1.31.19

Question 1

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Answer 1

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

The auditor should obtain sufficient appropriate audit evidence to draw reasonable conclusions on which to base the opinion. If the CPA is unable to obtain this evidence, the engagement most likely should be rejected.

Question 2

In manufacturing environments, employees are often required to use time cards and job time tickets. Which is the false statement related to the use of these documents?

Answer 2

Payroll should be prepared from job time tickets.

The payroll should be prepared from the time cards, which are the official records of time worked. The allocation of direct labor to the various jobs and the identification of indirect labor that should be charged to overhead is determined from the job time tickets.

Question 3

Which of the following controls could best prevent direct labor from being charged to manufacturing overhead?

Answer 3

Comparison of daily journal entries with factory labor summary.

Daily journal entries are made to record labor, materials, and overhead. Direct labor is posted from the daily factory labor summary. If the latter has been properly recorded, tracing the amounts to the journal entries will determine whether manufacturing overhead was incorrectly charged with direct rather than indirect labor.

Question 4

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Answer 4

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

Auditor disagreements with management about significant matters, whether or not satisfactorily resolved, should be communicated to those charged with governance. However, disagreements do not include differences of opinion based on preliminary information or incomplete facts that are later resolved.

Question 5

According to the auditing standards, which of the following terms identifies a requirement for audit evidence?

Answer 5

Appropriate.

AU-C 500, Audit Evidence, requires the auditor to obtain sufficient appropriate audit evidence on which to base the opinion. Appropriate evidence is relevant and reliable in supporting conclusions on which the opinion is based.

Question 6

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

Rights & obligation:
Valuation & allocation:

Answer 6

No
Yes

The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that accounts receivable are recorded at net realizable value.

Question 7

Which of the following types of control best describes procedures to ensure appropriate systems software acquisition?

Answer 7

General.

General controls are policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. General controls commonly include controls over data center and network operations; systems software acquisition and maintenance; access security; and application system acquisition, development, and maintenance.

Question 8

When a management’s specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s work is acceptable if

Answer 8

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

The auditor is responsible for the observation of inventories. The auditor performs this procedure whether the client or an external specialist takes the physical inventory. The auditor should (1) examine the specialist’s program, (2) observe its procedures and controls, (3) make or observe some physical counts, (4) recompute calculations, and (5) test intervening transactions.

Question 9

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

Answer 9

The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

Control risk and inherent risk are the components of the risk of material misstatement (RMM). The auditor determines the appropriate level of detection risk based on the assessment of RMMs and the acceptable level of audit risk. 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.

Question 10

In which of the following situations would it be most important to have employees sign for their pay?`

Answer 10

The firm uses a cash payment payroll function.

Under a cash payroll system, the receipt signed by the employee is the only document in support of payment. The signed receipt is essential to verify proper payment.

Question 11

Because an audit in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the audit with an attitude of

Answer 11

Professional skepticism.

Auditing standards require the auditor to exercise professional skepticism–that is, an attitude that includes a questioning mind and critical assessment of audit evidence (AU-C 240). The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Instead, (s)he should make an objective evaluation to determine whether the financial statements are free of material misstatement.

Question 12

Which of the following documents are examples of audit evidence generated by the client?

Answer 12

Shipping documents and receiving reports.

Shipping documents and receiving reports are a result of the operations of the client. As goods are shipped to customers, a shipping document is prepared by the client. As goods are received from vendors, a receiving report is prepared by the client.

Question 13

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor’s

Understanding of an entity’s internal control:
Overall responses to assessed risks:

Answer 13

Yes
Yes

The understanding of the components of internal control, including the control environment, should be documented regardless of the degree of risk (AU-C 315). The overall responses to the assessed RMMs at the financial statement level also should be documented (AU-C 330).

Question 14

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?

Answer 14

It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.

Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.

Question 15

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

Answer 15

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.

