MACC Audit Test 1
Ch 1&2-SU 1 #10 Who establishes generally accepted auditing standards? A. Auditing Standards Board and the Public Company Accounting Oversight Board. B. Financial Accounting Standards Board and the Governmental Accounting Standards Board. C. State Boards of Accountancy. D. Securities and Exchange Commission.
Answer (A) is correct. AICPA Conduct Rule 202, Compliance with Standards, requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.
Ch 3&4-SU 3 #92 Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud? A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion. B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. C. The factors considered in assessing the risk of material misstatement indicated an increased risk of intentional misstatements, but only a low risk of errors in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.
Answer (A) is correct. Absolute assurance is unattainable because of the characteristics of fraud and the limitations of audit evidence. Management may override controls in unpredictable ways or alter accounting records, and fraud may be concealed through collusion, falsifying documentation (including electronic approvals), or withholding evidence. Moreover, procedures that effectively detect an error (an unintentional misstatement) may not detect fraud (an intentional act that a perpetrator typically attempts to conceal).
Ch 3&4-SU 3 #69 For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent -As Risk Assessment Procedures -As Substantive Procedures -To assist in Forming an overall conclusion A. Yes No Yes B. No Yes No C. No Yes Yes D. Yes No No
Answer (A) is correct. Analytical procedures should be applied as risk assessment procedures to obtain an understanding of the entity and its environment, including internal control, and to assess the risks of material misstatement. They also may, but are not required to, be applied as substantive procedures. These are procedures (tests of details and analytical procedures) designed to detect material misstatements at the assertion level. Moreover, the auditor should perform analytical procedures near the end of the audit to assist in forming an overall conclusion. The purpose is to determine whether the statements are consistent with the auditor's understanding.
Ch 3&4-SU 3 #77 Analytical procedures used to form an overall audit conclusion generally include A. Considering unusual or unexpected account balances that were not previously identified. B. Performing tests of transactions to corroborate management's financial statement assertions. C. Gathering evidence concerning account balances that have not changed from the prior year. D. Retesting controls that appeared to be ineffective during the assessment of control risk.
Answer (A) is correct. Analytical procedures should be applied near the end of the audit. The purpose is to form an overall audit conclusion about whether the statements are consistent with the auditor's understanding of the entity. Procedures ordinarily should include reading the statements and considering (1) the adequacy of evidence regarding previously identified unusual or unexpected balances and (2) unusual or unexpected balances or relationships not previously noted (AU-C 520).
Ch 1&2-SU 1 #12 An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to A. Express an opinion as to the fairness of Camden's financial statements. B. Express an opinion as to the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. C. Certify the correctness of Camden's financial statements. D. Make a 100% examination of Camden's records.
Answer (A) is correct. Auditing standards require the auditor to express an opinion regarding the financial statements as a whole or to assert that an opinion cannot be expressed. An opinion states whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.
Ch 3&4-SU 3 #6 n assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk CPA's Business Risk A. Yes Yes B. Yes No C. No Yes D. No No
Answer (A) is correct. Before accepting an engagement, the CPA should consider the risks of being associated with the client. Auditor business risk relates to potential loss or injury to the auditor's professional practice from litigation and adverse publicity from the relationship with the client. The successful outcome of an audit and the ability to control auditor business risk often depends on the client's business risk. The auditor's understanding of the entity's business risks increases the likelihood of identifying risks of material misstatement. Thus, QC 10 states that policies and procedures should be established regarding acceptance and continuance of clients and specific engagements. They should provide reasonable assurance that the firm will undertake or continue relationships only when it does not have information leading to the conclusion that the client lacks integrity.
Ch 3&4-SU 3 #86 Which of the following characteristics most likely will heighten an auditor's concern about the risk of material misstatements due to fraud in an entity's financial statements? A. The entity's industry is experiencing declining customer demand. B. Employees who handle cash receipts are not bonded. C. Bank reconciliations usually include in-transit deposits. D. Equipment is often sold at a loss before being fully depreciated.
Answer (A) is correct. Certain risk factors are related to misstatements arising from fraudulent reporting. These factors may be grouped in three categories: (1) incentives/pressures, (2) opportunities, and (3) attitudes/rationalizations. One set of risk factors in the incentives/pressures category concerns threats to financial stability or profitability by economic, industry, or entity operating conditions, such as significant declines in customer demand and increasing business failures in either industry or the overall economy (AU-C 240).
Ch 3&4-SU 3 #84 Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor's concern about the risk of material misstatements due to fraud is least likely to be heightened if management A. Consists of many individuals that make operating and financing decisions. B. Commits to unduly aggressive forecasts. C. Has an excessive interest in increasing the entity's stock price through use of unduly aggressive accounting practices. D. Is interested in inappropriate means of minimizing reported earnings for tax-motivated reasons.
Answer (A) is correct. Domination of the decision process by one individual or a small group (an opportunity to commit fraud) is a fraud risk factor. In that case, compensating controls, e.g., effective oversight by the audit committee, reduce risk (AU-C 240, Appendix).
Ch 3&4-SU 3 #39 The acceptable level of detection risk is inversely related to the A. Assurance provided by substantive procedures. B. Risk of misapplying auditing procedures. C. Preliminary judgment about materiality levels. D. Risk of failing to discover material misstatements.
