Auditing

Acid Test Ratio

(Current Assets - Inventory) / Current Liabilities

Tainting Percentage Formula

(Recorded amount - Audited Amount) / Recorded Amount

Internal controls consist of five interrelated components:

1. Control Environment 2. Risk Assessment 3. Information and communication 4. Control Activities 5. Monitoring

what are the walkthrough procedures usually performed in an issuers intergrated audit

1. Inquiry 2. Observation 3. Inspection of relevant documentation 4. Reperformance of controls

What is the Purchases, Payables, & Cash Disbursements Cycle (Memorize)

1. Purchase Requisition (PR) (Beginning) --> Purchase Order (PO) --> Receiving Report (RR) --> Vendor Invoice (VI) --> Voucher --> Check --> Purchases Journal (or General Journal)

2 important pieces to a governmental audit are:

1. Report on Internal Controls 2. Compliance Audit Report

Average days sales in inventory

365 / inventory turnover inventory turnover= COGS/ Avg inventory

Days Sales in Accounts Receivable Formula

365/Accounts receivable turnover ratio A/R turnover = Net Sales/Average AR

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. The allowance for sampling risk was:

4.5% Solution: The allowance for sampling risk is the difference between the upper precision limit of 8% and the sample deviation rate of 3.5% (seven errors in a sample of 200)

The OMB's Uniform Guidance rules contain a "percentage of coverage" rule that requires the auditor of entities receiving federal financial support who do not meet the criteria for low risk to test major programs that, in the aggregate, encompass at least: 100% of federal expenditures. 50% of federal expenditures. 40% of federal expenditures. 30% of federal expenditures.

40%

Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date?

45 days

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?

60 days

SOC 2 Type 1

A SOC 2 report is a Report on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality or Privacy. A Type 1 report is a report on the design and implementation of a service organization's controls.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A high turnover of senior management A lack of independent checks A strained relationship between management and the predecessor auditor An inability to generate cash flow from operations

A lack of independent checks

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

A large number of bearer bonds on hand

AICPA members who perform compilation and review engagements are governed by all of the following except: -the AICPA Code of Professional Conduct. -SQCSs. -SSARSs. -ARSCs.

ARSCs - Accounting and Review Services Committee

What department prepares the voucher?

Accounts Payable

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?

Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

Which of the following statements about materiality is false? The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with the applicable financial reporting framework, while other matters are not important. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of the common financial information needs of users as a group, by the size or nature of a misstatement, or both.

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Montoya CPA is performing an audit engagement for a nonissuer. Which combination of the following would be the traits of the individual that the sufficiency of documentation should be directed towards? An inexperienced auditor who has previous experience with the specific audit An experienced auditor who has previous experience with the specific audit An inexperienced auditor who has no previous experience with the specific audit An experienced auditor who has no previous experience with the specific audit

An experienced auditor who has no previous experience with the specific audit

Under the __________ _________ paragraph of an accountants review report, there should be a statement indicating "Our responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by _________

Auditor's Responsibility Paragraph; AICPA

Which of the following best describes the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective on an audit performed in conformance with generally accepted government auditing standards?

Bias Threat

cash ratio

Cash / Current Liabilities

Tracing tests for ______

Completeness

Which assertion is typically higher risk for auditing payables when there is incentive to overstate net income?

Completeness Testing of the accounting records may be directed primarily toward a particular type of error. For example, when there is incentive to overstate net income, tests of receivables are primarily for overstatements, and tests of payables are primarily for understatements (i.e., there are unrecorded payables—the payable balance is not complete).

Which assertion relates to ensuring that a going concern uncertainty disclosure is included, as relevant, in financial statements?

Completeness; Completeness requires that all disclosures that should have been included in the financial statements have been included.

Which of the following procedures would an auditor most likely perform during the overall review stage of an audit of an entity's financial statements? Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement Determine whether inadequate provisions for the safeguarding of assets have been corrected Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

What does the acronym CRIME mean?

