Mock Exam 1

An uncertainty may result in: (more than 1) a. an unmodified opinion b. a qualified opinion c. an adverse opinion d. a disclaimer of opinion

A,B,C,D an uncertainty may result in an unmodified opinion if managements analysis is supported and properly recorded and disclosed. an uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinion would result

which of the following are required as part of an auditors planning process? (more than 1) a. understanding the design of controls b. determining whether controls have been implemented c. evaluating the operating effectiveness of controls d. documenting the understanding of internal controls

A,B,D as part of planning, the auditor is required to obtain an understanding of the design of controls and determine whether they have been implemented, as well as to document this understanding.

which of the following accounting services may an accountant perform without being required to comply with SSARS? I. preparing a working trial balance II. preparing standard monthly journal entries

Both I and II

Dante CPA is auditing the financial statements of Crest computing. During the previous year, Kratzke CPAs audited the financial statements. Crest has decided to present comparative financial statements for the current year. which of the following statements is true about Kratke's report? a. Kratzke should not reissue their report, since they may be unaware of recent circumstances that might have affected the previous years FS b. Kratzke should not reissue their report unless dante agrees to cosign that report c. Kratzke should reissue the report on the previous statements without performing any additional procedures as long as no changes have been made to those statements d. Kratzke may issue their report on the previous statements only after performing limited procedures to evaluate the continuing appropriateness of the report

D. should preform limited procedures like reading the current statements, comparing current and prior statements, and obtaining a rep letter from crest and dante

a report on a nonissuers internal control based on a n audit of internal control should include a statement indicating that: I. because there are inherent limitations in internal control, misstatements may occur and not be detected II. Projections of the evaluation of internal control to future periods are subject to the risk that the internal control may become inadequate III. the report is intended solely for the information and use of the audit committee, management, and other specified parties

I. and II. each of the first tow statements would be included in the inherent limitations paragraph of the report. III. would be included if the internal control matters noted during an audit

which of the following internal control activities is not usually performed in the vouchers payable department? a. accounting for unused prenumbered purchase orders and receiving report b. matching the vendors invoice with the related receiving report c. indicating the asset and expense accounts to be debited d. approving vouchers for payment by having an authorized employee sign the vouchers

a. accounting for unused prenumbered purchase orders are receiving reports is an effective control, but it would not typically be performed in the vouchers payable department

which of the following is a documentation requirement that an auditor should follow when auditing in accordance with governmental auditing standards? a. audit documentation should contain sufficient info so that supplementary oral explanations are not required b. the auditor should obtain written representation from management acknowledging responsibility for correcting instances of fraud, abuse, and waste c. the auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance d. audit documentation should contain a caveat that all instances of material errors and fraud may not be identified

a. audit documentation should contain sufficient info so that supplementary oral explanations are not required

when auditing an entitys financial statements is accordance with government auditing standards, an auditor should prepare a written report on the auditors: a. understanding of internal control and assessment of control risk b. opinion on the entitys attainment of the goals and objectives specified by applicable laws and regulations c. field work and procedures that substantiated the auditors specific findings and conclusions d. identification of the causes of performance problems and recommendations for actions to improve operations

a. government auditing standards require that the auditor issue a written report on internal control in all audits. as part of this reporting requirement, the auditor must describe the scope of the auditor work in obtaining an understanding of internal control and his or her assessment of control risk

the auditor concluded that the disclosures made in the financial statements did not adequately inform financial statement users about the company's ability to continue as a going concern. Under these circumstances, the auditor should issue an: a. qualified (except for) or adverse opinion, depending on the level of materiality b. adverse opinion or a disclaimer of opinion c. unmodified opinion with an emphasis of the matter paragraph or disclaimer of opinion, depending on the level of materiality d. qualified (except for) or disclaimer of opinion depending on the level of materially

a. improper disclosure of a going concern situation is a GAAP violation, so a qualified or adverse opinion should be issued