Answer (A) is correct. For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS No. 13).
Ch 3&4-SU 3 #44 A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation? A. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. B. The financial statements are not in accordance with the applicable financial reporting framework. C. The financial statements contain uncorrected misstatements that should result in a qualified opinion. D. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
Answer (A) is correct. If the uncorrected misstatements are immaterial, by definition the financial statements are free from material misstatement, and an unmodified opinion may be expressed. However, the schedule of uncorrected misstatements must be included in the management representation letter, and management must assert that these uncorrected misstatements are individually and collectively immaterial.
Ch 5-SU 10 #38 Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to A. Permit cross-referencing and simplify supervisory review. B. Support the audit report. C. Eliminate the need for follow-up reviews. D. Determine that working papers adequately support findings, conclusions, and reports.
Answer (A) is correct. Indexing permits cross-referencing, which is important because it simplifies supervisory review either during the audit or subsequently by creating an audit trail of related items through the working papers. Thus, it facilitates preparation of the final report, later audits of the same auditee, and peer review.
Ch 3&4-SU 3 #37 Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true? A. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk. B. The risk that material misstatement will not be timely prevented or detected by internal control can be reduced to zero by effective controls. C. Detection risk is a function of the efficiency of an auditing procedure. D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.
Answer (A) is correct. Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or combined with other misstatements, before consideration of any related controls. Some assertions and related balances or classes of transactions have greater inherent risk. Thus, cash has a greater inherent risk than less liquid assets.
Ch 3&4-SU 3 #59 Analytical procedures can best be categorized as A. Substantive procedures. B. Tests of controls. C. Qualitative tests. D. Budget comparisons.
Answer (A) is correct. Substantive procedures are designed to detect material misstatements at the assertion level. According to AU-C 520, Analytical Procedures, analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.
Ch 3&4-SU 3 #10 Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to Contingencies Balance Sheet Accounts A. Yes Yes B. Yes No C. No Yes D. No No
Answer (A) is correct. The Code of Professional Conduct protects the confidentiality of client information. Accordingly, the predecessor auditor cannot permit the auditor to review the predecessor's audit documentation without management's specific consent. Moreover, the auditor and the predecessor auditor must keep in confidence information obtained from each other. However, the predecessor auditor ordinarily is expected to cooperate with the auditor and respond fully. Audit documentation records the audit procedures performed, relevant evidence obtained, and conclusions reached. The auditor ordinarily reviews audit documentation related to planning, internal control, audit results, and other matters of continuing accounting and auditing significance, such as the analysis of balance sheet accounts, and those relating to contingencies.
Ch 3&4-SU 3 #75 An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that A. Fictitious credit sales have been recorded during the year. B. Employees have stolen inventory just before year end. C. The client recently tightened its credit-granting policies. D. An employee has been lapping receivables in both years.
Answer (A) is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increases. Fictitious sales increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3 ÷ 2 decreases it to 4 ÷ 3. The turnover ratio will decrease still more in the next period because fictitious items will continue to increase receivables (a real account) but not sales (a nominal account).
Ch 5-SU 10 #4 The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of A. Transactions. B. Authorizations. C. Costs. D. Cutoffs.
Answer (A) is correct. The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.
Ch 3&4-SU 3 #2 An auditor's engagement letter most likely will include A. Management's acknowledgment of its responsibility for maintaining effective internal control. B. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. C. A reminder that management is responsible for illegal acts committed by employees. D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments.
Answer (A) is correct. The auditor should agree with management on the terms of the engagement. The terms should be documented in an engagement letter. Among the matters addressed are management's responsibility for designing, implementing, and maintaining internal control relevant to preparing and fairly presenting financial statements that are free of material misstatement, whether due to fraud or error.
Ch 3&4-SU 3 #8 Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client's signature to the engagement letter. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.
Answer (A) is correct. The auditor should request management to authorize the predecessor to respond fully to inquires. The auditor should inquire about (1) reasons for the change in auditors, (2) disagreements with management about accounting policies and auditing procedures, (3) facts being on management's integrity, (4) communications to those charged with governance about fraud or noncompliance, and (5) communications to those charged with governance or management about internal control problems (AU-C 210, Terms of Engagement).
Ch 3&4-SU 3 #40 Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk Detection Risk Inherent Risk A. Yes Yes Yes B. No Yes Yes C. Yes Yes No D. Yes No Yes
Answer (A) is correct. The components of audit risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that range, for example, from high to low.
Ch 3&4-SU 3 #45 Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of A. Materiality. B. Comparative analysis. C. Reasonable assurance. D. Audit risk.
Answer (A) is correct. The concept of materiality requires the auditor to evaluate the relative importance of items to users of financial statements. In an entity with few but large accounts receivable, the individual accounts are relatively more important and the possibility of material misstatement is greater than in an entity with many small accounts
Ch 1&2-SU 1 #55 In connection with the element of human resources, a CPA firm's system of quality control should ordinarily provide that all personnel A. Participate in professional development activities that enable them to fulfill responsibilities assigned. B. Possess judgment and motivation. C. Seek assistance from persons having appropriate levels of knowledge, judgment, and authority. D. Demonstrate compliance with peer review directives.