Control Activities Risk Assessment Information and Communication Monitoring Environment itself

the likelihood that the client's internal control policies and procedures fail to prevent or detect a material misstatement

Control Risk

What internal control would help to assist in preventing or detecting the sending of an invoice for shipped goods that is not recorded in the sales journal?

Daily sales summaries are compared with control totals of invoices

Type 1 Report

Describes the service organization's controls and assesses whether they are suitably designed to achieve specified internal control objectives

Determine the appropriate audit response in regards to the situation: The auditors examined the client's internal controls over cash receipts and concluded that they are operating exactly as designed. However, the design of the controls does not include control procedures to prevent misstatements and the potential omission of cash receipts.

Determine if the control deficiency is a material weakness by obtaining further evidence.

Earning per share formula

Earnings per share = (Net income - preferred dividend) / Weighted average of shares outstanding

Which of the following elements is required in order for an auditor to form an opinion as to whether supplementary information accompanying financial statements is fairly stated?

Either an unmodified or qualified audit opinion on the related financial statements is issued.

In an audit of a nonissuer, what is the auditor's appropriate response if there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, management's plans do not alleviate that uncertainty, and the reporting entity refuses to provide adequate disclosure of the circumstances?

Either issue a qualified or adverse opinion

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? Monitoring compliance with internal control requirements imposed by regulatory bodies Limiting direct access to assets by physical segregation and protective devices Establishing budgets and forecasts to identify variances from expectations Supporting employees with the resources necessary to discharge their responsibilities

Establishing budgets and forecasts to identify variances from expectations

Which of the following definitions of risk is to be used by the auditor during a financial statement audit? Identify, analyze, and manage risks that affect the entity's objectives Evaluate the likelihood that material misstatements could occur in the financial statements Both identify, analyze, and manage risks that affect the entity's objectives and evaluate the likelihood that material misstatements could occur in the financial statements None of the answer choices are correct.

Evaluate the likelihood that material misstatements could occur in the financial statements

Determine the appropriate audit response in regards to the situation: The auditors concluded that the ineffectiveness of the design of controls over accounts payable and cash disbursements represents a material weakness in internal control even though the financial statements are not materially misstated.

Express an adverse opinion on the internal controls.

Determine the appropriate audit response in regards to the situation: Management has provided an assertion that there are no material weaknesses in controls. Subsequent tests revealed no material weaknesses.

Express an unmodified opinion on the internal controls.

Determine the appropriate audit response in regards to the situation: The auditor's prior-year report on internal control included an adverse opinion. The client has since modified internal controls. No material weaknesses were found in the current year.

Express an unmodified opinion on the internal controls.

Type 2 Report

Goes further by providing assurance on the operating effectiveness of the service organization's controls based on the auditor's tests of controls.

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the: 1. likely rate of deviations and 2. allowable risk of assessing control risk too high. I only II only Both I and II Either I or II

I only

How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer's financial statements? 1. The financial statements have not been audited. 2. The accountant has compiled the financial statements. I: Implicitly; II: Implicitly I: Explicitly; II: Explicitly I: Implicitly; II: Explicitly I: Explicitly; II: Implicitly

I: Explicitly; II: Explicitly

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

Identification of the responsible party

In a review of comparative financial statements, the reporting entity restated the prior year's financial statements to correct a prior-year known departure from GAAP. How should the continuing review accountant address this change in the current period's review report?

Include an other-matter paragraph indicating the date of the previous review report and the reasons behind the prior-period restatement, and the implications on the previous conclusion.

In a review of comparative financial statements, the reporting entity restated the prior year's financial statements to correct a prior-year known departure from GAAP. How should the continuing review accountant address this change in the current period's review report?

Include an other-matter paragraph indicating the date of the previous review report and the reasons behind the prior-period restatement, and the implications on the previous conclusion.; When the accountant's review report on the financial statements of a prior period contains a changed reference to a departure from the applicable financial reporting framework, the report should include an other-matter paragraph indicating the date of the previous review report; the circumstances that caused the changed reference; and if, in fact, the prior-period statements have been changed.

Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory? Periodic reconciliation of work-in-process with job cost sheets Segregation of functions between general accounting and cost accounting Independent comparisons of finished goods records with counts of goods on hand Approval of inventory journal entries by the storekeeper

Independent comparisons of finished goods records with counts of goods on hand

Limitations of risk management, control, and governance related to human judgment, resource limitations, and the need to balance the costs of controls in relation to expected benefits.

Inherent Limitations

Determine the appropriate audit response in regards to the situation: The client did not furnish adequate evidence for the auditor to evaluate the internal controls over inventory. All other evidence was provided.

Issue a disclaimer of opinion.

Which of the following is a true statement related to supplementary information? It is considered to be a part of the basic financial statements. It is required to be presented with audited financial statements. It is not necessary in order for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. It is required to be presented separate from the audited financial statements.

It is not necessary in order for the financial statements to be fairly presented in accordance with the applicable financial reporting framework.

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on management's description of EDP's system and the suitability of the design and operating effectiveness of controls. Lake is considering Cope's report on EDP's system in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

Lake may not refer to Cope under the circumstances.

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices." The foregoing passage is most likely from a:

Management Representation Letter

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting? There is a lack of interest by management in maintaining an earnings trend. Computer hardware is usually sold at a loss before being fully depreciated. Management had frequent disputes with the auditor on accounting matters. Monthly bank reconciliations usually include several large checks outstanding.

Management had frequent disputes with the auditor on accounting matters.

There are no material transactions that have not been properly recorded in the accounting records underlying the financial statements. What is the most likely source of this statement? Communication with predecessor auditor Management representation letter Auditor's communication with the audit committee Auditor's report

Management representation letter

MD&A stands for

Management's discussion and analysis

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters? Inability to assess the risk of material misstatement due to fraud Discovery of significant deficiencies in the design of the entity's internal control Both I and II I only II only Neither I nor II

Neither I nor II; ITS A REVIEW - the accountant does not test internal control system nor assess the risk of material mistatements

return on equity

Net Income / Average Stockholders' Equity

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances? Review report with a qualification Review report with a disclaimer Review report and footnote exceptions None of the answer choices are correct.

None of the answer choices are correct. A management representation letter is required for the issuance of a review report. Without this letter from management, the scope of the review is restricted, and the review cannot be completed. In this circumstance, the accountant would be precluded from issuing a review report on the financial statements and would ordinarily be precluded from issuing a compilation report on the financial statements.

Which of the following should a predecessor auditor perform before reissuing a report on financial statements when those financial statements are to be presented on a comparative basis with financial statements audited by another auditor? Obtain representation letters from management of the former client and the successor auditor. Change the date of the reissued report to match the date on which additional procedures were performed. Request attorney's responses to identify any significant litigation subsequent to the original date of the report. Review minutes of board meetings held since the original date of the audit report.

Obtain representation letters from management of the former client and the successor auditor.

In regard to a compilation report, which of the following is not ordinarily an example of a material departure from generally accepted accounting principles? Presentation of land at appraised value rather than cost Omission of a disclosure regarding advertising costs Omission of the statement(s) of cash flows Adoption of an accounting method for which the entity does not have reasonable justification

Omission of a disclosure regarding advertising costs

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?

One year

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan? Procedures performed to assess independence and the ability to perform the engagement The understanding of the terms of the engagement, including scope, fees, and resource allocation Other audit procedures to be performed to comply with generally accepted auditing standards Issues with management integrity that could affect the decision to continue the audit engagement

Other audit procedures to be performed to comply with generally accepted auditing standards

When an audit firm includes a report on compliance with aspects of contractual agreements in the auditor's report on the nonissuer's financial statements, in which paragraph of the audit report should the report on compliance be included? Opinion paragraph Other-matter paragraph Emphasis-of-matter paragraph Auditor's responsibility paragraph

Other-matter paragraph

the materiality amount(s) for segments of the audit, set by the auditor at less than materiality for the financial statements as a whole

Performance Materiality

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? Scanning perpetual inventory, production, and purchasing records Examining paid vendor invoices Tracing inventory items from the tag listing back to the physical inventory quantities Performing cutoff procedures for shipping and receiving

Performing cutoff procedures for shipping and receiving

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of: Presentation & Disclosure: (Yes/No) Rights & Obligations: (Yes/No)

Presentation & Disclosure: No Rights & Obligations: Yes An organization follows up on errors to the monthly statements to determine the accounts receivable dollar amount that the organization has the right to receive. The presentation assertion deals with whether components of the financial statements are properly listed and disclosed. The presentation would not be affected by management's following-up on errors reported by customers.