auditing standards require that the independent auditors report shall contain either an expression of opinion regarding the financial statements, taken as a whole or an assertion to the effect that an opinion cannot be expressed. which of the following would be prohibited by auditing standards? a. none of the other actions are prohibited b. the auditor disclaims an opinion on the entire set of FS c. an auditor is hired to render an opinion on the balance sheet only d. the auditor disclaims an opinion on the income statement and on the statement of cash flows, but renders an unmodified opinion on the balance sheet

a. one objective of the auditor is issuing a report is to prevent misinterpretation of the degree of responsibility assumed by the auditor. Disclaiming an opinion on one or all of the statements is acceptable, as is a limited reporting engagement in which not all of the financial statements are audited

an auditor uses variable sampling techniques to project the inventory balance each year for comparison with the clients assertion regarding the inventory balance in the FS. In 20x7, the auditors sample size was 112 inventory items. in 20x8 the number of units in inventory, the tolerable misstatement, and the required confidence were the same as in 20x7. however, the population variability increased due to the introduction of a new product line. the 20x8 required sample size would be: a. larger than the 20x7 required sample size b. the same as the 20x7 sample size c. smaller than the 20x7 sample size d. indeterminate based on the information provided

a. population variability has a direct effect on sample size

which of the following presumptions is correct about the reliability of audit evidence? a. an effective internal control structure provides more assurance about the reliability of audit evidence b. information obtained indirectly from outside sources is the most reliable evidential matter c. reliability of audit evidence refers to the amount of corroborative evidence obtained d. to be reliable, audit evidence should be conclusive rather than persuasive

a. reliability of audit evidence is enhanced by a satisfactory internal control structure

which is true about accounts receivable confirmations? a. confirmations may be based on a single transaction rather that entire customer balances b. confirmations provide evidence about existence rights and valuation c. the client may mail the confirmations, but they should be returned directly to the auditor d. blank confirmations provide improved response rates but may be less reliable

a. the auditor should consider the types of information respondents will be readily able to confirm. for example, it may be easier for certain respondents to confirm individual transactions rather than entire balances.

which of the following is not true about audit documentation? a. audit documentation should include a separate page for each material account balance or transaction class b. audit documentation should include identification of the staff who performed the audit work c. audit documentation should include information related to the selection and application of accounting principles d. audit documentation should demonstrate that sufficient appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued

a. there is no requirement that documentation related to each material account balance or transaction class be included on a separate page

which of the following is not true about the Department of Labors independence guidelines? a. an immaterial direct financial interest in the plan does not impair independence b. a former employee of the plan may be employed by the accounting firm c. the independence guidelines apply to rendering an opinion on employee benefit plans d. the independence guidelines prohibit the accountant from maintaining financial records for the employee benefit plan

a. under the department of labor any direct financial interest in the plan impairs independence

when an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a: a. disclaimer of opinion b. regulation S-X exemption c. report on pro forma financial statements d. unaudited association report

a. when an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements

which of the following are elements of a firms quality control that should be considered in establishing its quality control policies and procedures? a. assigning personnel, client acceptance, and professional development b. assigning personnel, professional development, and analytical review c. assigning personnel, client acceptance, and analytical review d. client acceptance, professional development, and analytical review

assigning personnel to engagements and providing for professional development are part of the human resources element of quality control. engagement/client acceptance is another element of quality control

North co. a privately held entity, asked its tax accountant, King a CPA in public practice to prepare Norths interim financial statements to be presented alongside North Co's tax return. King should not prepare these financial statements to norht unless, as a minimum, King complies with provisions of: a. SSAE b.SSARS c. SSCS d. SSUFS

b. SSARS applies to the preparation of financial statements that are presented alongside the entitys tax return. Note: SSARS would not apply of the preparation of the financial statements with the tax return were solely for submission to taxing authorities

which of the following statements is correct concerning analytical procedures used in planning an audit engagements? a. they often replace the test of controls that are preformed to assess control risk b.they usually use financial and nonfinancial data aggregated at a high level c. they usually involve the comparison of assertions developed by management to ratios calculated by an auditor d. they are often used to develop an auditors preliminary judgement about materiality

b. analytical procedure performed during planning often use data aggregated at a high level