Answer (A) is correct. The firm's policies and procedures should provide for all personnel to receive general and industry-specific CPE and engage in other professional development activities. The purpose is to enable personnel to carry out assigned responsibilities and satisfy CPE requirements of the AICPA and regulatory agencies, such as the GAO and state boards of accountancy (QC 10).
Ch 3&4-SU 3 #89 Which action regarding fraud is an activity related to performance of risk assessment procedures? A. Discussions among the engagement team members regarding the risks of material misstatement due to fraud. B. Document the results of procedures used to address the risk of fraud. C. Consider the characteristics of journal entries, particularly those made near year end. D. Consider whether estimates prepared and recorded by management could indicate a bias in reporting.
Answer (A) is correct. The key members of the engagement team should discuss the potential for material misstatement. The discussion should include an exchange of ideas (brainstorming) about (1) how and where the statements might be susceptible to material misstatement due to fraud ("fraud risk"), (2) how assets might be misappropriated or financial reports fraudulently misstated, (3) how management could conceal fraudulent reporting (including override of controls), (4) how to respond to fraud risk, (5) known factors reflecting pressures/incentives/opportunities to commit fraud or an environment that permits rationalization of fraud, (6) an emphasis on the need to maintain professional skepticism, and (7) consideration of facts indicating manipulation of financial measures (e.g., earnings management).
Ch 3&4-SU 3 #60 Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts), and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Study of the relationships of financial data with relevant nonfinancial data.
Answer (A) is correct. Tracing transactions through the system is a test of controls directed toward the operating effectiveness of internal control, not an analytical procedure.
Ch 5-SU 10 #16 If an auditor conducts an audit of financial statements in accordance with applicable auditing standards, which of the following will the auditor most likely detect? A. Misposting of recorded transactions. B. Unrecorded transactions. C. Forgery. D. Collusive fraud.
Answer (A) is correct. Until a transaction is recorded, leaving an audit trail, standard audit procedures are often ineffective. A misposting of previously recorded transactions is therefore the most likely item to be detected.
Ch 5-SU 10 #2 Most of the auditor's work in forming an opinion on financial statements consists of A. Understanding internal control. B. Obtaining and evaluating audit evidence. C. Examining cash transactions. D. Comparing recorded accountability with assets.
Answer (B) is correct. According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
Ch 1&2-SU 1 #14 Brandnew Company is going public, and its stock will be listed on a stock exchange. Audited financial statements are required to be filed with the Securities and Exchange Commission (SEC). Who is expected to be the primary user of the audited financial statements? A. The stock exchange. B. Brandnew Company's investors. C. The SEC. D. Brandnew Company's board of directors.
Answer (B) is correct. An audit's primary objective is to provide assurance to current and potential creditors and investors and other users of financial statements that the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.
Ch 3&4-SU 3 #33 The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that A. The auditor will reject a correct account balance as incorrect. B. Material misstatements that occur will not be detected by the audit. C. The auditor will apply an inappropriate audit procedure. D. The auditor will apply an inappropriate measure of audit materiality.
Answer (B) is correct. Audit risk is a function of the risks of material misstatement and detection risk. Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements. The auditor assesses the risk of material misstatement after obtaining an understanding of the entity and its environment, including its internal control. It exists at the overall financial statement level and assertion level. The RMM at the assertion level consists of inherent risk and control risk. Some auditors use a mathematical model based on the relationships of the components of audit risk to arrive at an acceptable level of detection risk. For example, it reflects that the acceptable detection risk has an inverse relationship with the RMMs at the assertion level (AU-C 200 and AS No. 8).
Ch 1&2-SU 16 #1 The objective of the audit of GAAP-based financial statements is to A. Make suggestions as to the form or content of the financial statements or to draft them in whole or in part. B. Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles. C. Ensure adoption of sound accounting policies and the establishment and maintenance of internal control. D. Express an opinion on the accuracy with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.
Answer (B) is correct. Based on an audit, the auditor expresses an opinion (or a disclaimer of opinion) on the fairness, in all material respects, of the presentation of financial statements, i.e., on whether they will be misleading to users.
Ch 3&4-SU 3 #35 As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from a less effective to a more effective procedure. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of inherent risk to a higher amount.
Answer (B) is correct. For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS No. 13).
Ch 3&4-SU 3 #76 Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities? A. Unrecorded purchases. B. Unrecorded sales. C. Merchandise purchases being charged to selling and general expense. D. Fictitious sales.
Answer (B) is correct. Fraud or error that decreases gross profit relative to sales (or increases sales relative to gross profit) causes the ratio to decline. Unrecorded sales cause inventory to decrease and cost of sales to increase with no increase in sales, thereby decreasing gross profit relative to sales and lowering the ratio.
Ch 1&2-SU 1 #27 Through legal precedent, generally accepted auditing standards established by the AICPA apply A. Only to CPAs who belong to local CPA societies. B. To all CPAs. C. Only to those CPAs who choose to have quality reviews. D. Only to CPAs conducting audits subject to AICPA jurisdiction.
Answer (B) is correct. GAAS apply to all CPAs, whether or not they are members of the AICPA. GAAS are deemed to be standards of the profession (explicitly or implicitly) by state boards of accountancy, which issue, renew, suspend, or revoke licenses and otherwise regulate CPAs in all states. Furthermore, the courts in both civil and criminal cases involving independent accountants also treat GAAS as standards of the profession. However, the PCAOB standards explicitly apply to the audit of issuers.