Which of the following is most likely to be an appropriate procedure that a practitioner may agree to perform in an agreed-upon procedures engagement? Read the entity's financial statements and related disclosures Review the entity's accounts receivable collection policy Recalculate the aging category for a randomly selected 25 accounts receivable invoices as of June 30, 20XX, based on the date of sale per the customer's invoice Test collectibility of accounts receivable

Recalculate the aging category for a randomly selected 25 accounts receivable invoices as of June 30, 20XX, based on the date of sale per the customer's invoice

At which level should identified risks of material misstatement be assessed for significant account balances (such as property and equipment) in the financial statement audit of a nonissuer?

Relevant assertion level; The auditor should determine whether the identified risks of material misstatement relate to specific relevant assertions related to classes of transactions, account balances, and disclosures, or whether they relate more pervasively to the financial statements taken as a whole and potentially affect many relevant assertions. Expressing the risk of material misstatement at the relevant assertion level (e.g., valuation of accounts receivable, existence of accounts payable) provides a basis for the auditor to determine the audit procedures that must be performed in order to lower audit risk.

Which of the following audit procedures would primarily respond to the audit objective for accounts receivable that accounts receivable are properly described and presented in the financial statements?

Review the accounts receivable trial balance for amounts due from officers and employees.; this is used to satisfy the audit objective that accounts receivable are properly described and presented in the financial statements which supports the assertion about presentation because it provides evidence about transaction with related parties, which must be separately disclosed

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? Inspecting correspondence with lawyers for evidence of unreported contingent liabilities Vouching accounting records for recurring transactions recorded just after the balance sheet date Reviewing confirmations of loans receivable and payable for indications of guarantees Performing analytical procedures for indications of possible financial difficulties

Reviewing confirmations of loans receivable and payable for indications of guarantees

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Rights and obligations and existence

This type of engagement addresses whether controls are suitably designed

SOC Type 1

This type of engagement is focused on whether controls achieve operational effectiveness

SOC Type 2

What is the difference between a SOC1 and SOC2 engagement?

SOC1 = D1 = Design = SOC1 engagements address whether controls are suitably designed SOC2 = Two = TW-O = SOC2 engagements address whether controls are suitably whether controls achieve O-perational effectiveness.

What is the Sales, Receivables, and Cash Receipts cycle?

Sales Order --> Bill of Lading --> Sales Invoice --> Sales Journal

1. Under PCAOB Auditing Standard 1215, audit documentation should be retained no fewer than how many years following the report release date? 2. Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date?

Seven years; 45 days

A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:

Statements on Standards for Attestation Engagements (SSAE).

Which of the following statements is false with respect to management representation letters on a review engagement? The accountant need not be in physical receipt of the management representation letter as of the date of the accountant's review report. The letter should be signed by those members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter, normally the CEO and CFO. If the current management was not present during all periods covered by the accountant's report, the accountant should nevertheless obtain written representations from current management on all such periods. The accountant acknowledges his or her responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows.

The accountant acknowledges his or her responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows.

What is the impact when supplementary information accompanies the reviewed financial statements?

The accountant should clearly indicate the degree of responsibility the review accountant is taking with respect to the supplementary information in an other-matter paragraph in the review report or in a separate report on the supplementary information.