which of the following conditions is necessary for an auditor to accept an engagement to audit and report on a nonissuers internal control over financial reporting? a. the auditor anticipates relying on the entitys internal control in the financial statement audit b. management presents its written assessment about the effectiveness of internal control c. the auditor is a continuing auditor who previously has audited the entitys financial statements d. management agrees not to present the auditors report in a general use document to stockholders

b. in order for an audit and report on a nonissuers internal control, management must present its written assessment about the effectiveness of internal control

which of the following is not true about those charged with governance of an organization? a. those charged with governance typically include the board of directors b. those charged with governance typically include management of the organization c. those charged with governance bear responsibility for overseeing the strategic direction of the organization d. those charged with governance bear responsibility for financial reporting

b. management is not typically included in those charged with governance

the acceptable level of detection risk is inversely related to the: a. preliminary judgement about materiality levels b. assurance provided by substantive tests c. risk of failing to discover material misstatements d. risk of misapplying auditing procedures

b. the acceptable level of detection risk is inversely related to the assurance provided by substantive tests.

which of the following matters is an auditor required to communicate to those charged with governance? a. the auditors preliminary judgments about materiality b. the process used by management in formulating sensitive accounting estimates c. the basis for his or her assessment of control risk d. the justification for preforming substantive procedures at interim dates

b. the auditor should ensure that those charged with governance are informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditors conclusions regarding the reasonableness of the estimates

managements written representation to the auditor in connection with a governmental audit would most likely include: a. representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist b. a statement that management has disclosed any communications from grantors concerning possible noncompliance c. a statement that management had identified and disclosed all material government programs to the auditor d. negative assurance that the government ha complied with compliance requirements

b. the management letter will include a statement that management has disclosed any communications from grantors concerning possible noncompliance

an auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. the auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. a sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. one invoice selected by the auditor cannot be located. which statement is true? a. since the sample deviation rate is less than the tolerable rate, the auditor should rely on the control b. there is not enough info given to determine whether the auditor should rely on this control c. the invoice selected by that auditor that cannot be located is ignored in the calculation of the sample deviation rate d. since the auditor has a tolerable rate of 5%, he or she can be 95% certain that he or she will make a correct decision

b. the missing invoice should be counted as a deviation, resulting in a 2% sample deviation rate. however this information alone is not sufficient to determine whether the control can be relied upon. the auditor would also need to know the upper deviation rate. it is the upper deviation rate that needs to be compared to the tolerable rate in making decisions

who is responsible for the selection and appointment of the independent external auditor? a. the CFO b. a joint responsibility shared by management and the audit committee c. the audit committee and the board of directors d. management

c.

which of the following statements is true regarding prospective financial statements? a. all reports on prospective financial statements require a statement that the report is for the limited use of specified parties b. the independent accountant may perform an examination or a review of pro forma financial statements, which are one form of prospective financial statements c. all reports on prospective financial statements require a statement indicating tht the prospective results may not be achieved d. all reports on prospective financial statements require that the accountant be independent

c. all reports on prospective financial statements require a statement indicating that the prospective results may not be achieved

an accountants standard report issued after compiling the financial statements of a nonissuer should state that: a. a compilation consists principally of inquiries of company personnel and analytical procedure b. i am not aware of any material modifications that should be made to the accompanying financial statements c. the accountant was not required to perform any procedure to verify the accuracy or completeness of the info provided by management d. a compilation is substantially less in scope than an audit in accordance to GAAS, the objective of which is the expression of an opinion

c. an accountants standard report issued after compiling financial statements of a nonissuer should state that the accountant was not required to perform any procedures to verify the accuracy or completeness of information provided by management

as the acceptable level of detection risk decreases, and auditor may change the: a. assessed level of inherent risk b. assessed level of control risk from low to high c. nature of substantive tests from a less effective to a more effective procedure d. timing of substantive tests from year end to interim

c. better evidence must be obtained to achieve a lower level of detection risk

Kent industries anticipates that its sales revenue will grow by 5% during the coming year based on historical returns, but also believes there is a slight chance for 20% growth if a new product that is currently being developed is launched during the year. Kents management has prepared two sets of financial statements, one based on 5% growth and the other based on 10% growth, in an effort to plan for the future. Giacomo, CPA has been hired to examine both sets of financial statements. which of the following is true regarding the two reports? a. the report on the 10% growth FS would include a statement that the results may not be achieved whereas the 5% growth FS would not require such comment b. neither the report on the 10% growth FS nor the report on the 5% growth should provide positive assurance c. Both the report on the 10% growth FS and the report on the 5% growth FS are appropriate for limited use d. the 5% growth FS would include a restriction on the use of the report, whereas the 10% growth financial statements would not include such a restriction

c. both financial forecasts and financial projections are appropriate for limited use

