year end, but not yet recorded.

An accountant has been engaged to compile a nonissuer's financial statements that contain several misapplications of accounting principles and unreasonable accounting estimates. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard compilation report is not adequate to communicate the deficiencies. Under these circumstances, the accountant should A.Disclaim an opinion on the financial statements and advise the board of directors that the financial statements should not be relied upon. B.Inform management that the engagement can proceed only if distribution of the accountant's compilation report is restricted to internal use. C.Determine the effects of the deficiencies and add a separate paragraph to the compilation report that describes the deficiencies and their effects. D.Withdraw from the compilation engagement and provide no further services concerning these financial statements.

D. Withdraw from the compilation engagement and provide no further services concerning these financial statements.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A.The audit committee's approval of the initial selection of accounting principles. B.A lack of competition in the entity's industry, accompanied by increasing profit margins. C.Management's disclosure of unresolved litigation and contingent liabilities. D.Year-end adjustments by the entity that significantly affect financial results.

D. Year-end adjustments by the entity that significantly affect financial results.

In selecting an appropriate sample for a substantive test, the auditor most likely would stratify the population if the A.Auditor suspects that management fraud has occurred during the year. B.Desired assessed level of control risk is less than the prior year. C.Technique to be used is attribute sampling. D.Auditor plans to give greater representation to large recorded amounts

D.Auditor plans to give greater representation to large recorded amounts.