What is the impact when supplementary information accompanies the reviewed financial statements? The accountant should clearly indicate the degree of responsibility the review accountant is taking with respect to the supplementary information in an other-matter paragraph in the review report or in a separate report on the supplementary information. The review report should not mention supplementary information included with the financial statements at the discretion of management. The accountant should clearly indicate the degree of responsibility the review accountant is taking with respect to the supplementary information in a separate report on the supplementary information. The accountant should clearly indicate the degree of responsibility the review accountant is taking with respect to the supplementary information in an other-matter paragraph in the review report.

The accountant should clearly indicate the degree of responsibility the review accountant is taking with respect to the supplementary information in an other-matter paragraph in the review report or in a separate report on the supplementary information.

An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct? The accountant should refuse the compilation engagement. A report need not be issued for a compilation of a nonissuer. The accountant should include the disclaimer "I am an owner of the entity" in the report. The accountant should include a final paragraph in the accountant's compilation report.

The accountant should include a final paragraph in the accountant's compilation report.

Performance Materiality

The amount set by the auditors at less than materiality for accounts (or individual financial statements) to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). Which of the following statements is correct regarding the auditor's responsibility for this supplementary financial information? The auditor should perform limited procedures. The auditor is not required to report omissions. The auditor should read the supplementary financial information. The auditor should apply tests of details of transactions.

The auditor should perform limited procedures.

Based on the assessed risk of material misstatement at the relevant assertion level, the auditor should consider which of the following matters in designing further audit procedures?

The characteristics of the class of transactions, account balance, or disclosure involved

Which of the following factors would least likely affect the quantity and content of an auditor's working papers? The condition of the client's records The assessed risk of material misstatement The nature of the auditor's report The content of the representation letter

The content of the representation letter

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? The entity's fiscal year ends on June 3. The entity enters into derivative transactions as hedges. The entity's financial statements are generated at an outside service center. The entity's financial data are available only in computer-readable form.

The entity enters into derivative transactions as hedges.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements? The entity's industry is experiencing declining customer demand. Employees who handle cash receipts are not bonded. Bank reconciliations usually include in-transit deposits. Equipment is often sold at a loss before being fully depreciated.

The entity's industry is experiencing declining customer demand.

When planning an engagement to audit the effectiveness of the entity's internal control in an integrated audit of a nonissuer, a practitioner would least likely consider which of the following factors? Preliminary judgments about the effectiveness of internal control The extent of recent changes in the entity and its operations The type of available evidential matter pertaining to the effectiveness of the entity's internal control The evaluation of the operating effectiveness of the controls

The evaluation of the operating effectiveness of the controls

The regulatory body that has the primary authority to develop requirements for performing federal program compliance audits in accordance with the Single Audit Act is:

The office of Management and Budget (OMB)

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met? Use of the agreed-upon procedures report is not restricted. The practitioner sets the criteria to be used in the determination of findings. The client agrees that the practitioner will decide appropriate procedures to be performed. The prospective financial statements include a summary of significant assumptions.

The prospective financial statements include a summary of significant assumptions.

SOC 1 Type 1 Report

The service auditor provides an opinion regarding fairness of the service organization's description of controls, but does not test the controls or express an opinion regarding the effectiveness of the controls

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee The risk that the internal control system will not detect a material misstatement of a financial statement assertion The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? Management places little emphasis on meeting earnings projections. The board of directors makes all major financing decisions. Material weaknesses previously communicated to management are not corrected. Transactions selected for testing are not supported by proper documentation.

Transactions selected for testing are not supported by proper documentation.

After making inquiries about credit-granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:

Valuation and allocation; Since the auditor is testing whether credit sales are actually collectible (if credit has been granted according to policy), the auditor would be testing valuation. Valuation asserts that the credit sales have been disclosed at appropriate amounts. In other words, the entity has properly valued the credit sale for its full amount, and the customer is creditworthy and is likely to pay.

Which of the following statements would not normally be included in a representation letter for a review of interim financial information? To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information. We have made available to you all financial records and related data.