Confidential client information may be disclosed by the accountant without the clients permission in all of the following circumstances except: a. as part of a quality review of the members professional practices b. if necessary to comply with a validly issued subpoena c. in response to an inquiry by a successor auditor d. in response to an inquiry made by the ethics division of the AICPA

c. confidential client info may not be disclosed to a successor auditor without the clients permission

an auditor may decide to decrease the acceptable level of risk when: a. many differences (audit value minus recorded value) are expected b. Initial sample results do not support the planned level of control risk c. the cost and effort of selecting additional sample items is low d. increased reliability from the sample is desired

c. decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low

during an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. 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 capitalize the leases. Under these circumstances, the accountant should: a. emphasize that the financial statements are for limited use only b. Express no assurance of any kind on the entitys financial statements c. disclose the departure from GAAP in a separate paragraph of the accountants report d. Issue an adverse opinion because of the departure from GAAP

c. failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the standard review report or withdraw from the engagement. if modification to the report is sufficient to disclose the departure from GAAP then the accountant may modify the review report

which risk, when assessed at a high level, is most likely to result in an inappropriate opinion on financial statements which are not fairly stated? a. the risk of incorrect rejection b. the risk of assessing control risk too low c. the risk of incorrect acceptance d. the risk of assessing control risk to high

c. if there is a high risk of incorrect acceptance, this means that it is quite possible that the auditor will incorrectly accept a balance as fairly stated, when in fact it is not fairly stated.

which of the following procedure would an auditor least likely perform before the balance sheet date? a. identification of related parties b. assessment of the risk of material misstatement c. confirmation of accounts payable d. observation of merchandise inventory

c. the auditor should consider whether the year end balances of the particular asset or liability accounts that might be selected for interim examination are reasonably predictable with respect to the amount, relative significance and composition. accounts payable is relatively difficult to predict because it may fluctuate at managements discretion

which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? a. determine whether accounting estimates deviate from historical patterns b. confirm inventories at locations outside the entity c. review the lawyers letter for information about litigation d. inquire about the existence of related party transactions

c. the auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the clients lawyer to corroborate this information. included in this letter is either an identification of the omission of any pending or threatened litigation, claims, and assessments, or a statement that the list of such matters is complete

the purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: a. administrative function from hiring function b. application controls from the general controls c. authorization of transactions from the custody of related transactions d. human resources function from the accounting functions

c. the hiring function provides authorization for payment. distributing payroll is a custodial function

For which of the following events would an auditor issue a report that omits any reference to consistency? a. a change from an accounting principle that is not generally accepted to one that is generally accepted b. managements lack of reasonable justification for a change in accounting principle c. a change in the method of accounting for inventories d. a change in the useful life used to calculate the provision for depreciation expense

d. a change in accounting estimate is accounted for prospectively and does not affect the comparability of financial statements between periods. because the auditors unmodified opinion implies that consistency exists, no modification to the report is necessary

which of the following types of audit evidence is the least reliable? a. canceled check b. bank statement obtained from the client c. vendors invoice d. purchase order

d. a purchase order is internal documentation and as such, it is more easily manipulated by the client

which of the following statements is correct concerning the use of negative confirmation requests? a. negative confirmation requests are effective when understatements of account balances are suspected b. unreturned negative confirmation requests indicate that alternative procedures are necessary c. negative confirmation requests are effective when detection risk is low d. unreturned negative confirmation requests rarely provide significant explicit evidence

d. although returned negative confirms may provide evidence about the financial statement assertions, unreturned negative confirm requests do not provide explicit evidence that the intended parties received and the confirmation request and verified that the information contained in them is correct