Under SEC independence rules, certain financial relationships prevent an auditor from being independent of the client. For example, an auditor is not independent if (1) the auditor has a direct (or material indirect) investment in an entity, (2) the entity has an investment in the client that is material to the entity, or (3) the entity can exercise significant influence over the client.

Question 16

Which of the following is true about the auditor’s communication with those charged with governance?

Answer 16

The communication should be a two-way discourse between the auditor and those charged with governance.

Two-way communication is expected and should provide those charged with governance an overview of the audit process and of the auditor’s responsibilities. It should also allow the auditor to obtain information relevant to the audit.

Question 17

Which of the following is a false statement about materiality?

Answer 17

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

Materiality is defined for planning purposes at three levels. Materiality for the financial statements as a whole is determined when designing the overall audit strategy. Materiality is also set for specific account balances, transaction classes, or disclosures. In certain cases, these amounts could influence users. Performance materiality is less than that for the statements as a whole or for specific balances, etc. Performance materiality is an adjustment for (1) individually immaterial misstatements and (2) possible uncorrected misstatements. But materiality for planning purposes ordinarily is not set for one financial statement. When designing audit procedures to be applied at the balance, transaction class, or disclosure level, the auditor plans to obtain reasonable assurance of detecting misstatements that, when aggregated with misstatements in other balances, etc., could be material to the statements as a whole.

Question 18

During the audit of a construction contract, it was discovered that the contractor was being paid for each ton of dirt removed. The contract called for payment based on cubic yards removed. Which internal control might have prevented this error?

Answer 18

Comparison of invoices with purchase orders or contracts.

The contractor’s invoice would have stated a unit of measure different from that in the contract. Thus, a comparison of the invoice with the original contract would have disclosed the error.

Question 19

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC’s description of the controls implemented and their design as of a specific date. These controls are relevant to the schools’ internal control, so Drake’s report will be useful in providing the schools’ independent auditors with information necessary to plan their audits. Drake’s report expressing an opinion on CSC’s controls implemented as of a specific date should contain a(n)

Answer 19

Description of the scope and nature of Drake’s procedures.

The report expressing an opinion on the description of controls implemented and their design (type 1 report) includes (1) a title that includes the word independent; (2) an addressee; (3) identification of management’s description of the system and the criteria in its assertion; (4) a reference to management’s assertion and a statement of management’s responsibility for the controls; (5) a statement that the service auditor’s responsibility is to express an opinion on the fairness of management’s description of the system and the suitability of the design of the controls in meeting the objectives; (6) a statement that the examination was conducted in accordance with the AICPA attestation standards; (7) a statement that the service auditor did not test the effectiveness of the controls; (8) statements about the scope of the service auditor’s procedures; (9) a statement about the inherent limitations of controls; (10) an opinion on whether, in all material respects, based on the criteria, management’s description of the system is fairly presented and whether the controls are suitably designed; (11) an alert, in a separate paragraph, restricting the use of the report to management of the service organization and user entities; (12) the date of the report; and (13) the name, city, and state of the service auditor (AT-C 320). NOTE: The AICPA has issued additional guidance on service auditor reports. The term “System and Organization Controls (SOC) report” is used in this guidance. The reports obtained by the user auditor in an audit are called SOC 1 reports (type 1 or type 2). Service auditors also may prepare SOC 2 and SOC 3 reports to provide assurance on more than internal controls over financial reporting (e.g., security, availability, processing integrity, confidentiality, or privacy). SOC 2 reports are to be used by those identified in the report, and SOC 3 reports may be used by any user.

Question 20

The portion of the audit plan for a financial statement audit that describes further audit procedures usually cannot be developed until the

Answer 20

Understanding of the entity’s internal control has been completed.

The audit plan develops over the course of the audit. Thus, planning for risk assessment procedures occurs early in the audit. However, the nature, timing, and extent of further audit procedures cannot be determined until the auditor has performed risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the statement and assertion levels.