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

For financial statement audits performed in accordance with generally accepted government auditing standards (GAGAS) in addition to GAAS (generally accepted auditing standards), when also must the auditor issue a report on internal control over financial reporting and on compliance with laws, regulations, and provisions of contracts or grant agreements? When engaged by the reporting entity to issue such reports When issuing an opinion on the financial statements When issuing an opinion or a disclaimer of opinion on the financial statements When issuing a qualified or adverse opinion on the financial statements

When issuing an opinion or a disclaimer of opinion on the financial statements

The written communication regarding significant deficiencies and material weaknesses identified during the audit should include all of the following except: a statement that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity's internal control. the definition of the term "material weakness" and, where relevant, the definition of the term "significant deficiency." a paragraph describing management's assertion concerning the effectiveness of internal control. the matters that are considered to be significant deficiencies and those that are considered to be material weaknesses.

a paragraph describing management's assertion concerning the effectiveness of internal control.

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:

a statement of restrictions on the use of the report.

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue:

an adverse opinion.

Detection risk differs from both control risk and inherent risk in that detection risk:

can be changed at the auditor's discretion.

An accountant who is engaged to issue a compilation report on one or more specified elements, accounts, or items of a financial statement: must adhere to the compilation performance requirements contained in the Statements on Standards for Attestation Engagements. should attest whether such compiled elements, accounts, or items of a financial statement are free of material errors. should not describe the basis on which the accounts are presented if that basis is other than generally accepted accounting principles. can issue the report for an entity of which the accountant is not independent.

can issue the report for an entity of which the accountant is not independent.

Accounting for prenumbered or numerical documents will always test for _____

completeness

An employee in the receiving department keyed in a shipment from a remote terminal and inadvertently omitted the purchase order number. The best systems control to detect this error would be a:

completeness test.

Reports are considered special reports when issued in conjunction with: interim financial information reviewed to determine whether material modifications should be made to conform with GAAP. feasibility studies presented to illustrate an entity's results of operations. compliance with aspects of regulatory requirements related to audited financial statements. pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.

compliance with aspects of regulatory requirements related to audited financial statements.

The audit program usually cannot be finalized until the:

consideration of the entity's internal control has been completed. ; An audit program should reflect the results of planning considerations and procedures. To reflect those results, such considerations must be complete. In planning the audit, the CPA should consider the anticipated reliance on internal control. The engagement letter, communicating material weaknesses, and searching for unrecorded liabilities are all necessary to finalize the audit report.

Inventory Turnover Ratio

cost of goods sold/average inventory

Current Ratio

current assets - current liabilities

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

decrease detection risk. -Audit risk is the product of inherent, control, and detection risks. Only detection risk (unlike inherent risk and control risk) can be changed at the discretion of the auditor to compensate for the assessed levels of the other two. Furthermore, there is an inverse relationship between detection risk and inherent and control risk. Thus, in order to achieve an overall audit risk level that is substantially the same as the planned audit risk level, if the assessed level of control risk is increased, the auditor must decrease the acceptable level of detection risk. This means the auditor would have to perform more substantive testing to offset the decreased reliability of internal control.

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures? The acceptable level of detection risk ___________(increases/decreases), and the extent of substantive procedures __________ (increases/decreases.)

decreases; increases

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

detection risk

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

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

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases have not been classified correctly. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not correct the classification of the leases. Under these circumstances, the accountant should: issue an adverse opinion because of the departure from the applicable financial reporting framework. express no assurance of any kind on the entity's financial statements. emphasize that the financial statements are for limited use only. disclose the departure from the applicable financial reporting framework in a separate paragraph of the accountant's review report.

disclose the departure from the applicable financial reporting framework in a separate paragraph of the accountant's review report.

Inherent risk and control risk differ from detection risk in that they: arise from the misapplication of auditing procedures. may be assessed in either quantitative or nonquantitative terms. exist independently of the financial statement audit. can be changed at the auditor's discretion.

exist independently of the financial statement audit.

Vouching a sample of items from the perpetual inventory records to the receiving reports achieves the specific ASB balance assertion of

existence

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:

existence of fixed asset additions

Vouching tests for _____

existence/occurence

If an auditor concludes that a matter involving a risk or an uncertainty is not adequately disclosed in the financial statements in conformity with an applicable financial reporting framework, the auditor should:

express a qualified or an adverse opinion.