Ch 3&4-SU 3 #98 An auditor's consideration of the risk of material misstatement due to fraud and the results of audit tests indicate a significant risk of fraud. The auditor should A. Express either a qualified or an adverse opinion. B. Consider withdrawing from the engagement and communicating the reasons for withdrawal to those charged with governance. C. Express only an adverse opinion because of the strong possibility of fraud. D. Inform proper authorities outside the entity.
Answer (B) is correct. If fraud risk is high, the auditor determines his or her responsibilities and considers withdrawing from the engagement. If the auditor withdraws, (s)he discusses the reasons with those charged with governance and determines whether reporting to others (e.g., regulators) is necessary.
Ch 1&2-SU 1 #11 Users of an issuer's financial statements demand independent audits because A. Users demand assurance that fraud does not exist. B. Management may not be objective in reporting. C. Users expect auditors to correct management errors. D. Management relies on the auditor to improve internal control.
Answer (B) is correct. Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.
Ch 1&2-SU 16 #6 A major purpose of the auditor's report on financial statements is to A. Assure investors of the complete accuracy of the financial statements. B. Clarify for the public the nature of the auditor's responsibility and performance. C. Deter creditors from extending loans in high-risk situations. D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.
Answer (B) is correct. One of the highest priorities of the AICPA has been to reduce the gap between the nature of the auditor's responsibility and performance and the public's perception of the audit function. The auditor's report issued in accordance with auditing standards clarifies the role of the auditor with the intention of diminishing the gap
Ch 1&2-SU 1 #39 Assurance services are best described as A. Services designed for the improvement of operations, resulting in better outcomes. B. Independent professional services that improve the quality of information, or its context, for decision makers. C. The assembly of financial statements based on information and assumptions of a responsible party. D. Services designed to express an opinion on historical financial statements based on the results of an audit.
Answer (B) is correct. The AICPA defines assurance services as "independent professional services that improve the quality of information, or its context, for decision makers." Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services
Ch 5-SU 10 #3 Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.
Answer (B) is correct. The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
Ch 1&2-SU 1 #23 GAAS require the auditor to be independent. An auditor is independent if (s)he is A. Competent. B. Independent in fact and in appearance. C. Consistent and independent in fact. D. Logical and intellectually honest.
Answer (B) is correct. The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (1) GAAS provide otherwise or (2) the auditor is required by law to accept and report on the engagement. Barring one of the exceptions, an auditor who is not independent must not report under GAAS. Independence means independence in fact and appearance (AU-C 200). This crucially important quality gives credibility to the auditor's opinion. If an auditor does not maintain the appearance of independence, however unbiased (s)he may be in fact, the public will be reluctant to believe that (s)he is unbiased.
Ch 3&4-SU 3 #97 Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor most likely should A. Perform additional audit procedures to establish that fraud has occurred. B. Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion. C. Confer with the client about the additional audit procedures necessary to establish that fraud has occurred. D. Notify the proper external authorities.
Answer (B) is correct. The auditor should refer the matter of an immaterial fraud to an appropriate level of management. The appropriate level of management ordinary is at least one level above the highest level involved. However, any fraud involving (1) management, (2) employees significantly involved in internal control, or (3) others when fraud materially misstates the financial statements, is reported to those charged with governance.
Ch 3&4-SU 3 #36 Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? A. The anticipated sample size of the planned substantive procedures. B. The entity's year-to-date financial results and position. C. The results of the internal control questionnaire. D. The contents of the representation letter.
Answer (B) is correct. The auditor's judgment about materiality for the financial statements as a whole might be based on benchmarks used as starting points. Examples are (1) categories of reported income (profit before tax, total revenue, gross profit, and total expenses), (2) total equity, and (3) net asset value. For profit-oriented entities, pretax profit from continuing operations is often used. The financial data for the benchmark usually includes (1) prior-period information, (2) period-to-date information, (3) budgets, or (4) forecasts. But recognition should be given to the effect of major changes in the entity's circumstances (for example, a significant merger) and relevant changes in the economy as a whole or the industry in which the entity operates (AU-C 320 and AS No. 11).
Ch 3&4-SU 3 #25 Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A. The audit plan. B. The auditor's judgment. C. Auditing standards. D. The audit documentation.
Answer (B) is correct. The auditor's professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.
Ch 3&4-SU 3 #83 Three conditions are generally present in the client's organization when fraud occurs. Those conditions include each of the following except a(n) A. Incentive or pressure to commit fraud. B. Professional skepticism about the likelihood of fraud. C. Opportunity to commit fraud. D. Attitude or rationalization about the act of fraud.
Answer (B) is correct. The auditor, not the client, should conduct the audit with professional skepticism. Professional skepticism is an "attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence" (AU-C 200).
Ch 1&2-SU 1 #28 Audit standards require that the engagement partner A. Examine all available corroborating evidence. B. Be responsible for the assignment of tasks to, and supervision of, assistants. C. Review evidence and audit documentation once the report has been issued. D. Design the audit to detect all instances of noncompliance with laws and regulations having direct effects on the determination of material financial statement amounts and disclosures.