In planning the audit, the auditor should consider materiality for the FS as a whole in terms of: a. the largest aggregate level of misstatement that could be considered material to the FS taken as a whole b. the smallest aggregate level of misstatement that could be considered material to the FS taken as a whole c. the largest aggregate level of misstatement that could be considered material to any one of the FS d. the smallest aggregate level of misstatement that could be considered material to any one of the FS

d. because the FS are interrelated

assuming no other material misstatements are found, an independent auditor determines that supplementary information is not fairly stated relative to the basic financial statements taken as a whole. In this instance, the independent auditor should: a. issue a qualified (except for) or adverse opinion b. issue an unmodified opinion without referencing to the supplementary information outside the basic FS c. Issue a disclaimer of opinion d. issue an unmodified opinion and add an other matter paragraph to describe the auditors position on the supplementary info

d. does not prevent issuance of unmodified opinion but should be disclosed in an other matter paragraph

a limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when the client: a. omits the statement of cash flows b. asks the auditor to report on the balance sheet and not the other basic financial statements c. refuses to disclose in the notes to the financial statements a significant related party transaction d. does not make the minutes of the board of directors meetings available to the auditor

d. failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion

with respect to an auditors consideration of fraud risk, which of the following is not required? a. a discussion among engagement personnel regarding fraud b. incorporation of an element of unpredictability into the audit c. an assumption that there is a risk of management override of controls d. implementation of controls to detect fraud

d. it is managements responsibility to design and implement programs and controls to prevent, deter, and detect fraud

an auditor provides positive assurance in all of the following reports except: a. a report on a specified account in a FS b. a report on a finanical presentation to comply with contractual agreements or regulatory requirements c. a report on other comprehensive basis of accounting financial statements d. a report on compliance with contractual or regulatory requirements related to audited FS

d. negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements

an auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as: a. deductions not authorized by employees b. overtime not approved by supervisors c. payroll checks with unauthorized signatures d. time tickets with invalid job numbers

d. test data often contains invalid information that is used to test EDP controls

whitney, CPA is assessing the auditability of Nissen manufacturing, a possible new client. which of the following would be least likely to cause whitney to reject Nissen as a new client? a. management of Nissen expresses a disregard of maintaining an adequate internal control environment b. management of Nissen is unable to provide financial records for the second half of the year due to a computer malfunction c. management of Nissen is unwilling to provide financial records to whitney, due to a desire to keep such information confidential d. management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers

d. the auditor may perform alternative procedures

which of the following statements is true regarding the risk assessment component of internal control? a. an auditor evaluates an entitys risk assessment because it is a component of overall audit risk in a financial statement audit b. an auditor need not consider an entitys risk assessment because he or she is primarily concerned with audit risk in a financial statement audit c. an auditors evaluation of an entitys risk assessment may not be applicable to the audit of every entity d. an auditor evaluates an entitys risk assessment to understand how management addresses risks relevant to financial reporting

d. the auditor needs to understand how management addresses risk relevant to financial reporting in order to properly plan the audit

two assertions for which confirmation of AR balances provides primary evidence are: a. existence and completeness b. completeness and valuation c. valuation and rights and obligations d. rights and obligations and existence

d. two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have the rights to this receivable) and existence (does the receivable really exist)

which of the following procedures is an auditor most likely to use to test the completeness assertion for fixed assets a. recalculation of depreciation on fixed assets b. comparison of items listed in the fixed asset ledger to actual assets observed by the auditor c. comparison of assets acquired during the year to the approved capital budget d. review of large items charged to repair and maintenance

d. when the auditor reviews large items charged to repairs and maintenance, he is looking for items that may have been erroneously expensed instead of capitalized

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods: a. determine the auditors acceptable level of audit risk b. assist in evaluating the planned audit objectives c. influence the design of internal control d. affect the auditors preliminary judgement about materiality levels

the auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. the extent to which the computer processing is used in significant accounting applications, as well as the complexity of the processing may also influence the nature, extent and timing of the audit