The opinion paragraph in an auditor's report for a nonissuer should include a statement that:

identifies the applicable financial reporting framework and its origin.

SOC 2 Type 2 Report

includes Type 1 information plus the service auditor tests controls and expresses an opinion regarding the effectiveness of the controls.

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

incorrect rejection.

In a financial statement audit, if the entity's substantial doubt about its ability to continue as a going concern for a reasonable period of time remains at year-end and is properly disclosed, the auditor should: issue an unmodified opinion without an emphasis-of-matter paragraph. issue an unmodified opinion with an emphasis-of-matter paragraph. issue a qualified opinion with an emphasis-of-matter paragraph. disclaim an opinion.

issue an unmodified opinion with an emphasis-of-matter paragraph.

what does it mean to assess control risk at the maximum?

it means the auditor cannot rely on the controls

After obtaining an understanding of the entity and its environment and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that: it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. additional evidence to support a further reduction in control risk is not available. an increase in the assessed level of control risk is justified for certain financial statement assertions. there were many internal control weaknesses that could allow errors to enter the accounting system.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

In auditing, a sever deficiency is _____ severe than a material weakness

less severe

the higher the risk of material mistatement, the (higher/lower) the detection risk

lower the detection risk. it must be lower to formulate more substantive procedures to lower the overall audit risk

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices." The foregoing passage is most likely from a: report on internal control. special report. management representation letter. letter for underwriters.

management representation letter.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that: tests of controls may fail to identify procedures relevant to assertions. material misstatements may exist in the financial statements. specified controls requiring segregation of duties may be circumvented by collusion. entity policies may be overridden by senior management.

material misstatements may exist in the financial statements.

The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether: material modifications should be made to conform with the applicable financial reporting framework. a reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited. condensed financial statements or pro forma financial information should be included in a registration statement. the financial statements are presented fairly in accordance with the applicable financial reporting framework.

material modifications should be made to conform with the applicable financial reporting framework.

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to: matters to which the attorney has given substantive attention in the form of legal representation. an evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. the attorney's opinion of the entity's historical experience in recent similar litigation. the probable outcome of asserted claims and pending or threatened litigation.

matters to which the attorney has given substantive attention in the form of legal representation.

Gole, CPA, is engaged to review the 20X2 financial statements of North Co., a nonissuer. Previously, Gole audited North's 20X1 financial statements and expressed an unmodified opinion. Gole decides to include a separate paragraph in the 20X2 review report because North plans to present comparative financial statements for 20X1 and 20X2. This separate paragraph should indicate that: the 20X2 review report is intended solely for the information of management and the board of directors. the 20X1 auditor's report may no longer be relied on. no auditing procedures were performed after the date of the 20X1 auditor's report. there are justifiable reasons for changing the level of service from an audit to a review.

no auditing procedures were performed after the date of the 20X1 auditor's report.

If the prior year audit report is not being reissued, should there be reference to the prior years audited financial statements in the introductory paragraph?

no. just include a separate paragraph regarding the responsibility assumed for the financial statements of the prior period

In performing an audit of a nonissuer in accordance with generally accepted auditing standards, an auditor has responsibility for identifying and responding to risks that there is substantial doubt about the entity's ability to continue as a going concern for:

one year after the date the financial statements are issued or available to be issued.

If we vouch and we find something has been recorded but cant find it down the transaction cycle, is this an understatement or overstatement?

overstatement

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:

perform tests of controls to support a lower level of assessed control risk.;

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: apply the planned substantive tests prior to the balance sheet date. perform the planned auditing procedures closer to the balance sheet date. increase the assessed level of control risk for relevant financial statement assertions. decrease the extent of auditing procedures to be applied to the class of transactions.

perform the planned auditing procedures closer to the balance sheet date.

An auditor determines that materiality for an audit is to be $X. The auditor determines that some misstatements will exist in his or her audit findings. As a result, the auditor calculates a new amount of 50% of X so that individual or in the aggregate misstatements do not quantitatively exceed the materiality level. This reduced calculation is known as:

performance materiality.; AU-C 320.09 defines performance materiality as "the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole."