Answer (B) is correct. The engagement partner should take responsibility for the direction, supervision, and performance of the audit engagement in compliance with (1) professional standards, (2) applicable legal and regulatory requirements, and (3) the firm's policies and procedures (AU-C 220).
Ch 1&2-SU 1 #44 The objective of assurance services is to A. Provide more timely information. B. Enhance decision making. C. Compare internal information and policies to those of other firms. D. Improve the firm's outcomes.
Answer (B) is correct. The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.
Ch 3&4-SU 3 #41 The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true? A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when, in fact, the financial statements are fairly stated. B. The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditor's belief that the financial statements as a whole are not materially misstated. C. If misstatements are not important individually but are important in the aggregate, the concept of materiality does not apply. D. Material fraud but not material errors cause financial statements to be materially misstated.
Answer (B) is correct. The opinion paragraph of the auditor's report explicitly refers to materiality. Hence, financial statements that are presented fairly, in all material respects, in accordance with the applicable financial reporting framework are not materially misstated. Material misstatement can result from fraud or error.
Ch 1&2-SU 1 #9 Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as A. An activity whose purpose is to search for fraud. B. A discipline that attests to financial information presented by management. C. A professional activity that measures and communicates financial and business data. D. A regulatory function that prevents the issuance of improper financial information.
Answer (B) is correct. The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP).
Ch 1&2-SU 1 #51 Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures? Human Resources Monitoring Engagement Performance A. Yes Yes No B. Yes Yes Yes C. No Yes Yes D. Yes No Yes
Answer (B) is correct. The quality control element of human resources relates to providing reasonable assurance that the firm has sufficient personnel with the necessary capabilities, competence, and commitment to ethics. The quality control element of monitoring relates to providing reasonable assurance that the firm has a quality control system that is relevant, adequate, effective, and complied with. The quality control element of engagement performance relates to providing reasonable assurance that (1) engagements are consistently performed in accordance with applicable requirements and (2) issued reports are appropriate (QC 10).
Ch 3&4-SU 3 #1 An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes A. Management's responsibility for errors and the illegal activities of employees that may cause material misstatement. B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors.
Answer (B) is correct. The understanding with the client regarding services to be performed is typically documented in an engagement letter. An engagement letter should indicate that a traditional financial statement audit is not designed to provide assurance on internal control. However, the auditor is responsible for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in control, that come to his or her attention.
Ch 5-SU 10 #40 An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for A. Cash flow increases and decreases. B. Risk assessments and assertions. C. Reclassifications and adjustments. D. Reconciliations and tickmarks.
Answer (C) is correct. A working trial balance is ordinarily used to record the year-end ledger balances prior to audit in the audit documentation. Reclassifications and adjustments are accumulated on the trial balance to reflect the final audited balances.
Ch 3&4-SU 3 #62 The objective of analytical procedures performed as risk assessment procedures is to A. Evaluate the adequacy of evidence gathered in response to unusual balances identified during the audit. B. Test individual account balances that depend on accounting estimates. C. Enhance the auditor's understanding of the client's business. D. Identify material weaknesses in internal control.
Answer (C) is correct. Analytical procedures applied as risk assessment procedures may (1) improve the understanding of the client's business and significant transactions and events and (2) identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit ramifications (AU-C 315).
Ch 3&4-SU 3 #64 Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that A. Misstatements exist in the relevant account balances. B. Internal control activities are not operating effectively. C. Additional audit procedures are required. D. The communication with the audit committee should be revised.
Answer (C) is correct. Analytical procedures used to form an overall conclusion ordinarily include reading the financial statements and considering (1) the adequacy of evidence regarding unusual or unexpected balances detected during the audit and (2) such balances or relationships not detected previously. If analytical procedures detect a previously unrecognized risk of material misstatement, the auditor must revise the assessments of the RMMs and modify the further planned procedures. Inconsistent fluctuations or relationships or significant differences should result in (1) inquiries of management, (2) corroboration of responses with other audit evidence, and (3) performance of any necessary other procedures. Moreover, the RMM due to fraud should be considered.
Ch 1&2-SU 1 #57 In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control element is this procedure most likely to satisfy? A. Professional relationship. B. Experience requirements. C. Relevant ethical requirements. D. Advancement.
Answer (C) is correct. CPA firms should avoid situations in which third parties might question the firm's independence. Thus, they should adhere to the independence and other principles established by the AICPA Code of Professional Conduct and the requirements of regulators and other authorities (QC 10).
Ch 1&2-SU 1 #17 CPAs within each state have formed state societies or associations of CPAs. Which of the following statements about these associations is false? A. Most associations have their own codes of professional ethics that closely parallel the AICPA Code of Professional Conduct. B. The state societies are independent of the AICPA. C. All CPAs in the state must be members of the state association or society. D. Members of state associations may also be members of the AICPA.
Answer (C) is correct. Membership in state societies as well as the AICPA is voluntary. State societies typically function through small, full-time staffs or committees composed of their members. They promote the interests of the membership through communication and continuing education programs.
Ch 1&2-SU 1 #61 In connection with the element of monitoring, a CPA firm's system of quality control ordinarily should provide for the maintenance of A. A file of minutes of staff meetings. B. Updated personnel files. C. Documentation to demonstrate compliance with its policies and procedures. D. Documentation to demonstrate compliance with peer review directives.
