12.28.18

Question 1

Which of the following is ordinarily designed to detect possible material dollar misstatements in the financial statements?

Answer 1

Analytical procedures.

Substantive procedures are designed to detect material misstatements in assertions. They consist of tests of details and substantive analytical procedures. 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.

Question 2

An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this irregularity by

Answer 2

Performing analytical procedures designed to disclose differences from expectations.

Analytical procedures may be effective when tests of details do not indicate potential misstatements. For example, accounts are not likely to be complete when improper journal entries have been made. Analytical procedures comparing prior amounts with expected amounts would likely disclose unexpected differences.

Question 3

Which of the following acts by a CPA who is not in public practice is most likely to be a violation of the ethical standards of the profession?

Answer 3

Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA’s employer.

A member not in public practice who uses the CPA designation in a manner implying that (s)he is independent of the employer has committed a knowing misrepresentation of fact.

Question 4

How should differences of opinion between the engagement partner and the quality control reviewer be resolved?

Answer 4

By following the firm’s policies and procedures.

A disagreement should be resolved by following the firm’s policies and procedures. The policies and procedures may include the resolution of disagreement, incorporating discussion, research, and consultation with other knowledgeable parties.

Question 5

During an audit, an internal auditor may provide direct assistance to an independent CPA in

Obtaining an understanding of internal control:
Performing tests of controls:
Performing substantive tests:

Answer 5

Yes
Yes
Yes

The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor’s assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures (AU-C 610). The internal auditor may provide assistance in all phases of the audit as long as (1) the internal auditor’s competence and objectivity have been tested, and (2) the independent auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.

Question 6

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

Answer 6

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

The terms of the engagement should include management’s responsibility to provide access to all information and persons deemed necessary to the audit. Depending on the pervasiveness of the potential effects of the inability to obtain sufficient appropriate evidence, the result may be a qualification of the opinion or a disclaimer of an opinion if the engagement is accepted.

Question 7

What is the definition of fraud in an audit of financial statements?

Answer 7

An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

Fraud is an “intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.”

Question 8

When auditing related party transactions, an auditor places primary emphasis on

Answer 8

Assessing the risks of material misstatement of related party transactions.

The auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions, or balances.

Question 9

Before accepting an engagement to audit a new client, an auditor is required to

Answer 9

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

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 about 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).

Question 10

In an audit of a nonissuer’s financial statements, projected misstatement is

Answer 10

An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Projected misstatement is the auditor’s best estimate of the misstatement in populations based on audit samples.

Question 11

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

Answer 11

Employment of the CPA’s spouse as a client’s director of internal audit.

With certain exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member (e.g., an individual on an attest engagement team) is subject to the Independence Rule. One exception is permitted for the employment by the client of an individual in the covered member’s immediate family. However, this exception does not apply if the employment was in a key position. A director of internal audit holds a key position.

Question 12

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

Answer 12

Comparing current-year to prior-year sales volumes.

Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. Plausible relationships among data are reasonably expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations (AU-C 315). Thus, the sources of information for the expectations generally are not developed by the auditor. For example, they include information for comparable prior periods and ratios typical for the client’s industry.

Question 13

An auditor most likely obtains an understanding of a new client to

Answer 13

Identify areas of audit emphasis.

The understanding provides a basis for assessing risks of material misstatement and responding to them in the exercise of professional judgment. For example, the auditor needs to identify areas that need special audit consideration, such as complex or unusual transactions or related-party transactions.

Question 14

Which of the following statements about analytical procedures is true?

Answer 14

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

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.

Question 15

The appearance of independence of a CPA, or that CPA’s firm, is most likely to be impaired if the CPA

Answer 15

Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation.

Independence is impaired with regard to the client if, during the period of the professional engagement, a covered member was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client, and the value of the estate’s holdings in the client exceeded 10% of the estate’s assets. Mere designation as a trustee or executor does not impair independence, but actual service does.

Question 16

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?

Answer 16

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

An audit plan based on the overall audit strategy is required for every audit. It includes the nature, timing, and extent of procedures expected to reduce audit risk to an acceptably low level. The audit plan includes (1) a description of risk assessment procedures; (2) a description of further audit procedures at the assertion level for material classes of transactions, account balances, and disclosures; and (3) other audit procedures required by GAAS or the PCAOB.

Question 17

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?

Answer 17

Management places substantial emphasis on meeting earnings projections.

The auditor should evaluate whether management may be motivated to engage in fraudulent financial reporting. Specific indicators of such motivation are that

1. Management compensation is based on unduly aggressive financial goals.
2. There is excessive interest in increasing stock price or earning trends through aggressive accounting practices.
3. Managers have made commitments to analysts’ or other users’ unrealistic forecasts.
4. Inappropriate means minimizing taxable earnings have been used.

Question 18

In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion

Answer 18

Includes brainstorming about how assets can be misappropriated.

Key engagement personnel should discuss the risk of fraud. The discussion should emphasize professional skepticism and continual alertness to potential fraud. The discussion may occur before or during information gathering, and communication should be ongoing. The discussion should include brainstorming about (1) factors that might create the conditions for errors or fraud, (2) how and where the statements might be misstated, (3) how assets might be misappropriated or financial reports misstated, (4) how fraud could be concealed, and (5) how the auditors might respond to fraud risks.

Question 19

Which of the following statements concerning the auditor’s use of the work of an auditor’s external specialist is true?

Answer 19

The auditor’s specialist should observe the same confidentiality requirements as the auditor.

An agreement between the auditor and the auditor’s external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor to also apply to the specialist. For example, a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling). Other requirements may be imposed by law or regulation.

Question 20

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Answer 20

Square footage of selling space.

Although analytical procedures used in planning the audit often use only financial data, sometimes relevant nonfinancial information is considered as well. For example, number of employees, square footage of selling space, volume of goods produced, and similar information may contribute to accomplishing the purpose of the procedures.