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:

planned reliance on the prescribed control.

Sample size (PPS)

recorded amount of the population / sampling interval

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

reperformance and observation.

SOC 1 Type 2

report on the fairness of the presentation of management's description of the service organization's system and the suitability of the design and operating effectiveness of the controls to achieve the related control objectives included in the description throughout a specified period.

The procedure, "The accountant should request written representation from members of management who have appropriate responsibilities for the financial statements...," is: required for a review only. required for both a compilation and review. not required for a review but required for a compilation. not required for either a compilation or a review.

required for a review only.

An auditor determined materiality for planning purposes before year-end based on a nonissuer entity's prior-year financial statements. During the audit, the auditor learns that the actual financial results are significantly different from those of the prior year because of a merger. The auditor's most appropriate response would be to: reassess the risk of material misstatement to determine whether detection risk remains appropriate. revise materiality for the financial statements as a whole. reperform audit procedures completed before year-end. reevaluate the sufficiency of audit procedures performed in the prior-year audit.

revise materiality for the financial statements as a whole.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

rights and obligations & existence; assertions about existence deal with whether assets exist at a particular date and that assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date

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

sales journal to the shipping documents. If the auditor is concerned that sales are overstated, the auditor is worried about the occurrence assertion regarding sales. Therefore, the auditor would want to verify that all recorded sales are supported by shipping documents, cash receipts, and/or third-party sales orders. The auditor would start with the sales journal and trace their way to the supporting documentation such as shipping documents.

A service auditor is the auditor who reports on processing of transactions by a ________

service organization

Projected Error (tainting percentage)

tainting percentage x sample interval

An accountant performing a nonissuer's review engagement is considering the appropriateness of a client's balance for accrued wages. The accountant should perform each of the following procedures, except: test the process used by management to determine the balance. compare the current-year balance to the prior-year balance. obtain representations from management regarding the year-end balance. make inquiries of the payroll accountant regarding completeness of the account balance.

test the process used by management to determine the balance. -The process used by management to determine the balance for accrued wages would not be performed for a review engagement. Procedures for conducting a review of financial statements generally are limited to performing analytical procedures (e.g., comparing financial information with statements for comparable prior periods, giving consideration to known changes), making inquiries of company personnel and management, and other procedures that address significant accounting and disclosure matters relating to the financial statements to be reported. Written representations are required from management for all financial statements and periods covered by the accountant's review report.

The risk of material misstatement changes the auditor's audit plan in order to attain the same amount of audit risk in the following ways except: the risk of material misstatement affects the amount of detection risk that the auditor can accept. the higher the risk of material misstatement, the lower the detection risk must be. the higher the risk of material misstatement, the higher the inherent risk. the higher the risk of material misstatement, the more substantive procedures the auditor must perform.

the higher the risk of material misstatement, the higher the inherent risk.

When communicating internal control related matters noted in an audit, an auditor's report issued on significant deficiencies should indicate that:

the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Sampling interval (PPS)

tolerable misstatement / reliability factor

When determining a sample size for a test of controls, the auditor should consider the tolerable rate of deviation from the controls (expressed in %), the likely rate of deviations (expressed in %), and the allowable risk of assessing control risk _____ ______

too low

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of:

valuation and allocation; Obtaining credit approval before shipping goods to customers supports management's financial statement assertion of valuation. Specifically, the collectability of accounts receivable is more likely, thus the valuation of accounts receivable is proper.

materiality

whether an item is large enough to likely influence the decision of an investor or creditor

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: determine the effects of the departures from GAAP and issue a special report on the financial statements. express a disclaimer of opinion on the financial statements and advise the board of directors that the financial statements should not be relied on. inform management that a review of the financial statements cannot be completed and request a change from a review to a compilation engagement. withdraw from the engagement and provide no further services concerning these financial statements

withdraw from the engagement and provide no further services concerning these financial statements