Answer (C) is correct. Monitoring is concerned with providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued. Documentation of monitoring includes procedures, evaluations, deficiencies, and the bases for taking or not taking further action. Documentation of all elements of quality control should be retained for a period of time sufficient to enable those performing monitoring procedures and a peer review to evaluate the extent of the firm's compliance with its quality control standards, or for a longer period if required by law or regulation (QC 10).
Ch 3&4-SU 3 #18 Which of the following is an auditor least likely to perform in planning a financial statement audit? A. Coordinating the assistance of entity personnel in data preparation. B. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. C. Selecting a sample of vendors' invoices for comparison with receiving reports. D. Reading the current year's interim financial statements.
Answer (C) is correct. Selecting a sample of vendors' invoices for comparison with receiving reports is a test of details (a substantive procedure). It is a further audit procedure performed to test relevant assertions.
Ch 1&2-SU 1 #22 Competence as an independent auditor includes all of the following except A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise assistants. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed.
Answer (C) is correct. The auditor is not a guarantor. The auditor's responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated
Ch 3&4-SU 3 #12 Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should A. State that (s)he found material misstatements that the client would not revise. B. Suggest that the auditor ask the client. C. Suggest that the auditor obtain the client's permission to discuss the reasons. D. Indicate that a misunderstanding occurred.
Answer (C) is correct. The auditor must obtain the client's permission before the predecessor auditor may discuss the reasons for termination of the previous relationship (AU-C 210 and AU-C 510). Furthermore, a member of the AICPA in public practice must not disclose confidential client information without the specific consent of the client.
Ch 3&4-SU 3 #48 Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? A. Prepare a rough draft of the financial statement and of the auditor's report. B. Assess control risk for the assertions embodied in the financial statements. C. Tour the client's facilities. D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.
Answer (C) is correct. The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including internal control. They include (1) inquiries within the entity, (2) analytical procedures, and (3) observation and inspection. An example of observation and inspection is touring the client's facilities.
Ch 3&4-SU 3 #5 Which of the following factors most likely would cause an auditor to decline a new audit engagement? A. An inadequate understanding of the entity's internal control. B. The close proximity to the end of the entity's fiscal year. C. Failure of management to satisfy the preconditions for an audit. D. An inability to perform preliminary analytical procedures before assessing control risk.
Answer (C) is correct. The auditor should agree with management or those charged with governance upon the terms of the engagement. The auditor accepts the engagement only if (1) the preconditions for an audit are present and (2) a common understanding of the terms has been reached. The preconditions are (1) use of an acceptable accounting framework and (2) agreement on the premise of the audit. The premise relates to the fundamental responsibilities of management and, if appropriate, those charged with governance.
Ch 3&4-SU 3 #81 Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Objective judgment. B. Integrity. C. Professional skepticism. D. Impartial conservatism.
Answer (C) is correct. The auditor should maintain professional skepticism throughout the audit. Professional skepticism is an "attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence" (AU-C 200).
Ch 1&2-SU 16 #4 Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company's financial position, results of operations, and cash flows without the expertise of an independent auditor. B. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. D. It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship in managing the affairs of the business.
Answer (C) is correct. The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. The opinion contained in the audit report, which accompanies audited financial statements, is the result of the auditor's performance of the attest function, that is, the gathering of evidence during the audit and the issuance of an opinion on the fairness of the presentation of the statements.
Ch 5-SU 10 #41 In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to A. Point out to the responsible entity officials the errors made by various entity personnel. B. Summarize the corrections that must be made before the entity can prepare and submit its federal tax return. C. Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered. D. Summarize the misstatements made by the entity so that corrections can be made after the audited financial statements are released.
Answer (C) is correct. The schedule of uncorrected misstatements identifies for management and the auditor the potential cumulative financial statement effect of misstatements. A misstatement arises from fraud or error. It is a difference between the amount, classification, presentation, or disclosure of a reported item and the amount, etc., required for the item to be presented fairly. Misstatements also include adjustments of amounts, etc., the auditor judges to be needed for the statements to be fairly presented. The auditor accumulates misstatements that are not clearly trivial. ("Clearly trivial" is not the same as immaterial. Clearly trivial matters are clearly inconsequential individually and combined with other misstatements. Given any uncertainty about whether a matter is clearly trivial, it is considered not clearly trivial.) The auditor should communicate to appropriate management on a timely basis the accumulated misstatements and evaluate the effect of material uncorrected misstatements.
Ch 3&4-SU 3 #4 The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the A. Management representation letter. B. Scope paragraph of the auditor's report. C. Engagement letter. D. Introductory paragraph of the auditor's report.
Answer (C) is correct. The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise.
Ch 3&4-SU 3 #105 When an auditor becomes aware of a possible act of noncompliance with laws or regulations, the auditor should obtain an understanding of the nature of the act to A. Consider whether other similar acts have occurred. B. Recommend remedial actions to those charged with governance. C. Evaluate the effect on the financial statements. D. Determine the reliability of management's representations.
Answer (C) is correct. When the auditor becomes aware of information concerning possible noncompliance with laws or regulations, the auditor should obtain (1) an understanding of the nature of the act and the circumstances in which it occurred and (2) further information to evaluate the effect on the financial statements.
Ch 3&4-SU 3 #68 A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
Answer (D) is correct. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Variability in these relationships can be explained by, for example, unusual events or transactions, business or accounting changes, misstatements, or random fluctuations.
Ch 3&4-SU 3 #90 Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? I. To the SEC when the client reports an auditor change II. To a successor auditor when the successor makes appropriate inquiries III. To a government funding agency from which the client receives financial assistance A. I and II. B. I and III. C. II and III. D. I, II, and III.
Answer (D) is correct. A duty of disclosure to parties other than the client is imposed by a subpoena. It also may exist when the entity reports an auditor change to the SEC on Form 8-K. For example, the auditor may have withdrawn because the client failed to take appropriate remedial action, and the failure may be a "reportable event" or the source of a "disagreement." These requirements also apply to reports on material noncompliance with laws and regulations that may be mandated by the Securities Exchange Act of 1934. Under AU-C 210, a predecessor auditor should respond promptly and fully, except in unusual circumstances, to inquiries by the auditor if the prospective client gives its specific permission. Under Government Auditing Standards, an auditor may have a duty to report fraud directly if it involves assistance received from a governmental agency. For example, when management has not taken remedial action, and the auditee does not report the fraud as soon as practicable to the entity that provided the assistance, the auditor must report the matter to that entity.
Ch 3&4-SU 3 #20 In planning the audit engagement, the auditor should consider each of the following except A. The auditor's independence. B. Risks of material misstatement due to fraud. C. Anticipated levels of audit risk and materiality. D. The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
Answer (D) is correct. Although the nature of the services expected to be rendered (e.g., a report on consolidated or consolidating financial statements or on compliance with contractual provisions) should be considered when establishing the understanding with the client, determining the kind of opinion to be expressed occurs after the completion of audit procedures.
Ch 1&2-SU 16 #7 The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley's financial statements. The primary objective of this audit is to provide assurance to the A. Regional stock exchange. B. Securities and Exchange Commission. C. Board of directors of Donley. D. Investors in Donley securities.
Answer (D) is correct. An audit's primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.
Ch 5-SU 10 #8 Which of the following statements about evidence is true? A. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive. B. Effective internal control contributes little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.
Answer (D) is correct. Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements
Ch 3&4-SU 3 #38 The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is A. Audit risk. B. Inherent risk. C. Control risk. D. Detection risk.
Answer (D) is correct. Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements (AU-C 200 and AS No. 8).
Ch 3&4-SU 3 #63 Which of the following statements about analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used as risk assessment procedures should not use nonfinancial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
Answer (D) is correct. For some assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor's risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor's professional judgment about the expected effectiveness and efficiency of the available procedures.
Ch 3&4-SU 3 #88 Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.
Answer (D) is correct. Fraud risk factors relate to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Each of these categories may be further classified according to the three conditions that ordinarily exist when fraud occurs: (1) incentives or pressures, (2) opportunities, and (3) attitudes or rationalizations. For example, excessive pressure may exist to meet the expectations of third parties (e.g., analysts, investors, and creditors) regarding profitability or trends (AU-C 240).
Ch 1&2-SU 1 #18 Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)? A. They are guides intended to set forth auditing procedures applicable to a variety of situations. B. They are procedural outlines intended to narrow the areas of inconsistency and divergence of auditor opinion. C. They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment. D. They are generally accepted auditing standards.
Answer (D) is correct. Generally accepted auditing standards are defined as SASs. Conduct Rule 202 requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).
Ch 3&4-SU 3 #34 Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as A. Audit risk. B. Detection risk. C. Sampling risk. D. Inherent risk.
Answer (D) is correct. Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or in the aggregate, before consideration of any related controls. This risk is greater for some assertions and related balances, classes, or disclosures, than others. For example, complex calculations are more likely to be misstated than simple ones. Inherent risk exists independently of the audit (AU-C 200 and AS No. 8).
Ch 5-SU 10 #39 The audit working paper that reflects the major components of an amount reported in the financial statements is the A. Interbank transfer schedule. B. Carryforward schedule. C. Supporting schedule. D. Lead schedule.
Answer (D) is correct. Lead schedules help to eliminate detail from the auditor's working trial balance by classifying and summarizing similar or related items that are contained on the supporting schedules. A lead schedule contains the detailed accounts from the general ledger making up the line item total in the financial statements; e.g., the cash account in the financial statements might consist of petty cash, cash-general, cash-payroll, etc.
Ch 3&4-SU 3 #19 In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the A. Timing of the audit. B. Costs and benefits of gathering evidence. C. Financial statements as a whole. D. Financial statement assertions.
Answer (D) is correct. Most audit work consists of obtaining and evaluating evidence about relevant financial statement assertions. They are management representations embodied in the financial statements that are used by the auditor to consider the types of possible material misstatements.
Ch 1&2-SU 1 #59 Williams & Co. is a medium-sized CPA firm enrolled in the Private Companies Practice Section (PCPS). The firm is to have a peer review under the AICPA Peer Review program. The review will most likely be performed by A. Partners of Williams & Co. who are not associated with the particular audits being reviewed. B. Audit review staff of the SEC. C. Audit review staff of the AICPA. D. Another CPA firm.
Answer (D) is correct. Peer review is a necessary part of the practice-monitoring requirement for AICPA membership. A peer review of a firm enrolled in the AICPA Peer Review program may be performed by a review team organized by (1) a firm engaged by the reviewed firm or (2) a state CPA society. Also, an association of firms may be authorized to aid its members by organizing review teams (PR 100). Furthermore, a PCPS firm need not perform the peer review of a PCPS firm, and the team captain need not be a PCPS member.
Ch 1&2-SU 16 #8 The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of A. Quality control. B. Generally accepted auditing standards, which include the concept of materiality. C. The auditor's assessment of the risk of material misstatement. D. Generally accepted accounting principles.
Answer (D) is correct. Reporting standards require the auditor to state whether the audited entity's financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation.
Ch 1&2-SU 1 #41 Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for compliance with principles, such as online privacy, security, and confidentiality? A. ElectroNet. B. EDIFACT. C. TechSafe. D. WebTrust.
Answer (D) is correct. The WebTrust seal provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion about compliance with individual principles or combinations of principles. Online privacy is the protection of the collection, use, disclosure, and retention of personal information. Security is the protection against unauthorized access to the system (both physical and logical). Processing integrity is the assurance that system processing is complete, accurate, timely, and authorized. Availability is the assertion that the system is available for operation and used as agreed. Confidentiality is the protection of information from being viewed by unauthorized parties.
Ch 3&4-SU 3 #82 Which of the following statements reflects an auditor's responsibility for detecting fraud and errors? A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. B. An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework. C. An auditor is not responsible for detecting fraud unless the application of GAAS would result in such detection. D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.
Answer (D) is correct. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by fraud or error. Thus, the auditor should (1) identify and assess the risks of material misstatement due to fraud at the financial statement and assertion levels, (2) obtain sufficient appropriate audit evidence regarding those risks through implementing responses, and (3) respond to identified fraud or suspected fraud. Moreover, the consideration of fraud should be logically integrated into the overall audit process in a manner consistent with other pronouncements, e.g., those on (1) planning and supervision, (2) audit risk and materiality, and (3) internal control.
Ch 1&2-SU 16 #2 Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities? A. Management has responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for internal control. B. Management has responsibility for the basic data underlying financial statements, and the auditor has responsibility for drafting the financial statements. C. The auditor's responsibility is confined to the audited portion of the financial statements, and management's responsibility is confined to the unaudited portions. D. The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.
Answer (D) is correct. The auditor is responsible for the opinion on financial statements, but management is responsible for the representations made in the financial statements.
Ch 1&2-SU 1 #8 The primary reason for an audit by an independent, external audit firm is to A. Satisfy governmental regulatory requirements. B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. C. Relieve management of responsibility for the financial statements. D. Provide increased assurance to users as to the fairness of the financial statements.
Answer (D) is correct. The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP). An audit performed by an independent, external audit firm provides assurance of the objectivity of the auditor's opinion.
Ch 5-SU 10 #37 Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include A. Schedules that support the current year's adjusting entries. B. Prior years' accounts receivable confirmations that were classified as exceptions. C. Documentation indicating that the audit work was adequately planned and supervised. D. Analyses of capital stock and other equity accounts.
Answer (D) is correct. The permanent section of the audit documentation usually contains copies of important client documents. It may include (1) the articles of incorporation, stock options, contracts, and bylaws; (2) the engagement letter, the contract between the auditor and the client; (3) analyses from previous audits of accounts of special importance to the auditor, such as noncurrent debt, PP&E, and equity; and (4) information concerning internal control, e.g., flowcharts, organization charts, and questionnaires.
Ch 1&2-SU 1 #49 A firm of independent auditors must establish and follow quality control policies and procedures because these standards A. Are necessary to meet increasing requirements of auditors' liability insurers. B. Provide assurance that clients maintain quality reporting systems. C. Include formal filing of records of such policies and procedures. D. Give reasonable assurance that the firm as a whole will conform with applicable auditing standards.
Answer (D) is correct. The system of quality control includes the organizational structure and the policies adopted and procedures established to provide reasonable assurance that the firm as a whole will comply with auditing and other applicable professional standards. Policies and procedures should be established with respect to the following elements: (1) Leadership responsibilities for quality within the firm (the "tone at the top"), (2) relevant ethical requirements, (3) acceptance and continuance of client relationships and specific engagements, (4) human resources, (5) engagement performance, and (6) monitoring (QC 10).
Ch 1&2-SU 1 #60 The requirement to promote a culture of quality is most closely associated with which of the following quality control elements? A. Leadership responsibilities for quality within the firm. B. Monitoring. C. Engagement performance. D. Relevant ethical requirements.
Answer (A) is correct. A CPA firm should promote an internal culture based on the recognition that quality is essential in performing engagements and should establish policies and procedures to support that culture. Leadership responsibilities for quality within the firm relates to the tone at the top of the organization. It permeates the entire organization and is an important component in the establishment of quality within the firm (QC 10).
Ch 5-SU 10 #10 Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of prenumbered client purchase orders filed in the vouchers payable department. C. Analytical procedures performed by the auditor on the entity's trial balance. D. Inspection of bank statements obtained directly from the client's financial institution.
Answer (D) is correct. When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.
